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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-K







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



| |  | For the fiscal year ended March 30, 2008
| |  | ----------------------------------------

OR



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



| |  | For the transition period from              to
| |  | ----------------------------------------------

Commission File Number 001-33646





TULLYS COFFEE CORPORATION

(Exact name of registrant as specified in its
charter)







|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Washington                                                    |  | 91-1557436                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)

3100 Airport Way South,

Seattle, Washington 98134

(Address of principal executive offices) (Zip Code)

Registrants telephone number, including area code: (206) 233-2070





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

None

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

Common Stock, no par value

Series A Convertible Preferred Stock, no par value

(Title of each class)





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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ̈    No  x

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

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



|                             |  |                      |  |                         
|---------------------------- |  | -------------------- |  | ------------------------
|Large Accelerated Filer   ̈   |  | Accelerated Filer   ̈ |  | Non-Accelerated Filer  x
|Smaller Reporting Company   ̈ |  |                      |  |                         

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of
such common equity, as of the last business day of the registrants most recently completed second fiscal quarter.Not Applicable (not traded on any market)

As of March 30, 2008 the number of shares of the registrants Common Stock outstanding was 3,251,891 (giving effect to the one-for-eight reverse split on June 28, 2007) and the number of shares of the
registrants Series A Convertible Preferred Stock outstanding was 12,930,374.

Documents incorporated by reference: None.









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TABLE OF CONTENTS



|                                           |  |                                                                                                              |  |         
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------ |  | --------
|Item No.                                   |  |                                                                                                              |  | Page No.
|A WARNING ABOUT FORWARD-LOOKING STATEMENTS |  | 1                                                                                                           
|                                          
|PART I                                    
|                                           |  |                                                                                                             
|ITEM 1.                                    |  | BUSINESS                                                                                                     |  | 2       
|ITEM 1A.                                   |  | RISK FACTORS                                                                                                 |  | 16      
|ITEM 1B.                                   |  | UNRESOLVED STAFF COMMENTS                                                                                    |  | 24      
|ITEM 2.                                    |  | PROPERTIES                                                                                                   |  | 24      
|ITEM 3.                                    |  | LEGAL PROCEEDINGS                                                                                            |  | 25      
|ITEM 4.                                    |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                          |  | 25      
|                                          
|PART II                                   
|                                           |  |                                                                                                             
|ITEM 5.                                    |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |  | 26      
|ITEM 6.                                    |  | SELECTED FINANCIAL DATA                                                                                      |  | 28      
|ITEM 7.                                    |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        |  | 31      
|ITEM 7A.                                   |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   |  | 51      
|ITEM 8.                                    |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                  |  | 52      
|ITEM 9.                                    |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                         |  | 95      
|ITEM 9A(T).                                |  | CONTROLS AND PROCEDURES                                                                                      |  | 95      
|ITEM 9B.                                   |  | OTHER INFORMATION                                                                                            |  | 96      
|                                          
|PART III                                  
|                                           |  |                                                                                                             
|ITEM 10.                                   |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                       |  | 98      
|ITEM 11.                                   |  | EXECUTIVE COMPENSATION                                                                                       |  | 99      
|ITEM 12.                                   |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS               |  | 111     
|ITEM 13.                                   |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE                                     |  | 112     
|ITEM 14.                                   |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                       |  | 114     
|                                          
|PART IV                                   
|                                           |  |                                                                                                             
|ITEM 15.                                   |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                   |  | 115     
|                                           |  | SIGNATURES                                                                                                   |  | 116     



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A Warning About Forward-Looking Statements

In this report, we refer to Tullys Coffee Corporation and its consolidated subsidiaries and joint ventures controlled by the Company as
we, us, our, the Company, Tullys Coffee, or Tullys.

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor
created by those sections. These statements include descriptions of our future financial condition, results of operations, objectives, strategies, plans, goals, targets or future performance and business for future periods, and generally may be
identified by use of phrases such as believe, expect, will, seek, should, anticipate, estimate, intend, plan, target,
initiatives, models, hope, goal, foresee or other words of similar import. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those
described in the Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations sections and other parts of this report that could cause events, including our actual results, to
differ materially from those anticipated in these forward-looking statements. These factors, among others, could cause our financial performance to differ materially from our goals, targets, objectives, intentions and expectations. These
forward-looking statements include, among other things, statements regarding our plans and expectations for new store openings, the cost of building new stores, the average unit volume of new stores, comparable store sales growth, increasing margins
and growing our wholesale and franchise businesses.

If one or more of the factors affecting our forward-looking statements proves
incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this report. Consequently, you should not place undue reliance on our
forward-looking information and statements.

We qualify all of our forward-looking statements by these cautionary statements. Except to the
extent required by the federal securities laws, we do not intend to update or revise the forward-looking statements contained in this report.



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PART I.



|ITEM 1. | BUSINESS
|------- | --------

Recent DevelopmentSale of Wholesale Operations

On February 4, 2008 we engaged an investment banking firm to assist in evaluating strategic alternatives to optimize company and
shareholder value. The Company has evaluated a range of alternatives. As a result of this assessment, on September 15, 2008, Tullys, its wholly-owned subsidiary Tullys Bellaccino, LLC, and GMCR, entered into the GMCR Agreement.
Under the GMCR Agreement, GMCR will purchase the assets associated with Tullys wholesale business and supply chain, including rights to use the Tullys brand worldwide (excluding Japan) and other Tullys trade names, trademarks and
service marks, for a total consideration of $40.3 million in cash, subject to adjustment based on the value of the assets as of the closing date. Of the cash proceeds payable to Tullys, $3.5 million will be placed in escrow for one year to
satisfy Tullys post-closing indemnification obligations to GMCR under the GMCR Agreement. We plan to use these proceeds to improve our liquidity, repay our indebtedness, and to fund our domestic retail and license businesses.

The GMCR Agreement contemplates that, at the closing, GMCR will grant Tullys a license to use the Tullys brand and other trade
names, trademarks and service marks in connection with certain (i) retail operations worldwide (excluding Japan) and (ii) wholesale operations outside of North America, and that the parties will enter into an exclusive coffee supply
arrangement. Tullys current shareholders and executive management team will continue to own and operate the companys domestic retail business (company owned, franchised and licensed retail store locations) and international retail and
wholesale businesses.

Tullys and GMCR have made customary representations, warranties and covenants in the GMCR Agreement. Pursuant
to the terms of the GMCR Agreement, except in certain limited circumstances Tullys may not solicit or enter into discussions regarding, or provide information in connection with, alternative transactions. The GMCR Agreement specifies certain
termination rights of the parties, and, under some circumstances, in the event of termination of the GMCR Agreement, Tullys may be required to pay GMCR a termination fee of $1.6 million. In addition, if Tullys terminates the GMCR
Agreement because GMCR is unable to obtain funding under its existing credit facility to complete the asset purchase, then GMCR will be obligated to reimburse Tullys for up to $1.6 million in Tullys out-of-pocket costs and expenses.

Closing of the proposed asset sale is subject to certain conditions, including approval by Tullys shareholders.

The GMCR Agreement was unanimously approved by Tullys board of directors. In addition, Tom T. OKeefe, our chairman of the board and founder,
who beneficially owns approximately 20.2% of our outstanding common stock, has entered into a voting agreement with GMCR pursuant to which he has agreed to vote his shares in favor of the transaction at the shareholders meeting at which our
shareholders will be asked to approve the GMCR Agreement and the transactions contemplated therein.

The transaction is expected to close
before the end of the calendar year. Tullys expects to file a preliminary proxy statement with regard to the GMCR Agreement in the next 30 days, which will include, among other things, information regarding the background of the boards
decision to enter into the GMCR Agreement.

Tullys believes it will incur contractual costs associated with the sale of the assets of
its wholesale business subject to the GMCR Agreement with GMCR. At this time, however, these costs are subject to, and potentially contingent upon, the various conditions of, and successful completion of the closing process. If the GMCR Agreement
and the transactions contemplated therein are not approved by Tullys shareholders, or are approved but the asset sale is not successfully completed, then certain of these potential costs may not be incurred. Thus,



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we are currently unable to provide a reasonable estimate of these costs. Direct and indirect costs associated with the sale, incurred subsequent to the
signing of the APA, will be recorded during the period incurred or upon recognition of the closing of the transaction, if successful, depending on the nature of such costs.

As all of the criteria of SFAS No. 144 were not met as of the balance sheet date, the Company has not classified the assets and liabilities of its
wholesale operations as held for sale and the results of operations for the wholesale operations will not be reported in discontinued operations. The Company will record the assets and liabilities as held for sale in our first quarter Fiscal 2009
reporting in accordance with the guidance provided in SFAS No. 144, which were met on June 26, 2008. However, the assets and liabilities related to the wholesale business as of March 30, 2008 that were included in the GMCR Agreement
amount to $4,725,000 and $66,000, respectively. In addition, certain accounts receivable, current assets and liabilities and short-term credit facilities associated with our wholesale business will be retained and settled by the Company upon closing
of the proposed transaction.

Consistent with our past disclosure and in light of the proposed sale of our wholesale business to GMCR, we
continue to evaluate the business, operations, and prospects of our remaining business units and to work with our financial advisors to explore potential opportunities to optimize the value of the company to our shareholders, including the sale of
our retail and international businesses.

Our Business

Tullys Coffee is a specialty retailer in the fast-casual categories of specialty coffee, snacks and non-alcoholic beverages, within the broader quick-service restaurant industry. Tullys is famous for our
gourmet hand-craft roasted coffees, wide selection of barista beverages, delicious assortment of breakfast and lunch offerings and anytime snacks, desserts and specialty beverages, and our genuine community coffeehouse experience. In addition,
Tullys also operates as a gourmet coffee roaster and wholesaler in the specialty coffee industry.

We end our fiscal year on the
Sunday closest to March 31. As a result, we record our revenue and expenses on a 52 or 53 week period, depending on the year. In this report, we refer to our fiscal periods as follows:



|                         |  |                                     
|------------------------ |  | ------------------------------------
|Reference in this report |  | Fiscal year ending (number of weeks)
|Fiscal 2009              |  | March 29, 2009 (52 weeks)           
|Fiscal 2008              |  | March 30, 2008 (52 weeks)           
|Fiscal 2007              |  | April 1, 2007 (52 weeks)            
|Fiscal 2006              |  | April 2, 2006 (52 weeks)            
|Fiscal 2005              |  | April 3, 2005 (53 weeks)            
|Fiscal 2004              |  | March 28, 2004 (52 weeks)           
|Fiscal 2003              |  | March 30, 2003 (52 weeks)           
|Fiscal 2002              |  | March 31, 2002 (52 weeks)           
|Fiscal 2001              |  | April 1, 2001 (52 weeks)            

We maintain a number of websites, including
www.tullys.com, www.telltullys.com, and www.mytullyscard.com. Information on our websites is not incorporated by reference and is not a part of this report. Tullys®, Tullys Coffee®, the Tullys logo, and Bellaccino® are registered trademarks of
Tullys. K-Cup® is a registered trademark of Keurig, Inc. All other trademarks, service marks, and tradenames referred to in this report are the property of their respective owners.

Retail Operations. We operate and franchise Tullys Coffee branded retail stores, with ninety-three company-operated stores
and fifty-eight franchised stores in Washington, California, Arizona, Oregon, Idaho, Montana and Utah as of March 30, 2008. We operate our stores in densely populated areas and commuting corridors, with locations in urban and suburban retail
districts, lifestyle centers, shopping centers and other high-



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traffic areas. We also operate or franchise smaller footprint stores in special venues such as within the premises of manufacturing facilities, and kiosks
and cafes located in grocery stores, hotels, hospitals, airports and university campuses. We manage our franchising and foreign business development activities through our specialty division.

Wholesale Operations.Our wholesale division sells our gourmet whole bean and ground Tullys coffees, our Bellaccino bottled beverages and
single-serve Tullys K-Cups. Our wholesale customers include our franchisees, office coffee services, foodservice channels and grocery locations in the western United States and the Chicago metropolitan area.

Menu Offering.We are passionate about providing our customers with the best gourmet coffees. We believe our barista bars serve the best selection
of delicious hand-crafted beverages in the business. Our barista bars offer customers a broad selection of freshly prepared hot and cold beverages in various sizes, including our coffees, espressos, teas, Guayaki yerba mates, chais, Bellaccino
blended beverages, fruit-based beverages (such as smoothies), ice cream shakes and hot cocoa. We complement our barista bar beverages with a diverse selection of premium foods, snacks and bottled beverages.

Customer Appeal.Our genuine community coffeehouse concept and varied menu have broad customer appeal, and are relevant at multiple day-parts and
in diverse geographic markets and climates. Our beverage and food offerings are built around core product families, enabling us to easily and cost-effectively introduce new menu items. Our comfortable, inviting stores are a great place to relax,
take a break or gather with friends throughout the day.

Our History

Tullys Coffee, a Washington corporation, was founded in 1992. Between 1992 and 2001, we expanded to 114 company-operated stores. During this period, we financed our retail expansion by raising over $60 million
in equity securities and convertible debt and through licensing fees paid to us by foreign licensees of over $17 million. Between Fiscal 2001 and 2003, our financial performance was negatively impacted by the economic downturn that affected Seattle
and San Francisco. During the same period, the market for new equity issues deteriorated significantly. To manage through this period and these challenges, rather than to seek additional and potentially dilutive growth capital, we chose to reduce
normal operating expenses by closing certain under-performing stores and slowing our new store development plans to preserve capital. Between Fiscal 2002 and 2006, we streamlined aspects of our operations and emphasized less capital intensive
business opportunities such as wholesale and franchising. From Fiscal 2006 to Fiscal 2008, we undertook a strategic business review and began implementing initiatives to improve our financial position and create a foundation for future growth. These
initiatives include:



| |  |  | Hiring several key executives to strengthen our management team and operations;
| | - |  | -------------------------------------------------------------------------------



| |  |  | Introducing new products and improving merchandising strategies in our retail and wholesale divisions;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Refurbishing most of our company-operated stores;
| | - |  | -------------------------------------------------



| |  |  | Implementing more efficient product purchasing and standardizing store operating procedures;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Implementing selective price changes;
| | - |  | -------------------------------------



| |  |  | Investing in personnel and infrastructure to support our U.S. franchising strategy;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Closing stores that fail to meet our performance requirements; and
| | - |  | ------------------------------------------------------------------



| |  |  | Fostering employee development and training, with an emphasis on customer service and operational efficiencies.
| | - |  | ---------------------------------------------------------------------------------------------------------------



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These initiatives have spurred significant improvements in our business, which we believe contributed to
comparable store sales increases in the four quarters of Fiscal 2008 of 9.5%, 7.6%, 8.8% and 2.1%, respectively over prior years comparable quarter.

Our Products

We are passionate about providing our customers with the best gourmet coffees. Tullys sources the
highest grade Arabica coffee beans from around the world to make world-class gourmet coffees. We roast millions of pounds of coffee beans annually, all in hand-crafted batches that utilize our proprietary recipes and roasting methods which allow us
to produce a selection of gourmet coffees to appeal to different customer tastes. All Tullys stores offer a fresh assortment of Tullys hand-craft roasted whole bean and ground varietal coffees and proprietary coffee blends, many of which
also are sold to our wholesale customers, along with the equipment to enjoy our coffees at home.

We believe that our barista bars offer
the best selection of hand-crafted beverages in the business and set us apart from our competitors. Our barista bar beverages include hot and cold beverages, highlighted by our coffees and espresso, teas, yerba mate, chai, Bellaccino blended
beverages, fruitbased beverages (such as smoothies), ice cream shakes and hot cocoa. These drinks can be customized with dairy or soy milk and our customers favorite flavors, including fresh Tullys espresso, Ghirardelli chocolate
and premium flavor extracts. All barista bar beverages are made-to-order by our highly trained baristas.

We complement our great beverages
with an array of premium foods, snacks, and bottled beveragesincluding pastries, muffins, cookies and desserts that are baked fresh daily by our artisan bakery partners; fresh, pre-packaged, ready-to-go salads and sandwiches; healthy
grab-and-go snacks such as nuts, trail mixes and dried fruits; chocolates and other confections; and juices, soda, waters and our Bellaccino bottled beveragesthat make our stores a gathering place for refreshment and energy throughout the day.

We regularly introduce new products in our stores to attract new customers and to offer existing customers additional products during
different day-parts. Our beverage and food offerings are built around core product families that enable us to introduce new items that appeal to a broad range of customers, at different day-parts, to suit different geographic markets and climates.

Tullys Market Opportunity

Tullys is strategically positioned as a premier gourmet coffee brand in the specialty retail coffeehouse segment and the wholesale whole bean and ground coffee segment. Consumers in both segments have shown a broadening appetite for
drinks of all varieties, resulting in diversification and expansion of the U.S. beverage markets. With gourmet espresso and coffee drinks as its centerpiece, Tullys is focused on benefiting from these growing markets by providing a wide array
of beverage choices to its customers. Additionally, Tullys is positioned to capitalize on significant opportunities in the snack and non-alcoholic beverage bars category, estimated at $24.7 billion in 2007 by the Specialty Coffee Association
of America, Euromonitor, and Automatic Merchandiser.

Consumption of specialty coffee in U.S. retail stores increased steadily from 2003 to
2006, according to the Specialty Coffee Association of America (SCAA), as the percentage of U.S. adults purchasing specialty coffee daily grew from 12% to 16% during this period. The demand from occasional adult consumers of specialty coffee
expanded more rapidly over this comparable period, with an increase in market penetration from 54% to 63%, according to the SCAA. Additionally, we expect several major trends to drive continued growth in the U.S. gourmet coffee market:



| |  |  | Consumers are opting for gourmet coffee.We believe there is an overall greater consumer awareness of specialty coffees superior quality and
taste. Consumers are becoming more educated, and understand and differentiate coffee by origin and bean type. Discerning consumers generally demand gourmet, Arabica coffee with a wide selection of specialty beverages such as lattes, mochas,
espressos and blended drinks.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Coffee consumption as a lifestyle.Consumers are pursuing coffee consumption as a regular facet of their everyday lifestyle. We believe there is a
growing appeal of the coffeehouse as a gathering place outside of work and home, providing an inviting atmosphere for people to congregate and socialize. A 2006 Deutsche Bank research study indicated 33% of non-coffee drinkers visited national chain
coffeehouses for the atmosphere and to socialize.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Demographics of coffee drinkers are widening.According to the National Coffee Association, the proportion of the U.S. adult population drinking
coffee on a daily basis rose to 56% in 2006, compared to 53% in 2005 and 49% in 2004. Young adults (18-24 years old) contributed to the increased penetration, with 31% of young adults consuming coffee daily in 2006, compared to 26% in 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increased food expenditures away from home.Food expenditures away from home in the U.S. continued to increase as a percentage of total food
expenditures, from 32% in 1980 to 41.4% in 2005, according to the Economic Research Service.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Specialty Retail Coffee Industry

The U.S. specialty coffee retail industry is highly fragmented with low barriers to entry and, with the exception of Starbucks, is
primarily characterized by small chains and regional brands. Based on data from the SCAA and Starbucks, we estimate that Starbucks held approximately 39% of the U.S. market, based on its retail unit count as of December 2006. The next largest
specialty retail coffee chain, Caribou Coffee, held less than a 2% market share as of December 31, 2006, based on data from the SCAA and Caribou Coffee. Industry participants believe that significant growth potential exists in this market, as
evidenced by an October 5, 2006 Starbucks news release indicating a unit potential of approximately 20,000 Starbucks coffeehouses in the United States (as compared to a December 31, 2006 base of 9,401 stores).

Wholesale Coffee Market

The U.S. wholesale
coffee market is comprised of two segments, the $6.1 billion grocery, convenience and independent food store segment and the $3.7 billion office coffee service segment, according to Euromonitor and Automatic Merchandiser, respectively.

Supermarkets are a major distribution channel for wholesale coffee and provide a significant growth opportunity for specialty coffee roasters with
over 34,000 supermarkets in the United States in 2005, according to the Food Marketing Institute.

The office coffee services channel grew
5.1% to $3.7 billion in 2005/06 from 2004/05, according to Automatic Merchandiser. The introduction of single-cup systems has fostered strong growth in this segment. A leader in the single serve market is Keurig, a subsidiary of Green Mountain
Coffee Roasters Inc., which reported that Keurig K-Cup shipments in the United States and Canada experienced a 43% growth rate from 102 million K-Cups in the last three months ending 2005 to 146 million in the three months ending 2006.

Specialty Non-Alcoholic Beverages

Sales of specialty beverages have shown strong acceptance and growth across a wide variety of categories. Although the categories below currently represent a relatively small portion of our revenue base, we believe they represent a
significant opportunity for Tullys retail and wholesale business.



| |  |  | RTD Coffee & TeaAccording to Beverage Marketing Corporation, the ready-to-drink, or RTD, coffee and tea segments have grown rapidly in recent
years with consumption of RTD coffee increasing by 23.0% and 10.4% in 2005 and 2006, respectively. RTD tea increased by 9.0% and 26.2% during the same periods according to Beverage Marketing Corporation.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Energy Drinks / Bottled WaterEnergy drinks and bottled water segments reached $1.1 billion and $6.3 billion in sales, respectively, in 2005, according
to Mintel research. These two categories have
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | seen very strong growth, led by the relatively new energy drink market. According to Beverage Marketing Corporation, volume consumption of energy drinks
increased 49.1% in 2006, following an 80.5% increase in 2005. Bottled water consumption has benefited from the trend towards healthier products and this market segment now represents the second most consumed liquid refreshment behind carbonated soft
drinks according to Beverage Marketing Corporation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Competitive Strengths

Our goal is to make our gourmet coffees and genuine community coffeehouse experience the first choice for consumers in our markets. To achieve this
objective, we intend to leverage the following strengths:

We hand-craft roast and sell world-class gourmet coffees.We are passionate about providing our customers with the best gourmet coffees. We roast millions of pounds of the highest grade Arabica coffee beans annually. Our proprietary recipes and roasting methods provide superior quality. We
customize each batch of coffee to produce rich and flavorful profiles without the bitterness associated with some premium coffees. Currently, we sell dozens of different proprietary coffee blends and three varietal coffees (which are single origin
coffees from growers in Colombia, Guatemala and Sumatra). We also offer super-premium special lot and estate coffees in our retail stores. Our long-term relationships with coffee growers and brokers help us procure the highest quality Arabica green
coffee from around the world.

Our barista bars set us apart from our competitors.We believe our barista bars
offer the best selection of hand-crafted beverages in the business. In addition to our hot and cold coffee and espresso-based drinks, our hand-crafted barista bar beverages include teas, yerba mate, chai, Bellaccino blended beverages,
fruitbased beverages (such as smoothies), ice cream shakes and hot cocoa. Our customers can custom order their drinks using fresh Tullys espresso, Ghirardelli chocolate, premium flavor extracts, and dairy and soy milk. We offer both
everyday favorites like lattes, mochas and Americanos, and featured seasonal drinks such as pumpkin spice Bellaccinos and orange granache mochas. All barista bar beverages are made-to-order by our highly trained baristas.

We address all day-parts with our barista beverages, foods, snacks, desserts and bottled beverages. Our fresh, made-to-order
hot and cold barista beverages and our broad selection of ready-to-go foods, snacks and bottled beverages appeal to our customers throughout the day. We offer fresh, pre-packaged salads and sandwiches; healthy grab-and-go snacks such as nuts, trail
mixes, and dried fruit; chocolates and other confections; and bottled beverages such as soda, waters, energy drinks, teas, and our Bellaccino bottled beverage. These offerings make our coffeehouses an attractive destination during the day and into
the evening. We feature best-in-class products, such as Ghirardelli chocolates, Dean & Deluca snacks, Guayaki yerba mates, and fresh baked goods, salads and sandwiches from local, artisan bakeries to reinforce our gourmet brand image.

We keep Tullys exciting by regularly introducing new products in our existing categories.Our
merchandising strategy allows us to leverage beverages and food items within our product families to efficiently offer new products that keep existing customers enthusiastic and attract new customers to our coffeehouses. This approach results in a
shorter period from development to launch of new products. For example, in the autumn we introduced a family of pumpkin spice beverages in our barista bar product family at the same time we introduced a special pumpkin spice cake and pastry in our
food product family. This merchandising strategy carries through to our wholesale business, typified by the launch of our Bellaccino bottled beverage as an extension of our Bellaccino blended beverage, the introduction of Tullys gourmet
coffees in single serve K-Cups, and the periodic introduction of new coffees and new coffee packaging to meet specific customer needs and taste preferences.

We provide a genuine community coffeehouse experience for our customers.We believe that the Tullys genuine community
coffeehouse experience differentiates us from our competitors. The Tullys experience is about friendly, personalized service in an upscale and relaxing environment, where customers enjoy comfortable seating, large community tables, soft music
and free Wi-Fi Internet access while savoring Tullys products. We strive to develop a genuine personal relationship with our customers and their



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communities by supporting community events, and local schools and charitable organizations, and by making our stores into neighborhood gathering places. Our
pay it forward philosophy involves empowering our store managers to become part of their local communities by providing complimentary coffee for community activities, helping non-profit organizations raise money, and publicizing
community events. Each store manager is provided a budget to develop these community building relationships. At the corporate level, we partner with charitable organizations and support their fundraising activities. For example, we help raise funds
to support a number of childrens health organizations, breast cancer research, and university scholarship funds. We believe our commitment to the community strengthens our relationship with our employees and our customers.

We have a substantial wholesale business. Our hand-craft roasted coffees are currently available to customers through
approximately 4,700 grocery stores, including Safeway, Kroger and Albertsons. We also supply our coffee through foodservice and office coffee service channels in the western United States. The introduction of Tullys Bellaccino bottled
beverages in late 2006 is expanding the Tullys brand to other retailers and consumers. Our launch of Tullys single serve K-Cups in 2006 has introduced our brand and coffees outside our core geographic markets, including the east and
southeast. Our success in the wholesale market, including areas where we currently have no retail presence, has demonstrated the strength of our brand and appeal of our products. Sales from our wholesale business grew approximately 309% from $5.1
million in Fiscal 2002 to $28.1 million in Fiscal 2008, representing a CAGR over this period of approximately 33%.

Our Growth Strategy

We have significant growth opportunities in our business, which we intend to pursue by implementing the following strategies. Implementation of these
strategies is dependent upon sufficient capital resources and the ability to secure a capital or debt raise. Further, growth will be limited in the event of a whole or partial disposition of the assets of any single segment.

Drive comparable store sales growth by executing on our fundamental retail strategies. We intend to drive comparable store
sales and average unit volume growth by executing on our fundamental retail strategies to increase store traffic and average transaction size. Over the past year, we implemented a set of core improvements to our retail operations, which we believe
was a key factor in driving comparable store sales increases in each of the four fiscal quarters of Fiscal 2008.

Execute our franchising strategy to expand our geographic footprint. Our franchising strategy focuses on adding franchised stores in market areas and venues that complement our company-operated stores. We have used franchising
to extend our presence in special venues, such as grocery stores, airports, hotels and university campuses. We also are pursuing multi-unit area agreements with experienced, well-capitalized franchisees, to open Tullys coffeehouses in markets
not targeted for development directly by us. We have implemented this approach successfully in the Idaho market, where our area developer has opened 6 franchised stores (since the November 2005 inception of our franchising arrangement). We hope to
achieve similar success in the Spokane, Washington market with our new area developer.

Leverage international
opportunities. Our international growth strategy emphasizes joint ventures and licensing relationships with companies situated in promising foreign markets, and sales of coffee and other products to those partners. We believe the success of
our former licensee, Tullys Coffee Japan (TCJ), demonstrates the broader opportunity available to us in foreign markets.

Our Retail
and Franchising Businesses

As of March 30, 2008, we had ninety-three Company-operated retail stores and fifty-eight franchised
retail stores in Washington, California, Arizona, Oregon, Idaho, Montana and Utah. Our stores are located in a variety of hightraffic urban and suburban neighborhoods, and in the Seattle and San Francisco central business districts. We also
operate or franchise smaller footprint stores in special venues, such as within the premises of



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manufacturing facilities, and kiosks and cafes that are located in grocery stores, hotels, hospitals and airports and on university campuses.

In conjunction with the APA signed with GMCR in relation to the wholesale business unit, management is actively marketing assets of the remaining
business units. Actions required to complete a sale of the other segments of the business, in whole or part, are under consideration and being evaluated. Management is also evaluating the impacts of the proposed sale on the other business segments
and corporate administration of the Company.

Menu and Products

Our beverage and food offerings are built around core product families that enable us to introduce new items that appeal to a broad range of customers, at different day-parts, to suit different geographic markets and
climates. Our product families are as follows:

Barista Bar BeveragesWe believe that our barista bars offer the
best selection of hand-crafted beverages in the business. These offerings include:



| |  |  | Drip CoffeesDaily selections of Tullys drip coffee, brewed fresh during the day, served by the cup or in to go decanters for group
events
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Espresso BeveragesLatte, cappuccino, mocha, and café Americano
| | - |  | ---------------------------------------------------------------



| |  |  | TeasBlack, green, and herbal teas, and chai, served hot or cold
| | - |  | ----------------------------------------------------------------



| |  |  | Smoothies and Fruit BeveragesFruit- and tea-based blended beverages, such as smoothies and blends
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | BellaccinoBellaccino blended beverages, made with our proprietary Bellaccino mix, ice and flavors like fresh Tullys espresso, Ghirardelli
chocolate, fruit, and Guayaki yerba mate
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ice Cream ShakesReal hand-made milk shakes featuring fresh espresso
| | - |  | --------------------------------------------------------------------



| |  |  | Yerba MateYerba mate-based lattes and blended beverages
| | - |  | --------------------------------------------------------

Baked Goods and FoodsOur selection of food offerings changes based on the time of day. We offer freshly baked pastries and
muffins during the morning, and pre-packaged sandwiches and salads from mid-morning through the remainder of the day. Cookies, cakes, ice cream and other desserts are featured during the afternoon and evening.

Grab-and-Go Snacks and ChocolateWe offer conveniently sized packages of nuts, trail mixes, dried berries, and
other snacks, and gourmet chocolates, from brands like Ghirardelli and Dean & Deluca, for snacking and impulse buys throughout the day.

Specialty BeveragesWe stock a range of specialty beverages in our cold cases, including our Bellaccino bottled beverages, juices, waters, soda and energy drinks.

Coffee and Tea for Home EnjoymentWe sell our freshly roasted gourmet coffees, including special limited edition
coffees, and a selection of leading gourmet teas, in each case for home consumption.

Brewing equipment and
accessoriesWe sell brewing equipment and accessories from leading manufacturers, including French presses, Keurig K-Cup brewing systems and Tullys K-Cups, espresso machines, mugs and coffee grinders.

Our Coffeehouses

Coffeehouse Design and
Appearance

Our coffeehouses are characterized by our warm color scheme, high quality finishes, easy-to-read menu board and enticing
product images. Our coffeehouses typically feature soft music and lighting; a childrens



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corner with kid-sized furniture, books and toys; comfortable sofas and chairs; and space dedicated to larger tables. Many of our coffeehouses have a
fireplace that adds to the warm and relaxed atmosphere. We seek to make each location comfortable and inviting for individuals and larger groups. We believe that our coffeehouse design reinforces our upscale brand image.

In addition, most of our company-operated stores and some franchised stores, offer free Wi-Fi Internet to our customers. Wi-Fi provides our customers a
convenient way to check e-mail and surf the web while enjoying our beverages and food offerings in the comfort of a Tullys coffeehouse.

Franchising Development

Our franchising strategy focuses on adding franchised stores in market areas and venues that
complement our company-operated stores. We have used franchising to extend our presence through smaller footprint stores in special venues, such as within the premises of manufacturing facilities, and kiosks and cafes that are located in grocery
stores, hotels, hospitals and airports and on university campuses. In November 2005 we established an area developer for Idaho, who now operates six stores. In March 2008 we established an area developer for Spokane, Washington. Franchising stores
in the domestic market offers the potential for accelerated growth with minimal capital investment from Tullys. The franchisee is responsible for all of the capital expenditures associated with the store, although we usually support the
construction, training and start-up of new franchised stores to ensure consistency with company-operated stores.

Grocery
CafesAlbertsons, Fred Meyer, and Frys Food and Drug operate franchised Tullys cafes in select stores. We believe that grocery cafes complement our wholesale business by supporting the marketing and sales of our whole bean and
ground coffees in these grocery stores and benefit our retail business by introducing grocery store customers to our brand and great barista bar beverages.

Other Special VenuesWe have franchised stores in a variety of special venues, such as universities, airports, and hotels, that have high volume captive audiences and where the location is owned, licensed
or managed by a third party. These stores include quick grab-and-go kiosks, coffee bars and full service stores. Our franchisees currently operate stores in the Seattle/Tacoma and Burbank, California airports, Hilton and Red Lion hotels in
Washington and California, and at universities in California and Washington, among other locations.

Area DevelopersWe plan to
focus on an area development approach for our future franchising activities, although we will consider single store franchises in circumstances involving special venues. Under an area developer approach, the area developer agrees to develop a
specified number of units in a geographic territory and obtains certain rights to that territory. We will consider geographic, marketplace, branding, venue, strategic and financial factors when evaluating new area development opportunities.

Retail Marketing

We believe
that our loyal customers are our most important marketing assets. Our focus on providing our customers with a genuine community coffeehouse experience is designed to transform our customers into Tullys evangelists. These customers
are our brand advocates and, through word-of-mouth, promote our products and share the Tullys genuine community coffeehouse experience with their friends and colleagues.

We employ marketing strategies to increase brand awareness, encourage trial and repeat purchases by educating potential customers about our hand-craft
roasted coffees and other beverage and food offerings, and promote our genuine community coffeehouse experience. We employ a variety of marketing tools that are tailored to the specific needs of particular markets or coffeehouses, including:



| |  |  | Point-of-sale signage and our menu boards, which encourage existing customers to try new products and seasonal offerings;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Promotions and local store marketing, including coupons and special offer books, which allow us to alert our customers to new products and seasonal offerings;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Community initiatives and sponsorships, which generate favorable publicity and help create and sustain the relationship between our coffeehouses and the surrounding
neighborhoods;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Special private label products for affinity groups, such as distinctively packaged coffees for the University of Washington (Husky Blend) and Washington
State University (Crimson Roast); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Postings on our website, www.tullys.com, which is a cost-effective method to reach potential new customers and encourage repeat visits from existing customers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

We periodically supplement these marketing initiatives with selective print and radio advertising through local radio,
newspapers and other publications to attract new customers within a particular market and to promote special and seasonal product offerings.

We offer our customers the Tullys Coffee Card, a stored-value payment card that serves as a convenient way to purchase our products and as an easy gift item. It is available at all company-operated Tullys stores and select
franchised stores. In Fiscal 2008, we continued to expand the features of the Tullys Coffee Card to include a loyalty program that provides customer rewards for use of the card, and we enabled online purchase, registration and reloading of
cards for customers at www.mytullyscard.com. Business and nonprofit enterprises may purchase Tullys Coffee Cards in bulk and co-label them for use as incentives or rewards for customers, employees and supporters.

Our Wholesale Business

The wholesale segment sells
gourmet whole bean and ground coffees, our Bellaccino bottled beverages and single serve Tullys K-Cups through the wholesale channel. We sell our products to approximately 4,700 grocery locations, as well as to office coffee services and
foodservice channels in the western United States and the Chicago metropolitan area. We also offer many of our products through mail-order and Internet channels.

On September 15, 2008, Tullys, its wholly-owned subsidiary Tullys Bellaccino, LLC, and GMCR, entered into the GMCR Agreement. Under the GMCR Agreement, GMCR will purchase the assets associated with
Tullys wholesale business and supply chain, including rights to use the Tullys brand worldwide (excluding Japan) and other Tullys trade names, trademarks and service marks, for a total consideration of $40.3 million in cash,
subject to adjustment based on the value of the assets as of the closing date.

As all of the criteria of SFAS No. 144 were not met as
of the balance sheet date, the Company has not classified the assets and liabilities of its wholesale operations as held for sale and the results of operations for the wholesale operations will not be reported in discontinued operations. The Company
will record the assets and liabilities as held for sale in our first quarter Fiscal 2009 reporting in accordance with the guidance provided in SFAS No. 144, which were met on June 26, 2008. However, the assets and liabilities related to
the wholesale business as of March 30, 2008 that were included in the GMCR Agreement amount to $4,725,000 and $66,000, respectively. In addition, certain accounts receivable, current assets and liabilities and short-term credit facilities
associated with our wholesale business will be retained and settled by the Company upon closing of the proposed transaction.

Products

Our product offerings in the wholesale channel include:



| |  |  | CoffeeWe offer our hand-crafted ground and whole bean coffees in a variety of packages and bulk-bin grocery formats. Different package sizes and types
are made to fit the specific usage requirements of grocery store customers and for foodservice, hotel in-room, and office coffee service use.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Bellaccino bottled beveragesWe launched our Bellaccino bottled coffee beverage line in August 2006. Our Bellaccino beverages are produced to our
specifications using freshly brewed Tullys coffee, milk and other ingredients. We currently offer Bellaccino in coffee, vanilla, and mocha flavors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Tullys K-CupsIn February 2006, we commenced sales of Tullys coffee in single serve packages called K-Cups, which are used in
special proprietary coffee brewing equipment manufactured by Keurig. We produce K-Cups under license from Keurig.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Distribution
Channels

We distribute and sell our products through a variety of wholesale channels, including the following:



| |  |  | GroceryOur existing customers in this channel include Albertsons, Kroger, Safeway, regional chains and independent operators, drug stores, and the
grocery distributors who serve them. Although we have substantial market presence within the supermarkets in the western United States, we have not begun to distribute our products through discount retailers and warehouse clubs in this market. We
also believe that substantial opportunities exist to increase sales of Tullys products to our current grocery customers through expanded product assortments, enhanced displays and other marketing strategies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Institutional foodservice distributorsIn the institutional foodservice channel, our primary distribution strategy is to work with foodservice and
beverage distribution companies. These distributors generally supply institutional customers such as restaurants, universities, sports and entertainment facilities, and our franchisees with Tullys products and equipment as part of the
distributors broader service offering.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Office coffee servicesThis segment includes national and regional suppliers of coffee to offices and other workplaces. Our launch of Tullys
K-Cups has introduced us to new office coffee services in the eastern and southern United States.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Wholesale Marketing

Tullys wholesale business provides opportunities for coffee consumers to experience our coffees outside our coffeehouses and
reinforces the Tullys genuine community coffeehouse experience with our existing customers. Subject to our pending sale of the wholesale business, in the grocery channel, Tullys provides marketing support through promotional allowances
and discounts in support of special price offerings to the grocers customers and through cooperative advertising and other marketing funds. We also make use of other marketing approaches, such as direct mail, to support wholesale customers,
co-sponsor trade shows and consumer events with our wholesale customers, and provide special displays and in-store demonstrations and sampling. Our franchised grocery cafes also support our in-store promotional displays and merchandising efforts. We
offer logo-bearing coffee cups and accessories and point-of-use signage to wholesale customers.

Coffee Roasting and Supply Chain Operations

Coffee Purchasing

Only the
highest grade Arabica coffee beans can produce the flavor and richness of Tullys coffee. Since our founding, we have worked hard to gain access to some of the highest quality green coffee beans from the finest estates and growing regions
around the world. Many of our coffees contain green beans from Central America and South America, and we also purchase coffees from Asia, Africa, Mexico and Hawaii. Our long-term relationships with coffee growers and brokers help us procure the
highest quality Arabica green coffee from around the world.

We sample every lot of coffee before and after we make a purchase. This
process protects our quality standard by assuring consistent flavor and other taste characteristics in our coffees.



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We generally turn our inventory of green coffee beans several times annually. Unlike roasted coffee
beans, green coffee beans are not highly perishable. We generally carry approximately $700,000 to $1.5 million of green coffee beans in inventory. If Arabica coffee beans from a region become unavailable or prohibitively expensive, we may
discontinue particular coffee types and blends or substitute coffee beans from other regions in our blends. We mitigate the risks associated by fluctuations in coffee prices by entering into fixed price commitments for a portion of our unroasted
coffee requirements.

Roasting and Packaging

We believe that the combination of hand-craft roasting and automated packaging results in the production of superior coffee that can be sold at prices that are competitive with the products of other specialty coffee
companies.

Tullys roasts coffee to exacting specifications at our roasting plant in Seattle, Washington. We employ a roasting
process that varies based upon the unique characteristics of the coffee beans being roasted. Each batch is roasted by hand under the close supervision of skilled master roasters, to maximize the flavor characteristics and other qualities of the
beans. Our roasting equipment uses classic small-batch cast iron roasting drums, which serve to more evenly apply heat to the coffee beans and avoid the burning and bean breakage suffered by some competing brands. Our master roasters use their
experience and sensessight, sound, taste and smellto monitor the roasting process and optimize the flavor and potential of our beans. All of our roasters undergo an apprenticeship program to learn our roasting methods and to gain the
skills necessary to roast coffee at Tullys. Frequently during the day, coffee is cupped to ensure it is meeting our quality standards.

After roasting, our coffee is conveyed to the packaging area where it is packed in ground or whole bean form. Our coffee packaging is intended to communicate the gourmet quality of the product contained in the
package. We pack our coffees in several different specialized package formats and in a range of package sizes. This enables us to develop products to specifically fit the needs of particular customer segments and serving equipment. We believe that
our packaging technology enables us to efficiently deliver high quality products and to increase production volumes to meet the needs of our growing retail and wholesale businesses.

Coffee is roasted daily and is promptly packaged to preserve its freshness. Production inventory levels and coffee date codes are carefully monitored to
maintain fresh coffee stocks in our roasting facility and at our retail stores. This also allows us to maintain our exacting freshness standards to minimize the time between roasting and delivery to our customers.

Purchasing and Distribution of Non-Coffee Goods

Tullys purchases non-coffee merchandise, equipment, fixtures and supplies for retail store locations, from a number of vendors. The materials are purchased on an as-needed basis. Some materials and items are distributed through
Tullys roasting plant and warehouse facility, while the suppliers deliver other items directly to our retail stores. Teas, dairy products, juices, bakery goods and accessories are also purchased from various vendors. Our ice cream and
Bellaccino blended drink bases are produced by third parties to our proprietary specifications. Perishable goods like dairy and bakery products are sourced from local artisan bakeries and dairies to ensure fresh quality products.

Employees

As of March 30, 2008, we employed
approximately 975 people, with approximately 850 employed in retail stores and regional retail operations. Our wholesale team consists of approximately 15 professionals with significant experience serving the grocery, foodservice and office coffee
service channels. Approximately 100 employees work in our administrative, franchisee support, roasting and distribution operations.



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We have a tiered benefits program to provide increased levels of benefits as the length of employment and
numbers of hours worked increases. Employees working between 17.5 and 24 hours are eligible for sick pay, a limited medical/dental program, and other benefits. Employees who work at least 24 hours per week are eligible for vacation, holidays,
medical and dental insurance and other benefits. Store managers, district managers, and wholesale sales personnel participate in incentive pay programs tied to various performance criteria. Bonuses for store and district managers are based upon
coffeehouse sales, profit and customer service standards. Because of our commitment to customer service, if a store or district managers score in customer service is below the required minimum, no bonus is given regardless of the score in
other areas. Most employees receive discounts on their purchases of beverages and merchandise in our stores. None of our employees are represented by a labor union and management anticipates this will continue to be the case. Tullys believes
that its current relations with employees are satisfactory.

We believe that training and developing our coffeehouse employees and retail
managers is essential to fulfilling our mission of creating the Tullys genuine community coffeehouse experience for our customers. Delivering superior, personalized customer service reflects the soul of who we are as a company. We have
specific in-store and classroom training requirements for all new retail store employees. Our Tullys University training program provides our more experienced employees with advanced training in coffee history and our roasting
techniques, beverage preparation, cash handling, cash register and paperwork procedures, sales techniques, and customer service. We also provide advanced training programs for our store and district managers and train the trainers
programs for our training staff.

To promote operational and cultural consistency with company-operated stores, we require our franchisees
to undergo similar training before opening their first coffeehouse and to provide ongoing classroom and in-store training to their coffeehouse employees. Employees at franchised locations generally complete a certification process that is comparable
to the program that we offer to our coffeehouse employees.

Competition

With the exception of Starbucks, which leads the retail specialty coffee segment, the industry is highly fragmented and contains no other company with a
strong national brand. In addition to Starbucks, on the retail level we compete with regional coffeehouses, such as Coffee Bean & Tea Leaf and Peets Coffee & Tea, as well as numerous local coffee shops, convenience stores,
restaurants, street vendors and, to a certain degree, quick service restaurants such as McDonalds and Krispy Kreme. As we continue to expand geographically, we expect to encounter additional regional and local competitors, such as Caribou Coffee and
Dunkin Donuts. In addition, consumers may choose non-coffee food and beverages offered by these and other competitors as alternatives to our offerings.

In the wholesale segment, we compete with both specialty coffee roasters, such as Starbucks and
Peets, and large foodservices companies, such as Procter & Gamble, which distributes coffee under the Millstone® brand. Smaller local and regional brands also compete in the
grocery and foodservice channels. In addition, we compete indirectly against all other coffee brands on the market, which may serve as substitutes for our gourmet whole bean and ground coffee. Tullys must compete with many gourmet and lower
quality coffee roasters and distributors (including those providing branded and private label coffees) for space on grocery shelves and for distribution by wholesale foodservice distributors. In the single serve category, the Tullys K-Cup
competes with other Keurig licensees and other single-cup coffee and tea delivery systems and brands.

We believe that our customers choose
among coffeehouses based upon the quality and variety of the coffee and other products, store atmosphere and convenience, customer service and, to a lesser extent, price. Product quality and variety, price, and promotional and marketing initiatives
are among the principal factors affecting competition in the wholesale segment.

In both the retail and wholesale segments, we expect the
gourmet coffee market to become even more competitive, both within our primary geographic markets and in other regions of the United States, as regional



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companies expand and attempt to build brand awareness in new markets and as smaller participants are consolidated into larger competitors. We believe that
there is an opportunity for many companies to compete in the gourmet coffee segment, and that the preferences and needs of consumers, owners of retail store buildings, coffee growers, coffee store employees, wholesale distributors and other
constituents of the specialty coffee industry will support continued competition in this segment.

Trademarks and Other Intellectual Property Rights

Tullys, its wholly-owned subsidiary Tullys Bellaccino, LLC, and GMCR entered into the GMCR Agreement Under the GMCR
Agreement, GMCR will purchase the assets associated with Tullys wholesale business and supply chain, including rights to use the Tullys brand worldwide (excluding Japan) and other Tullys trade names, trademarks and service marks,
for a total consideration of $40.3 million in cash, subject to adjustment based on the value of the assets as of the closing date. The GMCR Agreement contemplates that, at the closing, GMCR will grant Tullys a license to use the
Tullys brand and other trade names, trademarks and service marks in connection with certain (i) retail operations worldwide (excluding Japan) and (ii) wholesale operations outside of North America, and that the parties
will enter into an exclusive coffee supply arrangement. Tullys current shareholders and executive management team will continue to own and operate the companys domestic retail business (company owned, franchised and licensed retail store
locations) and international retail and wholesale businesses.

We regard intellectual property and other proprietary rights as important to
our success. We own several trademarks and service marks used on the products we sell and in connection with the services we provide that have been registered with the United States Patent and Trademark Office, including Tullys, the
Tullys logo, and Bellaccino. In addition, we have applications pending with the United States Patent and Trademark Office for a number of additional trademarks and service marks we use or intend to use to distinguish our products and services
in the marketplace from those of our competitors. We also own registered trademarks and service marks used on the products we sell and in connection with the services we provide in some foreign jurisdictions and have filed additional applications
for trademark and service mark protection in various foreign jurisdictions. The duration of trademark registrations varies from country to country. However, trademarks are generally valid and may be renewed indefinitely as long as they are in use
and/or their registrations are properly maintained.

In addition to registered and pending trademarks and service marks, we consider the
packaging for our coffee and the appearance of our trade dress (for example, the interior of our stores) to be strong identifiers of our brand. Although we consider our packaging and store design to be essential to our brand identity, and we have
registered certain of our product package trade dress with the United States Patent and Trademark Office, in most cases we have not applied to register these trademarks and trade dress, and thus cannot rely on the legal protections afforded by
trademark registration.

We also own numerous copyrights for items such as product packaging, promotional materials, in-store graphics and
training materials, although we have not sought to register these copyrights with the United States Copyright Office.

We also have
registered and maintain a number of Internet domain names, including Tullys.com. We consider our roasting methods and coffee blend recipes proprietary and seek to maintain them as trade secrets. We hold no patents.

Our ability to differentiate our brand from those of our competitors depends, in part, on the strength and enforcement of our trademarks, service marks,
and other intellectual property rights. We must constantly protect against any infringement by competitors. If a competitor infringes on our intellectual property rights, we may have to litigate to protect our rights, in which case, we may incur
significant expenses and divert significant attention from our business operations.



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|ITEM 1A. | RISK FACTORS
|-------- | ------------

This Annual Report on Form 10-K
contains forward-looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties. You should carefully consider the risks described below, as well as the other information contained in this
report, including our consolidated financial statements and the notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations. Any of the risks described below could materially and adversely
affect our business, prospects, financial condition and results of operations.

Risks Related to the Asset Sale

Because of the closing conditions in the GMCR Agreement and the possibility that GMCR may terminate the GMCR Agreement in specific instances, we cannot be sure
when, or even if, the transaction will be completed.

The closing of the sale of our wholesale business to GMCR is subject to the
satisfaction of a number of closing conditions, including, among others, the requirement that we obtain shareholder approval. In addition, GMCR may terminate the agreement if we do not cure breaches, if any, of our representations, warranties and
covenants in the GMCR Agreement within 60 days of notice or if the closing does not occur by December 31, 2008. We cannot guarantee that we will be able to meet the closing conditions of the GMCR Agreement. If we are unable to meet the closing
conditions, GMCR is not obligated to complete the transaction. We also cannot be sure that other circumstances, for example, a material adverse event, will not arise that would allow GMCR to terminate the GMCR Agreement prior to closing. If the sale
is not approved or does not close, our board of directors will be forced to evaluate other alternatives with respect to our wholesale business, which are expected to be less favorable to us than the sale to GMCR.

Failure to complete the sale of our wholesale business to GMCR may seriously affect our liquidity and ability to continue as a going concern.

The board of directors approved the sale of our wholesale business to GMCR in part because we believe that our revenues will not be sufficient over the
proximate term to cover our operating expenses. If we do not complete the sale of our wholesale business to GMCR, then we will be required to raise additional financing to repay our indebtedness and to continue funding our operations. There is no
assurance that financing will be available in amounts or on terms acceptable to us, if at all. In the absence of such financing, the Company may not able to meet its operating expenses and may be required to continue to scale back or terminate
operations and/or seek protection under applicable United States bankruptcy laws.

The proceeds of the sale of our wholesale business to GMCR may be
reduced if we are required to indemnify GMCR for damages resulting from our breach of the GMCR Agreement.

The GMCR Agreement
requires that we indemnify GMCR for damages resulting from our breach of the GMCR Agreement, if any. In general, until the first anniversary of the closing date, in the event the Company breaches any of its representations, warranties or covenants
contained in the GMCR Agreement, we would be required to indemnify and hold GMCR harmless from and against any and all damages it might incur that are caused by the breach up to a maximum of $3.5 million. The survival period and our potential
liability for breaches of certain of our representations, warranties or covenants are not subject to these limitations.

Risks Relating
to Our Business

We may be unable to continue as a going concern.

We have experienced significant operating losses since inception, had negative cash flows from operations of approximately $13.9 million for the year
ended March 30, 2008, and had an accumulated deficit as of March 30, 2008 of approximately $102 million. These matters, as well as others, raise substantial doubts about



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the Companys ability to continue as a going concern, unless we are able to complete the transaction with GMCR, obtain additional equity or debt
financing or consummate other strategic transactions.

We have a history of losses and expect to incur losses in the future.

We have incurred net losses in every year since inception except for Fiscal 2006, when we reported net income as a result of a $17.0 million gain on the
sale of intellectual property assets. Our net loss was $13.9 million for Fiscal 2008, and we had an accumulated deficit of $102.0 million as of March 30, 2008. We expect to report a net loss for Fiscal 2009 and likely will incur losses in
future periods. We will need to increase our net sales at a rate greater than our expenses to achieve profitability. For these reasons, we cannot predict whether we will become profitable in future periods.

We require a significant amount of cash, which may not be available to us, to fund our capital and liquidity needs.

For most of the fiscal years since our founding, we have not generated sufficient cash to fully fund operations. We historically have financed this cash
shortfall through the issuance of debt and equity securities, through borrowings, and through cash provided under our international licensing relationships. Our $10,000,000 credit facility with Benaroya Capital, which was due on August 31,
2008, is currently subject to a forbearance agreement pursuant to which Benaroya Capital has agreed to forbear from taking any action to collect on the Benaroya Note or to foreclose on its security interests. This facility will need to be replaced
or renewed. Our Northrim credit facility is subject to periodic renewal, and would need to be replaced if not renewed in October 2008. If we are unable to complete the sale of our wholesale business to GMCR, we would have to seek additional equity
or debt financing or identify and close other strategic transactions to fund our ongoing capital and liquidity needs.

Our credit facilities and
notes payable restrict our operating flexibility and ability to raise additional capital. If we were to default under these instruments, the lenders would have a right to seize certain of our assets.

Our Northrim secured credit facility provides this lender with a security interest in our accounts receivable and inventories. Our secured credit facility
with Benaroya Capital provide this lender with a security interest in substantially all of our assets, and our agreements with the guarantors of the Benaroya Capital debt limit our ability to incur additional secured debt. These provisions could
limit our ability to raise additional capital when needed, and a default by us under these agreements could result in the lenders taking actions that might be detrimental to the interests of our other creditors and shareholders. Pending closure of
the Asset Purchase Agreement with GMCR, the balances under both the Benaroya and Northrim facilities will be repaid.

Our failure to compete
successfully against current or future competitors could have a material adverse effect on our business, including loss of customers, declining sales and loss of market share.

The gourmet coffee market is highly competitive. A number of our competitors, Starbucks in particular, have much greater financial and marketing
resources, brand recognition and customer bases than us. In the retail specialty coffee segment, we compete with industry leader Starbucks as well as regional coffeehouses, such as Coffee Bean & Tea Leaf and Peets Coffee &
Tea, and local coffee shops, convenience stores, restaurants, street vendors and, to a certain degree, quick service restaurants such as McDonalds and Krispy Kreme. As we continue to expand geographically, we expect to encounter additional regional
and local competitors, such as Caribou Coffee and Dunkin Donuts. In addition, consumers may choose non-coffee beverages and food offered by these and other competitors as alternatives to our offerings.

In the wholesale segment, we compete with both specialty coffee roasters, such as Starbucks and Peets, and large foodservices companies. Smaller
local and regional brands also compete in the grocery and foodservice channels. In addition, we compete indirectly against all other coffee brands on the market, which may serve as



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substitutes for our gourmet whole bean and ground coffee. Tullys must compete with many gourmet and lower quality coffee roasters and distributors
(including those providing branded and private label coffees) for space on grocery shelves and for distribution by wholesale foodservice distributors. In the single serve category, the Tullys K-Cup competes with other Keurig licensees and
other single-cup coffee and tea delivery systems and brands. In the bottled beverage sector, we compete against many regional and national beverage companies including the Starbucks/PepsiCo, Inc. joint venture.

In both the retail and wholesale segments, we expect the gourmet coffee market to become even more competitive, both within our primary geographic
markets and in other regions of the United States, as regional companies expand and attempt to build brand awareness in new markets and as smaller participants are consolidated into larger competitors.

New products may not be accepted in current or future markets. Failure to achieve market acceptance of new products will adversely affect our revenues.

Our beverage and food offerings are built around core product families that enable us to introduce new items that we hope will appeal to a
broad range of customers, at different day-parts, to suit different geographic markets and climates. We believe that the introduction of these new products is important to the growth of our revenues for existing stores and future markets. Acceptance
of new products may vary in different geographic markets, and may be not be embraced by customers in our current or future markets. If our new products are not accepted, our operating results would be adversely affected.

If we lose key personnel upon whom we are dependent, we may not be able to manage our operations and meet our strategic objectives.

Many key responsibilities of our business have been assigned to a relatively small number of individuals. Our future success depends to a considerable
degree on the vision, skill, experience and effort of our senior management team. We do not maintain key-person insurance on any of these individuals. Any loss or interruption of the services of any of our key employees could significantly reduce
our ability to effectively manage our operations and implement our strategy.

Additionally, our founder and chairman, Tom T. OKeefe,
is involved in a number of community and business endeavors unrelated to our business. If Mr. OKeefe focuses his time and attention on these other endeavors without also dedicating the necessary time and efforts to our business, or if
Mr. OKeefe is unavailable to us due to death, disability or any other reason, it could have a significant impact on our efforts to achieve our business goals.

We recently had significant turnover to our senior management team, and resulting senior management must work together effectively for us to be successful.

In January 2008, we experienced turnover in our senior management team at the CEO, CFO and senior retail and marketing positions. If our new management
team, including any additional senior executives who join us in the future, are unable to work together effectively to implement our strategies, manage our operations and accomplish our business objectives, our ability to grow our business and
successfully meet operational challenges could be significantly impaired.

If we fail to maintain, develop and protect our brand, our business could
suffer.

Our brand may be harmed by factors that are outside of our control. For example, customers who purchase our whole bean or
ground coffees may improperly store the coffees or prepare beverages from our coffee incorrectly, in either case potentially affecting the quality of the coffee prepared from our products. If customers do not perceive our products to be of high
quality, then the value of our brand may be diminished and our ability to implement our business strategy may be adversely affected.



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Our franchisees or TCJ, the owner of our brand in Japan, may fail to operate Tullys coffeehouses in
a manner consistent with our standards and requirements. We have no control over TCJs use of our brand within Japan. Although our franchise agreements regulate franchisee behavior to some extent, enforcing remedies under franchise agreements
typically requires litigation, and our image and reputation may suffer even if such litigation is successfully concluded. If any of our franchisees acts in a manner inconsistent with our beliefs or preference, it could damage the value of our brand
in that franchisees territory, and such damage could spread to other territories.

Our success also depends in part on our continued
ability to use our existing trademarks and trade dress in order to increase brand awareness and further develop our brand in both domestic and foreign markets. If our efforts to protect our intellectual property rights are not adequate, or if any
third party misappropriates or infringes them, the value of our brand may be harmed. We may become engaged in litigation to protect our intellectual property, which could result in substantial costs to us as well as the diversion of
managements attention. Failure to succeed in any such litigation could deprive us of our using our trademarks and trade dress, or require us to pay significant licensing fees for such use.

Our franchisees, and the laws that govern the franchise relationship, could hinder our ability to grow.

We rely on our franchisees to develop territories in which we choose not to open company-operated stores. We rely on their local knowledge to successfully
address the needs of their territories. If a franchisee is unable to address these needs, we may be unable to sustain our presence in new regions. Additionally, at the end of Fiscal 2008, we had one area developer and three multi-unit grocery
relationships that collectively accounted for 45 of our 58 franchised stores. The loss of even one of these relationships would have a relatively significant adverse impact on our current franchise business.

Many of our franchise agreements grant exclusive rights to certain territories that last for multiple years. These rights not only prevent other
franchisees from operating in the franchised territory, but also could prevent us from opening company-operated stores in the territory, although we do reserve rights to develop wholesale opportunities, in our franchise territories. If a franchisee
is slow or fails to open new stores in its territory, we or another franchisee could be prevented or delayed from opening stores in that same territory. If such an event occurs, our ability to implement our business strategy may be adversely
affected.

We are subject to federal regulation and state laws that govern the offer and sale of franchises and the franchisor-franchisee
relationship. The failure to obtain or retain required licenses or registration approvals to sell franchises could delay or preclude franchise sales and otherwise adversely affect our business, financial condition and results of operations.
Additionally, any franchise law violations may give existing and future franchisees a basis to bring claims against us, which could result in rescission of the franchise agreement, damages or other relief. Assertion of such claims against us could
adversely affect our business, financial condition, and results of operations.

Because of the material changes in management of the
company in early 2008, timing of annual audits, and franchise regulations have been delayed.

We occupy our company-owned stores under long-term
leases, and we may be unable to renew leases at the end of the lease periods or obtain new leases on acceptable terms.

All of our
retail stores are located on leased premises or locations otherwise controlled by third parties. Many of our current leases are non-cancelable and typically have terms of several years. Therefore, we could be required to continue lease payments for
a store that we would otherwise wish to terminate. We also may not have the right or option to renew some of our existing leases. We face intense competition from both restaurants and other specialty retailers for suitable sites for new stores, and
if we are unable to renew an existing lease, we would be obligated either to find a new location or close the coffeehouse. If we negotiate a new lease or lease extension at an existing location, the rent may increase substantially. In either case,
our existing operations and



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operating results could be adversely affected. We intend to lease other premises in connection with the planned expansion of our retail operations, and we
believe leases that we enter into in the future likely will also be long-term and non-cancelable. Additionally, because we compete with other retailers and restaurants for store sites and some landlords may grant exclusive locations to our
competitors, we may not be able to obtain new leases or renew existing leases on acceptable terms. These factors could adversely affect our ability to execute our growth strategy.

We also enter into agreements to operate coffeehouses in special venues, such as hospitals or manufacturing plants, to operate as the exclusive coffee
provider in those locations. Unlike our typical retail store leases, some of these agreements can be terminated on short notice. Additionally, a single agreement of this type may govern several of our stores. As a result, the termination of one of
our special venue relationships could result in the closure of several of our stores at the same time. If these agreements are terminated, or if exclusivity within a specific special venue is not maintained, we would be unable to access these
markets or risk a decline in sales as a result of competition. In either case our brand-building strategy and results of operations would be adversely affected.

A significant interruption in the operation of our roasting, packaging and distribution facility would disrupt our operations.

We have only one coffee roasting, packaging and distribution facility. In some cases we either have limited or no replacement equipment readily available for certain of our significant processes. Additionally, a
significant interruption in the operation of our facility due to a natural disaster, such as an earthquake, or other causes, such as an extended breakdown of our production equipment, would significantly impair our ability to operate our business on
a day-to-day basis and would adversely affect our operating results.

Our hand-craft roasting methods are essential to the quality of our coffee, and
our business would suffer if we were unable to maintain quality control.

Because our coffees are hand-craft roasted in small
batches, we rely on the expertise and execution of our coffee roasters. If we are unable to maintain stringent quality control of our hand-craft roasting methods, the value of our brand would be diminished, and we could lose customers to our
competitors.

We have limited supplier choices for many of our products, and the inability of certain of these suppliers to meet our needs could
disrupt our operations.

In Fiscal 2008 two coffee brokers and one foodservice product distributor provided, in the aggregate,
approximately 35% of our product purchases. In addition, our ice cream, Bellaccino blended drink base, and our Bellaccino bottled beverages are produced by third parties to our proprietary specifications. If one or more of our suppliers is unable to
provide high-quality products to meet our requirements, or if our supplier relationships are otherwise interrupted, we may experience disruptions in product availability while establishing replacement supplies and our results of operations could
suffer.

In addition, we use local bakeries to supply our stores with bakery items. These bakeries typically have limited capital resources
to fund growth, and therefore may be unable to meet our needs as we grow. Small bakeries are generally more sensitive to increases in prices for raw ingredients for their products as compared to larger, commercial operations. Furthermore, as we
enter new markets, we may be unable to find quality, local bakeries that meet our needs. If this occurs we may not be able to offer bakery products in coffeehouses in that area, or we could be forced to purchase bakery products at higher costs or of
lower quality elsewhere, either of which could adversely affect our operating results.

We license the right to manufacture and sell Tullys
K-Cups from one of our direct competitors.

We manufacture and sell Tullys K-Cups under license from Keurig, which is a
wholly-owned subsidiary of Green Mountain Coffee Roasters, Inc., a direct competitor of ours in the wholesale coffee market. Keurig sells



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our K-Cups and other K-Cups from its website, and provides marketing support for its various roasters including Tullys. Increased sales of this product
are a part of our growth strategy. If Keurig were to terminate our license to manufacture and sell K-Cups, or if the terms and conditions of our license agreement were to be amended in an adverse manner, or if Keurig were to devote more marketing
resources to a competitors K-Cups than to ours, then our revenues and ability to implement our business strategy would be adversely affected.

Our inability to secure, maintain and increase our presence in grocery stores could adversely affect our revenues.

Our wholesale operations include sales to grocery stores, which for Fiscal 2008, accounted for approximately 16% of our net sales. The success of our wholesale business is largely dependent on our continuing development of strong
relationships with major retail chains. In Fiscal 2008, approximately 78% of our grocery sales resulted from relationships with four major retailers. The loss of our relationship with any of these retailers could have a significant impact on our
wholesale revenues. In addition, we may be unable to secure adequate shelf space in new markets or any shelf space at all, until we develop relationships with the retailers that operate in such markets. Consequently, growth opportunities for our
wholesale division may be limited and our revenues adversely affected if we are unable to successfully establish relationships with other retailers in new or current markets.

We also face severe competition to display our coffee packages on grocery store shelves and obtain optimal presence on those shelves. Due to the intense
competition for limited shelf space, retailers are in a position to negotiate favorable terms of sale, including price discounts, allowances and product return policies. To the extent we elect to increase discounts or allowances in an effort to
secure shelf space, our operating results will be adversely affected. We may not be able to increase or sustain our volume of retail shelf space or offer retailers price discounts sufficient to overcome competition and, as a result, our sales and
results of operations could be adversely affected. In addition, many of our competitors have significantly greater financial, manufacturing, marketing, management and other resources than we do and may have greater name recognition, a more
established distribution network and a larger base of wholesale customers and distributors. Many of our competitors also have well-established relationships with our current and potential grocery store customers and distributors, and have extensive
knowledge of our target markets. As a result, these competitors may be able to devote greater resources to the development, promotion and sale of their products and respond more quickly to evolving consumer preferences for us. If our
competitors sales surpass ours, retailers may give higher priority to our competitors products, causing such retailers to reduce their efforts to sell our products and resulting in the loss of advantageous shelf space.

Our business is dependent on a healthy economic climate in our principal geographic markets.

Our product offerings are discretionary items in our customers budgets. Adverse economic trends may cause consumers to reduce their discretionary
spending, which could have an adverse impact on our revenues. We are particularly susceptible to economic downturns in our principal geographic markets. Given our geographic concentration in the Seattle and San Francisco markets, an economic
downturn in those regions could have a material adverse effect on our business and operations throughout the region, as could other regional economic disruptions.

We face the risk of adverse publicity and litigation, actual or threatened, in connection with our products and operations.

We may from time to time be subject to complaints or actual or threatened litigation from consumers alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from these allegations may
materially adversely affect us, regardless of whether the allegations are valid or whether we are liable. In particular, instances of food-borne illness whether or not traced to our stores or products, could reduce demand for our menu offerings,
hurt our brand image or lead to litigation and liability. If any of our



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customers become ill from consuming our products, the affected stores may be forced to close or a product recall may be required. In addition, employee
claims against us based on, among other things, discrimination, harassment or wrongful termination may divert financial and management resources that would otherwise be used to benefit our future performance. There is also a risk of litigation from
our franchisees with regard to the terms of our franchise arrangements. We have been subject to a variety of claims from time to time, and future claims could materially adversely affect our business, prospects, financial condition, operating
results or cash flows.

We are subject to numerous and changing government regulations. Changes in, or failure to comply with, these regulations
could negatively affect our sales, increase our costs, result in fines or other penalties against us or harm our growth strategy.

Each retail location and our roasting facility are and will be subject to licensing and reporting requirements by a number of governmental authorities. These governmental authorities include federal, state and local health, environmental,
labor relations, sanitation, building, zoning, fire, safety and other authorities that have jurisdiction over the development and operation of our retail locations. Our activities are also subject to the Americans with Disabilities Act and related
regulations, which prohibit discrimination on the basis of disability in public accommodations and employment. Changes in any of these laws or regulations could have a material adverse effect on our business, financial condition and results of
operations. A failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of facilities for an indeterminate period of time, or third party litigation, any of which could have a material adverse
effect on us and our results of operations.

We have incurred and will continue to incur substantial costs to comply with the requirements of the
Sarbanes-Oxley Act of 2002.

The Sarbanes-Oxley Act of 2002 (the Act) introduced new requirements regarding corporate governance and
financial reporting. Among the many requirements of the Act is for management to annually assess and report on the effectiveness of our internal control over financial reporting under Section 404(a) and for our registered public accountant to
attest to this report under Section 404(b). The SEC has modified the effective date and adoption requirements of Section 404(a) and Section 404(b) implementation for non-accelerated filers multiple times, such that we are first
required to issue our management report on internal control over financial reporting in this annual report on Form 10-K for the fiscal year ending March 30, 2008. We are currently required to have our auditor attest to managements
assessment beginning for our fiscal year ending March 29, 2009.

Our ability to use our net operating loss carryforwards may be subject to
limitation.

An ownership change, which may occur if there is a transfer of ownership exceeding 50% of our outstanding shares of
common stock in any three-year period, may lead to a limitation on the usability of, or a potential loss of some or all of, our net operating loss carryforwards or NOLs.

Because the regulations governing NOLs are highly complex and may be changed from time to time, and because our attempts to prevent an ownership
change from occurring may not be successful, the NOLs could be limited or lost. To the extent the NOLs become unavailable to us; our future taxable income and that of any consolidated affiliate will be subject to federal income taxation,
thus reducing funds otherwise available for corporate purposes.

Risks Relating to Our Industry

Fluctuations in the availability and cost of the products used by our stores or roasting facility may affect our results of operations.

Our future success depends to a large extent upon the availability of high-quality green Arabica coffee beans at reasonable prices. The cost of our coffee
beans is subject to a range of factors, many of which are beyond our



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control. Coffee prices generally increased for the 2008 season. There has been increasing demand for Arabica coffee beans that could put additional upward
pressure on prices or limit the quantities available to us. Natural events, civil unrest and labor issues or shipping disruptions could interrupt the supply of these premium beans or affect the cost. Green coffee bean prices have been affected in
the past, and could be affected in the future, by the actions of organizations that have attempted to influence commodity prices of green coffee beans.

In addition, increases in the cost of other raw materials (such as paper and dairy), natural resources (such as energy and gasoline) or the price we pay for our baked goods, could result in an increase in the costs of
the products served in our stores. Our ability to raise prices in response to rising costs of coffee beans or other raw ingredients may be limited, and our profitability could be adversely affected if the costs of our inputs were to rise
substantially. Moreover, passing price increases on to our customers could result in losses in sales volume or margins in the future. Rapid, sharp decreases in the cost of our raw ingredients could also force us to lower sales prices before we have
realized cost reductions in our inventory. Such cost fluctuations could adversely affect our gross margins, or force us to increase the retail and wholesale prices for our products.

Increasing labor costs could adversely affect our results of operations and cash flows.

Many
of our employees are hourly employees whose wages may be affected by increases in the federal, state or municipal living wage rates. Numerous proposals have been made on federal, state and local levels to increase minimum wage levels. An
increase in the minimum wage may create pressure to increase the pay scale for our employees, which would increase our labor costs and those of our franchisees.

We face significant competition in recruiting qualified employees and managers for our retail stores. A shortage in the labor pool, an increase in the costs of employee benefits or other general inflationary pressures
could also increase labor costs. In addition, changes in labor laws or reclassifications of our employees from management to hourly employees could affect our labor cost. An increase in labor costs could have a material adverse effect on our results
of operations and cash flows if we are unable to recover these increases by raising the prices we charge our customers.

Many companies in
our industry face various lawsuits filed by hourly, nonexempt employees alleging various violations of wage and hour employment laws, including without limitation, overtime pay, missed meal and rest periods, and tip sharing. We are currently facing
a lawsuit in California filed by a former store employee alleging that Tullys failed to provide adequate meal and rest periods for its employees. The plaintiff is seeking class action certification on behalf of all hourly employees in
Tullys California stores. The details of this particular lawsuit are more fully described in Legal Proceedings.

The products we
serve contain certain ingredients, the health effects of which are not fully understood.

Our gourmet coffees and many of our other
beverages contain caffeine and other ingredients, the health effects of which are not fully understood. A number of research studies conclude or suggest that excessive consumption of caffeine may lead to increased heart rate, nausea and vomiting,
restlessness and anxiety, depression, headaches, tremors, sleeplessness and other adverse health effects. Harmful effects of caffeine consumed by pregnant women are also the subject of several research studies.

We also serve products that contain ingredients other than caffeine, such as sugars, fats, and carbohydrates. Public interest groups have focused
attention on the marketing of high-fat and high-sodium foods to children in a stated effort to combat childhood obesity.

An unfavorable
report or public opinion on the health effects of the ingredients used in our products, particularly caffeine, could significantly reduce the demand for our products, which could harm our business and reduce our sales and profitability.



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Consumer preferences related to coffee, dairy and bakery products could adversely affect our revenues or our costs.

Because our business is predominantly dependent on a single product, gourmet coffee, we are vulnerable to changes in consumer
preferences and economic conditions that could harm our financial results. Consumer preferences can change rapidly and without warning, moving from one trend to another among many product or retail concepts. Shifts in consumer preferences away from
the gourmet coffee segment would have a material adverse effect on our results of operations. Our continued success will depend in part on our ability to anticipate, identify and respond quickly to changing consumer preferences and economic
conditions.

Risks Related to Our Capital Stock

There is no trading market for our stock, and no assurance such a market will develop in the future.

There is no
public market for our common stock or our preferred stock. Consequently, the liquidity of an investment in our capital stock is limited. We cannot offer any assurance that an active trading market for our common stock will develop or how liquid that
market may become.

Our two largest shareholders have significant influence over matters subject to shareholder vote and may support corporate
actions that conflict with other shareholders interests.

As of March 30, 2008, we had approximately 5,000 owners of
record of our common stock. Notwithstanding this large number of shareholders, as of March 30, 2008, Mr. Tom T. OKeefe, our founder and chairman, beneficially owned approximately 20.2% of our common stock, and the estate of
Mr. Keith McCaw beneficially owned approximately 5.1% of our common stock. The ownership position of Mr. OKeefe and the estate of Mr. McCaw gives each of these shareholders individually, and on a combined basis if acting in
unison, the ability to significantly influence or control the election of our directors and other matters brought before the shareholders for a vote, including any potential sale of Tullys. The voting power held by Mr. OKeefe and by
the estate of Mr. McCaw could prevent or significantly delay another company from acquiring or merging with us, even if the acquisition or merger was in the best interests of our shareholders.

Payment of liquidation preferences to holders of our Series A Preferred Stock could result in little or no proceeds remaining available for other shareholders.

Our articles of incorporation provide that our Series A Preferred stock is senior to the shares of common stock for a stated dollar
amount of liquidation preferences, and the Series B Preferred stock is junior to a stated dollar amount of liquidation preference of both the Series A Preferred stock and the shares of common stock. If we were acquired or sold all or a substantial
portion of our assets at a time when our preferred stock is outstanding, the amounts remaining for distribution to shareholders might be less than the aggregate liquidation preferences of the more senior shareholders, and no amounts might be
available for distribution to the more junior shareholders.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

Not Applicable.



|ITEM 2. | PROPERTIES
|------- | ----------

As of March 30, 2008, Tullys
operated ninety-three retail stores in the United States, all of which are located on property leased by or otherwise provided to us. Seventy-one of these stores are located in Washington, twenty-one are in California, and one is in Idaho. We lease
approximately 80,000 feet of office and warehouse space in Seattle, Washington, to house our headquarters, roasting plant and distribution facilities pursuant to a ten-year lease expiring May 2010 and subject to two five-year options to renew.



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|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

In April 2001, Tullys
granted UCC Ueshima Coffee Company, Ltd. (UCC) a license to establish and operate Tullys specialty coffee stores, including a license to use Tullys business names, trademarks and intellectual property rights for purposes of
establishing and operating Tullys stores, and to sell Tullys coffee at wholesale, in 25 Asian territories (excluding Japan which is served by Tullys Coffee Japan).

Since the license agreement was executed in April 2001, UCC had opened one Tullys store, which it closed in 2004. UCC had not established nor
operated any other Tullys stores nor engaged in wholesale sales of Tullys products within its territory. Tullys attempted to find a mutually satisfactory resolution to this problem with UCC, but these efforts were not successful.
In June 2006, Tullys notified UCC that it had breached the license agreement, and on November 7, 2006, UCC filed a lawsuit in the United States District Court for the Western District of Washington. The suit alleged that Tullys had
breached the license agreement by, among other things, terminating the license agreement for UCCs non-performance and sought a declaration that UCC was not in breach of the license agreement, that Tullys was in breach, and that UCC was
entitled to enforce its alleged security interest as to certain of Tullys assets that were subject to the license agreement (namely, the Asian trademarks and the right to use Tullys intellectual properties in the territories).

On January 7, 2008, Tullys and UCC entered into a settlement agreement to settle that lawsuit. Under the settlement agreement,
the parties agreed to a mutual release of claims and to the dismissal of the lawsuit with prejudice. UCC also assigned all of its rights and interest under the 2001 license agreement to Tullys. The settlement agreement was finalized and became
effective on January 7, 2008.

In consideration for the settlement, Tullys agreed to pay $6.0 million to UCC, consisting of $2.0
million paid to UCC on January 8, 2008, and a $4.0 million promissory note issued by Tullys Coffee Asia Pacific, Inc. (TCAP), a wholly owned subsidiary of Tullys, to UCC. The promissory note bears interest at
3.0% per year and is due in annual principal installments of $1,000,000 commencing on December 28, 2008. Payments under the note may accelerate under certain circumstances and TCAP is generally required to pay two dollars of principal
under the note for each dollar that TCAP distributes to Tullys. Tullys has issued a limited guaranty for TCAPs obligations under the note, which is generally secured by the assets of Tullys and TCAP related to the Licensed
Territories, including Tullys stock in TCAP, TCAPs interest in the Tullys Coffee Asia joint venture, Tullys trademarks for the Licensed Territories and Tullys interest as licensor of Tullys Coffee Asia, but is
non-recourse as to Tullys other assets.

In December 2007, a lawsuit was filed against Tullys in California state court by a
former store employee alleging that Tullys failed to provide meal and rest periods for its employees. We anticipate that the plaintiff will seek class action certification on behalf of all hourly employees in Tullys California
stores. The plaintiff is seeking damages, restitution, injunctive relief, and attorneys fees and costs. Similar lawsuits alleging missed meal and rest periods have been filed in California against many other companies. We are
investigating the claims and intend to vigorously defend this litigation, but cannot predict the financial impact to us of the litigation at this time. We believe that Tullys has complied with all laws that require providing meal and rest
periods for its employees. We have accrued $147,000 as of March 30, 2008 for estimated legal fees in order to defend this litigation.

We are a party to various other legal proceedings arising in the ordinary course of our business, but are not currently a party to any other legal proceeding that we believe could have a material adverse effect on our financial position or
results of operations.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

No matters were submitted to a vote of our shareholders during the fourth quarter of Fiscal 2008.



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

Market Information, Holders and Dividends

Currently
there is no public market for Tullys common stock. As of March 30, 2008 there were approximately 5,000 holders of record of Tullys common stock.

We have not paid cash dividends in the past and we presently do not plan to pay dividends in the foreseeable future. We intend to retain and use earnings, if any, to finance the growth of our business for an
indefinite period. Any determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, results of operations, capital requirements, restrictions under our borrowing
agreements, and such other factors as the board of directors deems relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information

(As of March 30, 2008)



|                                                            |  |                                                                                          |  |                                                                           |       |                                                                                                                                        |       
|----------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------- | ----- | -------------------------------------------------------------------------------------------------------------------------------------- | ------
|Plan Category                                               |  | Number of securities to beissued upon exercise ofoutstanding options,warrants and
rights |  | Weighted average exerciseprice of outstanding options,warrants and
rights |       | Number of securitiesremaining available forfuture issuance under equitycompensation
plans(excluding securities reflectedin column (a))
|                                                            |  | (a)                                                                                      |  | (b)                                                                       |       | (c)                                                                                                                                   
|Equity compensation plans approved by security holders      |  |                                                                                          |  |                                                                           |       |                                                                                                                                        |       
|1994 Option Plan                                            |  | 227,587                                                                                  |  | $                                                                         | 5.29  |                                                                                                                                        |      
|2004 Option Plan                                            |  | 224,353                                                                                  |  | $                                                                         | 11.29 |                                                                                                                                        | 88,147
|Equity compensation plans not approved by security holders* |  | 207,784                                                                                  |  | $                                                                         | 0.08  |                                                                                                                                        |      
|                                                            |  |                                                                                          |  |                                                                           |       |                                                                                                                                        |       
|Total                                                       |  | 659,724                                                                                  |  | $                                                                         | 5.70  |                                                                                                                                        | 88,147
|                                                            |  |                                                                                          |  |                                                                           |       |                                                                                                                                        |       



|* | These options were granted by our chairman to employees and third parties and may be exercised to purchase shares of Tullys Common Stock owned by our chairman. We refer to
these options as being granted under the Founders Stock Option Plan. We do not expect any additional options to be granted under the Founders Stock Option Plan.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In 1994, Tullys shareholders approved the 1994 Stock Option Plan, pursuant to which we issued incentive or nonqualified stock options to our
employees and directors. In August 1999 our shareholders approved an amended plan (the 1994 Option Plan), which established the maximum number of shares issuable under the 1994 Option Plan and the Employee Stock Purchase Plan at 525,000
shares. The 1994 Option Plan expired on October 19, 2004 (this will not terminate outstanding options). As of March 30, 2008, options for 227,587 shares were outstanding under the 1994 Option Plan and options for 161,234 shares had been
exercised under the 1994 Option Plan, and no shares had been issued under the Employee Stock Purchase Plan.

On September 23, 2004,
the board of directors approved the adoption of the 2004 Stock Option Plan, effective as of November 1, 2004 and subject to shareholder approval. The 2004 Stock Option Plan authorizes the issuance of up to 312,500 shares of common stock under
the 2004 Stock Option Plan and Tullys Employee Stock Purchase Plan. The Tullys shareholders approved the 2004 Stock Option Plan in December 2004. As of March 30, 2008, options to purchase 224,353 common shares were outstanding under
the 2004 Stock Option Plan.



26



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Stock options are granted solely at the discretion of our board of directors and are issued at a price
determined by our board of directors. The term of each option granted is for such period as determined by our board of directors, but not more than ten years from date of grant. Options are nontransferable and may generally be exercised based on a
vesting schedule determined by our board of directors. Options may be either incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, or nonqualified stock options. Our shareholders also previously approved the
Employee Stock Purchase Plan, under which employees would be permitted to purchase common stock from the Company. No offerings have been made to employees under the Employee Stock Purchase Plan.

Recent Sales of Unregistered Securities

Tullys
issued and sold securities in the transactions described below during Fiscal 2008.

Warrants to CreditorWe issued warrants to
purchase an aggregate of 72,191 shares of common stock with an exercise price of $2.64 per share to Benaroya Capital as additional consideration for the Benaroya Note guaranteeing the indebtedness under our credit facilities. The offer and sale of
these securities were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, as offers and sales not involving a public offering.

Warrants to GuarantorsWe issued warrants to purchase an aggregate of 21,000 shares of common stock with an exercise price of $2.64 per share
to shareholders for guaranteeing the indebtedness under our Benaroya credit facility. The offer and sale of these securities were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as
amended, as offers and sales not involving a public offering.

Stock Issued upon Exercise of Warrants In Fiscal 2008, we
issued 258,278 shares of common stock to 189 warrant holders for aggregate consideration of $394,170. The offer and sale of these securities was made in reliance on the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, as an offer and sale not involving a public offering.

Conversion of Series A Preferred SharesIn
Fiscal 2008, 213 holders of our Series A preferred shares converted 2,628,778 of their Series A preferred shares into an aggregate of 371,491 shares of common stock. The offer and sale of these securities were made in reliance on the exemption
provided by Section 3(a) (9) under the Securities Act, as amended.

Conversion of Series B Preferred SharesIn Fiscal
2008, 112 holders of our Series B preferred shares converted 1,307,360 of their Series B preferred shares into an aggregate of 163,416 shares of common stock. The offer and sale of these securities were made in reliance on the exemption provided by
Section 3(a) (9) under the Securities Act, as amended.

Stock Issued upon Settlement of a ClaimIn October 2007, we
issued 11,719 shares of our common stock, with an agreed value of $12.00 per share, to 64 members of a settlement class that filed an employment related lawsuit against us in February 2004. The offer and sale of these securities was made in reliance
on the exemption from registration provided by Section 3(a) (10) of the Securities Act of 1933, as amended.



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The following table sets forth selected historical consolidated financial data for our company. The selected financial information set forth below under the captions Results of Operations Data for Fiscal 2008, Fiscal 2007, and
Fiscal 2006, and the selected consolidated balance sheet data as of March 30, 2008 and April 1, 2007, have been derived from our audited consolidated financial statements included elsewhere in this report. The selected historical
consolidated financial information set forth below under the captions Results of Operations Data for Fiscal 2005 and 2004 and the selected consolidated balance sheet data as of April 2, 2006, April 3, 2005, and March 28,
2004, have been derived from our audited financial statements that are not included in this report.

The data presented below should be
read in conjunction with, and is qualified in its entirety by reference to, Managements Discussion and Analysis of Financial Condition and Results of Operations and our historical consolidated financial statements and the notes
thereto appearing elsewhere in this report.



|                                                                         |  |                                               |         |   |            |   |        |            |  |   |            |    |  |            |         |    |  |   |        |  
|------------------------------------------------------------------------ |  | --------------------------------------------- | ------- | - | ---------- | - | ------ | ---------- |  | - | ---------- | -- |  | ---------- | ------- | -- |  | - | ------ | -
|                                                                         |  | Fiscal Years(1)                               |        
|                                                                         |  | Fiscal2008                                    |         |   | Fiscal2007 |   |        | Fiscal2006 |  |   | Fiscal2005 |    |  | Fiscal2004 |        
|                                                                         |  | (dollars in thousands, except per share data) |        
|Results of Operations Data(1, 3)                                         |  |                                               |         |   |            |   |        |            |  |   |            |    |  |            |         |    |  |   |        |  
|Net Sales                                                                |  |                                               |         |   |            |   |        |            |  |   |            |    |  |            |         |    |  |   |        |  
|Retail                                                                   |  | $                                             | 42,897  |   |            | $ | 39,334 |            |  | $ | 38,194     |    |  | $          | 40,102  |    |  | $ | 40,617 |  
|Wholesale                                                                |  |                                               | 28,132  |   |            |   | 20,901 |            |  |   | 13,187     |    |  |            | 9,516   |    |  |   | 6,522  |  
|Specialty                                                                |  |                                               | (1,952  | ) |            |   | 1,647  |            |  |   | 6,864      |    |  |            | 4,362   |    |  |   | 3,629  |  
|Total                                                                    |  |                                               | 69,077  |   |            |   | 61,882 |            |  |   | 58,245     |    |  |            | 53,980  |    |  |   | 50,768 |  
|Operating loss                                                           |  |                                               | (11,578 | ) |            |   | (9,486 | )          |  |   | (1,313     | )  |  |            | (3,695  | )  |  |   | (1,846 | )
|Net income (loss)                                                        |  | $                                             | (13,909 | ) |            | $ | (9,754 | )          |  | $ | 15,423     |    |  | $          | (4,625  | )  |  | $ | (2,595 | )
|Net Income (loss) per share:                                             |  |                                               |         |   |            |   |        |            |  |   |            |    |  |            |         |    |  |   |        |  
|Basic                                                                    |  | $                                             | (4.77   | ) |            | $ | (4.27  | )          |  | $ | 6.97       |    |  | $          | (2.21   | )  |  | $ | (1.26  | )
|Diluted                                                                  |  | $                                             | (4.77   | ) |            | $ | (4.27  | )          |  | $ | 2.42       |    |  | $          | (2.21   | )  |  | $ | (1.26  | )
|                                                                         |  |                                               |         |   |           
|Shares used in calculation of net income (loss) per share (thousands):   |  |                                               |         |   |            |   |        |            |  |   |            |    |  |            |         |    |  |   |        |  
|Basic                                                                    |  |                                               | 2,917   |   |            |   | 2,283  |            |  |   | 2,212      |    |  |            | 2,095   |    |  |   | 2,056  |  
|Diluted                                                                  |  |                                               | 2,917   |   |            |   | 2,283  |            |  |   | 6,434      |    |  |            | 2,095   |    |  |   | 2,056  |  
|                                                                         |  |                                               |         |   |           
|Balance Sheet Data                                                       |  |                                               |         |   |            |   |        |            |  |   |            |    |  |            |         |    |  |   |        |  
|Total assets                                                             |  | $                                             | 18,918  |   |            | $ | 17,350 |            |  | $ | 21,527     |    |  | $          | 17,930  |    |  | $ | 20,017 |  
|Long-term obligations (including current portion)(2)                     |  |                                               | 15,727  |   |            |   | 5,297  |            |  |   | 3,402      |    |  |            | 6,883   |    |  |   | 6,446  |  
|Stockholders equity (deficit)                                           |  | $                                             | (13,424 | ) |            | $ | (4,109 | )          |  | $ | 5,127      |    |  | $          | (10,689 | )  |  | $ | (6,671 | )
|                                                                         |  |                                               |         |   |           
|Other Data (unaudited)                                                   |  |                                               |         |   |            |   |        |            |  |   |            |    |  |            |         |    |  |   |        |  
|Earnings (loss) before interest, taxes, depreciation and amortization(3) |  | $                                             | (8,785  | ) |            | $ | (6,110 | )          |  | $ | 19,676     |    |  | $          | 2       |    |  | $ | 1,830  |  
|Adjusted EBITDA(3)                                                       |  | $                                             | (2,924  | ) |            | $ | (5,039 | )          |  | $ | (3,098     | )  |  | $          | (720    | )  |  | $ | 484    |  
|Comparable Store Sales Increase (Decrease)                               |  |                                               | 5.0     | % |            |   | 3.9    | %          |  |   | (1.9       | )% |  |            | (2.0    | )% |  |   | 3.0    | %
|Retail Store Count at Period End:                                        |  |                                               |         |   |            |   |        |            |  |   |            |    |  |            |         |    |  |   |        |  
|Company-operated by Tullys                                              |  |                                               | 93      |   |            |   | 90     |            |  |   | 88         |    |  |            | 92      |    |  |   | 94     |  
|Franchisee-operated (U.S.)                                               |  |                                               | 58      |   |            |   | 38     |            |  |   | 23         |    |  |            | 5       |    |  |   | 1      |  
|                                                                         |  |                                               |         |   |            |   |        |            |  |   |            |    |  |            |         |    |  |   |        |  
|Total retail store count                                                 |  |                                               | 151     |   |            |   | 128    |            |  |   | 111        |    |  |            | 97      |    |  |   | 95     |  
|                                                                         |  |                                               |         |   |            |   |        |            |  |   |            |    |  |            |         |    |  |   |        |  
|International licensee stores(4)                                         |  |                                               |        |   |            |   |       |            |  |   |           |    |  |            | 245     |    |  |   | 174    |  



Notes for Selected Financial Data



|(1) | Each fiscal year included 52 weeks, except for Fiscal 2005 which had 53 weeks. The 53rd week accounted for $955,000 in net sales in Fiscal 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Long-term obligations (including current portion) at the end of each period shown are summarized as follows:
|--- | ------------------------------------------------------------------------------------------------------------



|                                                                                                    |  |                        |        |            |   |            |  |            |       |            |   |       |  |   |      
|--------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---------- | - | ---------- |  | ---------- | ----- | ---------- | - | ----- |  | - | -----
|                                                                                                    |  | Fiscal Years          
|                                                                                                    |  | Fiscal2008             |        | Fiscal2007 |   | Fiscal2006 |  | Fiscal2005 |       | Fiscal2004
|                                                                                                    |  | (dollars in thousands)
|Credit facility, current portion of long-term debt and UCC obligation and capital lease obligations |  | $                      | 12,935 |            | $ | 4,270      |  | $          | 2,209 |            | $ | 2,078 |  | $ | 1,145
|Long-term debt, net of current portion                                                              |  |                        | 10     |            |   | 19         |  |            | 28    |            |   | 600   |  |   | 2,167
|Capital lease obligations, net of current portion                                                   |  |                        | 30     |            |   | 53         |  |            | 72    |            |   | 112   |  |   | 203  
|Long-term UCC note payable, net of current portion                                                  |  |                        | 2,310  |            |   |           |  |            |      |            |   |      |  |   |     
|Other liabilities                                                                                   |  |                        | 442    |            |   | 955        |  |            | 1,093 |            |   | 1,093 |  |   |     
|Convertible promissory note, net of discount                                                        |  |                        |       |            |   |           |  |            |      |            |   | 3,000 |  |   | 2,931
|                                                                                                    |  |                        |        |            |   |            |  |            |       |            |   |       |  |   |      
|Long-term obligations (including current portion)                                                   |  | $                      | 15,727 |            | $ | 5,297      |  | $          | 3,402 |            | $ | 6,883 |  | $ | 6,446
|                                                                                                    |  |                        |        |            |   |            |  |            |       |            |   |       |  |   |      



|(3) | Earnings before interest, taxes, depreciation and amortization, or EBITDA, is a financial measure we use to evaluate our operating performance, excluding the effects of financing
costs, income taxes, and non-cash depreciation and amortization. Adjusted EBITDA further adjusts for the effects of certain unusual items and to exclude revenues associated with our terminated relationship with TCJ. See Managements
Discussion and AnalysisKey Performance Measures and Definitions for additional information regarding the nature and use of EBITDA and Adjusted EBITDA. See the table in Managements Discussion and AnalysisNon-GAAP
Financial Measures for a reconciliation of EBITDA and Adjusted EBITDA to our reported amounts of net income (loss). See Managements Discussion and AnalysisNon-GAAP Financial Measures for a discussion of some of the
limitations of EBITDA and Adjusted EBITDA as analytical tools.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following table sets forth, for the periods indicated, the computation of EBITDA and Adjusted EBITDA,
and the reconciliation to the reported amounts for net income (loss):



|                                                              |  |                        |         |   |            |   |        |            |  |   |            |   |  |            |        |   |  |   |        |  
|------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------- | - | ------ | ---------- |  | - | ---------- | - |  | ---------- | ------ | - |  | - | ------ | -
|                                                              |  | Fiscal Years           |        
|                                                              |  | Fiscal2008             |         |   | Fiscal2007 |   |        | Fiscal2006 |  |   | Fiscal2005 |   |  | Fiscal2004 |       
|                                                              |  | (dollars in thousands) |        
|Net income (loss)                                             |  | $                      | (13,909 | ) |            | $ | (9,754 | )          |  | $ | 15,423     |   |  | $          | (4,625 | ) |  | $ | (2,595 | )
|Add back amounts for computation of EBITDA:                   |  |                        |         |   |            |   |        |            |  |   |            |   |  |            |        |   |  |   |        |  
|Interest income, interest expense, and loan guarantee fees    |  |                        | 2,358   |   |            |   | 287    |            |  |   | 385        |   |  |            | 924    |   |  |   | 760    |  
|Income taxes                                                  |  |                        | 2       |   |            |   | 17     |            |  |   | 339        |   |  |            | 52     |   |  |   | 43     |  
|Depreciation and amortization                                 |  |                        | 2,764   |   |            |   | 3,340  |            |  |   | 3,529      |   |  |            | 3,651  |   |  |   | 3,622  |  
|                                                              |  |                        |         |   |            |   |        |            |  |   |            |   |  |            |        |   |  |   |        |  
|EBITDA                                                        |  |                        | (8,785  | ) |            |   | (6,110 | )          |  |   | 19,676     |   |  |            | 2      |   |  |   | 1,830  |  
|                                                              |  |                        |         |   |           
|Add back (deduct) amounts for computation of Adjusted EBITDA: |  |                        |         |   |            |   |        |            |  |   |            |   |  |            |        |   |  |   |        |  
|Gain on sale of Japan Rights                                  |  |                        |        |   |            |   |       |            |  |   | (17,392    | ) |  |            |       |   |  |   |       |  
|Accelerated recognition of deferred license revenue from TCJ  |  |                        |        |   |            |   |       |            |  |   | (4,405     | ) |  |            |       |   |  |   |       |  
|Recognition of deferred license revenue from TCJ              |  |                        |        |   |            |   |       |            |  |   | (166       | ) |  |            | (647   | ) |  |   | (647   | )
|TCJ license fees and royalties                                |  |                        |        |   |            |   |       |            |  |   | (811       | ) |  |            | (2,234 | ) |  |   | (1,240 | )
|Evaluation of TCJ business integration opportunity            |  |                        |        |   |            |   |       |            |  |   |           |   |  |            | 129    |   |  |   | 541    |  
|Litigation costs                                              |  |                        | 883     |   |            |   | 799    |            |  |   |           |   |  |            |       |   |  |   |       |  
|Settlement of litigation                                      |  |                        |        |   |            |   | 72     |            |  |   |           |   |  |            | 1,628  |   |  |   |       |  
|Reversal of recognized deferred license revenue               |  |                        | 3,469   |   |            |   |       |            |  |   |           |   |  |            |       |   |  |   |       |  
|Severance costs                                               |  |                        | 76      |   |            |   | 200    |            |  |   |           |   |  |            | 402    |   |  |   |       |  
|Recognition of deferred offering costs                        |  |                        | 1,433   |   |            |   |       |            |  |   |           |   |  |            |       |   |  |   |       |  
|                                                              |  |                        |         |   |            |   |        |            |  |   |            |   |  |            |        |   |  |   |        |  
|Adjusted EBITDA                                               |  | $                      | (2,924  | ) |            | $ | (5,039 | )          |  | $ | (3,098     | ) |  | $          | (720   | ) |  | $ | 484    |  
|                                                              |  |                        |         |   |            |   |        |            |  |   |            |   |  |            |        |   |  |   |        |  



|(4) | As the result of the Japan Rights Sale, the Tullys stores operated and franchised by TCJ in Japan are excluded from our franchised and licensed store counts after
August 31, 2005. Tullys and TCJ have agreed to cooperate in the development of the Tullys brand for the mutual benefit of the two companies.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

You should read the following discussion and analysis of our financial condition and results of operations for Fiscal 2008, Fiscal 2007 and Fiscal
2006, together with our consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under Risk Factors and elsewhere in this report.

Business Overview

We are a specialty retailer and
wholesaler of hand-craft roasted, gourmet coffees. We generate revenues through three operating divisions:



| |  |  | Retail. Our retail division operates Tullys Coffee retail stores in the United States and generates revenues through the sales of products in these
stores.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Wholesale. Our wholesale division sells our gourmet whole bean and ground coffees and Bellaccino bottled beverages to customers in the grocery, office coffee
service and foodservice channels and to our franchisees.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Specialty. Our specialty division oversees the franchising of Tullys Coffee retail stores and manages our international joint venture, foreign
licensing, and business development activities. We generate revenues through licensing fees from U.S. and foreign franchisees and sales of products to foreign customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For most of the fiscal years since our founding, we have not generated sufficient cash to fully fund operations. We historically have financed this cash
shortfall through the issuance of debt and equity securities, through borrowings, and through cash provided under our international licensing relationships.

Our $10,000,000 credit facility with Benaroya Capital, due on August 31, 2008, will need to be replaced or renewed. Our Northrim credit facility is subject to periodic renewal, and would need to be replaced if not
renewed in October 2008. Subsequent to the balance sheet date on September 11, 2008, the Company and Benaroya Capital entered into the Forbearance Agreement. Under the Forbearance Agreement, Benaroya Capital has agreed to forbear from taking any
action to collect on the Benaroya Note or to foreclose on its security interests. Proceeds from the sale of the wholesale business would be used to fully repay the outstanding balance of on the Benaroya facility and the Northrim credit.

Subsequent to the balance sheet date, on September 15, 2008, Tullys, its wholly-owned subsidiary Tullys Bellaccino, LLC, and Green
Mountain Coffee Roasters, Inc., a Delaware corporation, entered into an Asset Purchase Agreement. Under the GMCR Agreement, GMCR will purchase the assets associated with Tullys wholesale business and supply chain, including rights to use the
Tullys brand worldwide (excluding Japan) and other Tullys trade names, trademarks and service marks, for a total consideration of $40.3 million in cash, subject to adjustment based on the value of the wholesale assets as of the closing
date.

The GMCR Agreement contemplates that, at the closing, GMCR will grant Tullys a license to use the Tullys
brand and other trade names, trademarks and service marks in connection with certain (i) retail operations worldwide (excluding Japan) and (ii) wholesale operations outside of North America, and that the parties will enter into an
exclusive coffee supply arrangement. Tullys current shareholders and executive management team will continue to own and operate the Companys domestic retail business (company owned, franchised and licensed retail store locations) and
international retail and wholesale businesses.

Consistent with our past disclosure and in light of the proposed sale of our wholesale
business to GMCR, we continue to evaluate the business, operations, and prospects of our remaining business units and to work with our



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financial advisors to explore potential opportunities to optimize the value of the company to our shareholders, including the sale of our retail and
international businesses.

Our Company History

Since our founding in 1992, our objective has been to make our gourmet coffees and genuine community coffeehouse experience the first choice for consumers in our markets. To achieve this goal, we have made significant investments in
marketing and building our brand and have concentrated on opening company-operated retail stores and developing our wholesale and specialty business. We have filed reports under the Securities Exchange Act of 1934 since 1999.

Between 1992 and 2001, we expanded to 114 company-operated stores. During this period, we financed our retail expansion by raising over $60 million in
equity securities and convertible debt and through licensing fees paid to us by foreign licensees of over $17 million. Between Fiscal 2001 and 2003, our financial performance was negatively impacted by the economic downturn that affected Seattle and
San Francisco, our two principal retail markets. During the same period, the market for new equity issues deteriorated significantly. To manage through this period and these challenges, rather than seek additional and potentially dilutive growth
capital, we chose to reduce normal operating expenses by closing certain under-performing stores and slowing our new store development plans to preserve capital. Between Fiscal 2002 and 2008, we streamlined aspects of our operations and emphasized
less capital intensive business opportunities such as wholesale and franchising.

In the second quarter of Fiscal 2006, we sold to our
Japanese licensee the right to use our trademarks and other intellectual property assets and rights in connection with the operation of the Tullys business in Japan. We received $17.5 million in cash proceeds in this transaction, which we
refer to as the Japan Rights Sale. These proceeds were used to improve our liquidity, reduce borrowings, and to further develop our domestic retail and wholesale businesses without causing shareholder dilution.

On February 4, 2008 we engaged an investment banking firm to assist in evaluating strategic alternatives to optimize company and shareholder value. The
Company has evaluated a range of alternatives. As a result of this assessment, on September 15, 2008, Tullys, its wholly-owned subsidiary Tullys Bellaccino, LLC, and Green Mountain Coffee Roasters, Inc., a Delaware corporation, entered
into an Asset Purchase Agreement. Under the GMCR Agreement, GMCR will purchase the assets associated with Tullys wholesale business and supply chain, including rights to use the Tullys brand worldwide (excluding Japan) and other
Tullys trade names, trademarks and service marks, for a total consideration of $40.3 million in cash, subject to adjustment based on the value of the wholesale assets as of the closing date. Expected proceeds from the sale of the wholesale
business would be used to fully repay the outstanding balance of on the Benaroya facility and the Northrim credit lines.

Growth Trends in Our Business

Retail Division.

Tullys has ninety-three company-operated retail stores and fifty-eight franchised stores in Washington, California, Arizona, Oregon, Idaho, Montana and Utah. Our stores are located in a variety of urban and suburban neighborhoods, and
in the Seattle and San Francisco central business districts. We also operate or franchise smaller footprint stores in special venues, such as within the premises of manufacturing facilities, and kiosks and cafes that are located in grocery stores,
hotels, hospitals and airports and on university campuses.

We have recently undertaken a strategic review of our retail business. As a
result, we are implementing initiatives to improve our retail operations, store facilities and merchandising strategies. The ongoing goal of our retail division initiatives is to increase retail store average unit volume, increase comparable store
sales and improve new store unit economics. We are simultaneously targeting operational improvements to enhance our retail margins and profitability. All of these initiatives are designed to collectively improve our sales and profitability.



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The initiatives discussed above have catalyzed significant improvements to our retail operations, which
we believe contributed to seven consecutive quarters of comparable store sale increases: 4.1%, 7.0% and 7.1% in the last three fiscal quarters of Fiscal 2007 and 9.5%, 7.6%, 8.8% and 2.1% for the four quarters of Fiscal 2008.

Wholesale Division.

Tullys sells
gourmet whole bean and ground coffees, our Bellaccino bottled beverages and single serve Tullys K-Cups through the wholesale channel. We sell our products through grocery locations as well as to office coffee services and foodservice channels
in the western United States and the Chicago metropolitan area. We also offer many of our products through mail-order and Internet channels.

We have emphasized growth in our wholesale business as an important and less capital intensive complement to our retail business. In each of the past five years, we have grown our wholesale business by expanding our distribution footprint,
acquiring new customers in existing territories, executing ongoing marketing, promotional and display programs and by introducing and selling new products.

Specialty Division.

Our specialty division oversees the franchising of Tullys Coffee retail stores and manages
our international joint venture, foreign licensing, and business development activities. Franchising complements our company-operated retail business by making Tullys genuine community coffeehouse experience more widely available and
convenient for customers. Franchising also benefits our wholesale business both directly (we wholesale our products to franchisees) and indirectly (by extending our brand and promoting consumer familiarity with Tullys products). At
March 30, 2008 there were fifty-eight U.S. franchisee-operated stores, primarily in special venues such as grocery stores, airports, hotels and university campuses.

Revenue Trends

We produce revenues in the U.S. from our retail, wholesale and U.S. specialty
operations. For the past fourteen consecutive fiscal quarters, our total U.S. net sales have increased as compared to the same quarter in the previous fiscal period. Our quarterly U.S. sales are summarized as follows:



|            |  |                                  |        |               |   |              |  |               |        |  |   |       
|----------- |  | -------------------------------- | ------ | ------------- | - | ------------ |  | ------------- | ------ |  | - | ------
|            |  | Fiscal Years                    
|            |  | FirstQuarter                     |        | SecondQuarter |   | ThirdQuarter |  | FourthQuarter
|            |  | (unauditeddollars in thousands)
|Fiscal 2006 |  | $                                | 12,665 |               | $ | 12,746       |  | $             | 13,863 |  | $ | 12,137
|Fiscal 2007 |  |                                  | 13,647 |               |   | 16,143       |  |               | 15,689 |  |   | 14,957
|Fiscal 2008 |  |                                  | 16,271 |               |   | 17,806       |  |               | 19,265 |  |   | 17,921

Our quarterly U.S. net sales increases as compared to the same quarter in the previous fiscal year
are summarized as follows:



|            |  |              |   |  |               |   |  |              |   |  |               |  
|----------- |  | ------------ | - |  | ------------- | - |  | ------------ | - |  | ------------- | -
|            |  | Fiscal Years |  
|            |  | FirstQuarter |   |  | SecondQuarter |   |  | ThirdQuarter |   |  | FourthQuarter |  
|Fiscal 2006 |  | 6.1          | % |  | 4.0           | % |  | 8.3          | % |  | 3.7           | %
|Fiscal 2007 |  | 7.8          | % |  | 26.7          | % |  | 13.2         | % |  | 23.2          | %
|Fiscal 2008 |  | 19.2         | % |  | 10.3          | % |  | 22.8         | % |  | 19.8          | %



33



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Our international revenues (from our specialty division) have fluctuated from period to period as the
result of growth of our former licensee in Japan and changes in the structure of our relationship with that licensee, the Japan Rights Sale in Fiscal 2006 and culminating in repossession of the licensing rights in conjunction with our UCC settlement
in the fourth quarter of 2008 as described in Note 12. Our quarterly international (foreign) sales are summarized as follows:



|            |  |                                  |       |               |   |       |              |  |               |     |  |   |        |     
|----------- |  | -------------------------------- | ----- | ------------- | - | ----- | ------------ |  | ------------- | --- |  | - | ------ | ----
|            |  | Fiscal Years                     |      
|            |  | FirstQuarter                     |       | SecondQuarter |   |       | ThirdQuarter |  | FourthQuarter |    
|            |  | (unauditeddollars in thousands) |      
|Fiscal 2006 |  | $                                | 1,081 |               | $ | 5,028 | (a)          |  | $             | 365 |  | $ | 360    |     
|Fiscal 2007 |  |                                  | 360   |               |   | 366   |              |  |               | 360 |  |   | 360    |     
|Fiscal 2008 |  |                                  | 519   |               |   | 404   |              |  |               | 360 |  |   | (3,469 | )(b)



|(a) | Includes $4,405,000 from the accelerated recognition of deferred license revenues due to the Japan Rights Sale.
|--- | ---------------------------------------------------------------------------------------------------------------

|(b) | Includes the ($3,469,000) net effect from the reversal of previously recognized deferred license revenue in relation to the repossession of the licensing right with our UCC
settlement in the fourth quarter of 2008 as described in Note 12.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Operating Cost Trends

Retail Cost Trends.We experience both variable and fixed cost trends in our retail division cost structure. Cost of products (cost of goods sold),
labor cost, occupancy costs other than rent, supplies, and other operating expenses typically increase or decrease according to broader pricing trends for those products. During Fiscal 2008, we have experienced cost increases associated with higher
costs for dairy, paper and baked goods, as well as higher energy-related costs. In some cases, store-level retail operating expenses may increase or decrease depending on the sales volume at a particular location. Generally, our leases provide for
periodic rent increases (which are generally leveled for financial reporting purposes by straight-line rent accounting).

We
undertake certain retail business initiatives with the objective of reducing costs as a percentage of sales through increased efficiencies and operating leverage. However, initiatives intended to produce a future benefit may cause a short-term
increase in costs, both in absolute dollars and as a percentage of sales. We analyze retail division operating costs as a percentage of store sales.

Wholesale Cost Trends. Wholesale cost of goods sold is generally higher as a percentage of revenue than retail cost of goods sold. Wholesale cost of goods sold is greatly affected by the cost of roasted coffee,
which includes the cost of green coffee, packaging and production costs. Costs such as wholesale sales commissions and freight charges generally depend on related wholesale sales volumes. Other wholesale costs, such as salaries, are largely fixed in
relation to sales growth, but increase as additional personnel are hired. Our recently introduced products, such as Bellaccino and K-Cups, generally have a higher cost of goods sold than traditional coffee products. We analyze these costs as a
percentage of wholesale sales.

Specialty Cost Trends. Most of our specialty division costs consist of labor, travel and legal
expenses. Labor and travel costs have increased to support our growing U.S. franchise store base. We also incur legal and compliance costs in connection with our franchising operations both domestically and internationally. We believe franchising
costs may decrease as a percentage of franchise royalty and license revenues as we leverage our investment in franchising infrastructure and labor, travel and legal expenses while realizing the leverage from a larger franchised store base.

Marketing, General and Administrative Cost Trends. Most of our marketing expenditures are discretionary in nature and depend on the
type, intensity and frequency of the marketing programs we employ. Examples of marketing expenses include point-of-sale materials, community initiatives, sponsorships and advertising. We are currently targeting a long-term reduction in marketing
expenses.



34



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Our general and administrative costs are less discretionary than our marketing costs. While we still seek
to grow our business, we have determined that we can scale back our development and support spending until such time as we may significantly accelerate our growth of new company-operated stores. In the third and fourth quarters of Fiscal 2008, we
reduced our administrative staff by several positions and implemented other cost savings initiatives.

Non-GAAP Financial Measures

Certain of the measures described below we use for internal management purposes are non-GAAP measures. We believe this managerial information is important
supplemental information to investors. Regulation G under the Securities Act, as well as Regulation S-K and other provisions of the Securities Exchange Act of 1934, define and prescribe the conditions for use of certain non-GAAP financial
information.

We use this information for internal managerial purposes and as a means to evaluate period-to-period comparisons. These
non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. This information reflects an additional way of viewing
aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provides a more complete understanding of factors and trends affecting our business. We strongly
encourage investors to review our financial statements and publicly filed reports in their entirety and to not rely on any single financial measure. Because non-GAAP financial measures are not standardized, it may not be possible to compare these
financial measures with all other companies non-GAAP financial measures having the same or similar names. The non-GAAP financial measures we use are not prepared in accordance with and should not be considered an alternative to, measurements
required by GAAP, such as sales, operating income, net income and income per share, and should not be considered measures of our liquidity. For information about our financial results as reported in accordance with GAAP, please see our Condensed
Consolidated Financial Statements included in this Annual Report on Form 10-K.

In particular, although EBITDA and Adjusted EBITDA may be
used by management teams, securities analysts and others in their evaluation of companies, these measures have limitations as analytical tools. Some of the limitations of these measures are:



| |  |  | They do not reflect certain cash expenditures or our future requirements for capital expenditures or contractual commitments;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | They do not reflect changes in, or cash requirements for, our working capital needs;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | They do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on debt;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and these
measures do not reflect any cash requirements for such replacements;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other companies in our industry may calculate EBITDA or Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expenses that are unusual in nature may still occur from time to time.
| | - |  | ----------------------------------------------------------------------



35



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The following table sets forth, for the periods indicated, the computation of EBITDA and Adjusted EBITDA,
and the reconciliation to the reported amounts for net income (loss):



|                                                                      |  |                        |         |   |            |   |        |            |  |   |         |  
|--------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------- | - | ------ | ---------- |  | - | ------- | -
|                                                                      |  | Fiscal Years           |        
|                                                                      |  | Fiscal2008             |         |   | Fiscal2007 |   |        | Fiscal2006 | 
|                                                                      |  | (dollars in thousands) |        
|Net income (loss)                                                     |  | $                      | (13,909 | ) |            | $ | (9,754 | )          |  | $ | 15,423  |  
|Add back amounts for computation of EBITDA:                           |  |                        |         |   |            |   |        |            |  |   |         |  
|Interest income, interest expense, and loan guarantee fees            |  |                        | 2,358   |   |            |   | 287    |            |  |   | 385     |  
|Income taxes                                                          |  |                        | 2       |   |            |   | 17     |            |  |   | 339     |  
|Depreciation and amortization                                         |  |                        | 2,764   |   |            |   | 3,340  |            |  |   | 3,529   |  
|Earnings (loss) before interest, taxes, depreciation and amortization |  |                        | (8,785  | ) |            |   | (6,110 | )          |  |   | 19,676  |  
|Add back (deduct) amounts for computation of Adjusted EBITDA:         |  |                        |         |   |            |   |        |            |  |   |         |  
|Gain on Japan Rights Sale(1)                                          |  |                        |        |   |            |   |       |            |  |   | (17,392 | )
|Accelerated recognition of deferred license revenue from TCJ(2)       |  |                        |        |   |            |   |       |            |  |   | (4,405  | )
|Recognition of deferred license revenue from TCJ(2)                   |  |                        |        |   |            |   |       |            |  |   | (166    | )
|TCJ license fees and royalties(2)                                     |  |                        |        |   |            |   |       |            |  |   | (811    | )
|Litigation costs(3)                                                   |  |                        | 883     |   |            |   | 799    |            |  |   |        |  
|Reversal of recognized deferred license revenue(4)                    |  |                        | 3,469   |   |            |   |       |            |  |   |        |  
|Settlement of litigation(5)                                           |  |                        |        |   |            |   | 72     |            |  |   |        |  
|Recognition of deferred offering costs(6)                             |  |                        | 1,433   |   |            |   |       |            |  |   |        |  
|Severance costs                                                       |  |                        | 76      |   |            |   | 200    |            |  |   |        |  
|                                                                      |  |                        |         |   |            |   |        |            |  |   |         |  
|Adjusted EBITDA                                                       |  | $                      | (2,924  | ) |            | $ | (5,039 | )          |  | $ | (3,098  | )
|                                                                      |  |                        |         |   |            |   |        |            |  |   |         |  



|(1) | As the result of the Japan Rights Sale, we recognized a gain of $17,392,000 and recognized $4,405,000 of deferred license revenue, as described in Note 12 of the Notes to the
Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | After the Japan Rights Sale, we no longer receive license fee and royalty income from Tullys Coffee Japan. As a result of the Japan Rights Sale, we recognized $4,405,000 of
the deferred license revenue on an accelerated basis, as described in Note 12 of the Notes to the Consolidated Financial Statements, and no longer recognize amortization of deferred license revenue related to TCJ.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | During Fiscal 2007 and 2008, we recorded the estimated costs related to litigation with UCC for $799,000 and $736,000 respectively as described in Note 12 of the Notes to the
Consolidated Financial Statements. During Fiscal 2008 we also accrued for estimated legal fees for the defense of employee claims in California for $147,000, as described in Note 16 of the Notes to the Consolidated Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | During Fiscal 2008, with the settlement with UCC and the resulting repossession of the licensed territory, we reversed previously recognized deferred license revenue of $3,469,000
as described in Note 12.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | In Fiscal 2005 we entered into a settlement agreement related to class action litigation, which was given final approval by the court in Fiscal 2007, as described in Note 16 of the
Notes to the Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | In Fiscal 2008 we recognized $1,433,000 of deferred offering costs in relation to expenses incurred during our proposed public offering.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------



36



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Retail Performance Measures

Our U.S. retail stores are summarized as follows:



|                                             |  |              |   |  |            |   |  |            |  
|-------------------------------------------- |  | ------------ | - |  | ---------- | - |  | ---------- | -
|                                             |  | Fiscal Years |  
|                                             |  | Fiscal2008   |   |  | Fiscal2007 |   |  | Fiscal2006 |  
|NUMBER OF STORES:                            |  |              |   |  |            |   |  |            |  
|Company-operated stores                      |  |              |   |  |            |   |  |            |  
|Stores at beginning of the period            |  | 90           |   |  | 88         |   |  | 92         |  
|New stores                                   |  | 5            |   |  | 6          |   |  | 2          |  
|Closed stores                                |  | (2           | ) |  | (4         | ) |  | (6         | )
|                                             |  |              |   |  |            |   |  |            |  
|End of the period                            |  | 93           |   |  | 90         |   |  | 88         |  
|                                             |  |              |   |  |            |   |  |            |  
|Franchisee-operated stores                   |  |              |   |  |            |   |  |            |  
|Stores at beginning of the period            |  | 38           |   |  | 23         |   |  | 5          |  
|New stores                                   |  | 21           |   |  | 15         |   |  | 18         |  
|Closed stores                                |  | (1           | ) |  |           |   |  |           |  
|                                             |  |              |   |  |            |   |  |            |  
|End of the period                            |  | 58           |   |  | 38         |   |  | 23         |  
|                                             |  |              |   |  |            |   |  |            |  
|Total company-operated and franchised stores |  |              |   |  |            |   |  |            |  
|Stores at beginning of the period            |  | 128          |   |  | 111        |   |  | 97         |  
|New stores                                   |  | 26           |   |  | 21         |   |  | 20         |  
|Closed stores                                |  | (3           | ) |  | (4         | ) |  | (6         | )
|                                             |  |              |   |  |            |   |  |            |  
|End of the period                            |  | 151          |   |  | 128        |   |  | 111        |  
|                                             |  |              |   |  |            |   |  |            |  
|STORE LOCATIONS BY STATE (end of period):    |  |              |   |  |            |   |  |            |  
|Washington                                   |  | 93           |   |  | 80         |   |  | 72         |  
|California                                   |  | 26           |   |  | 26         |   |  | 26         |  
|Arizona                                      |  | 13           |   |  | 13         |   |  | 6          |  
|Idaho                                        |  | 10           |   |  | 6          |   |  | 3          |  
|Oregon                                       |  | 3            |   |  | 3          |   |  | 4          |  
|Montana                                      |  | 4            |   |  |           |   |  |           |  
|Utah                                         |  | 2            |   |  |           |   |  |           |  
|                                             |  |              |   |  |            |   |  |            |  
|TOTAL                                        |  | 151          |   |  | 128        |   |  | 111        |  
|                                             |  |              |   |  |            |   |  |            |  

Our quarterly comparable store sales increases (decreases) over prior years comparable
quarter are summarized as follows:



|            |  |              |    |  |               |    |  |              |    |  |               |      
|----------- |  | ------------ | -- |  | ------------- | -- |  | ------------ | -- |  | ------------- | -----
|            |  | Fiscal Years |   
|            |  | FirstQuarter |    |  | SecondQuarter |    |  | ThirdQuarter |    |  | FourthQuarter |      
|Fiscal 2006 |  | (1.3         | )% |  | (1.6          | )% |  | (4.0         | )% |  | (0.6          | )%(a)
|Fiscal 2007 |  | (2.5         | )% |  | 4.1           | %  |  | 7.0          | %  |  | 7.1           | %    
|Fiscal 2008 |  | 9.5          | %  |  | 7.6           | %  |  | 8.8          | %  |  | 2.1           | %    



|(a) | Excludes the estimated effect of the 53rdweek in Fiscal 2005.
|--- | -------------------------------------------------------------



37



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##### Table of Contents

Results of Operations



|                                                  |  |                        |        |   |            |   |        |            |  |   |        |  
|------------------------------------------------- |  | ---------------------- | ------ | - | ---------- | - | ------ | ---------- |  | - | ------ | -
|                                                  |  | Fiscal Years           |       
|                                                  |  | Fiscal2008             |        |   | Fiscal2007 |   |        | Fiscal2006 | 
|                                                  |  | (dollars in thousands) |       
|Net Sales                                         |  |                        |        |   |            |   |        |            |  |   |        |  
|Retail store sales                                |  | $                      | 42,897 |   |            | $ | 39,334 |            |  | $ | 38,194 |  
|Wholesale sales                                   |  |                        | 28,132 |   |            |   | 20,901 |            |  |   | 13,187 |  
|Specialty sales of products                       |  |                        | 203    |   |            |   | 6      |            |  |   | 11     |  
|                                                  |  |                        |        |   |            |   |        |            |  |   |        |  
|Total sales of products                           |  |                        | 71,232 |   |            |   | 60,241 |            |  |   | 51,392 |  
|Licenses, royalties, and fees                     |  |                        | 234    |   |            |   | 201    |            |  |   | 842    |  
|SpecialtyRecognition of deferred revenue         |  |                        | (2,389 | ) |            |   | 1,440  |            |  |   | 6,011  |  
|                                                  |  |                        |        |   |            |   |        |            |  |   |        |  
|Total net sales                                   |  | $                      | 69,077 |   |            | $ | 61,882 |            |  | $ | 58,245 |  
|                                                  |  |                        |        |   |            |   |        |            |  |   |        |  
|Cost of Goods Sold and Related Occupancy Expenses |  |                        |        |   |            |   |        |            |  |   |        |  
|Retail cost of goods sold                         |  | $                      | 15,697 |   |            | $ | 14,293 |            |  | $ | 13,456 |  
|Retail occupancy expenses                         |  |                        | 5,323  |   |            |   | 5,217  |            |  |   | 5,236  |  
|Wholesale                                         |  |                        | 19,858 |   |            |   | 14,546 |            |  |   | 8,398  |  
|Specialty                                         |  |                        | 214    |   |            |   | 5      |            |  |   | 7      |  
|                                                  |  |                        |        |   |            |   |        |            |  |   |        |  
|Total                                             |  | $                      | 41,092 |   |            | $ | 34,061 |            |  | $ | 27,097 |  
|                                                  |  |                        |        |   |            |   |        |            |  |   |        |  
|Operating Expenses                                |  |                        |        |   |            |   |        |            |  |   |        |  
|Store operating expenses                          |  | $                      | 19,474 |   |            | $ | 17,911 |            |  | $ | 17,095 |  
|Other operating expenses:                         |  |                        |        |   |            |   |        |            |  |   |        |  
|Wholesale operating expenses                      |  |                        | 4,158  |   |            |   | 4,067  |            |  |   | 3,039  |  
|SpecialtyU.S. franchising expenses               |  |                        | 506    |   |            |   | 419    |            |  |   | 355    |  
|Specialtyinternational division expenses         |  |                        | 1,046  |   |            |   | 933    |            |  |   | 144    |  
|                                                  |  |                        |        |   |            |   |        |            |  |   |        |  
|Total other operating expenses                    |  | $                      | 5,710  |   |            | $ | 5,419  |            |  | $ | 3,538  |  
|                                                  |  |                        |        |   |            |   |        |            |  |   |        |  
|Wholesale shipping expenses                       |  | $                      | 1,161  |   |            | $ | 828    |            |  | $ | 489    |  
|Marketing, general and administrative expenses    |  | $                      | 10,435 |   |            | $ | 9,641  |            |  | $ | 7,355  |  
|                                                  |  |                        |       
|Other Data                                        |  |                        |        |   |            |   |        |            |  |   |        |  
|EBITDA                                            |  | $                      | (8,785 | ) |            | $ | (6,110 | )          |  | $ | 19,676 |  
|                                                  |  |                        |       
|Adjusted EBITDA                                   |  | $                      | (2,924 | ) |            | $ | (5,039 | )          |  | $ | (3,098 | )



38



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##### Table of Contents

For additional information about our operating divisions, see Note 21 of the Notes to the Consolidated
Financial Statements.



|                                                                             |  |              |    |  |            |   |  |            |     
|---------------------------------------------------------------------------- |  | ------------ | -- |  | ---------- | - |  | ---------- | ----
|                                                                             |  | Fiscal Years |   
|                                                                             |  | Fiscal2008   |    |  | Fiscal2007 |   |  | Fiscal2006 |     
|Total Net Sales Metrics                                                      |  |              |    |  |            |   |  |            |     
|Amounts as Percent of Total Net Sales                                        |  |              |    |  |            |   |  |            |     
|Retail store sales                                                           |  | 62.1         | %  |  | 63.6       | % |  | 70.9       | %(a)
|Wholesale sales                                                              |  | 40.7         | %  |  | 33.8       | % |  | 24.5       | %(a)
|Specialtyinternational product sales                                        |  | 0.3          | %  |  | 0.0        | % |  | 0.0        | %(a)
|                                                                             |  |              |    |  |            |   |  |            |     
|Total sales of products                                                      |  | 103.1        | %  |  | 97.4       | % |  | 95.5       | %(a)
|SpecialtyLicenses, royalties and fees                                       |  | 0.3          | %  |  | 0.3        | % |  | 1.5        | %(a)
|SpecialtyRecognition of deferred revenue                                    |  | (3.4         | )% |  | 2.3        | % |  | 3.0        | %(a)
|                                                                             |  |              |    |  |            |   |  |            |     
|Total net sales                                                              |  | 100.0        | %  |  | 100.0      | % |  | 100.0      | %   
|                                                                             |  |              |    |  |            |   |  |            |     
|Retail Metrics                                                               |  |              |    |  |            |   |  |            |     
|Amounts as Percent of retail store sales                                     |  |              |    |  |            |   |  |            |     
|Retail cost of goods sold                                                    |  | 36.6         | %  |  | 36.3       | % |  | 35.2       | %   
|Retail occupancy expenses                                                    |  | 12.4         | %  |  | 13.3       | % |  | 13.7       | %   
|Store operating expenses                                                     |  | 45.4         | %  |  | 45.5       | % |  | 44.8       | %   
|                                                                             |  |              |   
|Wholesale Metrics                                                            |  |              |    |  |            |   |  |            |     
|Amounts as Percent of wholesale sales                                        |  |              |    |  |            |   |  |            |     
|Wholesale cost of goods sold                                                 |  | 70.6         | %  |  | 69.6       | % |  | 63.7       | %   
|Wholesale operating expenses                                                 |  | 14.8         | %  |  | 19.5       | % |  | 23.0       | %   
|Wholesale shipping expenses                                                  |  | 4.1          | %  |  | 4.0        | % |  | 3.7        | %   
|Percentage Increase in Wholesale Sales vs. Previous Period                   |  | 34.6         | %  |  | 58.5       | % |  | 45.4       | %(b)
|Marketing, general and administrative expenses as percent of Total Net Sales |  | 15.1         | %  |  | 15.6       | % |  | 13.7       | %(c)



Notes:



|(a) | Percentages for Fiscal 2006 are pro forma amounts, to exclude the effects from the accelerated recognition of $4,405,000 of deferred license revenues due to the Japan Rights Sale.
Including this amount, the percentages for Fiscal 2006 would be Retail store sales65.6%, Wholesale sales22.6% and Specialty11.8%.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Amount excludes the estimated effects of the 53rdweek in Fiscal 2005.
|--- | ---------------------------------------------------------------------

|(c) | Percentages exclude the effects from the accelerated recognition of $4,405,000 of deferred license revenues due to the Japan Rights Sale. Including this amount, the percentage would
be 12.6% for Fiscal 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fiscal 2008 Compared To Fiscal 2007

Net Sales

Total net sales increased $7,195,000 or 11.6% to $69,077,000 for Fiscal 2008, as
compared to $61,882,000 for Fiscal 2007. Sales of products increased $10,991,000 or 18.2% to $71,232,000 for Fiscal 2008, as compared to $60,241,000 for Fiscal 2007. Sales of products increased $7,231,000 for the wholesale division, $197,000 for the
specialty division and sales from company-operated retail stores increased $3,563,000. Licenses, royalties and fees increased $33,000 or 16.4% to $234,000 as compared to $201,000 for Fiscal 2007.



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The divisional increase in net sales was comprised as follows:



|                                                                         |  |                                |        |  
|------------------------------------------------------------------------ |  | ------------------------------ | ------ | -
|Total company Fiscal 2008 compared
to Fiscal 2007 (dollars in thousands) |  | Increase(Decrease) inNet Sales |       
|Retail                                                                   |  | $                              | 3,563  |  
|Wholesale                                                                |  |                                | 7,231  |  
|Specialty                                                                |  |                                | (3,599 | )
|                                                                         |  |                                |        |  
|Total company                                                            |  | $                              | 7,195  |  
|                                                                         |  |                                |        |  

The retail sales increase represented a 9.1% increase compared to Fiscal 2007. For Fiscal 2008
comparable retail store sales grew 5.0%. The factors comprising the retail sales increase are summarized as follows:



|                                                                                                            |  |                                |        |  
|----------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | -
|Retail division Components of net
sales increase Fiscal 2008 compared to Fiscal 2007 (dollars in thousands) |  | Increase(Decrease) inNet Sales |       
|Comparable stores sales increase                                                                            |  | $                              | 1,824  |  
|Sales increase from new stores                                                                              |  |                                | 2,820  |  
|Sales decrease from stores closed during Fiscal 2007 and Fiscal 2008                                        |  |                                | (1,081 | )
|                                                                                                            |  |                                |        |  
|Total retail division                                                                                       |  | $                              | 3,563  |  
|                                                                                                            |  |                                |        |  

Wholesale net sales increased $7,231,000, or 34.6%, to $28,132,000 for 2008 from $20,901,000 for
Fiscal 2007. The increase reflects a $4,430,000 sales increase in the office coffee service channel (reflecting the addition of new customers and increased sales of our K-Cup products). This increase also reflects a $2,407,000 sales increase in the
grocery channel and franchise customer channel (reflecting the additional sales of product to our franchisee locations).

Net sales for the
specialty division decreased by $3,599,000 to $(1,952,000) for Fiscal 2008 as compared to Fiscal 2007, reflecting the ($3,469,000) net effect from the reversal of previously recognized deferred revenue in relation to the repossession of the
licensing right with our UCC settlement in the fourth quarter of Fiscal 2008 as described in Note 12 of the Notes to the Consolidated Financial Statements.

Cost of Goods Sold and Operating Expenses

Cost of goods sold and related occupancy costs increased $7,031,000, or
20.6%, to $41,092,000 for Fiscal 2008 as compared to Fiscal 2007. Cost of goods sold and related occupancy costs increased to 59.5% of total sales of products for Fiscal 2008, compared to 56.5% for the corresponding period last year. The increase
was primarily due to faster growth of our wholesale sales, which have a higher product cost as a percentage of sales compared to our retail and specialty sales. Retail cost of goods sold increased from 36.3% in Fiscal 2007 to 36.6% in Fiscal 2008,
reflecting increased costs for products sold and product mix. Retail occupancy cost of goods sold decreased from 13.3% in Fiscal 2007 to 12.4% in Fiscal 2008, reflecting the closing of stores with higher occupancy costs in Fiscal 2008 and opening of
stores with lower relative occupancy costs. Wholesale cost of goods sold increased from 69.6% of wholesale sales in Fiscal 2007 to 70.6 % in Fiscal 2008 due to a higher percentage of wholesale sales coming from K-Cups (which have a lower margin
than most wholesale products) and higher product costs.

Store operating expenses increased $1,563,000, or 8.7%, to $19,474,000 in Fiscal
2008 from $17,911,000 in Fiscal 2007 as the result of general cost increases and the costs associated with programs to improve retail store service levels, including increases in store staffing and staff compensation. As a percentage of retail
sales, store operating expenses decreased to 45.4% for Fiscal 2008 compared to 45.5% for Fiscal 2007.



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##### Table of Contents

Other operating expenses (expenses associated with all operations other than company-operated retail
stores) increased $291,000 or 5.4% to $5,710,000 during Fiscal 2008 from $5,419,000 in Fiscal 2007. The increase reflects $69,000 of additional costs associated with the opening and development of U.S. franchised stores.

Marketing, general and administrative costs decreased $639,000 or 6.6%, to $9,002,000 during Fiscal 2008 from $9,641,000 in Fiscal 2007. This decrease
was primarily due to a $107,000 reduction in stock option expense as well as a $139,000 decrease in marketing costs in Fiscal 2008.

Depreciation and amortization expense decreased $576,000, or 17.2%, to $2,764,000 for Fiscal 2008 from $3,340,000 for Fiscal 2007, reflecting a lower level of depreciable assets in the current period.

We recognized $1,433,000 of costs relating to our proposed and terminated underwritten stock offering for Fiscal 2008. We incurred no such expenses in
the corresponding period of Fiscal 2007.

Other Income (Expense)

Interest expense increased $1,793,000 or 522.7% to $2,136,000 for Fiscal 2008 as compared to $343,000 for Fiscal 2007, primarily as the result of interest
expense associated with the Benaroya Note (see Note 11 of the Notes to the Consolidated Financial Statements). Loan Guaranty expense increased to $222,000 for Fiscal 2008 as compared to no such expenses in Fiscal 2007, reflecting the fees paid to a
guarantor of the Benaroya Note.

Income Taxes

Income taxes decreased $15,000 from $17,000 for Fiscal 2007 to $2,000 for Fiscal 2008, reflecting a reduction in payments to local and state authorities.

At March 30, 2008, we had federal and state net operating loss carryforwards of approximately $52.0 million and $15.8 million, respectively. The
federal net operating loss carryfowards expire between 2021 and 2028 and the state net operating losses expire between 2009 and 2028. Our net operating loss carryforwards are one of our deferred income tax assets; however, the ultimate realization
of these deferred income tax assets is dependent upon generation of future taxable income. Due to the uncertainty of future taxable income, deferred tax assets resulting from these net operating losses have been fully reserved. In accordance with
SFAS 109, Accounting for Income Taxes, we will assess the continuing need for a valuation allowance that results from uncertainty regarding our ability to realize the benefits of our deferred tax assets.

Net Loss

As a result of the factors described
above, we had a net loss of $13,909,000 for Fiscal 2008 as compared to the net loss of $9,754,000 for Fiscal 2007, an increased net loss of $4,155,000 or 42.6%.

EBITDA

As a result of the factors described above, we had negative EBITDA of $8,785,000 for Fiscal 2008 as compared
to negative EBITDA of $6,110,000 during Fiscal 2007, an increased negative EBITDA of $2,675,000 or 43.8%.

Adjusted EBITDA

As a result of the factors described above, we had negative Adjusted EBITDA of $2,924,000 for Fiscal 2008 as compared to negative Adjusted EBITDA of
$5,039,000 during Fiscal 2007, an improvement of $2,115,000 or 42.0%.



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##### Table of Contents

Fiscal 2007 Compared To Fiscal 2006

Net Sales

Sales of products increased $8,849,000 or 17.2% to $60,241,000 for Fiscal 2007, as
compared to $51,392,000 for Fiscal 2006. Sales of products increased $7,714,000 for the wholesale division and sales from company-operated retail stores increased $1,140,000. Although Fiscal 2006 included the one-time effects from the accelerated
recognition of $4,405,000 of deferred license revenues, net sales increased $3,637,000, or 6.2%, to $61,882,000 as compared to net sales of $58,245,000 for Fiscal 2006.

The divisional increase in net sales was comprised as follows:



|                                                                                              |  |                                |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | -
|Total company Fiscal 2007 Compared
To Fiscal 2006 (dollars in thousands)                      |  | Increase(Decrease) inNet Sales |       
|Retail                                                                                        |  | $                              | 1,140  |  
|Wholesale                                                                                     |  |                                | 7,714  |  
|Specialty (including in Fiscal 2006 $4,405 from accelerated recognition of deferred revenues) |  |                                | (5,217 | )
|                                                                                              |  |                                |        |  
|Total company                                                                                 |  | $                              | 3,637  |  
|                                                                                              |  |                                |        |  

The retail sales increase represented a 3.0% increase compared to Fiscal 2006. For Fiscal 2007
comparable retail store sales grew 3.9%. The factors comprising the retail sales increase are summarized as follows:



|                                                                                                            |  |                                |        |  
|----------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | -
|Retail division Components of net
sales increase Fiscal 2007 Compared To Fiscal 2006 (dollars in thousands) |  | Increase(Decrease) inNet Sales |       
|Comparable stores sales increase                                                                            |  | $                              | 1,335  |  
|Sales increase from new stores                                                                              |  |                                | 2,710  |  
|Sales decrease from stores closed during Fiscal 2007 and Fiscal 2006                                        |  |                                | (2,867 | )
|Other                                                                                                       |  |                                | (38    | )
|                                                                                                            |  |                                |        |  
|Total retail division                                                                                       |  | $                              | 1,140  |  
|                                                                                                            |  |                                |        |  

Wholesale net sales increased $7,714,000, or 58.5%, to $20,901,000 for Fiscal 2007 from
$13,187,000 for Fiscal 2006. The increase reflects a $5,215,000 sales increase in the grocery channel (due primarily to growth in the number of grocery retailers selling Tullys coffee, increased sales to current grocery retailers, and sales of
our new Bellaccino bottled beverages) and sales of our new K-Cup products.

Net sales for the specialty division decreased by $5,217,000 to
$1,647,000 for Fiscal 2007 as compared to Fiscal 2006, primarily due to the one time accelerated recognition of $4,405,000 of deferred revenues in the prior year period and the cessation of license fees from TCJ, both as a result of the Japan Rights
Sale.

Cost of Goods Sold and Operating Expenses

Cost of goods sold and related occupancy costs increased $6,964,000, or 25.7%, to $34,061,000 for Fiscal 2007 as compared to Fiscal 2006. Cost of goods sold and related occupancy costs increased to 56.5% of total
sales of products for Fiscal 2007, compared to 52.8% for the corresponding period last year. The increase was primarily due to faster growth of our wholesale sales, which have a high product cost as a percentage of sales compared to our retail and
specialty sales. Retail cost of goods sold increased from 35.2% in Fiscal 2006 to 36.3% in Fiscal 2006, reflecting increased product costs, product mix, and discounts reflected in sales for the stored value card loyalty programs introduced in Fiscal
2007. Retail occupancy cost of goods sold decreased from 13.7% in Fiscal 2006 to 13.3% in Fiscal 2007, reflecting the closing of stores with higher occupancy costs,



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##### Table of Contents

opening of stores with lower relative occupancy costs, and increases in average unit volumes. Wholesale cost of goods sold increased from 63.7% in Fiscal
2006 to 69.6% in Fiscal 2007 reflecting lower margins on newly introduced products (including Bellaccino and K-Cups) and higher product costs.

Store operating expenses increased $816,000, or 4.8%, to $17,911,000 in Fiscal 2007 from $17,095,000 in Fiscal 2006 as the result of general cost increases, start-up costs at new stores, and the costs associated with programs to improve
retail store service levels, including increases in store staffing and new training programs. As a percentage of retail sales, store operating expenses increased to 45.5% for Fiscal 2007 compared to 44.8% for Fiscal 2006.

Other operating expenses (expenses associated with all operations other than company-operated retail stores) increased $1,881,000 or 53.2% to $5,419,000
during Fiscal 2007 from $3,538,000 in Fiscal 2006. The increase reflects $1,028,000 of increased expenses incurred in connection with the expansion of our wholesale business, and $799,000 of legal fees and costs related to the UCC litigation (see
Note 12 of the Notes to the Consolidated Financial Statements), as well as $64,000 additional costs associated with the opening and development of new U.S. franchised stores.

Marketing, general and administrative costs increased $2,286,000 or 31.1%, to $9,641,000 during Fiscal 2007 from $7,355,000 in Fiscal 2006. This increase
was primarily due to costs associated with the business improvement initiatives described above, and included increased marketing and advertising costs of $1,168,000 and $378,000 for the expansion of retail training programs and support staff.
Severance and related costs of $200,000 were incurred in Fiscal 2007, as compared to $68,000 of severance and related costs incurred in Fiscal 2006. Additionally, stock option expenses for Fiscal 2007 increased $248,000 as compared to the prior year
period due to the effects of new stock option grants and the adoption of SFAS 123(R).

Depreciation and amortization expense decreased
$189,000, or 5.4%, to $3,340,000 for Fiscal 2007 from $3,529,000 for Fiscal 2006.

Other Income (Expense)

During Fiscal 2006, Tullys recognized a gain of $17,392,000 on the Japan Rights Sale (see Note 12 of the Notes to the Consolidated Financial
Statements), which did not recur in Fiscal 2007.

Interest expense decreased $184,000 or 34.9% to $343,000 for Fiscal 2007 as compared to
$527,000 for Fiscal 2006, reflecting a lower average balance on our credit line and repayment of our convertible note.

Income Taxes

Income tax expense decreased by $322,000 to $17,000 for Fiscal 2007, as compared to $339,000 during Fiscal 2006 (which reflected
the estimated income tax and Alternative Minimum Tax, or AMT, consequences from the Japan Rights Sale in Fiscal 2006).

At April 1,
2007, we had tax net operating loss carryforwards of approximately $37,000,000 that expire between 2013 and 2027. Our net operating loss carryforwards are one of our deferred income tax assets; however, the ultimate realization of these deferred
income tax assets is dependent upon generation of future taxable income. Due to the uncertainty of future taxable income, deferred tax assets resulting from these net operating losses have been fully reserved. In accordance with SFAS 109,
Accounting for Income Taxes, we will assess the continuing need for a valuation allowance that results from uncertainty regarding our ability to realize the benefits of our deferred tax assets.

Net Income (Loss)

As a result of the factors
described above, we had a loss of $9,754,000 for Fiscal 2007 as compared to the net income of $15,423,000 for Fiscal 2006.



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##### Table of Contents

EBITDA

As a result of the factors described above, we had negative EBITDA of $6,110,000 for Fiscal 2007 as compared to EBITDA of $19,676,000 during Fiscal 2006.

Adjusted EBITDA

As a result of the factors described above, we had negative Adjusted EBITDA of $5,039,000 for Fiscal
2007 as compared to negative Adjusted EBITDA of $3,098,000 during Fiscal 2006.

Liquidity and Financial Condition

Sources and Uses of Cash in our Business

The following table sets forth, for the periods indicated, selected statements of cash flows data:



|                                                                            |  |                        |         |   |            |   |        |            |  |   |         |  
|--------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------- | - | ------ | ---------- |  | - | ------- | -
|                                                                            |  | Fiscal Years           |        
|                                                                            |  | Fiscal2008             |         |   | Fiscal2007 |   |        | Fiscal2006 | 
|                                                                            |  | (dollars in thousands) |        
|STATEMENTS OF CASH FLOWS DATA                                               |  |                        |         |   |            |   |        |            |  |   |         |  
|Cash provided by (used for):                                                |  |                        |         |   |            |   |        |            |  |   |         |  
|Net income (loss)                                                           |  | $                      | (13,909 | ) |            | $ | (9,754 | )          |  | $ | 15,423  |  
|Gain on Japan Rights Sale                                                   |  |                        |        |   |            |   |       |            |  |   | (17,392 | )
|Franchise revenue repossession and refund provision                         |  |                        | 5,295   |   |            |   |       |            |  |   |        |  
|Adjustments for depreciation and other non-cash operating statement amounts |  |                        | 971     |   |            |   | 2,526  |            |  |   | (1,929  | )
|                                                                            |  |                        |         |   |            |   |        |            |  |   |         |  
|Net loss adjusted for non-cash operating statement amounts                  |  |                        | (7,643  | ) |            |   | (7,228 | )          |  |   | (3,898  | )
|Deferred revenue cash received                                              |  |                        |        |   |            |   | (25    | )          |  |   | 25      |  
|Cash provided (used) for other changes in assets and liabilities            |  |                        | 1,138   |   |            |   | 3,346  |            |  |   | (3,208  | )
|                                                                            |  |                        |         |   |            |   |        |            |  |   |         |  
|Net cash used in operating activities                                       |  |                        | (6,505  | ) |            |   | (3,907 | )          |  |   | (7,081  | )
|Net cash proceeds from Japan Rights Sale                                    |  |                        |        |   |            |   |       |            |  |   | 17,392  |  
|Purchases of property and equipment                                         |  |                        | (2,309  | ) |            |   | (1,763 | )          |  |   | (2,369  | )
|Net borrowings (repayments) of debt and capital leases                      |  |                        | 7,261   |   |            |   | 1,624  |            |  |   | (4,004  | )
|Repayment on UCC note payable                                               |  |                        | (2,000  | ) |            |   |       |            |  |   |        |  
|Minority interest in joint venture                                          |  |                        | 3,000   |   |            |   |       |            |  |   |        |  
|Other                                                                       |  |                        | 394     |   |            |   | 95     |            |  |   | 6       |  
|                                                                            |  |                        |         |   |            |   |        |            |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                        |  | $                      | (159    | ) |            | $ | (3,951 | )          |  | $ | 3,944   |  
|                                                                            |  |                        |         |   |            |   |        |            |  |   |         |  

Overall, our operating activities, investing activities, and financing activities used $159,000 of
cash during Fiscal 2008 as compared to $3,951,000 of cash used during Fiscal 2007 and $3,944,000 cash provided in Fiscal 2006.

In Fiscal
2006, we sold to our Japanese licensee the right to use our trademarks and other intellectual property assets and rights in connection with the operation of the Tullys business in Japan. We received $17.5 million in cash proceeds in this
transaction. We used these proceeds to improve our liquidity without shareholder dilution, reduce our debt, and for the development of our domestic retail and wholesale businesses.

Cash used in operating activities for Fiscal 2008 was $6,505,000, a change of $2,598,000 compared to Fiscal 2007 when operating activities used cash of
$3,907,000. This related primarily to a $4,155,000 increase in net loss in Fiscal 2008 compared to Fiscal 2007 due to the net effect of reversing previously recognized deferred revenue, offset by a $5,295,000 noncash benefit of the UCC Note Payable.



44



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##### Table of Contents

Investing activities used cash of $2,303,000 in Fiscal 2008, which included $2,309,000 of capital
expenditures relating to opening five new company-operated stores and purchasing equipment for our wholesale division.

Financing
activities provided cash of $8,649,000 in Fiscal 2008, provided cash of $1,751,000 in Fiscal 2007, and used cash of $3,998,000 in Fiscal 2006. In each year, the primary financing activity was borrowing and repayment of debt and capital leases. In
Fiscal 2008, Tullys made a $2,000,000 payment on the note payable related to the settlement of the UCC litigation as discussed in Note 12. Also, in Fiscal 2008, Tullys entered into a joint venture which provided $3,000,000 of cash
related to the minority interest as discussed in Note 13 of the Consolidated Financial Statements.

Contractual Commitments

We did not have any off-balance sheet arrangements as of March 30, 2008. The following table summarizes our principal financial
commitments (other than ordinary trade obligations such as accounts payable and accrued liabilities) as of March 30, 2008:



|                            |  |                             |        |                 |   |           |  |           |       |                  |   |     |  |   |      
|--------------------------- |  | --------------------------- | ------ | --------------- | - | --------- |  | --------- | ----- | ---------------- | - | --- |  | - | -----
|                            |  | Payments Due by Fiscal Year
|                            |  | Total                       |        | Less than 1year |   | 1-3 years |  | 3-5 years |       | More than 5years
|                            |  | (dollars in thousands)     
|Northrim facility(1)        |  | $                           | 4,650  |                 | $ | 4,650     |  | $         |      |                  | $ |    |  | $ |     
|Benaroya credit facility(1) |  |                             | 7,482  |                 |   | 7,482     |  |           |      |                  |   |    |  |   |     
|UCC Note Payable            |  |                             | 4,000  |                 |   | 1,000     |  |           | 3,000 |                  |   |    |  |   |     
|Other debt                  |  |                             | 173    |                 |   | 163       |  |           | 10    |                  |   |    |  |   |     
|Capital leases              |  |                             | 53     |                 |   | 23        |  |           | 30    |                  |   |    |  |   |     
|Store operating leases      |  |                             | 13,199 |                 |   | 4,535     |  |           | 6,955 |                  |   | 661 |  |   | 1,048
|Green coffee purchases(2)   |  |                             | 3,622  |                 |   | 3,622     |  |           |      |                  |   |    |  |   |     
|Executive severance(3)      |  |                             | 20     |                 |   | 20        |  |           |      |                  |   |    |  |   |     
|                            |  |                             |        |                 |   |           |  |           |       |                  |   |     |  |   |      
|                            |  | $                           | 33,199 |                 | $ | 21,495    |  | $         | 9,995 |                  | $ | 661 |  | $ | 1,048
|                            |  |                             |        |                 |   |           |  |           |       |                  |   |     |  |   |      



|(1) | The Northrim facility and Benaroya credit facility expires on October 2008 and August 2008, respectively, but may become due sooner in some circumstances. See Note 11 and 23 of the
Notes to the Consolidated Financial Statements. Subsequent to the balance sheet date on September 11, 2008, the Company and Benaroya Capital agreed to enter into the Forbearance Agreement, pursuant to which Benaroya Capital has agreed to forbear
from taking any action to collect on the Benaroya Note or to foreclose on its security interests. Proceeds from the sale of the wholesale business will be used to fully repay the Northrim and Benaroya facilities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | As of March 30, 2008, we had approximately $3,622,000 of coffee purchase contracts with fixed-price coffee purchase commitments. Since March 30, 2008, we have entered into
additional coffee purchase contracts.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Pursuant to the employment letters for members of Tullys senior management team, Tullys has agreed to pay severance compensation to these several executives in the event
their employment by Tullys is terminated for reasons other than certain excluded circumstances. The amount of severance to be paid would depend upon the rate of salary at the time of termination and other factors. As of March 30, 2008,
the aggregate contingent obligation for severance to these individuals was approximately $208,000. Also, pursuant to the employment letters for members of Tullys senior management team, Tullys has agreed to pay severance compensation to
these several executives in the event that there is a change in control. The amount of severance to be paid would depend upon the rate of salary at the time of termination and other factors. As of March 30, 2008, the aggregate contingent
obligation for severance to these individuals for the change in control provision was approximately $394,000. Accrued liabilities at March 30, 2008 include accrued severance costs related to our former executives in the amount of $20,000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Liquidity and Capital Resources

As of March 30, 2008 we had cash and cash equivalents of $1,271,000. Because we principally operate as a cash retail business, we
generally do not require a significant net investment in working capital and historically have operated with current liabilities in excess of our current assets. Exclusive of the borrowings, aggregating $11,721,000 as of March 30, 2008, under
our Northrim credit line and the Benaroya credit facility, both of which are also classified as current liabilities at March 30, 2008 (see Note 11 of the Notes to the Consolidated Financial Statements), we had current trade liabilities of
$17,020,000 as compared to current assets of $11,309,000 at March 30, 2008. Our wholesale business requires a greater level of investment in accounts receivable and inventory, which have increased as that business has grown. Our inventory
levels typically increase during the spring due to coffee crop seasonality and, to a lesser degree, during the autumn due to holiday season merchandise. Inventories are also subject to short-term fluctuations based upon the timing of coffee
receipts.

In recent years, Tullys has met its needs for investment and operating capital primarily through short term borrowings,
the proceeds from the sale of our Japanese intellectual property rights in August 2005, and the proceeds from our limited partnership agreement that established a new joint venture called TCAP in January, 2008.

In Fiscal 2007, we commenced an effort to fund accelerated growth of our business through a proposed underwritten public offering of our common stock. On
April 27, 2007, we filed a registration statement on Form S-1 (File No. 333-142438), for this proposed stock offering. On February 7, 2008, we withdrew the registration statement on Form S-1 due to unfavorable market conditions.

On February 4, 2008 we engaged an investment banking firm to assist in evaluating strategic alternatives to optimize company and
shareholder value. The Company has evaluated a range of alternatives. As a result of this assessment, Subsequent to the balance sheet date, on September 15, 2008, Tullys, its wholly-owned subsidiary Tullys Bellaccino, LLC, and GMCR,
entered into the GMCR Agreement. Under the GMCR Agreement, GMCR will purchase the assets associated with Tullys wholesale business and supply chain, including rights to use the Tullys brand worldwide (excluding Japan) and other
Tullys trade names, trademarks and service marks, for a total consideration of $40.3 million in cash, subject to adjustment based on the value of the assets as of the closing date.

The GMCR Agreement contemplates that, at the closing, GMCR will grant Tullys a license to use the Tullys brand and other trade
names, trademarks and service marks in connection with certain (i) retail operations worldwide (excluding Japan) and (ii) wholesale operations outside of North America, and that the parties will enter into an exclusive coffee supply
arrangement. Tullys current shareholders and executive management team will continue to own and operate the Companys domestic retail business (company owned, franchised and licensed retail store locations) and international retail and
wholesale businesses.

Closing of the proposed asset sale is subject to certain conditions, including approval by Tullys
shareholders.

The GMCR Agreement was unanimously approved by Tullys board of directors. In addition, Tom T. OKeefe, our
chairman of the board and founder, who beneficially owns approximately 20.2% of our outstanding common stock, has entered into a voting agreement with GMCR pursuant to which he has agreed to vote his shares in favor of the transaction at the
shareholders meeting at which our shareholders will be asked to approve the GMCR Agreement and the transactions contemplated therein.

The transaction is expected to close before the end of the calendar year. Tullys expects to file a preliminary proxy statement with regard to the GMCR Agreement in the next 30 days, which will include, among other things, information
regarding the background of the boards decision to enter into the GMCR Agreement.



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Tullys believes it will incur contractual costs associated with the sale of the assets of its
wholesale business subject to the GMCR Agreement with GMCR. At this time, however, these costs are subject to, and potentially contingent upon, the various conditions of, and successful completion of the closing process. If the GMCR Agreement and
the transactions contemplated therein are not approved by Tullys shareholders, or are approved but the asset sale is not successfully completed, then certain of these potential costs may not be incurred. Thus, we are currently unable to
provide a reasonable estimate of these costs. Direct and indirect costs associated with the sale, incurred subsequent to the signing of the APA, will be recorded during the period incurred or upon recognition of the closing of the transaction, if
successful, depending on the nature of such costs.

As all of the criteria of SFAS No. 144 were not met as of the balance sheet date,
the Company has not classified the assets and liabilities of its wholesale operations as held for sale and the results of operations for the wholesale operations will not be reported in discontinued operations. The Company will record the assets and
liabilities as held for sale in our first quarter Fiscal 2009 reporting in accordance with the guidance provided in SFAS No. 144, which were met on June 26, 2008. However, the assets and liabilities related to the wholesale business as of
March 30, 2008 that were included in the GMCR Agreement amount to $4,725,000 and $66,000, respectively. In addition, certain accounts receivable, current assets and liabilities and short-term credit facilities associated with our wholesale
business will be retained and settled by the Company upon closing of the proposed transaction.

Consistent with our past disclosure and in
light of the proposed sale of our wholesale business to GMCR, we continue to evaluate the business, operations, and prospects of our remaining business units and to work with our financial advisors to explore potential opportunities to optimize the
value of the company to our shareholders, including the sale of our retail and international businesses.

The Benaroya credit facility
($7,071,000 in principal amount outstanding at March 30, 2008, net of discount) was established as a short-term bridge financing to meet business needs prior to the anticipated completion of the proposed stock offering. Subsequent
to the balance sheet date on September 11, 2008, the Company and Benaroya Capital agreed to enter into a Forbearance Agreement. Under the Forbearance Agreement, Benaroya Capital has agreed to forbear from taking any action to collect on the
Benaroya Note or to foreclose on its security interests. Proceeds from the sale of the wholesale business would be used to fully repay the Benaroya facility upon successful closing.

Our Northrim credit line ($4,650,000 in principal amount outstanding at March 30, 2008) is generally subject to annual renewals. The Benaroya and
Northrim facilities mature August 31, 2008 and October 31, 2008, respectively, and, in order to satisfy these obligations and our other business requirements, Tullys believes it will be necessary to (i) raise equity capital and
use some of the proceeds for repayment of these debt obligations, (ii) replace them with other credit facilities, or (iii) renew them. Pending closure of the Asset Purchase Agreement with GMCR, the balances under both the Benaroya and
Northrim facilities will be repaid.

Other cash requirements for the next twelve months, in addition to normal operating expenses and the
commitments described in the consolidated financial statements and notes, are expected to consist primarily of capital expenditures related to the maintenance of company-operated stores and equipment and accounts receivable related to new wholesale
business. Some of these capital expenditures may be accomplished through operating or capital leases.

If the recently entered GMCR
Agreement is not successfully completed and additional financing is not found, we would likely be required to substantially reduce expenditures of our business. Further, changes in our operating plans, lower than anticipated sales, increased
expenses, or other events, may require us to seek additional debt, equity financing, or sale of assets on an accelerated basis. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could impact
negatively our financial condition and results of operations.



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Further, we could be required to substantially reduce operating, marketing, general and administrative
costs related to our continuing operations, or reduce or discontinue our investments in store improvements, new customers and new products. If these actions were not sufficient, we could be required to sell stores or other assets and could be unable
to take advantage of business opportunities or respond to competitive pressures. The sale of stores or other income-producing assets could adversely affect our future operating results and cash flows.

In their report dated September 16, 2008, our registered public accounting firm stated that our financial statements for the fiscal year ended
March 30, 2008 were prepared assuming we would continue as a going concern; however our recurring losses and accumulated deficit raise substantial doubts about our ability to continue as a going concern. The Companys ability to continue
as a going concern is in doubt as a result of a maturing short-term credit facilities, recurring losses from operations and accumulated deficit and is subject to the Companys ability to obtain additional equity or credit financing, which may
or may not be available, or consummate a strategic transaction.

Seasonality

Our business is subject to moderate seasonal fluctuations. Greater portions of Tullys net sales are generally realized during the third quarter of
Tullys fiscal year, which includes the December holiday season. Seasonal patterns are generally applicable to each of our operating divisions. In addition, quarterly results are affected by the timing of the opening of new stores (by
Tullys and our franchisees) or the closure of stores not meeting our expectations. Because of these factors, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. The pending sale
on the wholesale business may have an unexpected impact on the historical seasonality trends of our business.

Application of Critical Accounting
Policies

We have identified the policies below as critical to our business operations and the understanding of our results of
operations. The impact and any associated risks related to these policies on our business operations are discussed throughout Managements Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our
reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements. Note that our preparation of the consolidated financial
statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and
expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Our discussion
and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We believe the
following critical accounting policies affect our more significant judgments and estimates used in our consolidated financial statements, and should be read in conjunction with the Consolidated Financial Statements. Our critical accounting policies
relate particularly to (1) revenue recognition, (2) evaluation of long-lived assets for impairment, (3) lease termination reserves, and (4) share based payments.

Revenue recognition

Sales are
generally recognized at the time of the sale at retail store locations. Customer payments received on the issuance and replenishment of our Tullys coffee cards (stored value payment cards) are deferred and recognized as revenues when the cards
are redeemed, net of the estimated amounts of customer incentives and discounts associated with the cards. Managements judgment is involved in determining the applicable timing for



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recognition of these incentives and discounts in revenues. Sales for the wholesale and specialty divisions are recognized upon shipment of the products.
Allowances to wholesale customers for retail display and distribution positions (such as slotting allowances) are recognized as a reduction in sales, reducing gross profits until fully amortized (typically a period of two to six months).
Other wholesale sales discounts and allowances are recognized in the period earned by the customer. In some instances, the amounts of an allowance or discount will depend upon the actual performance of a customer for a particular program (such as
the number of packages of Tullys product sold in a particular period of time). The actual performance for the program will be determined by the customer and Tullys after the program is completed. Tullys initially records
managements estimate of the expected results for such programs, and then an adjustment is made, as necessary, when the actual results are reported to Tullys.

Revenues from advance license fees and similar agreements are recognized on the straight-line basis over the expected life of the agreements (ranging from eight to fifteen years). Managements judgment is
involved in determining the applicable amortization periods for these advance license fees. Royalty revenues for specialty licensees are recognized in accordance with the license agreements based upon sales at specific licensee store locations.
Coffee roasting fees are recognized when the licensee that is subject to the fee purchases coffee. Initial franchise fees for new stores franchised by Tullys are recognized when Tullys has completed the services required to earn these
fees and make them non-refundable, which is generally upon opening of a store. Royalty revenues from franchisee operated stores are recognized according to the relevant franchise agreements.

Evaluation of long-lived assets for impairment and assets held for sale

We periodically review the carrying value of our long-lived assets for continued appropriateness. This review is based upon our projections of anticipated
future cash flows. We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. While we believe that our estimates of future cash flows are reasonable,
different assumptions regarding such cash flows could materially affect our evaluations. The net carrying value of assets not recoverable are reduced to their fair value. Our estimates of fair value represent our best estimate, based primarily on
discounted cash flows.

Assets and liabilities to be disposed of by sale are, among other factors, classified as Held for Sale
at which point management has committed to a plan for the disposition, the sale is probable and expected to occur within 12 months and the assets are in sellable condition.

Recognition and measurement of lease termination reserves

Periodically, we will determine that certain leases will be terminated and the store or other operation will be closed. At the time when agreements are reached, we accrue for the net future minimum lease payments of
the related lease agreements. Amounts accrued as net future minimum losses include the discounted estimated future rental payments and lease termination fees, and estimated sub-lease recoveries.

Share Based Payments

We grant stock
options to purchase our common stock to certain employees under the 2004 Stock Option Plan. Additionally, we have outstanding options that were granted under an earlier stock option plan. The benefits provided under all of these plans are subject to
the provisions of revised Statement of Financial Accounting Standards No. 123, or SFAS 123R, Share-Based Payment, which we adopted effective April 3, 2006. We elected to use the modified prospective application
in adopting SFAS 123 R and, therefore, have not restated our results for prior periods. The valuation provisions of SFAS 123 R apply to new awards and to awards that are outstanding on the adoption date and subsequently modified or
cancelled.



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The determination of fair value of stock option awards on the date of grant using the Black-Scholes model
is affected by our stock price and subjective assumptions. These assumptions include, but are not limited to, the expected term of stock options and expected stock price volatility over the term of the awards. Our stock options have characteristics
significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimates.

SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. When actual forfeitures vary from our estimates, we recognize the
difference in compensation expense in the period the actual forfeitures occur or when options vest.

New Accounting Standards

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements(SFAS 157). SFAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another
accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair value measures; however, the application of this statement may change current practice. The
requirements of SFAS 157 are effective for our fiscal year beginning March 31, 2008. We are in the process of evaluating this guidance and therefore have not yet determined the impact that SFAS 157 will have on our financial
statements upon adoption. See also discussion of the interpretation of this pronouncement below.

In February 2008, the FASB issued Staff
Position (FSP) No. FAS 157-b, Fair Value Measurements. This FSP delays the effective date of SFAS 157 until January 1, 2009 for all nonfinancial assets and liabilities, except those recognized or disclosed at
fair value in the financial statements on a recurring basis. Nonfinancial assets and liabilities include, among other things: intangible assets acquired through business combinations; long-lived assets when assessing potential impairment; and
liabilities associated with restructuring activities.

In February 2007, the FASB issued Statement of Financial Accounting Standard
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment to FASB Statement No. 115(SFAS 159). SFAS 159 permits entities to choose, at specific election
dates, to measure eligible financial assets and liabilities at fair value (referred to as the fair value option) and report associated unrealized gains and losses in earnings. SFAS 159 also requires entities to display the fair
value of the selected assets and liabilities on the face of the balance sheet. SFAS 159 does not eliminate disclosure requirements of other accounting standards, including fair value measurement disclosures in SFAS 157. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. We are currently evaluating the implications of SFAS 159, and its impact on our financial statements has not yet been determined.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (FAS 141R). FAS 141R retains the
fundamental requirements in FAS 141 that the acquisition method of accounting (which FAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination.
FAS 141R also establishes principles and requirements for how the acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the
acquiree; (b) improves the completeness of the information reported about a business combination by changing the requirements for recognizing assets acquired and liabilities assumed arising from contingencies; (c) recognizes and measures
the goodwill acquired in the business combination or a gain from a bargain purchase; and (d) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business
combination. FAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (for acquisitions closed on or
after January 1, 2009 for the Company). Early application is not permitted. We have not yet determined the impact, if any, FAS 141R will have on our consolidated financial statements.



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In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements (FAS 160). FAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies
that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a
parents ownership interest in a subsidiary that do not result in deconsolidation. FAS 160 is effective for fiscal years beginning on or after December 15, 2008 (as of March 29, 2010 for the Company). We have not yet determined
the impact, if any, that FAS 160 will have on our consolidated financial statements.

In March 2008, the FASB issued SFAS
No. 161, Disclosures about Derivative Instruments and Hedging Activities (FAS 161). FAS 161 amends SFAS 133 and establishes, among other things, the disclosure requirements for derivative instruments and for hedging
activities. This Statement amends and expands the disclosure requirements of Statement 133 with the intent to provide users of financial statements with an enhanced understanding of derivative instruments and hedging activities. The requirements of
FAS 161 are effective for fiscal years beginning after November 15, 2008. We have not yet determined the impact, if any, that FAS 161 will have on our consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful Lives of Intangible Assets (FSP 142-3), which
amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB No. 142, Goodwill and Other Intangible Assets. The intent of FSP
142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other U.S. generally
accepted accounting principles. We do not expect the adoption of FSP 142-3 to have a material effect on our consolidated financial position or results of operations.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

The supply and price of coffee beans are subject to significant volatility and can be affected by multiple factors in producing countries, including weather, political and economic conditions. In addition, green coffee bean prices have been
affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee beans through agreements establishing export quotas or
restricting coffee bean supplies worldwide. In order to limit the cost exposure of the main commodity used in our business, we enter into fixed-price purchase commitments. Typically, Tullys has entered into contracts for the next seasons
delivery of green coffee beans to help ensure adequacy of supply. As of March 30, 2008, we had approximately $3,622,000 in fixed price purchase commitments. Since March 30, 2008, we have entered into additional coffee purchase contracts.
We estimate that a ten percent increase in coffee bean pricing could reduce operating income by $1,500,000 to $1,600,000 annually if we were unable to adjust our retail prices.

To provide adequate funding for operations, we utilize both fixed rate and variable rate debt with varying maturities. At March 30, 2008, we had
approximately 71% of our outstanding debt at fixed rates. If interest rates for our variable rate debt had averaged 10% more during the year, our interest expense would have increased, and income before taxes would have decreased by $44,000 for the
year ended March 30, 2008.

We currently have no foreign currency exchange rate exposure related to our purchasing of coffee beans
because all transactions are denominated in U.S. dollars.



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

The
following consolidated financial statements, and related notes thereto, of Tullys Coffee Corporation, and the Report of Independent Registered Public Accounting Firm, are filed as a part of this Annual Report on Form 10-K.

Index to Consolidated Financial Statements



|                                                                                                                                           |  |           
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------
|                                                                                                                                           |  | PageNumber
|Report of Independent Registered Public Accounting Firm                                                                                    |  | 53        
|Consolidated Balance Sheets as of March 30, 2008 and April 1, 2007                                                                         |  | 54        
|Consolidated Statements of Operations for the years ended March 30, 2008, April 1, 2007, and April 
2, 2006                                |  | 55        
|Consolidated Statements of Changes in Stockholders Equity (Deficit) for the years ended March 
30, 2008, April 1, 2007, and April 2, 2006 |  | 56        
|Consolidated Statements of Cash Flows for the years ended March 30, 2008, April 1, 2007, and April 
2, 2006                                |  | 59        
|Notes to Consolidated Financial Statements                                                                                                 |  | 61        



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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Tullys Coffee
Corporation

We have audited the accompanying consolidated balance sheets of Tullys Coffee Corporation and subsidiaries as of
March 30, 2008 and April 1, 2007 and the related consolidated statements of operations, stockholders equity (deficit) and cash flows for each of the periods ended March 30, 2008, April 1, 2007 and April 2, 2006.
These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Tullys Coffee Corporation and subsidiaries as of March 30, 2008 and April 1, 2007, and the consolidated results of its operations and its cash flows for each of the periods ended March 30,
2008, April 1, 2007 and April 2, 2006, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that Tullys Coffee Corporation will continue as a going concern. As more fully described in Note 2 to the consolidated financial statements, the Company
has incurred recurring operating losses, an accumulated and total stockholders deficit and a working capital deficiency. These conditions raise substantial doubt about the Companys ability to continue as a going concern. The
consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this
uncertainty.

Moss Adams LLP

Seattle, Washington

September 16, 2008



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Tullys Coffee Corporation

Consolidated Balance Sheets



|                                                                                                                                                                                                                                                                     |  |                                          |          |   |              |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------- | - | ------------ | - | ------- | -
|                                                                                                                                                                                                                                                                     |  | March 30,2008                            |          |   | April 1,2007 |  
|                                                                                                                                                                                                                                                                     |  | (dollars in thousands,except share data) |         
|Assets                                                                                                                                                                                                                                                               |  |                                          |          |   |              |   |         |  
|Current assets                                                                                                                                                                                                                                                       |  |                                          |          |   |              |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                                            |  | $                                        | 1,271    |   |              | $ | 1,430   |  
|Accounts receivable, net of allowance for doubtful accounts of $321 and $295 at 2008 and 2007, respectively                                                                                                                                                          |  |                                          | 5,372    |   |              |   | 3,970   |  
|Inventories                                                                                                                                                                                                                                                          |  |                                          | 3,929    |   |              |   | 3,023   |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                            |  |                                          | 737      |   |              |   | 778     |  
|                                                                                                                                                                                                                                                                     |  |                                          |          |   |              |   |         |  
|Total current assets                                                                                                                                                                                                                                                 |  |                                          | 11,309   |   |              |   | 9,201   |  
|Property and equipment, net                                                                                                                                                                                                                                          |  |                                          | 6,741    |   |              |   | 7,115   |  
|Goodwill                                                                                                                                                                                                                                                             |  |                                          | 456      |   |              |   | 456     |  
|Other intangible assets, net                                                                                                                                                                                                                                         |  |                                          | 168      |   |              |   | 273     |  
|Other assets                                                                                                                                                                                                                                                         |  |                                          | 244      |   |              |   | 305     |  
|                                                                                                                                                                                                                                                                     |  |                                          |          |   |              |   |         |  
|Total assets                                                                                                                                                                                                                                                         |  | $                                        | 18,918   |   |              | $ | 17,350  |  
|                                                                                                                                                                                                                                                                     |  |                                          |          |   |              |   |         |  
|Liabilities and Stockholders Deficit                                                                                                                                                                                                                                |  |                                          |          |   |              |   |         |  
|Current liabilities                                                                                                                                                                                                                                                  |  |                                          |          |   |              |   |         |  
|Accounts payable                                                                                                                                                                                                                                                     |  | $                                        | 8,599    |   |              | $ | 5,957   |  
|Accrued liabilities                                                                                                                                                                                                                                                  |  |                                          | 4,404    |   |              |   | 3,897   |  
|Credit line and current portion of long-term debt                                                                                                                                                                                                                    |  |                                          | 11,885   |   |              |   | 4,228   |  
|Current portion of UCC note payable                                                                                                                                                                                                                                  |  |                                          | 1,027    |   |              |   |        |  
|Current portion of capital lease obligations                                                                                                                                                                                                                         |  |                                          | 23       |   |              |   | 42      |  
|Deferred revenue                                                                                                                                                                                                                                                     |  |                                          | 2,803    |   |              |   | 3,755   |  
|                                                                                                                                                                                                                                                                     |  |                                          |          |   |              |   |         |  
|Total current liabilities                                                                                                                                                                                                                                            |  |                                          | 28,741   |   |              |   | 17,879  |  
|Long-term debt, net of current portion                                                                                                                                                                                                                               |  |                                          | 10       |   |              |   | 19      |  
|UCC note payable, net of current portion                                                                                                                                                                                                                             |  |                                          | 2,310    |   |              |   |        |  
|Capital lease obligation, net of current portion                                                                                                                                                                                                                     |  |                                          | 30       |   |              |   | 53      |  
|Other liabilities                                                                                                                                                                                                                                                    |  |                                          | 442      |   |              |   | 955     |  
|Deferred lease costs                                                                                                                                                                                                                                                 |  |                                          | 809      |   |              |   | 1,129   |  
|Deferred revenue, net of current portion                                                                                                                                                                                                                             |  |                                          |         |   |              |   | 1,424   |  
|                                                                                                                                                                                                                                                                     |  |                                          |          |   |              |   |         |  
|Total liabilities                                                                                                                                                                                                                                                    |  |                                          | 32,342   |   |              |   | 21,459  |  
|                                                                                                                                                                                                                                                                     |  |                                          |          |   |              |   |         |  
|Minority interest in joint venture                                                                                                                                                                                                                                   |  |                                          | 6,000    |   |              |   |        |  
|                                                                                                                                                                                                                                                                     |  |                                          |          |   |              |   |         |  
|Commitments and contingencies (Note 16)                                                                                                                                                                                                                              |  |                                          |          |   |              |   |         |  
|Stockholders deficit                                                                                                                                                                                                                                                |  |                                          |          |   |              |   |         |  
|Series A Convertible Preferred stock, no par value; 31,000,000 shares authorized, 12,930,374 and 15,559,152 issued and outstanding at 2008 and
2007, respectively; stated value of $2.50 per share and a liquidation preference of $32,326 (2008) and $38,898 (2007) |  |                                          | 28,783   |   |              |   | 34,639  |  
|Common stock, no par value; 120,000,000 shares authorized at 2008 and 2007; 3,251,891 and 2,406,570 shares issued and outstanding at 2008 and
2007, respectively, with a liquidation preference of $58,534 (2008) and $43,322 (2007)                                 |  |                                          | 19,100   |   |              |   | 9,822   |  
|Series B Convertible Preferred stock, no par value; 8,000,000 shares authorized, 3,613,349 and 4,920,709 issued and outstanding at 2008 and
2007, respectively, stated value of $2.50 per share and a liquidation preference of $9,033 (2008) and $12,302 (2007)     |  |                                          | 8,009    |   |              |   | 10,911  |  
|Additional paid-in capital                                                                                                                                                                                                                                           |  |                                          | 29,719   |   |              |   | 28,645  |  
|Subscription receivable                                                                                                                                                                                                                                              |  |                                          | (3,000   | ) |              |   |        |  
|Accumulated deficit                                                                                                                                                                                                                                                  |  |                                          | (102,035 | ) |              |   | (88,126 | )
|                                                                                                                                                                                                                                                                     |  |                                          |          |   |              |   |         |  
|Total stockholders deficit                                                                                                                                                                                                                                          |  |                                          | (13,424  | ) |              |   | (4,109  | )
|                                                                                                                                                                                                                                                                     |  |                                          |          |   |              |   |         |  
|Total liabilities and stockholders deficit                                                                                                                                                                                                                          |  | $                                        | 18,918   |   |              | $ | 17,350  |  
|                                                                                                                                                                                                                                                                     |  |                                          |          |   |              |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



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Tullys Coffee Corporation

Consolidated Statements of Operations



|                                                                                                    |  |                                              |         |   |              |   |        |              |  |   |        |  
|--------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | ------- | - | ------------ | - | ------ | ------------ |  | - | ------ | -
|                                                                                                    |  | Years ended                                  |        
|                                                                                                    |  | March 30,2008                                |         |   | April 1,2007 |   |        | April 2,2006 | 
|                                                                                                    |  | (dollars in thousands, exceptper share data) |        
|Net sales                                                                                           |  |                                              |         |   |              |   |        |              |  |   |        |  
|Retail store sales                                                                                  |  | $                                            | 42,897  |   |              | $ | 39,334 |              |  | $ | 38,194 |  
|Wholesale sales                                                                                     |  |                                              | 28,132  |   |              |   | 20,901 |              |  |   | 13,187 |  
|Specialty sales of products                                                                         |  |                                              | 203     |   |              |   | 6      |              |  |   | 11     |  
|                                                                                                    |  |                                              |         |   |              |   |        |              |  |   |        |  
|Total sales of products                                                                             |  |                                              | 71,232  |   |              |   | 60,241 |              |  |   | 51,392 |  
|Licenses, royalties, and fees                                                                       |  |                                              | 234     |   |              |   | 201    |              |  |   | 842    |  
|Recognition of deferred license revenue                                                             |  |                                              | (2,389  | ) |              |   | 1,440  |              |  |   | 6,011  |  
|                                                                                                    |  |                                              |         |   |              |   |        |              |  |   |        |  
|Net sales                                                                                           |  |                                              | 69,077  |   |              |   | 61,882 |              |  |   | 58,245 |  
|                                                                                                    |  |                                              |         |   |              |   |        |              |  |   |        |  
|Cost of goods sold and operating expenses                                                           |  |                                              |         |   |              |   |        |              |  |   |        |  
|Retail cost of goods sold                                                                           |  |                                              | 15,697  |   |              |   | 14,293 |              |  |   | 13,456 |  
|Retail occupancy expenses                                                                           |  |                                              | 5,323   |   |              |   | 5,217  |              |  |   | 5,236  |  
|                                                                                                    |  |                                              |         |   |              |   |        |              |  |   |        |  
|Total retail cost of goods sold and related occupancy expenses                                      |  |                                              | 21,020  |   |              |   | 19,510 |              |  |   | 18,692 |  
|Wholesale cost of goods sold                                                                        |  |                                              | 19,858  |   |              |   | 14,546 |              |  |   | 8,398  |  
|Specialty cost of goods sold                                                                        |  |                                              | 214     |   |              |   | 5      |              |  |   | 7      |  
|                                                                                                    |  |                                              |         |   |              |   |        |              |  |   |        |  
|Cost of goods sold and related occupancy expenses                                                   |  |                                              | 41,092  |   |              |   | 34,061 |              |  |   | 27,097 |  
|Store operating expenses                                                                            |  |                                              | 19,474  |   |              |   | 17,911 |              |  |   | 17,095 |  
|Other operating expenses                                                                            |  |                                              | 5,710   |   |              |   | 5,419  |              |  |   | 3,538  |  
|Wholesale shipping expenses                                                                         |  |                                              | 1,161   |   |              |   | 828    |              |  |   | 489    |  
|Marketing, general and administrative costs                                                         |  |                                              | 9,002   |   |              |   | 9,641  |              |  |   | 7,355  |  
|Depreciation and amortization                                                                       |  |                                              | 2,764   |   |              |   | 3,340  |              |  |   | 3,529  |  
|Settlement of litigation                                                                            |  |                                              |        |   |              |   | 72     |              |  |   |       |  
|Impairment of long-lived assets                                                                     |  |                                              |        |   |              |   |       |              |  |   | 236    |  
|Recognition of deferred offering costs                                                              |  |                                              | 1,433   |   |              |   |       |              |  |   |       |  
|Store closure and lease termination costs                                                           |  |                                              | 19      |   |              |   | 96     |              |  |   | 219    |  
|                                                                                                    |  |                                              |         |   |              |   |        |              |  |   |        |  
|Total cost of goods sold and operating expenses                                                     |  |                                              | 80,655  |   |              |   | 71,368 |              |  |   | 59,558 |  
|                                                                                                    |  |                                              |         |   |              |   |        |              |  |   |        |  
|Operating loss                                                                                      |  |                                              | (11,578 | ) |              |   | (9,486 | )            |  |   | (1,313 | )
|Other income (expense)                                                                              |  |                                              |         |   |              |   |        |              |  |   |        |  
|Interest expense                                                                                    |  |                                              | (2,136  | ) |              |   | (343   | )            |  |   | (527   | )
|Interest income                                                                                     |  |                                              |        |   |              |   | 56     |              |  |   | 208    |  
|Gain on sale of Japan Rights                                                                        |  |                                              |        |   |              |   |       |              |  |   | 17,392 |  
|Miscellaneous income                                                                                |  |                                              | 29      |   |              |   | 36     |              |  |   | 68     |  
|Loan guarantee fee expense                                                                          |  |                                              | (222    | ) |              |   |       |              |  |   | (66    | )
|                                                                                                    |  |                                              |         |   |              |   |        |              |  |   |        |  
|Total other income (expense)                                                                        |  |                                              | (2,329  | ) |              |   | (251   | )            |  |   | 17,075 |  
|                                                                                                    |  |                                              |         |   |              |   |        |              |  |   |        |  
|Income (loss) before income taxes                                                                   |  |                                              | (13,907 | ) |              |   | (9,737 | )            |  |   | 15,762 |  
|Income tax expense                                                                                  |  |                                              | 2       |   |              |   | 17     |              |  |   | 339    |  
|                                                                                                    |  |                                              |         |   |              |   |        |              |  |   |        |  
|Net income (loss)                                                                                   |  | $                                            | (13,909 | ) |              | $ | (9,754 | )            |  | $ | 15,423 |  
|                                                                                                    |  |                                              |         |   |              |   |        |              |  |   |        |  
|Earnings (loss) per sharebasic and diluted                                                         |  |                                              |         |   |              |   |        |              |  |   |        |  
|Earnings (loss) per sharebasic                                                                     |  | $                                            | (4.77   | ) |              | $ | (4.27  | )            |  | $ | 6.97   |  
|Earnings (loss) per sharediluted                                                                   |  | $                                            | (4.77   | ) |              | $ | (4.27  | )            |  | $ | 2.42   |  
|Weighted average shares used in computing basic and diluted earnings (loss) pershare (in thousands) |  |                                              |         |   |              |   |        |              |  |   |        |  
|Earnings (loss) per sharebasic                                                                     |  |                                              | 2,917   |   |              |   | 2,283  |              |  |   | 2,212  |  
|Earnings (loss) per sharediluted                                                                   |  |                                              | 2,917   |   |              |   | 2,283  |              |  |   | 6,434  |  

The accompanying notes are an integral part of these consolidated financial statements.



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##### Table of Contents

Tullys Coffee Corporation

Consolidated Statements of Changes in Stockholders Equity (Deficit)

Years Ended March 30, 2008, April 1, 2007, and April 2, 2006



|                                                                      |  |                                               |  |                |                                          |                |           |              |                |                           |        |                |                          |          |                           |  |   |                    |   |        |           |        |   |       |        |         |   |  |   |     |   |  |   |        |  |   |     |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------- |  | --------------------------------------------- |  | -------------- | ---------------------------------------- | -------------- | --------- | ------------ | -------------- | ------------------------- | ------ | -------------- | ------------------------ | -------- | ------------------------- |  | - | ------------------ | - | ------ | --------- | ------ | - | ----- | ------ | ------- | - |  | - | --- | - |  | - | ------ |  | - | --- | - |  | - | ------- | - |  | - | ------- | -
|                                                                      |  | Convertible Preferred Stock                   |  |                | Convertible PreferredStock, to be issued |                |           | Common Stock |                | Common Stock,to be issued |        |                | Additionalpaid-incapital |          | DeferredStockCompensation |  |   | AccumulatedDeficit |   |        | Total     |       
|                                                                      |  | Series AShares                                |  | Series AAmount |                                          | Series BShares |           |              | Series BAmount |                           |        | Series AShares |                          |          | Series AAmount            |  |   | Shares             |   | Amount |           | Shares |   |       | Amount |         |   |  |   |    
|                                                                      |  | (dollars in thousands, except per share data) | 
|Balance, April 3, 2005                                                |  | 15,378,264                                    |  | $              | 34,483                                   |                | 4,980,709 |              |                | $                         | 11,044 |                |                          | 180,888  |                           |  | $ | 157                |   |        | 2,169,116 |        | $ | 9,384 |        | 42,109  |   |  | $ | 86  |   |  | $ | 27,974 |  | $ | (22 | ) |  | $ | (93,795 | ) |  | $ | (10,689 | )
|Issuance of common stock warrants as compensation for loan guarantees |  |                                               |  |                |                                          |                |           |              |                |                           |        |                |                          |          |                           |  |   |                    |   |        |           |        |   |       |        |         |   |  |   |     |   |  |   | 254    |  |   |     |   |  |   |         |   |  |   | 254     |  
|Exercise of stock options                                             |  |                                               |  |                |                                          |                |           |              |                |                           |        |                |                          |          |                           |  |   |                    |   |        | 4         |        |   |       |        |         |   |  |   |     |   |  |   |        |  |   |     |   |  |   |         |   |  |   |         |  
|Issuance of stock options                                             |  |                                               |  |                |                                          |                |           |              |                |                           |        |                |                          |          |                           |  |   |                    |   |        |           |        |   |       |        |         |   |  |   |     |   |  |   | 42     |  |   |     |   |  |   |         |   |  |   | 42      |  
|Conversion of Series B to Common                                      |  |                                               |  |                |                                          |                | (60,000   | )            |                |                           | (133   | )              |                          |          |                           |  |   |                    |   |        | 7,500     |        |   | 133   |        |         |   |  |   |     |   |  |   |        |  |   |     |   |  |   |         |   |  |   |        |  
|Amortization of deferred stock compensation                           |  |                                               |  |                |                                          |                |           |              |                |                           |        |                |                          |          |                           |  |   |                    |   |        |           |        |   |       |        |         |   |  |   |     |   |  |   |        |  |   | 22  |   |  |   |         |   |  |   | 22      |  
|Cancellation of stock options                                         |  |                                               |  |                |                                          |                |           |              |                |                           |        |                |                          |          |                           |  |   |                    |   |        |           |        |   |       |        |         |   |  |   |     |   |  |   | 69     |  |   |     |   |  |   |         |   |  |   | 69      |  
|Exercise of common stock warrants                                     |  |                                               |  |                |                                          |                |           |              |                |                           |        |                |                          |          |                           |  |   |                    |   |        | 2,263     |        |   | 6     |        |         |   |  |   |     |   |  |   |        |  |   |     |   |  |   |         |   |  |   | 6       |  
|Issuance of shares from rights offering                               |  | 180,888                                       |  |                | 156                                      |                |           |              |                |                           |        |                |                          | (180,888 | )                         |  |   | (157               | ) |        | 42,109    |        |   | 87    |        | (42,109 | ) |  |   | (86 | ) |  |   |        |  |   |     |   |  |   |         |   |  |   |        |  
|Stock offering costs                                                  |  |                                               |  |                |                                          |                |           |              |                |                           |        |                |                          |          |                           |  |   |                    |   |        |           |        |   |       |        |         |   |  |   |     |   |  |   |        |  |   |     |   |  |   |         |   |  |   |         |  
|Net loss                                                              |  |                                               |  |                |                                          |                |           |              |                |                           |        |                |                          |          |                           |  |   |                    |   |        |           |        |   |       |        |         |   |  |   |     |   |  |   |        |  |   |     |   |  |   | 15,423  |   |  |   | 15,423  |  
|                                                                      |  |                                               |  |                |                                          |                |           |              |                |                           |        |                |                          |          |                           |  |   |                    |   |        |           |        |   |       |        |         |   |  |   |     |   |  |   |        |  |   |     |   |  |   |         |   |  |   |         |  
|Balance, April 2, 2006                                                |  | 15,559,152                                    |  | $              | 34,639                                   |                | 4,920,709 |              |                | $                         | 10,911 |                |                          |         |                           |  | $ |                   |   |        | 2,220,992 |        | $ | 9,610 |        |        |   |  | $ |    |   |  | $ | 28,339 |  | $ |    |   |  | $ | (78,372 | ) |  | $ | 5,127   |  
|                                                                      |  |                                               |  |                |                                          |                |           |              |                |                           |        |                |                          |          |                           |  |   |                    |   |        |           |        |   |       |        |         |   |  |   |     |   |  |   |        |  |   |     |   |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



56



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##### Table of Contents

Tullys Coffee Corporation

Consolidated Statements of Changes in Stockholders Equity (Deficit)

Years Ended March 30, 2008, April 1, 2007, and April 2, 2006

(continued)



|                                                         |  |                                               |  |                |        |                          |           |                    |   |        |       |           |  |   |       |  |   |        |  |   |         |   |  |   |        |  
|-------------------------------------------------------- |  | --------------------------------------------- |  | -------------- | ------ | ------------------------ | --------- | ------------------ | - | ------ | ----- | --------- |  | - | ----- |  | - | ------ |  | - | ------- | - |  | - | ------ | -
|                                                         |  | Convertible Preferred Stock                   |  | Common Stock   |        | Additionalpaid-incapital |           | Accumulateddeficit |   |        | Total |          
|                                                         |  | Series AShares                                |  | Series AAmount |        | Series BShares           |           | Series BAmount     |   | Shares |       | Amount    |  |   |      
|                                                         |  | (dollars in thousands, except per share data) | 
|Balance, April 2, 2006                                   |  | 15,559,152                                    |  | $              | 34,639 |                          | 4,920,709 |                    | $ | 10,911 |       | 2,220,992 |  | $ | 9,610 |  | $ | 28,339 |  | $ | (78,372 | ) |  | $ | 5,127  |  
|Exercise of common stock warrants                        |  |                                               |  |                |        |                          |           |                    |   |        |       | 103,070   |  |   | 119   |  |   |        |  |   |         |   |  |   | 119    |  
|Exercise of stock options                                |  |                                               |  |                |        |                          |           |                    |   |        |       | 75,508    |  |   | 9     |  |   |        |  |   |         |   |  |   | 9      |  
|Issuance of common stock under terms of legal settlement |  |                                               |  |                |        |                          |           |                    |   |        |       | 7,000     |  |   | 84    |  |   |        |  |   |         |   |  |   | 84     |  
|Stock option expense                                     |  |                                               |  |                |        |                          |           |                    |   |        |       |           |  |   |       |  |   | 306    |  |   |         |   |  |   | 306    |  
|Net loss                                                 |  |                                               |  |                |        |                          |           |                    |   |        |       |           |  |   |       |  |   |        |  |   | (9,754  | ) |  |   | (9,754 | )
|                                                         |  |                                               |  |                |        |                          |           |                    |   |        |       |           |  |   |       |  |   |        |  |   |         |   |  |   |        |  
|Balance, April 1, 2007                                   |  | 15,559,152                                    |  | $              | 34,639 |                          | 4,920,709 |                    | $ | 10,911 |       | 2,406,570 |  | $ | 9,822 |  | $ | 28,645 |  | $ | (88,126 | ) |  | $ | (4,109 | )

The accompanying notes are an integral part of these consolidated financial statements.



57



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##### Table of Contents

Tullys Coffee Corporation

Consolidated Statements of Changes in Stockholders Equity (Deficit)

Years Ended March 30, 2008, April 1, 2007, and April 2, 2006

(continued)



|                                                         |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  |                  |  |       |        |   |  |   |        |  |   |        |   |  |   |          |   |  |   |       |  |   |         |  
|-------------------------------------------------------- |  | --------------------------------------------- | - |  | -------------- | ------ | - | ------------------------ | ---------- | ---------------------- | -------------- | - | ------------------ | ------ |  | ---------------- |  | ----- | ------ | - |  | - | ------ |  | - | ------ | - |  | - | -------- | - |  | - | ----- |  | - | ------- | -
|                                                         |  | Convertible Preferred Stock                   |   |  | Common Stock   |        |   | Additionalpaid-incapital |            | Subscriptionreceivable |                |   | Accumulateddeficit |        |  | MinorityInterest |  | Total |       
|                                                         |  | Series AShares                                |   |  | Series AAmount |        |   | Series BShares           |            |                        | Series BAmount |   |                    | Shares |  | Amount           |  |       |        |   |  |  
|                                                         |  | (dollars in thousands, except per share data) |  
|Balance, April 1, 2007                                   |  | 15,559,152                                    |   |  | $              | 34,639 |   |                          | 4,920,709  |                        |                | $ | 10,911             |        |  | 2,406,570        |  | $     | 9,822  |   |  | $ | 28,645 |  | $ |       |   |  | $ | (88,126  | ) |  | $ |      |  | $ | (4,109  | )
|Exercise of common stock warrants                        |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  | 258,278          |  |       | 394    |   |  |   |        |  |   |        |   |  |   |          |   |  |   |       |  |   | 394     |  
|Series A Preferred stock converted to common stock       |  | (2,628,778                                    | ) |  |                | (5,856 | ) |                          |            |                        |                |   |                    |        |  | 371,491          |  |       | 5,856  |   |  |   |        |  |   |        |   |  |   |          |   |  |   |       |  |   |        |  
|Series B Preferred stock converted to common stock       |  |                                               |   |  |                |        |   |                          | (1,307,360 | )                      |                |   | (2,902             | )      |  | 163,416          |  |       | 2,902  |   |  |   |        |  |   |        |   |  |   |          |   |  |   |       |  |   |        |  
|Exercise of stock options                                |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  | 40,082           |  |       | 6      |   |  |   |        |  |   |        |   |  |   |          |   |  |   |       |  |   | 6       |  
|Issuance of common stock warrants for loan fees          |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  |                  |  |       |        |   |  |   | 635    |  |   |        |   |  |   |          |   |  |   |       |  |   | 635     |  
|Issuance of common stock warrants for loan guarantee     |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  |                  |  |       |        |   |  |   | 185    |  |   |        |   |  |   |          |   |  |   |       |  |   | 185     |  
|Issuance of common stock under terms of legal settlement |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  | 11,719           |  |       | 132    |   |  |   |        |  |   |        |   |  |   |          |   |  |   |       |  |   | 132     |  
|Cash in lieu of fractional stock on reverse split        |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  | 335              |  |       | (12    | ) |  |   |        |  |   |        |   |  |   |          |   |  |   |       |  |   | (12     | )
|Stock option expense                                     |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  |                  |  |       |        |   |  |   | 199    |  |   |        |   |  |   |          |   |  |   |       |  |   | 199     |  
|Accrued expense paid through grant of stock options      |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  |                  |  |       |        |   |  |   | 55     |  |   |        |   |  |   |          |   |  |   |       |  |   | 55      |  
|Minority interest in joint venture                       |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  |                  |  |       |        |   |  |   |        |  |   |        |   |  |   |          |   |  |   | 6,000 |  |   | 6,000   |  
|Subscription receivable                                  |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  |                  |  |       |        |   |  |   |        |  |   | (3,000 | ) |  |   |          |   |  |   |       |  |   | (3,000  | )
|Net loss                                                 |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  |                  |  |       |        |   |  |   |        |  |   |        |   |  |   | (13,909  | ) |  |   |       |  |   | (13,909 | )
|                                                         |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  |                  |  |       |        |   |  |   |        |  |   |        |   |  |   |          |   |  |   |       |  |   |         |  
|Balance, March 30, 2008                                  |  | 12,930,374                                    |   |  | $              | 28,783 |   |                          | 3,613,349  |                        |                | $ | 8,009              |        |  | 3,251,891        |  | $     | 19,100 |   |  | $ | 29,719 |  | $ | (3,000 | ) |  | $ | (102,035 | ) |  | $ | 6,000 |  | $ | (13,424 | )
|                                                         |  |                                               |   |  |                |        |   |                          |            |                        |                |   |                    |        |  |                  |  |       |        |   |  |   |        |  |   |        |   |  |   |          |   |  |   |       |  |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



58



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##### Table of Contents

Tullys Coffee Corporation

Consolidated Statements of Cash Flows



|                                                                                    |  |                        |         |   |              |   |        |              |  |   |         |  
|----------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------ | ------------ |  | - | ------- | -
|                                                                                    |  | Years ended            |        
|                                                                                    |  | March 30,2008          |         |   | April 1,2007 |   |        | April 2,2006 | 
|                                                                                    |  | (dollars in thousands) |        
|Cash flows from operating activities                                                |  |                        |         |   |              |   |        |              |  |   |         |  
|Net income (loss)                                                                   |  | $                      | (13,909 | ) |              | $ | (9,754 | )            |  | $ | 15,423  |  
|Adjustments to reconcile net income (loss) to net cash used in operating activities |  |                        |         |   |              |   |        |              |  |   |         |  
|Depreciation and amortization                                                       |  |                        | 2,764   |   |              |   | 3,340  |              |  |   | 3,529   |  
|Impairment of long-lived assets                                                     |  |                        |        |   |              |   |       |              |  |   | 236     |  
|Store closure costs charged to operations                                           |  |                        | 19      |   |              |   | 96     |              |  |   | 219     |  
|(Gain) loss on sale of property and equipment                                       |  |                        | (3      | ) |              |   |       |              |  |   | 5       |  
|Gain on sale of Japan Rights                                                        |  |                        |        |   |              |   |       |              |  |   | (17,392 | )
|Stock option expense                                                                |  |                        | 199     |   |              |   | 362    |              |  |   | 114     |  
|Provision for doubtful accounts                                                     |  |                        | 121     |   |              |   | 180    |              |  |   | 220     |  
|Loan guarantee fee expense                                                          |  |                        | 222     |   |              |   |       |              |  |   | 66      |  
|Non-cash interest expense                                                           |  |                        | 529     |   |              |   |       |              |  |   |        |  
|Reversal of deferred license revenue                                                |  |                        | (1,800  | ) |              |   |       |              |  |   |        |  
|Franchise revenue repossession and refund provision                                 |  |                        | 5,295   |   |              |   |       |              |  |   |        |  
|Recognition of deferred revenue                                                     |  |                        | (1,080  | ) |              |   | (1,452 | )            |  |   | (6,318  | )
|Changes in assets and liabilities                                                   |  |                        |         |   |              |   |        |              |  |   |         |  
|Accounts receivable                                                                 |  |                        | (1,523  | ) |              |   | (1,844 | )            |  |   | (813    | )
|Inventories                                                                         |  |                        | (887    | ) |              |   | 117    |              |  |   | (600    | )
|Prepaid expenses and other current assets                                           |  |                        | 556     |   |              |   | 533    |              |  |   | 631     |  
|Accounts payable                                                                    |  |                        | 2,642   |   |              |   | 2,559  |              |  |   | (1,241  | )
|Accrued liabilities                                                                 |  |                        | 165     |   |              |   | 1,016  |              |  |   | (1,293  | )
|Deferred revenue                                                                    |  |                        | 504     |   |              |   | 1,257  |              |  |   | 303     |  
|Deferred lease costs                                                                |  |                        | (319    | ) |              |   | (292   | )            |  |   | (195    | )
|Deferred licensing revenue cash received                                            |  |                        |        |   |              |   | (25    | )            |  |   | 25      |  
|                                                                                    |  |                        |         |   |              |   |        |              |  |   |         |  
|Net cash used in operating activities                                               |  |                        | (6,505  | ) |              |   | (3,907 | )            |  |   | (7,081  | )
|                                                                                    |  |                        |         |   |              |   |        |              |  |   |         |  
|Cash flows from investing activities                                                |  |                        |         |   |              |   |        |              |  |   |         |  
|Net proceeds from Japan Rights sale                                                 |  |                        |        |   |              |   |       |              |  |   | 17,392  |  
|Purchases of property and equipment                                                 |  |                        | (2,309  | ) |              |   | (1,763 | )            |  |   | (2,307  | )
|Other                                                                               |  |                        | 6       |   |              |   | (32    | )            |  |   | (62     | )
|                                                                                    |  |                        |         |   |              |   |        |              |  |   |         |  
|Net cash (used in) provided by investing activities                                 |  |                        | (2,303  | ) |              |   | (1,795 | )            |  |   | 15,023  |  
|                                                                                    |  |                        |         |   |              |   |        |              |  |   |         |  
|Cash flows from financing activities                                                |  |                        |         |   |              |   |        |              |  |   |         |  
|Net borrowings under Northrim credit facility                                       |  |                        | 596     |   |              |   | 2,152  |              |  |   | (465    | )
|Payments on long-term debt (including convertible note) and capital leases          |  |                        | (554    | ) |              |   | (528   | )            |  |   | (3,539  | )
|Proceeds from Benaroya credit facility                                              |  |                        | 7,482   |   |              |   |       |              |  |   |        |  
|Repayment on UCC note payable                                                       |  |                        | (2,000  | ) |              |   |       |              |  |   |        |  
|Minority interest contribution to joint venture                                     |  |                        | 3,000   |   |              |   |       |              |  |   |        |  
|Cash in lieu of fractional stock on reverse split                                   |  |                        | (12     | ) |              |   |       |              |  |   |        |  
|Proceeds from exercise of stock options and warrants                                |  |                        | 137     |   |              |   | 127    |              |  |   | 6       |  
|                                                                                    |  |                        |         |   |              |   |        |              |  |   |         |  
|Net cash (used in) provided by financing activities                                 |  |                        | 8,649   |   |              |   | 1,751  |              |  |   | (3,998  | )
|                                                                                    |  |                        |         |   |              |   |        |              |  |   |         |  
|Net increase(decrease) in cash and cash equivalents                                 |  |                        | (159    | ) |              |   | (3,951 | )            |  |   | 3,944   |  
|Cash and cash equivalents                                                           |  |                        |         |   |              |   |        |              |  |   |         |  
|Beginning of period                                                                 |  |                        | 1,430   |   |              |   | 5,381  |              |  |   | 1,437   |  
|                                                                                    |  |                        |         |   |              |   |        |              |  |   |         |  
|End of period                                                                       |  | $                      | 1,271   |   |              | $ | 1,430  |              |  | $ | 5,381   |  
|                                                                                    |  |                        |         |   |              |   |        |              |  |   |         |  



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Tullys Coffee Corporation

Consolidated Statements of Cash Flows

(continued)



|                                                                                                  |  |                        |       |              |   |              |  |   |    
|------------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | ------------ | - | ------------ |  | - | ---
|                                                                                                  |  | Years ended           
|                                                                                                  |  | March 30,2008          |       | April 1,2007 |   | April 2,2006
|                                                                                                  |  | (dollars in thousands)
|Supplemental disclosure of cash flow information and non-cash investing and financing activities: |  |                        |       |              |   |              |  |   |    
|Cash paid during the period for interest                                                          |  | $                      | 2,136 |              | $ | 296          |  | $ | 622
|Non-cash activity                                                                                 |  |                        |       |              |   |              |  |   |    
|Issuance of note payable to UCC for franchise repossession                                        |  | $                      | 6,000 |              |   |              |  |   |    
|Accrued expense paid through grant of stock options                                               |  |                        | 55    |              |   |             |  |   |   
|Warrant issued for loan commitment fee                                                            |  |                        | 635   |              |   |             |  |   |   
|Discount recorded for note proceeds                                                               |  |                        | 582   |              |   |             |  |   |   
|Discount recorded for UCC note                                                                    |  |                        | 690   |              |   |             |  |   |   
|Warrants issued for loan guarantee                                                                |  |                        | 185   |              |   |             |  |   |   
|Insurance premiums financed through note payable                                                  |  |                        | 341   |              |   | 544          |  |   | 535
|Purchases of property and equipment through capital leases                                        |  |                        |      |              |   | 27           |  |   | 83 
|Liability paid through issuance of stock                                                          |  |                        | 132   |              |   | 84           |  |   |   



The accompanying notes are
an integral part of these consolidated financial statements.



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Tullys Coffee Corporation

Notes to Consolidated Financial Statements

1. The Company and significant accounting policies

The Company and nature of operations

Tullys Coffee Corporation was formed in 1992. In these consolidated financial statements, references to we, us,
Tullys or the Company refer to Tullys Coffee Corporation. Tullys hand roasts premium specialty coffees that are sold through retail specialty coffee stores operating under the Tullys brand and are also
sold through our Wholesale division to domestic customers in the foodservice, supermarket, restaurant, office coffee service and institutional channels. Tullys-branded retail stores are operated by our Retail division and are also operated by
other parties under license or franchise. Tullys stores sell our high quality, premium roasted whole bean coffees, and serve a wide selection of hot and cold beverages that feature our coffees and our premium softened ice cream. Tullys
stores also sell baked goods and pastries and other complementary snack and food items and coffee-related accessories, supplies, and equipment.

Our Specialty division is responsible for our U.S. franchising activities (exclusive of any product sales to these customers, which are included in the Wholesale division) and for our international business activities (see Note 13). For
purposes of these consolidated financial statements, the terms franchise and license are used interchangeably.

On
September 15, 2008, the Company entered into an asset purchase and sale agreement to sell substantially all assets of the wholesale division, see Note 23.

Principles of Consolidation

The accompanying consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP). The consolidated financial statements reflect the financial position and operating results of Tullys, including wholly owned
subsidiaries and joint ventures controlled by the Company. Intercompany transactions and balances have been eliminated.

Fiscal periods

We end our fiscal year on the Sunday closest to March 31. As a result, we record our revenue and expenses on a 52 or 53 week
period, depending on the year. The fiscal year ended March 30, 2008 (Fiscal 2008) included 52 weeks, the fiscal year ended April 1, 2007 (Fiscal 2007) included 52 weeks, the fiscal year ended April 2, 2006
(Fiscal 2006) included 52 weeks, while our fiscal year ended April 3, 2005 (Fiscal 2005) included 53 weeks. The fiscal year ended March 28, 2004 (Fiscal 2004) included 52 weeks. The fiscal year ending
March 29, 2009 (Fiscal 2009) will have 52 weeks.

Reverse stock split

On June 28, 2007, our articles of incorporation were amended to effect a one-for-eight reverse stock split of our common stock, as described in Note
18. All common share information (including information related to options and warrants to purchase common stock) and all per share information related to our common stock in the consolidated financial statements have been restated to
reflect the one-for-eight reverse split.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported



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amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash

Cash equivalents in excess of current operating requirements are invested in short-term, interest-bearing instruments with maturities of three months or
less at the date of purchase and are stated at cost, which approximates market value.

Trade Accounts Receivable

Tullys provides products to approved customers on an open account basis. We generally do not require collateral on trade receivables. Tullys
reviews a customers credit history before extending credit and establishes an allowance for doubtful accounts based on the risk of specific customers. Historically, credit related losses on trade receivables have not been significant.

Inventories

Inventories are
stated at the lower of cost (on the first-in, first-out basis) or market. Our sourcing and merchandising process is centralized, but each store generally orders its individual requirements from our distribution facility and our authorized vendors.
We have the ability to purchase our green coffee beans from several vendors and are not significantly dependent on any single source of supply.

Property and equipment

Property and equipment are carried at cost less accumulated depreciation and amortization.
Depreciation of property and equipment includes amortization of assets under capital leases and is provided on the straight-line method over the estimated economic lives. Machinery and equipment are depreciated over 5 to 7 years. Leasehold
improvements are depreciated over the shorter of their estimated economic lives (generally ten years) or the applicable lease term as defined under generally accepted accounting principles. Software is depreciated over 3 years. The cost of property
held under capital lease is equal to the lower of the net present value of the minimum lease payments or the fair value of the leased property at the inception of the lease. Expenditures for additions and improvements are capitalized and
expenditures for repairs and maintenance are charged to expense as incurred. The cost and accumulated depreciation of assets sold or retired are removed from the accounts, and the related gains and losses are included in the results of operations.
Certain properties and equipment have been reduced below cost due to impairment charges.

Other intangible assets

Other intangible assets include leasehold interests, trademark and associated design costs, covenants not to compete, and other assets. Amortization of
leasehold interests is provided over the applicable lease term as defined under generally accepted accounting principles. Other intangible assets are amortized on the straight-line method over estimated lives of 5 to 15 years.

Assets held for sale and impairment of long-lived assets

Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If impairment has occurred, an impairment loss must be recognized.



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As part of our review, assets are grouped and evaluated at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other groups of assets. Tullys has identified this lowest level to be principally individual stores. We consider historical performance and future estimated results in
our evaluation of potential impairment and then compare the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted
future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is measured by discounting expected future cash flows.

Assets to be disposed of by sale are evaluated in accordance with SFAS 144. Assets and liabilities to be disposed of by sale are, among other factors,
classified as Held for Sale at which point management has committed to a plan for the disposition, the sale is probable and expected to occur within 12 months and the assets are in sellable condition.

Lease termination costs

Periodically,
Tullys will determine that certain leases will be terminated and the location will be closed. At such determination, we accrue for the net future minimum lease payments of the related lease agreements. Amounts accrued as net future minimum
losses include the discounted estimated future rental payments, lease termination fees, and sub-lease recoveries.

Segment reporting

We present segment information in accordance with Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131), which established reporting and disclosure standards for an enterprises operating segments. Operating segments are defined as components of an enterprise for which
separate financial information is available and regularly reviewed by our senior management.

Our Retail division operates Tullys
Coffee retail stores in the United States and generates revenues through the sales of products in these stores. We complement our Retail divisions operations with additional channels for distribution of our branded products, which we manage as
separate business segments: (1) our Specialty division, which sells Tullys coffee and related products and supplies to our foreign licensees and manages the relationships with these licensees, and (2) our Wholesale division, which
sells Tullys coffee and related products and supplies to domestic resellers in the supermarket, foodservice, restaurant, office coffee service, and institutional channels, including our U.S. franchisees. The Wholesale division is also
responsible for our mail order and Internet sales activities.

Revenue recognition

Sales are generally recognized at the time of the sale at retail store locations. Customer payments received on the issuance and replenishment of our
Tullys coffee cards (stored value payment cards) are deferred and recognized as revenues when the cards are redeemed, net of the estimated amounts of customer incentives and discounts associated with the cards. Managements judgment is
involved in determining the applicable timing for recognition of these incentives and discounts in revenues.

Sales for the Wholesale and
Specialty divisions are recognized upon shipment of the products. Allowances to wholesale customers for retail display and distribution positions (such as slotting allowances) are recognized as a reduction in sales, reducing gross
profits until fully amortized (typically a period of two to six months). Other wholesale sales discounts and allowances are recognized in the period earned by the customer. In some instances, the amounts of an allowance or discount will depend upon
the actual performance of a customer for a particular program (such as the number of packages of Tullys product sold in a particular period of time). The



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actual performance for the program will be determined by the customer and Tullys after the program is completed. Tullys initially records
managements estimate of the expected results for such programs, and then an adjustment is made, as necessary, when the actual results are reported to Tullys.

Revenues from advance license fees and similar agreements are recognized on the straight-line basis over the expected life of the agreements. Managements judgment is involved in determining the applicable
amortization periods for these advance license fees. Royalty revenues for specialty licensees are recognized in accordance with the license agreements based upon sales at specific licensee store locations. Coffee roasting fees are recognized when
the licensee that is subject to the fee purchases coffee. Initial franchise fees for new stores franchised by Tullys are recognized when Tullys has completed the services required to earn these fees and make them non-refundable, which is
generally upon opening of a store. Royalty revenues from franchisee operated stores are recognized according to the relevant franchise agreements.

Concentrations of credit risk

We sell to various individuals and organizations while extending credit to customers
and are therefore subject to credit risk. Tullys maintains its cash and investment balances with what we believe to be high credit quality financial institutions.

Store pre-opening costs

Costs incurred in connection with start-up and promotion of new store
openings are expensed when incurred.

Advertising costs

Costs incurred for advertising and marketing are expensed in the periods to which the promotions are applicable and totaled $1,518,000, $2,406,000 and $1,238,000 during Fiscal 2008, Fiscal 2007, and Fiscal
2006, respectively. Local store advertising and marketing costs are reported in store operating expenses, while the advertising and marketing costs of our Wholesale and Specialty divisions are reported in other operating expenses. General
advertising and marketing costs for the Company and our Retail division are reported in marketing, general and administrative costs.

Rent expense

Tullys operates in leased buildings. Certain lease agreements provide for scheduled rent increases during the lease terms or
for rental payments commencing on a date other than the date of initial occupancy. Such stepped rent expense is recorded on a straight-line basis over the respective terms of the leases. Certain leases require contingent rent based on
gross sales and such rent expense is recognized as incurred. Certain leases have rent holiday (free rent) periods, and Tullys recognizes these rental credits on a straight-line basis over the respective lease terms.

Litigation costs

From time to time, the
Company may become involved in litigation or similar claims. Such matters are evaluated, and, if it is determined that a loss is probable and estimable, the estimated amount is recorded, including the estimated costs of defending the matter (if
applicable). Potential gains associated with such litigation are recognized if and when they are realized by us.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
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amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

Tullys has recorded a valuation allowance against net
deferred tax assets as we could not conclude that it was more likely than not that the tax benefits from temporary differences and net operating loss carryforwards would be realized. In subsequent periods, we may reduce the valuation allowance,
provided that the possibility of utilization of the deferred tax assets is more likely than not.

On April 2, 2007, we adopted the
provisions of Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which defines the threshold for recognizing the benefits of tax return positions in the financial statements as more-likely-than-not to be
sustained by the taxing authority. Interpretation No. 48 applies to all tax positions accounted for under SFAS No. 109, Accounting for Income Taxes. There was no adjustment required to be made to our opening retained earnings
balance upon adoption of Interpretation No. 48. We have elected to treat interest and penalties accrued on unrecognized tax benefits as a component of income tax expense within our financial statements. See Note 9 for additional detail on
the Companys tax positions.

Fair value of financial instruments

The carrying amount of cash and cash equivalents and other current assets and liabilities, such as accounts receivable and accounts payable as presented
in the consolidated financial statements, approximates fair value based on the short-term nature of these instruments. We believe the carrying amounts of our notes payable, line of credit and long-term debt approximate fair value because the
interest rates are subject to change with, or approximate, market interest rates.

Stock-based compensation

On April 3, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (Revised), Share-Based Payment,
(SFAS 123R) which requires the measurement and recognition of compensation for all stock-based awards made to employees, including stock options and restricted stock rights, based on estimated fair values. SFAS 123R supersedes previous
accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25). The Company applied the alternative transition (shortcut) method in calculating its pool of excess tax
benefits (APIC pool), as provided for in FASB Staff Position FAS 123R-3, Transition Election Accounting for the Tax Effects of Share-Based Payment Awards.

We adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of April 3, 2006. In accordance with the modified prospective transition method,
our consolidated financial statements for periods prior to Fiscal 2007 have not been restated to reflect this change. Stock-based compensation recognized under the new standard is based on the value of the portion of the stock-based award that vests
during the period, adjusted for expected forfeitures. Stock-based compensation recognized in our consolidated financial statements for Fiscal 2007 include compensation cost for stock-based awards granted prior to, but not fully vested as of,
April 2, 2006, and stock-based awards granted subsequent to April 2, 2006. Our stock-based awards consist primarily of stock options granted to employees and directors.

The compensation cost for awards granted prior to April 3, 2006 is based on the grant-date fair value of the stock-based award estimated in
accordance with the pro forma provisions of SFAS 123, while awards granted after April 2, 2006 follow the provisions of SFAS 123R. Compensation cost for awards granted prior to April 2, 2006 is recognized on a straight-line basis over
the requisite service period for each separately remaining vesting portion of the award, while compensation cost for awards granted after April 2, 2006 is recognized on a straight-line basis over the requisite service period for the entire
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For all of these stock-based awards, we have used the Black-Scholes option pricing model for the
valuation for stock option awards on the date of grant. These computations are affected by the estimated fair value of our stock at the grant date as well as assumptions regarding a number of highly complex and subjective variables. These variables
include, but are not limited to, the expected life of the award, our expected stock price volatility over the term of the award and actual and projected exercise behaviors. Although the fair value of stock option awards is determined in accordance
with SFAS 123R, the Black-Scholes option pricing model requires the input of subjective assumptions, and other reasonable assumptions could provide differing results.

Earnings (loss) per share

Basic earnings (loss) per share is calculated as net income (loss)
applicable to the common shareholders divided by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is based on the weighted-average number of shares of common stock and common
stock equivalents outstanding during the period, including options, warrants, convertible preferred stock and convertible debt computed using the treasury stock method. The computation of net income (loss) per share is summarized in Note 22.

Reclassifications

Reclassifications of prior year balances have been made to conform to the current year classifications and have no impact on net income (loss) or financial position.

New accounting standards

In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair Value Measurements(SFAS 157). SFAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about
fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair value measures; however,
the application of this statement may change current practice. The requirements of SFAS 157 are effective for our fiscal year beginning March 31, 2008. We are in the process of evaluating this guidance and therefore have not yet determined
the impact that SFAS 157 will have on our financial statements upon adoption. See also discussion of the interpretation of this pronouncement below.

In February 2008, the FASB issued Staff Position (FSP) No. FAS 157-b, Fair Value Measurements. This FSP delays the effective date of SFAS 157 until January 1, 2009 for all
nonfinancial assets and liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. Nonfinancial assets and liabilities include, among other things: intangible assets acquired through business
combinations; long-lived assets when assessing potential impairment; and liabilities associated with restructuring activities.

In February
2007, the FASB issued Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment to FASB Statement No. 115(SFAS 159).
SFAS 159 permits entities to choose, at specific election dates, to measure eligible financial assets and liabilities at fair value (referred to as the fair value option) and report associated unrealized gains and losses in
earnings. SFAS 159 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. SFAS 159 does not eliminate disclosure requirements of other accounting standards, including fair
value measurement disclosures in SFAS 157. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the implications of SFAS 159, and its impact on our financial statements has not yet
been determined.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FAS 141R).
FAS 141R retains the fundamental requirements in FAS 141 that the acquisition method of accounting (which FAS 141



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called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. FAS 141R
also establishes principles and requirements for how the acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree;
(b) improves the completeness of the information reported about a business combination by changing the requirements for recognizing assets acquired and liabilities assumed arising from contingencies; (c) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase; and (d) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business
combination. FAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (for acquisitions closed on or
after January 1, 2009 for the Company). Early application is not permitted. We have not yet determined the impact, if any, FAS 141R will have on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements
(FAS 160). FAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling
interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a parents ownership interest
in a subsidiary that do not result in deconsolidation. FAS 160 is effective for fiscal years beginning on or after December 15, 2008 (as of March 29, 2010 for the Company). We have not yet determined the impact, if any, that
FAS 160 will have on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities (FAS 161). FAS 161 amends SFAS 133 and establishes, among other things, the disclosure requirements for derivative instruments and for hedging activities. This Statement amends and
expands the disclosure requirements of Statement 133 with the intent to provide users of financial statements with an enhanced understanding of derivative instruments and hedging activities. The requirements of FAS 161 are effective for fiscal years
beginning after November 15, 2008. We have not yet determined the impact, if any, that FAS 161 will have on our consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful Lives of Intangible Assets (FSP 142-3), which amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB No. 142, Goodwill and Other Intangible Assets. The intent of FSP 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other U.S. generally accepted accounting
principles. The Company does not expect the adoption of FSP 142-3 to have a material effect on its consolidated financial position or results of operations.

2. Liquidity

The Companys financial statements for the fiscal year ended March 30, 2008 were prepared
assuming the Company would continue as a going concern; however, the Companys recurring losses, net working capital deficit and accumulated deficit raise substantial doubts about its ability to continue as a going concern. The Companys
ability to continue as a going concern is in doubt as a result of a maturing short-term credit facilities, recurring losses from operations and accumulated deficit and is subject to the Companys ability to obtain additional equity or credit
financing, which may or may not be available, and successfully close the pending transaction with GMCR, see Note 23.

As of March 30,
2008 we had cash and cash equivalents of $1,271,000. Because we principally operate as a cash retail business, we generally do not require a significant net investment in working capital and historically have operated with current
liabilities in excess of our current assets. Exclusive of the borrowings, aggregating



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$11,721,000 as of March 30, 2008, under our Northrim credit line and the Benaroya credit facility, both of which are also classified as current
liabilities at March 30, 2008 (see Note 11), we had current trade liabilities of $17,020,000 as compared to current assets of $11,309,000 at March 30, 2008. Our wholesale business requires a greater level of investment in accounts
receivable and inventory, which have increased as that business has grown. Our inventory levels typically increase during the spring due to coffee crop seasonality and, to a lesser degree, during the autumn due to holiday season merchandise.
Inventories are also subject to short-term fluctuations based upon the timing of coffee receipts.

In recent years, Tullys has met
its needs for investment and operating capital primarily through short term borrowings, the proceeds from the sale of our Japanese intellectual property rights in August 2005, and the proceeds from our limited partnership agreement that established
a new joint venture called TCAP in January, 2008.

In Fiscal 2007, we commenced an effort to fund accelerated growth of our business
through a proposed underwritten public offering of our common stock. On April 27, 2007, we filed a registration statement on Form S-1 (File No. 333-142438), for this proposed stock offering. On February 7, 2008, we withdrew the
registration statement on Form S-1 due to unfavorable market conditions.

On February 4, 2008 we engaged an investment banking firm to
assist in evaluating strategic alternatives to optimize company and shareholder value. The Company has evaluated a range of alternatives. As a result of this assessment, subsequent to the balance sheet date, on September 15, 2008, Tullys,
its wholly-owned subsidiary Tullys Bellaccino, LLC, and GMCR, entered into an the GMCR Agreement. Under the GMCR Agreement, GMCR will purchase the assets associated with Tullys wholesale business and supply chain, including rights to use
the Tullys brand worldwide (excluding Japan) and other Tullys trade names, trademarks and service marks, for a total consideration of $40.3 million in cash, subject to adjustment based on the value of the wholesale assets as of the
closing date.

The GMCR Agreement contemplates that, at the closing, GMCR will grant Tullys a license to use the
Tullys brand and other trade names, trademarks and service marks in connection with certain (i) retail operations worldwide (excluding Japan) and (ii) wholesale operations outside of North America, and that the parties
will enter into an exclusive coffee supply arrangement. Tullys current shareholders and executive management team will continue to own and operate the Companys domestic retail business (company owned, franchised and licensed retail store
locations) and international retail and wholesale businesses.

Closing of the proposed asset sale is subject to certain conditions,
including approval by Tullys shareholders.

The GMCR Agreement was unanimously approved by Tullys board of directors. In
addition, Tom T. OKeefe, our chairman of the board and founder, who beneficially owns approximately 20.2% of our outstanding common stock, has entered into a voting agreement with GMCR pursuant to which he has agreed to vote his shares in
favor of the transaction at the shareholders meeting at which our shareholders will be asked to approve the GMCR Agreement and the transactions contemplated therein.

The transaction is expected to close before the end of the calendar year. Tullys expects to file a preliminary proxy statement with regard to the
GMCR Agreement in the next 30 days, which will include, among other things, information regarding the background of the boards decision to enter into the GMCR Agreement.

Tullys believes it will incur contractual costs associated with the sale of the assets of its wholesale business subject to the GMCR Agreement with
GMCR. At this time, however, these costs are subject to, and potentially contingent upon, the various conditions of, and successful completion of the closing process. If the GMCR Agreement and the transactions contemplated therein are not approved
by Tullys shareholders, or are approved but the asset sale is not successfully completed, then certain of these potential costs may not be incurred. Thus,



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we are currently unable to provide a reasonable estimate of these costs. Direct and indirect costs associated with the sale, incurred subsequent to the
signing of the APA, will be recorded during the period incurred or upon recognition of the closing of the transaction, if successful, depending on the nature of such costs.

As all of the criteria of SFAS No. 144 were not met as of the balance sheet date, the Company has not classified the assets and liabilities of its
wholesale operations as held for sale and the results of operations for the wholesale operations will not be reported in discontinued operations. The Company will record the assets and liabilities as held for sale in our first quarter Fiscal 2009
reporting in accordance with the guidance provided in SFAS No. 144, which were met on June 26, 2008. However, the assets and liabilities related to the wholesale business as of March 30, 2008 that were included in the GMCR Agreement
amount to $4,725,000 and $66,000, respectively. In addition, certain accounts receivable, current assets and liabilities and short-term credit facilities associated with our wholesale business will be retained and settled by the Company upon closing
of the proposed transaction.

Consistent with our past disclosure and in light of the proposed sale of our wholesale business to GMCR, we
continue to evaluate the business, operations, and prospects of our remaining business units and to work with our financial advisors to explore potential opportunities to optimize the value of the company to our shareholders, including the sale of
our retail and international businesses.

The Benaroya credit facility ($7,071,000 in principal amount outstanding at March 30, 2008,
net of discount) was established as a short-term bridge financing to meet business needs prior to the anticipated completion of the proposed stock offering. Subsequent to the balance sheet date on September 11, 2008, the Company and
Benaroya Capital agreed to enter into a Forbearance Agreement. Under the Forbearance Agreement, Benaroya Capital has agreed to forbear from taking any action to collect on the Benaroya Note or to foreclose on its security interests. Proceeds from
the sale of the wholesale business would be used to fully repay the Benaroya facility upon successful closing.

Our Northrim credit line
($4,650,000 in principal amount outstanding at March 30, 2008) is generally subject to annual renewals. The Benaroya and Northrim facilities mature August 31, 2008 and October 31, 2008, respectively, and, in order to satisfy these
obligations and our other business requirements, Tullys believes it will be necessary to (i) raise equity capital and use some of the proceeds for repayment of these debt obligations, (ii) replace them with other credit facilities,
or (iii) renew them. Pending closure of the Asset Purchase Agreement with GMCR, the balances under both the Benaroya and Northrim facilities will be repaid.

Other cash requirements for the next twelve months, in addition to normal operating expenses and the commitments described in the consolidated financial statements and notes, are expected to consist primarily of
capital expenditures related to the maintenance of company-operated stores and equipment and accounts receivable related to new wholesale business. Some of these capital expenditures may be accomplished through operating or capital leases.

If the recently entered GMCR Agreement is not successfully completed and additional financing is not found, we would likely be required to
substantially reduce expenditures of our business. Further, changes in our operating plans, lower than anticipated sales, increased expenses, or other events, may require us to seek additional debt, equity financing, or sale of assets on an
accelerated basis. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could impact negatively our financial condition and results of operations.

Further, we could be required to substantially reduce operating, marketing, general and administrative costs related to our continuing operations, or
reduce or discontinue our investments in store improvements, new customers and new products. If these actions were not sufficient, we could be required to sell stores or other assets and could be unable to take advantage of business opportunities or
respond to competitive pressures. The sale of stores or other income-producing assets could adversely affect our future operating results and cash flows.



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3. Accounts Receivable and allowance for doubtful accounts

Accounts receivable represent amounts billed to customers. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in
the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. Accounts receivable determined to be uncollectible are charged against the allowance for
doubtful accounts and recoveries are credited to the allowance for doubtful accounts.

The allowance for doubtful accounts is summarized as
follows:



|                                        |  |                        |     |   |              |   |     |  
|--------------------------------------- |  | ---------------------- | --- | - | ------------ | - | --- | -
|                                        |  | Years ended            |    
|                                        |  | March 30,2008          |     |   | April 1,2007 |  
|                                        |  | (dollars in thousands) |    
|Balance, beginning of the year          |  | $                      | 295 |   |              | $ | 149 |  
|Additions charged to costs and expenses |  |                        | 121 |   |              |   | 180 |  
|Write-offs and other deductions         |  |                        | (95 | ) |              |   | (34 | )
|                                        |  |                        |     |   |              |   |     |  
|Balance, end of the year                |  | $                      | 321 |   |              | $ | 295 |  
|                                        |  |                        |     |   |              |   |     |  

4. Inventories

Inventories consist of the following:



|                             |  |                        |       |              |   |      
|---------------------------- |  | ---------------------- | ----- | ------------ | - | -----
|                             |  | March 30,2008          |       | April 1,2007
|                             |  | (dollars in thousands)
|Coffee                       |  |                        |       |              |   |      
|Unroasted                    |  | $                      | 749   |              | $ | 792  
|Roasted                      |  |                        | 1,827 |              |   | 1,167
|Other goods held for sale    |  |                        | 515   |              |   | 479  
|Packaging and other supplies |  |                        | 838   |              |   | 585  
|                             |  |                        |       |              |   |      
|Total                        |  | $                      | 3,929 |              | $ | 3,023
|                             |  |                        |       |              |   |      

5. Other assets

Other assets consist of the following:



|                       |  |                        |     |              |   |    
|---------------------- |  | ---------------------- | --- | ------------ | - | ---
|                       |  | March 30,2008          |     | April 1,2007
|                       |  | (dollars in thousands)
|Security deposits      |  | $                      | 244 |              | $ | 244
|Other prepaid expenses |  |                        |    |              |   | 61 
|                       |  |                        |     |              |   |    
|Total                  |  | $                      | 244 |              | $ | 305
|                       |  |                        |     |              |   |    



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6. Property and equipment

Property and equipment consist of the following:



|                                                |  |                        |         |   |              |   |         |  
|----------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------- | -
|                                                |  | March 30,2008          |         |   | April 1,2007 |  
|                                                |  | (dollars in thousands) |        
|Machinery and equipment                         |  | $                      | 11,674  |   |              | $ | 10,429  |  
|Leasehold improvements                          |  |                        | 16,314  |   |              |   | 16,115  |  
|Furniture and fixtures                          |  |                        | 5,038   |   |              |   | 4,647   |  
|Asset held under capital lease                  |  |                        | 1,074   |   |              |   | 1,074   |  
|Software                                        |  |                        | 299     |   |              |   | 464     |  
|                                                |  |                        |         |   |              |   |         |  
|                                                |  |                        | 34,399  |   |              |   | 32,729  |  
|Less: Accumulated depreciation and amortization |  |                        | (27,658 | ) |              |   | (25,614 | )
|                                                |  |                        |         |   |              |   |         |  
|Total                                           |  | $                      | 6,741   |   |              | $ | 7,115   |  
|                                                |  |                        |         |   |              |   |         |  

7. Goodwill and intangible assets

As of March 30, 2008 and April 1, 2007 goodwill was $456,000. Under SFAS 142, goodwill is to be periodically reevaluated and the carrying amount
for goodwill is required to be reduced if an impairment is identified. Tullys has determined that this analysis will be performed annually during the fourth quarter of each fiscal year. The analysis was performed and no impairment was
identified for Fiscal 2008, Fiscal 2007, or Fiscal 2006.

As of March 30, 2008, other intangible assets, which collectively had a
remaining weighted average useful life of approximately six years, were $168,000 net of $984,000 in accumulated amortization. As of April 1, 2007, other intangible assets, which collectively had a remaining weighted average useful life of
approximately seven years, were $273,000, net of accumulated amortization of $872,000.

The total amortization expense of other intangible
assets was $112,000, $92,000, and $105,000 in Fiscal 2008, Fiscal 2007 and Fiscal 2006, respectively. Amortization expense for these other intangible assets during the next five years is estimated to be between $45,000 and $110,000 per year.

8. Impairment of long-lived assets

Tullys recognized non-cash impairment losses of $236,000 in the fourth quarter of Fiscal 2006, in accordance with the provisions of SFAS 144 and SFAS 142. This relates to impairment of leasehold improvements and equipment. No
impairment was identified in the review for Fiscal 2008 or Fiscal 2007. These reviews were performed in connection with the development and implementation of our annual business plans. In order to determine the impairment, considerable management
judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates.



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9. Income taxes

Our net operating loss carryforwards have offset this gain for federal income tax purposes, but a portion of the gain is taxable for state income taxes and for federal alternative minimum tax (AMT)
purposes.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes. The significant components of deferred tax assets and liabilities are as follows:



|                                                             |  |                        |         |   |              |   |         |  
|------------------------------------------------------------ |  | ---------------------- | ------- | - | ------------ | - | ------- | -
|                                                             |  | March 30,2008          |         |   | April 1,2007 |  
|                                                             |  | (dollars in thousands) |        
|Deferred tax assets                                          |  |                        |         |   |              |   |         |  
|Net operating loss carryforwards                             |  | $                      | 17,964  |   |              | $ | 13,421  |  
|Stock options                                                |  |                        | 1,640   |   |              |   | 1,468   |  
|Deferred revenue                                             |  |                        |        |   |              |   | 1,061   |  
|Property and equipment                                       |  |                        | 2,240   |   |              |   | 2,316   |  
|Asset impairment, store closures and lease termination costs |  |                        | 1,456   |   |              |   | 1,464   |  
|Deferred lease costs                                         |  |                        | 291     |   |              |   | 415     |  
|Tax credit                                                   |  |                        | 317     |   |              |   | 309     |  
|Allowance for doubtful accounts                              |  |                        | 116     |   |              |   | 130     |  
|Accrued vacation and other liabilities                       |  |                        | 675     |   |              |   | 788     |  
|Investment in joint venture                                  |  |                        | 1,079   |   |              |   |        |  
|Other                                                        |  |                        | 265     |   |              |   | 111     |  
|                                                             |  |                        |         |   |              |   |         |  
|Total deferred tax assets                                    |  |                        | 26,043  |   |              |   | 21,483  |  
|                                                             |  |                        |         |   |              |   |         |  
|Deferred tax liabilities                                     |  |                        |         |   |              |   |         |  
|Debt discount                                                |  |                        | (248    | ) |              |   |        |  
|Less: Valuation allowance                                    |  |                        | (25,795 | ) |              |   | (21,483 | )
|                                                             |  |                        |         |   |              |   |         |  
|Net deferred tax asset                                       |  | $                      |        |   |              | $ |        |  
|                                                             |  |                        |         |   |              |   |         |  

At March 30, 2008, we had federal and state net operating loss carryforwards of approximately
$52,000,000 and $15,800,000, respectively. The federal net operating loss carryforwards expire between 2021 and 2028 and the state net operating losses expire between 2009 and 2028.

Our ability to use our net operating losses to offset future income could be subject to restrictions enacted in the United States Internal Revenue Code
of 1986, as amended. These restrictions limit future use of net operating losses and credit carryforwards if certain stock ownership changes occur.

The provision for income taxes is summarized as follows (dollars in thousands):



|                   |  |               |   |              |   |     |              |  |   |    
|------------------ |  | ------------- | - | ------------ | - | --- | ------------ |  | - | ---
|                   |  | Years ended  
|                   |  | March 30,2008 |   | April 1,2007 |   |     | April 2,2006
|Current taxes      |  |               |   |              |   |     |              |  |   |    
|Federal            |  | $             |  |              | $ | 42  |              |  | $ | 281
|State              |  |               | 2 |              |   | (25 | )            |  |   | 58 
|                   |  |               |   |              |   |     |              |  |   |    
|Total current      |  |               | 2 |              |   | 17  |              |  |   | 339
|                   |  |               |   |              |   |     |              |  |   |    
|Deferred taxes     |  |               |  |              |   |    |              |  |   |   
|                   |  |               |   |              |   |     |              |  |   |    
|Income tax expense |  | $             | 2 |              | $ | 17  |              |  | $ | 339
|                   |  |               |   |              |   |     |              |  |   |    



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A reconciliation of the statutory federal income tax rate to Tullys effective income tax rate is as
follows:



|                                           |  |               |    |  |              |    |  |              |   
|------------------------------------------ |  | ------------- | -- |  | ------------ | -- |  | ------------ | --
|                                           |  | Years ended   |   
|                                           |  | March 30,2008 |    |  | April 1,2007 |    |  | April 2,2006 |   
|Tax expense (benefit)                      |  |               |    |  |              |    |  |              |   
|Federal statutory rate                     |  | (34.0         | )% |  | (34.0        | )% |  | 35.0         | % 
|State income taxes, net of federal benefit |  | (1.9          | )% |  | (2.7         | )% |  | 1.7          | % 
|Rate change                                |  | 3.7           | %  |  | 0.0          | %  |  | 0.0          | % 
|Other                                      |  | 1.2           | %  |  | 1.1          | %  |  | 0.2          | % 
|Valuation allowance                        |  | 31.0          | %  |  | 35.8         | %  |  | (35.4        | )%
|                                           |  |               |    |  |              |    |  |              |   
|Effective income tax rate                  |  | 0.0           | %  |  | 0.2          | %  |  | 1.5          | % 
|                                           |  |               |    |  |              |    |  |              |   

In June, 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement 109 (FIN 48). FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum
recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods,
disclosure and transition.

The Company adopted the provisions of FIN 48 on April 2, 2007. As of the date of adoption, the Company had
no unrecognized tax benefits and therefore no adjustment to retained earnings as a cumulative effect adjustment to shareholders equity. The Company had no interest or penalties related to the unrecognized tax benefits as of the date of
adoption. The Company will recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The
Company is subject to U.S. federal and state income taxes. The Company is no longer subject to U.S. federal or state income tax examinations before Fiscal 2005 and fiscal 2004, respectively. However, to the extent allowed by law, the tax authorities
may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss amount.

The Company is not currently under Internal Revenue Service (IRS) or state examination.

10. Accrued liabilities

Accrued liabilities consist of the following:



|                                                  |  |                        |       |              |   |      
|------------------------------------------------- |  | ---------------------- | ----- | ------------ | - | -----
|                                                  |  | March 30,2008          |       | April 1,2007
|                                                  |  | (dollars in thousands)
|Employee wages and taxes                          |  | $                      | 1,304 |              | $ | 1,488
|Professional fees and services                    |  |                        | 455   |              |   | 938  
|Accrued lease termination and store closure costs |  |                        | 99    |              |   | 139  
|Accrued real estate and property taxes            |  |                        | 236   |              |   | 318  
|Accrued discounts and allowances (Note 3)         |  |                        | 859   |              |   | 511  
|Accrued interest                                  |  |                        | 768   |              |   |     
|Other                                             |  |                        | 683   |              |   | 503  
|                                                  |  |                        |       |              |   |      
|Total                                             |  | $                      | 4,404 |              | $ | 3,897
|                                                  |  |                        |       |              |   |      



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11. Credit lines and long term debt

On June 22, 2005, Tullys entered into a secured credit facility with Northrim (the Northrim Facility). On June 25, 2007, the
credit facility was renewed until October 31, 2008 (see Note 23). Under the credit facility, Tullys may borrow up to $5,000,000, subject to the amount of eligible accounts receivable and inventories. Borrowings under this facility bear
interest at the prime rate plus 6.0% and are secured by our inventories and through the assignment (with recourse) of our accounts receivable.

On April 26, 2007, we borrowed $4,000,000 from Benaroya Capital (less an initial loan fee of $100,000) and issued the promissory note (the Benaroya Note) to evidence that indebtedness. In connection with the loan, we
granted warrants to purchase 12,411 shares of common stock at an exercise price of $2.64 per share to Benaroya Capital, which were recorded at their estimated aggregate fair value of $109,000 when granted. On July 12, 2007, the Benaroya Note
amount was amended to establish a credit facility (the Benaroya credit facility) with allowable borrowings of up to $10 million, to reduce the interest rate from 15% to 13.5% per annum (effective July 12, 2007) and to extend
its maturity date. Borrowings under the Benaroya credit facility are due upon the earlier of (i) August 31, 2008, (ii) the first business day following the closing of an underwritten public offering of our equity securities and
(iii) 30 days after Benaroya Capital has given Tullys notice that Benaroya Capital, in good faith, deems itself insecure. Interest accrues on the outstanding principal balance of the Benaroya Note, calculated on a daily basis and payable
on the maturity date. Overdue amounts bear interest at a rate equal to eighteen percent (18%) per annum. Loan fees of $482,000 were added to the principal balance in connection with the July amendment of the Benaroya credit facility and
warrants to purchase 59,780 shares of common stock at an exercise price of $2.64 per share were issued to Benaroya Capital, which were recorded at their estimated aggregate fair value of $526,000 when granted. Borrowings under the Benaroya credit
facility are secured by all of Tullys assets but are subordinate to Northrims existing lien on accounts receivable and inventory. The Benaroya Capital warrants became exercisable on April 26, 2008 and will expire during 2012.

The Benaroya credit facility generally allows additional monthly borrowings of $500,000 up to the maximum of $10 million or until Benaroya
Capital deems itself insecure. Our chairman has guaranteed our obligations under the Benaroya credit facility, and another shareholder has guaranteed up to $3,000,000 under the Benaroya credit facility. Our chairman is not being
compensated for his guaranty. We have agreed to compensate the second guarantor through the cash payment of a $167,100 commitment fee and a grant of warrants to purchase 21,000 shares of our common stock at an exercise price of $2.64 per share,
which were recorded at their estimated aggregate fair value of $184,800 when granted (these warrants became exercisable on July 12, 2008. Additionally, we will pay a facility draw fee to this second guarantor at the annualized rate of 2% on the
average amount of guaranteed debt outstanding. We have agreed to indemnify these guarantors from all claims, liabilities, costs and expenses incurred by them arising from or related to the note holders demands under the guarantees. We also
have agreed not to increase the amount of the Northrim Facility or grant any other security interest in our assets without the prior written consent of these guarantors. Borrowings under the Benaroya credit facility and Northrim Facility are
classified as a short-term obligation in our balance sheet, reflecting the terms of the July 12, 2007 amendment.



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The discounts on the principal proceeds from Benaroya Capital and the fair value of the warrants issued
to Benaroya Capital, as described above, have been recorded as a discount on the Benaroya Note. This discount is being reduced through accretion of non-cash interest expense over the life of the note. These amounts are summarized as follows:



|                                                                                 |  |                                   |       |  
|-------------------------------------------------------------------------------- |  | --------------------------------- | ----- | -
|                                                                                 |  | Fiscal periodended March 30, 2008 |      
|                                                                                 |  | (unaudited)                       |      
|                                                                                 |  | (dollars in thousands)            |      
|Additions during the Fiscal Year 2008:                                           |  |                                   |       |  
|Loan fee discount                                                                |  | $                                 | 582   |  
|Warrants issued to Benaroya Capital                                              |  |                                   | 635   |  
|                                                                                 |  |                                   |       |  
|Initial discount recorded on Benaroya Note                                       |  |                                   | 1,217 |  
|Lessaccretion of discount included in interest expense for the Fiscal Year 2008 |  |                                   | (806  | )
|                                                                                 |  |                                   |       |  
|Debt discount on Benaroya credit facility as of March 30, 2008                   |  | $                                 | 411   |  
|                                                                                 |  |                                   |       |  

Subsequent to the balance sheet date on September 11, 2008, the Company and Benaroya Capital
agreed to enter into a Forbearance Agreement. Under the Forbearance Agreement, Benaroya Capital has agreed to forbear from taking any action to collect on the Benaroya Note or to foreclose on its security interests (See Note 23). Pending closure of
the Asset Purchase Agreement with GMCR, the balances under both the Benaroya and Northrim facilities will be repaid.

On January 7,
2008, Tullys and UCC entered into the Settlement Agreement to settle the pending lawsuit filed. Under the Settlement Agreement, the parties agreed to a mutual release of claims and to the dismissal of the lawsuit with prejudice. UCC also
assigned all of its rights and interest under the 2001 license agreement to Tullys. The Settlement Agreement was finalized and effective January 7, 2008.

In consideration for the settlement, Tullys agreed to pay $6.0 million to UCC, consisting of $2.0 million paid to UCC on January 8, 2008, and a $4.0 million promissory note issued by Tullys Coffee
Asia Pacific, Inc. (TCAP), a wholly owned subsidiary of Tullys, to UCC. The promissory note bears interest at 3.0% per year and is due in annual principal installments of $1,000,000 commencing on December 28, 2008.
Payments under the note may accelerate under certain circumstances (including the completion of an initial public stock offering by Tullys) and TCAP is generally required to pay to UCC two dollars of principal under the note for each dollar
that TCAP distributes to Tullys. Tullys has issued a limited guaranty for TCAPs obligations under the note, which is generally secured by the assets of Tullys and TCAP related to the licensed territories (as described in Note
13), including Tullys stock in TCAP, TCAPs interest in the Tullys Coffee Asia joint venture, Tullys trademarks for the licensed territories and Tullys interest as licensor of Tullys Coffee Asia, but is
non-recourse as to Tullys other assets.



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The promissory note issued under the Settlement Agreement with UCC bears interest at 3.0% per year.
As this rate is below Tullys incremental borrowing rate of 12%, TCAP recorded the obligation in accordance with Accounting Principles Board Opinion No. 21 Interest on Receivables and Payables. The resulting discount is being
reduced through accretion of non-cash interest expense over the life of the note. These amounts are summarized as follows:



|                                                                                 |  |                                   |     |  
|-------------------------------------------------------------------------------- |  | --------------------------------- | --- | -
|                                                                                 |  | Fiscal periodended March 30, 2008 |    
|                                                                                 |  | (unaudited)                       |    
|                                                                                 |  | (dollars in thousands)            |    
|Additions during the Fiscal Year 2008:                                           |  |                                   |     |  
|Initial discount recorded on UCC Note                                            |  | $                                 | 731 |  
|Lessaccretion of discount included in interest expense for the Fiscal Year 2008 |  |                                   | (41 | )
|                                                                                 |  |                                   |     |  
|Debt discount on UCC Note Payable as of March 30, 2008                           |  | $                                 | 690 |  
|                                                                                 |  |                                   |     |  

Obligations under credit lines and long-term debt consist of the following:



|                                                                                                                                                                                                                                                                                                         |  |                        |         |   |              |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------ | -
|                                                                                                                                                                                                                                                                                                         |  | March 30,2008          |         |   | April 1,2007 |  
|                                                                                                                                                                                                                                                                                                         |  | (dollars in thousands) |        
|Borrowings under the Northrim facility                                                                                                                                                                                                                                                                   |  | $                      | 4,650   |   |              | $ | 4,053  |  
|Borrowings under the Benaroya credit facility, net of unaccreted discount of $411,000                                                                                                                                                                                                                    |  |                        | 7,071   |   |              |   |       |  
|Note payable for the settlement of the UCC litigation, net of unaccreted discount of $690,000                                                                                                                                                                                                            |  |                        | 3,337   |   |              |   |       |  
|Note payable for purchase of insurance, payable in monthly installments of approximately $42,000 and $41,000 including interest at 5.53% and
5.50%, through September 2007 and September 2008 respectively, collateralized by unearned or return insurance premiums, accrued dividends and loss payments |  |                        | 155     |   |              |   | 166    |  
|Vehicle purchase note payable in monthly installments of approximately $833 including interest at 3.98%, through March 2010, secured by the
related vehicles                                                                                                                                             |  |                        | 19      |   |              |   | 28     |  
|                                                                                                                                                                                                                                                                                                         |  |                        |         |   |              |   |        |  
|                                                                                                                                                                                                                                                                                                         |  |                        | 15,232  |   |              |   | 4,247  |  
|Less: Current portion                                                                                                                                                                                                                                                                                    |  |                        | (12,912 | ) |              |   | (4,228 | )
|                                                                                                                                                                                                                                                                                                         |  |                        |         |   |              |   |        |  
|Long-term debt, net of current portion                                                                                                                                                                                                                                                                   |  | $                      | 2,320   |   |              | $ | 19     |  
|                                                                                                                                                                                                                                                                                                         |  |                        |         |   |              |   |        |  

Long-term debt consists of $2,310,000 related to the UCC promissory note of which annual principal
installments of $1,000,000 are due for the next four years commencing on December 28, 2008. Also, included in long-term debt is $10,000 related to notes payable on vehicle purchases.

12. International licenses and deferred revenue

Tullys Coffee Japan

Prior to August 31, 2005, Tullys had license and supply agreements with its
licensee for Japan, Tullys Coffee Japan. On August 19, 2005, Tullys and Tullys Coffee Japan entered into the Japan Rights Agreement under which Tullys agreed to sell to Tullys Coffee Japan all of Tullys
rights, title and interest for Japan with respect to the Tullys trademarks, store designs, processes and other intellectual property assets and rights for the Tullys business in Japan (the Japan Rights) for $17,500,000. The
Japan Rights Agreement does not provide Tullys Coffee Japan with the right to use Tullys proprietary intellectual properties outside of Japan and does not



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affect Tullys ownership or rights with respect to the Tullys intellectual properties outside of Japan. Tullys and Tullys Coffee Japan
have agreed to cooperate in the development of the Tullys brand for the mutual benefit of the two companies.

The Japan Rights sale
closed on August 31, 2005 and Tullys received $13,819,000 on August 31, 2005. The remaining $3,681,000 of the purchase price was paid by Tullys Coffee Japan to Tullys on October 5, 2005. Under the Japan Rights
Agreement, the parties also resolved a tax indemnification claim previously made by Tullys Coffee Japan without any further payments by either party. Tullys recognized a gain of $17,392,000 on the Japan Rights sale, as follows (dollars
in thousands):



|                                  |  |   |        |  
|--------------------------------- |  | - | ------ | -
|Cash sales price for Japan Rights |  | $ | 17,500 |  
|Lesstransaction costs            |  |   | (108   | )
|                                  |  |   |        |  
|Gain on sale of Japan Rights      |  | $ | 17,392 |  
|                                  |  |   |        |  

Under the Japan Rights Agreement, the license and supply agreements with Tullys Coffee Japan
were terminated on August 31, 2005 and Tullys right to receive license fees and coffee roasting fees from Tullys Coffee Japan terminated for periods after July 31, 2005. License fees and coffee roasting fee revenues from
Tullys Coffee Japan are summarized as follows (dollars in thousands):



|                                                                        |  |               |   |              |   |              |  |   |    
|----------------------------------------------------------------------- |  | ------------- | - | ------------ | - | ------------ |  | - | ---
|                                                                        |  | Years ended  
|                                                                        |  | March 30,2008 |   | April 1,2007 |   | April 2,2006
|License fees and coffee roasting fee revenues from Tullys Coffee Japan |  | $             |  |              | $ |             |  | $ | 811
|                                                                        |  |               |   |              |   |              |  |   |    

As the result of the termination of the license and supply agreements with Tullys Coffee
Japan, we recognized the unamortized balance of the deferred license revenue related to these agreements, which aggregated $4,405,000 as of August 31, 2005, in Fiscal 2006.

UCC Ueshima Coffee Company, Ltd.

In April 2001, Tullys granted UCC Ueshima Coffee
Company, Ltd. (UCC) a license to establish and operate Tullys specialty coffee stores, including a license to use Tullys business names, trademarks and intellectual property rights for purposes of establishing and operating
Tullys stores, and to sell Tullys coffee at wholesale, in 25 Asian territories (excluding Japan which is served by Tullys Coffee Japan).

Since the license agreement was executed in April 2001, UCC had opened one Tullys store, which it closed in 2004. UCC had not established nor operated any other Tullys stores nor engaged in wholesale sales
of Tullys products within its territory. Tullys attempted to find a mutually satisfactory resolution to this problem with UCC, but these efforts were not successful. In June 2006, Tullys notified UCC that it had breached the
license agreement, and on November 7, 2006, UCC filed a lawsuit in the United States District Court for the Western District of Washington. The suit alleged that Tullys had breached the license agreement by, among other things,
terminating the license agreement for UCCs non-performance and sought a declaration that UCC was not in breach of the license agreement, that Tullys was in breach, and that UCC was entitled to enforce its alleged security interest as to
certain of Tullys assets that were subject to the license agreement (namely, the Asian trademarks and the right to use Tullys intellectual properties in the territories). On January 7, 2008, Tullys and UCC entered into an
agreement (the Settlement Agreement) to settle the pending lawsuit as described in Note 16.

Tullys recorded
$799,000 during Fiscal 2007 and $736,000 in Fiscal 2008 for the costs of its defense and for prosecution of its counterclaims and did not have a remaining accrual for these costs as of March 30, 2008.



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At the April 2001 commencement of the UCC license term, UCC paid a license fee of $12.0 million to
Tullys. The license agreement provided that this fee was fully earned upon payment. Tullys initially recorded the $12.0 million license fee as deferred revenue, and has recognized it as revenue on a periodic basis during the zero royalty
period, during which it was expected that Tullys would have substantial performance obligations associated with supporting the opening and operation of Tullys stores by UCC. As a result, deferred licensing revenues (included in
liabilities) at December 30, 2007 included $1.8 million associated with the UCC license agreement.

In the fourth quarter of Fiscal
2008, Tullys determined that the termination of the license agreement under the Settlement Agreement and the resulting $6.0 million note payable represented a repossession under Statement of Financial Accounting Standards
No. 45, Accounting for Franchise Fee Revenue. In accordance with SFAS 45, Tullys reversed $3.5 million in previously recognized license revenue and $1.8 million in deferred license fee revenue.

Deferred licensing revenue recognized under the agreements with Tullys Coffee Japan and the license agreement with UCC is summarized as follows
(dollars in thousands):



|                                                                                                                |  |               |        |   |              |   |              |  |   |      
|--------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | - | ------------ | - | ------------ |  | - | -----
|                                                                                                                |  | Years ended  
|                                                                                                                |  | March 30,2008 |        |   | April 1,2007 |   | April 2,2006
|Recognition of deferred license revenue under international agreements                                          |  |               |        |   |              |   |              |  |   |      
|Periodic recognition of deferred license revenue under agreements with Tullys Coffee Japan                     |  | $             |       |   |              | $ |             |  | $ | 166  
|Revenue recognized upon termination of license and supply agreements under agreements with Tullys Coffee Japan |  |               |       |   |              |   |             |  |   | 4,405
|                                                                                                                |  |               |        |   |              |   |              |  |   |      
|Total deferred license revenue recognized under agreements with Tullys Coffee Japan                            |  |               |       |   |              |   |             |  |   | 4,571
|                                                                                                                |  |               |        |   |              |   |              |  |   |      
|Periodic recognition of deferred license revenue under UCC license agreement                                    |  |               | 1,080  |   |              |   | 1,440        |  |   | 1,440
|                                                                                                                |  |               |        |   |              |   |              |  |   |      
|Reversal of previously recognized deferred license revenue under UCC license agreement                          |  |               | (3,469 | ) |              |   |             |  |   |     
|                                                                                                                |  |               |        |   |              |   |              |  |   |      
|Total deferred license revenue recognized under agreements with Tullys Coffee Japan and UCC                    |  | $             | (2,389 | ) |              | $ | 1,440        |  | $ | 6,011
|                                                                                                                |  |               |        |   |              |   |              |  |   |      



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Deferred revenue is summarized as follows:



|                                                          |  |                                 |        |  
|--------------------------------------------------------- |  | ------------------------------- | ------ | -
|                                                          |  | Fiscal year endedMarch 30, 2008 |       
|                                                          |  | (dollars inthousands)           |       
|Deferred licensing revenue:                               |  |                                 |        |  
|Additions to deferred licensing revenue in the period     |  | $                               |       |  
|Less: Deferred licensing revenue recognized in net sales  |  |                                 | (2,880 | )
|Other, net                                                |  |                                 | (9     | )
|                                                          |  |                                 |        |  
|Net decrease in deferred licensing revenue for the period |  |                                 | (2,889 | )
|Deferred license revenue                                  |  |                                 |        |  
|Beginning of period                                       |  |                                 | 2,889  |  
|                                                          |  |                                 |        |  
|End of period                                             |  |                                 |       |  
|Less: Non-current portion                                 |  |                                 |       |  
|                                                          |  |                                 |        |  
|Current portion of deferred licensing revenue             |  |                                 |       |  
|Deferred revenue from stored value cards                  |  |                                 | 2,803  |  
|                                                          |  |                                 |        |  
|Current portion deferred revenue                          |  | $                               | 2,803  |  
|                                                          |  |                                 |        |  

13. Investment in Joint Venture

On January 7, 2008, TCAP, a wholly owned subsidiary of Tullys, and AFCM, a Singapore company, entered into a limited partnership agreement that
established a new joint venture called Tullys Coffee Asia Pacific Partners, LP (Tullys Coffee Asia). The new joint venture will seek to develop the Tullys brand in Asia (excluding Japan), Australia and New Zealand (the
Licensed Territories) through franchising and licensing activities, retail store operations, coffee roasting, wholesale distribution and other business activities. Tullys partner in this venture, AFCM, is a newly established
enterprise managed by the founder and former chief executive officer of TCJ

In connection with the formation of Tullys Coffee Asia,
TCAP assigned its rights (under an October 12, 2007 exclusive license agreement between Tullys and TCAP) to use Tullys business names, trademarks and intellectual property rights in the Licensed Territories to Tullys Coffee
Asia. AFCM agreed to contribute $6.0 million to the venture, of which $2.5 million was paid to Tullys Coffee Asia on January 7, 2008, $500,000 paid on January 31, 2008, and the $3.0 million balance was paid on March 31, 2008
(which is reflected as a reduction to stockholders equity on the balance sheet dated March 30, 2008). Of the capital contributed by AFCM, $3.0 million is being distributed by the joint venture to TCAP, and the remaining $3.0 million will
be used by the joint venture for development of its business. The $3.0 million capital distribution from the joint venture to TCAP includes (1) $500,000 cash distributed to Tullys on January 8, 2008, (2) $2,000,000 paid to UCC
on January 8, 2008 as described below in Note 16, and (3) $500,000 paid to TCAP on January 31, 2008. After completion of the $6.0 million AFCM capital contribution and the $3.0 million distribution to TCAP as described above, the
joint venture ownership percentages are 50% TCAP (general partner) and 50% AFCM (limited partner). Under its license agreement with Tullys, the joint venture is obligated to pay Tullys a royalty equal to one percent of the applicable
revenue base from operations in the Licensed Territories, commencing on April 1, 2008. Revenues associated with TCAP will be reported under our Specialty segment.

Investments in entities over which the Company has control are consolidated in the Consolidated Balance Sheets and Consolidated Statements of Operations. The Companys investment in Tullys Coffee Asia is
carried at $6,000,000 which relates to the initial contribution of $9,000,000, reduced by the capital withdrawal by Tullys of $3,000,000.



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14. Related-party transactions

Our chairman has guaranteed our obligations under the Benaroya credit facility, and another shareholder has guaranteed up to $3,000,000 under the Benaroya credit facility. Our chairman is not being compensated for his
guaranty. We have agreed to compensate the second guarantor through the cash payment of a $167,100 commitment fee and a grant of warrants to purchase 21,000 shares of our common stock at an exercise price of $2.64 per share, which were recorded at
their estimated aggregate fair value of $184,800 when granted (these warrants became exercisable on July 12, 2008. Additionally, we will pay a facility draw fee to this second guarantor at the annualized rate of 2% on the average amount of
guaranteed debt outstanding which accumulated to a fee of $16,000 for the Fiscal 2008.

In February 2006, an affiliate of Northrim acquired
a 24% ownership interest in Pacific Wealth Advisors, LLC (PWA), a newly formed company which is the successor by merger to Pacific Portfolio Consulting (Pacific Portfolio). PWA is a wealth management and investment advisory
services holding company. A member of the Tullys Board of Directors is the president of PWA and Pacific Portfolio and has an ownership interest of more than 10% in PWA. During Fiscal 2008, Tullys paid approximately $441,000 to Northrim
for interest on the amounts borrowed, and the outstanding debt to Northrim at March 30, 2008 was $4,650,000. Pacific Portfolio provided investment advisory consulting services for the Tullys employee 401(k) savings plan (see Note 20) and
received fees of approximately $6,700 for this service in Fiscal 2008 and $8,200 in Fiscal 2007.

Carl Pennington, Sr. was appointed as a
board member, effective as of January 15, 2008 and as Tullys President, effective as of January 15, 2008. Before joining Tullys, Mr. Pennington founded Pinnacle Management, a management company, and PinnPointe
Consulting Group, a consulting company advising retail and wholesale companies. Mr. Pennington is a shareholder of Pinnacle Management, which manages Impact Sales, Inc., a grocery broker, and Pinnacle Coffee, a franchisee of six Tullys
franchised stores as of March 30, 2008. Mr. Pennington serves as a board member of Impact Sales, the grocery broker for Tullys. Impact Sales received $566,000 in fiscal year 2008 from Tullys as brokerage commission on grocery
sales. He receives no compensation from Impact Sales. Mr. Pennington has no ownership interest in Pinnacle Coffee. Mr. Penningtons base salary as Tullys president is $290,000 per year.

As discussed in Note 13, in connection with the formation of Tullys Coffee Asia, TCAP assigned its rights (under an October 12, 2007 exclusive
license agreement between Tullys and TCAP) to use Tullys business names, trademarks and intellectual property rights in the Licensed Territories to Tullys Coffee Asia. AFCM agreed to contribute $6.0 million to the venture, of which
$2.5 million was paid to Tullys Coffee Asia on January 7, 2008, $500,000 paid on January 31, 2008, and the $3.0 million balance was paid on March 31, 2008 (which is reflected as a reduction to stockholders equity on the
balance sheet dated March 30, 2008). The capital contribution related to AFCMs ownership in TACAP is reflected as a $6.0 million minority interest on the Consolidated Balance Sheet.

15. Store closure and lease termination costs

We periodically close stores that do not meet our performance criteria and stores for which extension of the lease term was not practicable. Store closure and lease termination costs are summarized as follows (dollars in thousands):



|                                                                              |  |             |    |             |   |             |  |   |    
|----------------------------------------------------------------------------- |  | ----------- | -- | ----------- | - | ----------- |  | - | ---
|                                                                              |  | Fiscal 2008 |    | Fiscal 2007 |   | Fiscal 2006
|Store closure costs, including losses from disposal of property and equipment |  | $           | 19 |             | $ | 96          |  | $ | 43 
|Lease termination costs                                                       |  |             |   |             |   |            |  |   | 176
|                                                                              |  |             |    |             |   |             |  |   |    
|Total                                                                         |  | $           | 19 |             | $ | 96          |  | $ | 219
|                                                                              |  |             |    |             |   |             |  |   |    



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During Fiscal 2008, we closed two stores that represented approximately 0.5% of our Fiscal 2008 retail
sales. During Fiscal 2007, we closed four stores that represented approximately 2.0% of our Fiscal 2007 retail sales, and during Fiscal 2006, we closed six stores that represented approximately 3.2% of our Fiscal 2006 retail sales.

16. Commitments and contingencies

Lease commitments

We lease all of our retail, roasting plant and office space under operating leases, which expire through 2016. The leases provide
for minimum annual payments, and (in certain cases) contingent rentals based upon gross sales, escalation clauses and/or options to renew. Rental expense is recorded on a straight-line basis over the respective terms of the leases. Rental expense
under these operating leases was approximately $5,300,000, $5,100,000, and $5,300,000, for Fiscal 2008, Fiscal 2007, and Fiscal 2006, respectively. Contingent rental expense was approximately $344,000, $274,000, and $218,000 for Fiscal 2008, Fiscal
2007 and Fiscal 2006, respectively and is recognized as incurred.

In connection with certain leases, lessors have granted tenant
improvement allowances to Tullys. These amounts, included in liabilities under the caption deferred lease costs, are amortized into income on a straight-line basis over the life of the related lease. Also recorded in deferred lease
costs is the stepped rent excess of rental expense computed on a straight-line basis over the actual rent payments required by the terms of our leases.

Minimum future rental payments under noncancellable operating leases as of March 30, 2008 are summarized as follows:



|                       |  |   |       
|---------------------- |  | - | ------
|Fiscal year            |  |  
|(dollars in thousands) |  |  
|2009                   |  | $ | 4,535 
|2010                   |  |   | 3,873 
|2011                   |  |   | 2,126 
|2012                   |  |   | 956   
|2013                   |  |   | 661   
|Thereafter             |  |   | 1,048 
|                       |  |   |       
|Total                  |  | $ | 13,199
|                       |  |   |       

We have subleased some of our leased premises to third parties under subleases with varying terms
through 2012. Expected future sublease receipts under such sub-lease agreements are summarized as follows:



|                       |  |   |    
|---------------------- |  | - | ---
|Fiscal year            |  |  
|(dollars in thousands) |  |  
|2009                   |  | $ | 234
|2010                   |  |   | 142
|2011                   |  |   | 55 
|2012                   |  |   | 43 
|2013                   |  |   |   
|                       |  |   |    
|Total                  |  | $ | 474
|                       |  |   |    



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Tullys has funded the acquisition of equipment through capital leases. These leases typically have
terms ranging from three to five years and generally have bargain purchase options. Minimum future rental payments under capital leases as of March 30, 2008 are summarized as follows:



|                                                                 |  |   |     |  
|---------------------------------------------------------------- |  | - | --- | -
|Fiscal year                                                      |  |   |    
|(dollars in thousands)                                           |  |   |    
|2009                                                             |  | $ | 28  |  
|2010                                                             |  |   | 22  |  
|2011                                                             |  |   | 12  |  
|2012                                                             |  |   | 1   |  
|2013                                                             |  |   |    |  
|                                                                 |  |   |     |  
|Total minimum lease payment                                      |  |   | 63  |  
|Less: Amount representing future interest                        |  |   | (10 | )
|                                                                 |  |   |     |  
|Present value of net minimum lease payments under capital leases |  | $ | 53  |  
|                                                                 |  |   |     |  

Purchase commitments

It is our general practice to enter into forward commitments for the purchase of green coffee in order to secure future supplies of premium quality coffee beans that meet our specifications, in quantities that we
estimate will be required to meet our future roasting needs. Typically, Tullys has entered into contracts for the next seasons delivery of green coffee beans to help ensure adequacy of supply. As of March 30, 2008, we had
approximately $3,622,000 of contracts with fixed-price coffee purchase commitments. Since March 30, 2008, we have continued to enter into additional coffee purchase contracts. We believe, based on relationships established with our suppliers,
that the risk of non-delivery on such purchase commitments is remote.

Employment Agreements and Compensatory Arrangements

Pursuant to the employment letters for members of Tullys senior management team, Tullys has agreed to pay severance compensation to these
several executives in the event their employment by Tullys is terminated for reasons other than certain excluded circumstances. The amount of severance to be paid would depend upon the rate of salary at the time of termination and other
factors. As of March 30, 2008, the aggregate contingent obligation for severance to these individuals was approximately $208,000. Also, pursuant to the employment letters for members of Tullys senior management team, Tullys has agreed to
pay severance compensation to these several executives in the event that there was a change in control. The amount of severance to be paid would depend upon the rate of salary at the time of termination and other factors. As of March 30, 2008,
the aggregate contingent obligation for severance to these individuals for the change in control provision was approximately $394,000. Accrued liabilities at March 30, 2008 include accrued severance costs related to our former executives in the
amount of $20,000.

Contingencies

In February 2004 a lawsuit was filed against Tullys in Superior Court of California, Los Angeles County (the Court) by two former store managers on behalf of themselves and on behalf of other former and current store
managers in the state of California. The suit alleged that Tullys improperly classified such managers as exempt under Californias wage and hour laws and sought damages, restitution, reclassification and attorneys fees and costs. On
April 21, 2005, the parties entered into a memorandum of understanding regarding the settlement of this matter, which was subsequently reflected by the parties in a Joint Stipulation of Settlement and Release (the Settlement
Agreement). On September 14, 2006, the Court granted final approval of the Settlement Agreement and dismissed the suit with prejudice.



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In Fiscal 2005, Tullys incurred a one-time charge of approximately $1.6 million for the settlement
and associated costs. In connection with the final approval of the settlement, Tullys incurred additional expenses of $72,000 in Fiscal 2007. Under the settlement, Tullys agreed to make cash payments totaling approximately $800,000 to
the settlement class over a three year period starting in October 2006 and to issue 37,500 shares of its common stock, with an agreed value of $450,000, to the settlement class during that period. In October 2006, Tullys issued 7,000 shares of
common stock and paid $164,000 to the settlement class. In October 2007, Tullys issued 11,719 shares of common stock and paid $266,000 to the settlement class. Under the settlement, Tullys is required to issue stock and pay cash
settlement payments in future periods as follows (in addition, cash settlement payments after the initial payment will include interest at 6.75% per year):



|             |  |                                   |  |                                      |    
|------------ |  | --------------------------------- |  | ------------------------------------ | ---
|             |  | Shares ofcommon stockto be issued |  | Cashsettlementpayments(in thousands)
|October 2008 |  | 11,719                            |  | $                                    | 266
|October 2009 |  | 7,031                             |  |                                      | 159
|             |  |                                   |  |                                      |    
|Total        |  | 18,750                            |  | $                                    | 425
|             |  |                                   |  |                                      |    

On January 7, 2008, Tullys and UCC entered into the Settlement Agreement to settle the
pending lawsuit filed November 7, 2006 by UCC in the U.S. District Court for the Western District of Washington, relating to the 2001 license agreement between the parties. Under the Settlement Agreement, the parties agreed to a mutual release
of claims and to the dismissal of the lawsuit with prejudice. UCC also assigned all of its rights and interest under the 2001 license agreement to Tullys. The Settlement Agreement was finalized and effective January 7, 2008.

In consideration for the settlement, Tullys agreed to pay $6.0 million to UCC, consisting of $2.0 million paid to UCC on January 8, 2008,
and a $4.0 million promissory note issued by TCAP, a wholly owned subsidiary of Tullys, to UCC. The promissory note bears interest at 3.0% per year and is due in annual principal installments of $1,000,000 commencing on December 28,
2008. Payments under the note may accelerate under certain circumstances (including the completion of an initial public stock offering by Tullys) and TCAP is generally required to pay two dollars of principal under the note for each dollar
that TCAP distributes to Tullys. Tullys has issued a limited guaranty for TCAPs obligations under the note, which is generally secured by the assets of Tullys and TCAP related to the Licensed Territories, including
Tullys stock in TCAP, TCAPs interest in the Tullys Coffee Asia joint venture, Tullys trademarks for the Licensed Territories and Tullys interest as licensor of Tullys Coffee Asia, but is non-recourse as to
Tullys other assets. The parties expect the lawsuit to be dismissed with prejudice by the court.

In December 2007 a lawsuit was
filed against Tullys in California State Court by a former store employee alleging that Tullys failed to provide meal and rest periods for its employees. We anticipate that the plaintiff will seek class action certification on
behalf of all hourly employees in Tullys California stores. The plaintiff is seeking damages, restitution, injunctive relief, and attorneys fees and costs. Similar lawsuits alleging missed meal and rest periods have been filed in
California against many other companies. We are investigating the claims and intend to vigorously defend this litigation, but cannot predict the financial impact to us of the litigation at this time. We believe that Tullys has complied
with all laws that require providing meal and rest periods for its employees. We have accrued $147,000 as of March 30, 2008 for estimated legal fees in order to defend this litigation.

We are a party to various other legal proceedings arising in the ordinary course of our business, but are not currently a party to any other legal
proceeding that we believe could have a material adverse effect on our financial position or results of operations.



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17. Stock options

Effective April 3, 2006, we adopted SFAS 123R, which establishes accounting for stock-based awards exchanged for employee services, using the modified prospective application transition method. Accordingly,
stock-based compensation cost is measured at grant date, based on the fair value of the award, and recognized over the requisite service period. Previously, we applied APB 25 and related interpretations, as permitted by SFAS 123.

Company Stock Incentive Plan

In 1994,
Tullys shareholders approved a Stock Incentive Plan (the 1994 Plan). In August 1999 our shareholders approved an amended plan, which established the maximum number of shares issuable under the 1994 Plan and the Employee Stock
Purchase Plan at 525,000, and in June 2003, our Board of Directors further amended the 1994 Plan. By its terms, the 1994 Plan expired in October 2004 (this did not terminate outstanding options).

In December 2004, the Tullys shareholders approved the 2004 Stock Option Plan, effective as of November 1, 2004. The 2004 Stock Option Plan
authorizes the issuance of up to 312,500 shares of common stock under the 2004 Stock Option Plan and Tullys Employee Stock Purchase Plan.

The provisions of the 2004 Stock Option Plan (and the 1994 Plan prior to its expiration) are summarized as follows. We may issue incentive or nonqualified stock options to our employees and directors. Stock options are granted solely at the
discretion of our Board of Directors and are issued at a price determined by our Board of Directors. The term of each option granted is for such period as determined by our Board of Directors, but not more than ten years from date of grant. Options
are nontransferable and may generally be exercised based on a vesting schedule determined by our Board of Directors. The plan provides for acceleration of outstanding options under certain conditions, including certain changes in control of
Tullys.

Founders Stock Option Plan

In addition to options granted under the 1994 Plan, our chairman and founder has granted options to purchase shares of his stock to employees and third parties (the Founders Plan). No options have
been granted by the Chairman under the Founders Plan since Fiscal 2002. These options have vesting periods ranging from immediate vesting to five year vesting and have a twenty-five year life. In October 2005, the chairman and founder
contributed his holdings of Tullys common stock to TTOK, LLC, a limited liability company owned by the chairman, and the Founders Plan stock option obligations were assigned to TTOK, LLC.

Other Equity Instruments

Tullys has
granted warrants to purchase common stock. These warrants have up to one year vesting periods and generally have ten year lives. Issued, outstanding and exercisable warrants as of March 30, 2008 are summarized as follows:



|                                                              |  |                     |  |                   |  |               
|------------------------------------------------------------- |  | ------------------- |  | ----------------- |  | --------------
|                                                              |  | Outstandingwarrants |  | Numberexercisable |  | ExercisePrices
|Issued with Series A Preferred Stock investment units         |  | 617,309             |  | 617,309           |  | $2.64         
|Issued to guarantors of debt                                  |  | 184,922             |  | 91,731            |  | $0.40         
|Issued to holder of convertible note in lieu of cash interest |  | 120,000             |  | 120,000           |  | $0.08         
|Other                                                         |  | 13,359              |  | 13,359            |  | $0.08-$2.64   
|                                                              |  |                     |  |                   |  |               
|Totals                                                        |  | 935,590             |  | 842,399           |  |               
|                                                              |  |                     |  |                   |  |               



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Stock Options

We issue new shares of common stock upon the exercise of stock options granted under the 1994 Plan and the 2004 Stock Option Plan. The exercise of options granted under the Founders Plan results in a transfer of
shares to the exercising optionee from the shares owned by TTOK, LLC, and does not affect the total outstanding shares of stock or provide cash proceeds to Tullys.

Determining Fair Value Under SFAS 123R

Valuation and Amortization Method.

We estimated the fair value of stock option awards granted using the Black-Scholes option valuation model. We amortize the fair value of all awards on
a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Life.

The expected life of awards granted represents the period of time that they are expected to be outstanding. We determined the expected life based
primarily on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules, expected exercises and post-vesting forfeitures.

Expected Volatility.

We estimated the volatility of our common stock at the date of grant based on
the historical volatility of our common stock. The volatility factor we use in the Black-Scholes option valuation model is based on our historical stock prices over the most recent period commensurate with the estimated expected life of the award.

Risk-Free Interest Rate.

We based our risk-free interest rate used in the Black-Scholes option valuation model on the implied risk-free interest rate with an equivalent remaining term equal to the expected life of the award.

Expected Dividend Yield.

We use an
expected dividend yield of zero in the Black-Scholes option valuation model, consistent with our recent experience.

The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option pricing model. A summary of the weighted average assumptions and resulting weighted average fair value results for options granted during the periods presented is as
follows:



|                                             |  |                       |         |   |                      |   |         |                      |  |   |         |  
|-------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | -------------------- |  | - | ------- | -
|                                             |  | Years ended           |        
|                                             |  | March 30,        2008 |         |   | April 1,        2007 |   |         | April 2,        2006 | 
|Weighted average risk free interest rate     |  |                       | 3.22    | % |                      |   | 4.76    | %                    |  |   | 2.79    | %
|Expected dividend yield                      |  |                       | 0       | % |                      |   | 0       | %                    |  |   | 0       | %
|Expected lives                               |  |                       | 5 years |   |                      |   | 3 years |                      |  |   | 3 years |  
|Weighted average expected volatility         |  |                       | 80      | % |                      |   | 94      | %                    |  |   | 86      | %
|Weighted average fair value at date of grant |  | $                     | 7.26    |   |                      | $ | 7.15    |                      |  | $ | 6.36    |  



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Expected Forfeitures.

We primarily use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation only for those awards that are expected to
vest. For Fiscal 2008 we estimated our pre-vesting option forfeiture rate at 18%.

Stock-based Compensation Under SFAS 123(R)

Stock-based compensation expense related to stock-based awards under SFAS 123(R) for Fiscal 2008 and Fiscal 2007 totaled $199,000 and $362,000,
respectively, which is included in marketing, general and administrative costs in our Consolidated Statements of Operations. During Fiscal 2006, we recognized non-cash compensation expense of $114,000 and disclosed a pro forma non-cash compensation
expense consistent with the provisions of SFAS No. 123, as amended by SFAS No. 148 of $280,000.

As of March 30, 2008, we
had approximately $734,000 of total unrecognized compensation cost related to the 185,868 non-vested stock-based awards granted under all equity compensation plans. We expect to recognize this cost over a period of approximately three years.

The following table presents the impact of our adoption of SFAS 123(R) on data in our consolidated financial statements (in thousands,
except per share amounts);



|                                                                                 |  |               |       |   |              |   |       |              |  |   |       |  
|-------------------------------------------------------------------------------- |  | ------------- | ----- | - | ------------ | - | ----- | ------------ |  | - | ----- | -
|                                                                                 |  | Years ended   |      
|                                                                                 |  | March 30,2008 |       |   | April 1,2007 |   |       | April 2,2006 | 
|Consolidated Statements of Operations:                                           |  |               |       |   |              |   |       |              |  |   |       |  
|Decrease in income from operations                                               |  | $             | 199   |   |              | $ | 362   |              |  | $ | 114   |  
|Decrease in income or increase in loss before income taxes                       |  |               | (199  | ) |              |   | (362  | )            |  |   | (114  | )
|Decrease in net income or increase in net loss                                   |  |               | (199  | ) |              |   | (362  | )            |  |   | (114  | )
|Decrease in basic earnings per share or increase in basic net loss per share     |  | $             | (0.07 | ) |              | $ | (0.16 | )            |  | $ | (0.05 | )
|Decrease in diluted earnings per share or increase in diluted net loss per share |  | $             |      |   |              | $ |      |              |  | $ | (0.02 | )
|Consolidated Balance Sheets:                                                     |  |               |       |   |              |   |       |              |  |   |       |  
|Increase in additional-paid-in capital                                           |  | $             | 199   |   |              | $ | 306   |              |  | $ | 111   |  



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Stock Award Activity

As of March 30, 2008 options for 659,724 shares were outstanding under the 1994 Plan and the 2004 Stock Option Plan, of which 542,119 were fully vested.

The following table summarizes activity under our stock option option plans:



|                                                    |  |                 |   |  |                                         |  |                                                  |  |                        
|--------------------------------------------------- |  | --------------- | - |  | --------------------------------------- |  | ------------------------------------------------ |  | -----------------------
|Exercise price per share                            |  | Numberof Shares |   |  | Weighted-averageexercise price PerShare |  | Weighted-averageremainingcontractuallife (years) |  | Aggregateintrinsicvalue
|Outstanding at April 3, 2005                        |  | 669,884         |   |  | 3.57                                    |  |                                                  |  |                        
|Granted                                             |  | 74,486          |   |  | 10.66                                   |  |                                                  |  |                        
|Exercised                                           |  | (77             | ) |  | .21                                     |  |                                                  |  |                        
|Forfeited                                           |  | (55,876         | ) |  | 7.17                                    |  |                                                  |  |                        
|                                                    |  |                 |   | 
|Outstanding at April 2, 2006                        |  | 688,417         |   |  | 4.05                                    |  |                                                  |  |                        
|Granted                                             |  | 203,750         |   |  | 11.53                                   |  |                                                  |  |                        
|Exercised                                           |  | (75,493         | ) |  | .12                                     |  |                                                  |  |                        
|Forfeited                                           |  | (47,970         | ) |  | 13.15                                   |  |                                                  |  |                        
|                                                    |  |                 |   | 
|Outstanding at April 1, 2007                        |  | 768,704         |   |  | 5.85                                    |  |                                                  |  |                        
|Granted                                             |  | 70,730          |   |  | 11.36                                   |  |                                                  |  |                        
|Exercised                                           |  | (44,304         | ) |  | .14                                     |  |                                                  |  |                        
|Forfeited                                           |  | (135,406        | ) |  | 11.54                                   |  |                                                  |  |                        
|                                                    |  |                 |   |  |                                         |  |                                                  |  |                        
|Outstanding at March 30, 2008                       |  | 659,724         |   |  | 5.64                                    |  | 8.59                                             |  | 3,948,869              
|                                                    |  |                 |   |  |                                         |  |                                                  |  |                        
|Exercisable or convertible at the end of the period |  | 542,119         |   |  | 4.43                                    |  | 8.43                                             |  | 3,948,869              
|                                                    |  |                 |   |  |                                         |  |                                                  |  |                        

The aggregate intrinsic value of options outstanding at March 30, 2008 is calculated as the
difference between the market price of the underlying common stock and the exercise price of the options for the 364,850 exercisable options that had exercise prices that were lower than the $11.28 fair market value, as determined by our Board of
Directors, of our common stock at March 30, 2008.

The total intrinsic value of options exercised during the Fiscal 2008, Fiscal 2007,
and Fiscal 2006 using the March 30, 2008 $11.28 fair market value was $494,000, $842,000, and $1,000 respectively.



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Pro Forma Information Under SFAS 123 and APB 25

Prior to Fiscal 2007, our stock-based compensation was accounted for using the intrinsic value method prescribed in APB 25 and related interpretations.
Had compensation cost under our stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, our net loss and basic and diluted net loss per share would have been
changed to the pro forma amounts indicated below (in thousands, except for per share data):



|                                       |  |              |       
|-------------------------------------- |  | ------------ | ------
|                                       |  | April 2,2006
|Stock-based employee compensation cost |  |              |       
|As reported                            |  | $            | 113   
|Pro forma                              |  | $            | 280   
|Net income (loss)-as reported          |  | $            | 15,423
|Net income (loss)-pro forma            |  | $            | 15,256
|Basic earnings (loss) per share        |  |              |       
|As reported                            |  | $            | 6.97  
|Pro forma                              |  | $            | 6.90  
|Diluted earnings (loss) per share      |  |              |       
|As reported                            |  | $            | 2.42  
|Pro forma                              |  | $            | 2.37  

18. Stockholders equity

Reverse Stock Split

On June 27, 2007, our shareholders approved an amendment to our
articles of incorporation to give effect to a one-for-eight reverse split of our outstanding common stock and approved an amendment to our articles of incorporation to eliminate the requirement for a minimum price per share as a condition for the
automatic conversion of our Series A Preferred stock. On June 28, 2007, these amendments to our articles of incorporation became effective. Except where specifically indicated, all common share information (including information related to
options and warrants to purchase common stock) and all per share information related to our common stock in this report has been restated to reflect the one-for-eight reverse split.

Under our articles of incorporation, the voting privileges and conversion ratios for our outstanding shares of Series A Preferred Stock and our Series B
Preferred Stock are automatically adjusted to give proportionate effect to this reverse split.

Pursuant to provisions in our stock option
and warrant agreements, the number of common shares available for purchase under these agreements, and the exercise prices, are automatically adjusted to give proportionate effect to this reverse split.

Preferred stock

Each outstanding share of our
Series A Preferred Stock is convertible at any time by the holder thereof into shares of common stock at the then-effective conversion price. In addition, each outstanding share of Series A Preferred Stock is automatically convertible into shares of
common stock if Tullys completes an underwritten public offering of Tullys shares of common stock with gross proceeds to Tullys in excess of $15 million (Qualified Offering). The Series A Preferred Stock contains
an anti-dilution protection right that provides for a weighted average adjustment of the conversion price in the event we issue shares of capital stock at an effective price less than the Series A Preferred conversion price then in effect, subject
to certain limitations and exclusions. At March 30, 2008, each eight shares of our outstanding Series A Convertible Preferred share could be converted at the option of the shareholder into approximately 1.13 shares of common stock (giving
effect to the one-for-eight reverse split of our common stock).



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Holders of Series A Preferred Stock are entitled to receive dividends when and if any dividends are
declared to be paid by our Board of Directors. Voting rights of the Series A Preferred Stock are subject to adjustment for the anti-dilution adjustment and as a result, at March 30, 2008, each eight shares of Series A Preferred Stock would be
entitled to cast approximately 1.13 votes on all matters submitted to a vote of our shareholders (giving effect to the one-for-eight reverse split of our common stock). Series A Preferred shareholders may exercise cumulative voting rights with
respect to the election of Directors.

In the event of any liquidation or winding up of Tullys, each share of Series A Preferred
Stock is entitled to receive, prior and in preference to all other payments to the holders of Series B Preferred Stock and the shares of common stock, an amount equal to $2.50, plus any and all declared but unpaid dividends with respect to such
share of Series A Preferred Stock (the Series A Liquidation Preference). Assuming distribution of the full Series A Liquidation Preference, common stock liquidation preference (described below), and the Series B Liquidation Preference
(described below), and subject to the rights of any additional preferred stock that may in the future be designated and issued by Tullys, our remaining assets available for distribution to shareholders would be distributed pro rata among the
holders of the Series A Preferred Stock, Series B Preferred Stock and shares of common stock, treating the shares of Series A Preferred Stock and Series B Preferred Stock on an as-converted basis.

Certain holders of Series A Preferred Stock have certain rights to require us to register the shares of common stock issued upon conversion of the Series
A Preferred Stock. These rights generally allow persons holding the underlying shares of common stock to require Tullys to use its best efforts to register the shares for resale under the Securities Act of 1933, as amended, and under such
state securities laws as may be necessary. These rights include the right to demand that we file a registration statement for the underlying shares of common stock at the shareholders option no more than one time following an initial public
offering, if any, and thereafter, unlimited rights once Tullys is eligible to use Form S-3.

Each outstanding share of Series B
Preferred Stock is convertible at any time by the holder thereof into shares of common stock at the then-effective conversion price. In addition, each outstanding share of Series B Preferred Stock is automatically convertible into shares of common
stock at the then-effective conversion price when and if we make a Qualified Offering. The conversion price for the Series B Preferred shares is subject to an anti-dilution adjustment, but no adjustment has been required. Giving effect to the
one-for-eight reverse split of our common stock, each eight Series B Preferred shares could be converted at the option of the shareholder into one share of common stock as of March 30, 2008.

Holders of Series B Preferred Stock are entitled to receive dividends when and if any dividends are declared to be paid by our Board of Directors. Each
eight shares of Series B Preferred Stock also are entitled to cast one vote on all matters submitted to a vote of the shareholders of Tullys (giving effect to the one-for-eight reverse split of our common stock).

In the event of any liquidation or winding up of Tullys, each share of Series B Preferred Stock is entitled to receive, after full satisfaction of
the Series A Liquidation Preference and the common stock liquidation preference (described below), and prior and in preference to all other payments to the holders of shares of common stock, an amount equal to $2.50, plus any and all declared but
unpaid dividends with respect to such share of Series B Preferred Stock (the Series B Liquidation Preference). Assuming distribution of the full Series A Liquidation Preference, common stock liquidation preference and the Series B
Liquidation Preference, and subject to the rights of any additional series or classes of preferred stock that may in the future be designated and issued by Tullys, the remaining assets of Tullys available for distribution to shareholders
would be distributed pro rata among the holders of the Series A Preferred Stock, Series B Preferred Stock and shares of common stock, treating the shares of Series A Preferred Stock and Series B Preferred Stock on an as-converted basis.

During Fiscal 2008, certain shareholders transmitted shares of Series A Preferred Stock or Series B Preferred Stock to our transfer agent for
safekeeping. In some cases, these preferred shareholders requested that



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their preferred shares be converted into our common stock. Where this has been indicated by the shareholder, the conversion has been reflected in the Fiscal
2008 financial statements. For some of these shareholders, the intent of the shareholder was unclear, and while we investigate this matter with the shareholders, we have not reflected these preferred shares as being converted into our common stock.
If we determine that any of these other shareholders intended to convert their shares into common stock, will be reflected in the financial statements for our fiscal year ending March 29, 2009.

Common stock and Warrants

In the event of any
liquidation or winding up of Tullys, after distribution of the full Series A Liquidation Preference, each common share is entitled to receive an amount per share equal to $18.00 (giving effect to the one-for-eight reverse split of our common
stock), plus any and all declared but unpaid dividends with respect to such share of shares of common stock (the common stock liquidation preference). Assuming distribution of the full Series A Liquidation Preference, common stock
liquidation preference and the Series B Liquidation Preference (described above), and subject to the rights of any additional preferred stock that may in the future be designated and issued by us, our remaining assets available for distribution to
shareholders would be distributed pro rata among the holders of the Series A Preferred Stock, Series B Preferred Stock and shares of common stock, treating the shares of Series A Preferred Stock and Series B Preferred Stock on an as-converted basis.

Subscription receivable

As of
March 30, 2008, we had a $3,000,000 receivable related to the capital contribution due from AFCM as described in Note 13. This balance was later collected subsequent to the balance sheet date. The Company has recorded this receivable as a
reduction to stockholders equity as of March 30, 2008.

19. Stock purchase plan

In Fiscal 2000, our stockholders approved the Employee Stock Purchase Plan (the Purchase Plan). The Purchase Plan qualifies under
Section 423 of the Internal Revenue Code. Tullys has authorized up to 312,500 shares of common stock to be offered under the Purchase Plan and 2004 Stock Option Plan combined. No offerings have yet occurred under the Purchase Plan.

20. Employee 401(k) savings plan

During Fiscal 2000, we adopted a 401(k) savings plan for employees. Eligible employees may contribute up to 20% of their salaries to the plan. Eligible employees are employees over the age of 18 who have been employed by Tullys for
six months. There is no mandatory match from Tullys. Most plan administrative costs are paid by the 401(k) savings plan.

21. Segment
Reporting

We present segment information in accordance with Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS 131), which established reporting and disclosure standards for an enterprises operating segments. Operating segments are defined as components of an enterprise for which
separate financial information is available and regularly reviewed by our senior management.

The accounting policies of the operating
segments are the same as those described in the summary of significant accounting policies in Note 1. We do not allocate our assets among our business units for purposes of making business decisions, and therefore do not present asset information by
operating segment. Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP financial measurement we use to measure the operating performance of our operating segments. EBITDA excludes the effects of
financing costs, income taxes, and non-cash depreciation and amortization.



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The tables below present information by operating segment:



|                                                               |  |                        |         |   |              |   |        |              |  |   |        |  
|-------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------ | ------------ |  | - | ------ | -
|                                                               |  | Years Ended            |        
|                                                               |  | March 30,2008          |         |   | April 1,2007 |   |        | April 2,2006 | 
|                                                               |  | (dollars in thousands) |        
|Net sales                                                      |  |                        |         |   |              |   |        |              |  |   |        |  
|Retail division                                                |  | $                      | 42,897  |   |              | $ | 39,334 |              |  | $ | 38,194 |  
|Wholesale division                                             |  |                        | 28,132  |   |              |   | 20,901 |              |  |   | 13,187 |  
|Specialty division(1)                                          |  |                        | (1,952  | ) |              |   | 1,647  |              |  |   | 6,864  |  
|                                                               |  |                        |         |   |              |   |        |              |  |   |        |  
|Net sales                                                      |  | $                      | 69,077  |   |              | $ | 61,882 |              |  | $ | 58,245 |  
|                                                               |  |                        |         |   |              |   |        |              |  |   |        |  
|Earnings before interest, taxes, depreciation and amortization |  |                        |         |   |              |   |        |              |  |   |        |  
|Retail division(2)                                             |  | $                      | 2,384   |   |              | $ | 1,817  |              |  | $ | 1,952  |  
|Wholesale division                                             |  |                        | 2,955   |   |              |   | 1,459  |              |  |   | 1,261  |  
|Specialty division(1)                                          |  |                        | (3,718  | ) |              |   | 290    |              |  |   | 6,358  |  
|Corporate and other expenses(3)                                |  |                        | (10,406 | ) |              |   | (9,676 | )            |  |   | (7,287 | )
|Gain on Japan Rights sale                                      |  |                        |        |   |              |   |       |              |  |   | 17,392 |  
|                                                               |  |                        |         |   |              |   |        |              |  |   |        |  
|Earnings before interest, taxes, depreciation and amortization |  |                        | (8,785  | ) |              |   | (6,110 | )            |  |   | 19,676 |  
|Depreciation and amortization                                  |  |                        | (2,764  | ) |              |   | (3,340 | )            |  |   | (3,529 | )
|Income taxes                                                   |  |                        | (2      | ) |              |   | (17    | )            |  |   | (339   | )
|Interest income, interest expense, and loan guarantee fees     |  |                        | (2,358  | ) |              |   | (287   | )            |  |   | (385   | )
|                                                               |  |                        |         |   |              |   |        |              |  |   |        |  
|Net income (loss)                                              |  | $                      | (13,909 | ) |              | $ | (9,754 | )            |  | $ | 15,423 |  
|                                                               |  |                        |         |   |              |   |        |              |  |   |        |  
|Depreciation and amortization                                  |  |                        |         |   |              |   |        |              |  |   |        |  
|Retail division                                                |  | $                      | 1,880   |   |              | $ | 2,363  |              |  | $ | 2,444  |  
|Wholesale division                                             |  |                        | 255     |   |              |   | 297    |              |  |   | 330    |  
|Specialty division                                             |  |                        | **      |   |              |   | **     |              |  |   | **     |  
|Corporate and other expenses                                   |  |                        | 629     |   |              |   | 680    |              |  |   | 755    |  
|                                                               |  |                        |         |   |              |   |        |              |  |   |        |  
|Total depreciation and amortization                            |  | $                      | 2,764   |   |              | $ | 3,340  |              |  | $ | 3,529  |  
|                                                               |  |                        |         |   |              |   |        |              |  |   |        |  



|** | Not materialless than $1,000
|-- | -----------------------------

|(1) | Specialty division net sales and operating income for Fiscal 2006 include $4,405,000 of deferred license revenue recognized as the result of the termination of the license and
supply agreements with Tullys Coffee Japan (see Note 12). Specialty division net sales and operating income for Fiscal 2008 include a $3,469,000 net reversal of deferred revenue previously recognized as a result of the repossession of a
franchise under the UCC settlement described in Note 12.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The Retail division operating results include adjustments for impairment of long-lived assets of $236,000 (Fiscal 2006) and for amounts required to close stores and terminate store
leases totaling $19,000 (Fiscal 2008), $96,000 (Fiscal 2007), and $219,000 (Fiscal 2006).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Corporate and other expenses include a charge of approximately $72,000 for Fiscal 2007, for the settlement and associated costs related to a lawsuit (see Note 16).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

On September 15, 2008, the Company entered into an asset purchase and sale agreement to sell substantially all of the
assets of the wholesale business to GMCR for $40,300,000. The closing is subject to certain closing conditions, including shareholder approval.

22. Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) adjusted to eliminate the interest on convertible debt (if assumed to be converted), by the sum of
the weighted average number of common shares and the effect of dilutive common share equivalents.



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Tullys has granted options and warrants to purchase common stock, and issued preferred stock and
debt convertible into common stock (collectively, the common share equivalent instruments). Under some circumstances, the common share equivalent instruments may have a dilutive effect on the calculation of earnings or loss per share.
All of the common share equivalent instruments were excluded from the computation of diluted loss per share for Fiscal 2007 and Fiscal 2008 because the effect of these instruments on the calculation would have been antidilutive.

The computations of earnings (loss) per share, and of the weighted average shares used for basic earnings (loss) per share and diluted earnings (loss)
per share are summarized as follows:



|                                                                                              |  |                                                         |         |   |              |   |        |              |  |   |       
|--------------------------------------------------------------------------------------------- |  | ------------------------------------------------------- | ------- | - | ------------ | - | ------ | ------------ |  | - | ------
|                                                                                              |  | Years Ended                                            
|                                                                                              |  | March 30,2008                                           |         |   | April 1,2007 |   |        | April 2,2006
|                                                                                              |  | (dollars and shares in thousands,except per share data)
|Computation of basic earnings (loss) per share                                                |  |                                                         |         |   |              |   |        |              |  |   |       
|Net income (loss)                                                                             |  | $                                                       | (13,909 | ) |              | $ | (9,754 | )            |  | $ | 15,423
|Adjustments for basic earnings (loss) per share                                               |  |                                                         |        |   |              |   |       |              |  |   |      
|                                                                                              |  |                                                         |         |   |              |   |        |              |  |   |       
|Net income (loss) for basic earnings (loss) per share                                         |  | $                                                       | (13,909 | ) |              | $ | (9,754 | )            |  | $ | 15,423
|                                                                                              |  |                                                         |         |   |              |   |        |              |  |   |       
|Weighted average shares used in computing basic earnings (loss) per share                     |  |                                                         | 2,917   |   |              |   | 2,283  |              |  |   | 2,212 
|Basic earnings (loss) per share                                                               |  | $                                                       | (4.77   | ) |              | $ | (4.27  | )            |  | $ | 6.97  
|Computation of diluted earnings (loss) per share                                              |  |                                                         |         |   |              |   |        |              |  |   |       
|Net income (loss)                                                                             |  | $                                                       | (13,909 | ) |              | $ | (9,754 | )            |  | $ | 15,423
|Add interest on convertible note, if assumed to be converted                                  |  |                                                         |        |   |              |   |       |              |  |   | 167   
|                                                                                              |  |                                                         |         |   |              |   |        |              |  |   |       
|Net income (loss) for diluted earnings (loss) per share                                       |  | $                                                       | (13,909 | ) |              | $ | (9,754 | )            |  | $ | 15,590
|                                                                                              |  |                                                         |         |   |              |   |        |              |  |   |       
|Weighted average shares used in computing diluted earnings (loss) per share                   |  |                                                         | 2,917   |   |              |   | 2,283  |              |  |   | 6,434 
|Diluted earnings (loss) per share                                                             |  | $                                                       | (4.77   | ) |              | $ | (4.27  | )            |  | $ | 2.42  
|Weighted average shares used in computing earnings (loss) per share                           |  |                                                         |         |   |              |   |        |              |  |   |       
|Weighted average common shares outstanding, used in computing basic earnings (loss) per share |  |                                                         | 2,917   |   |              |   | 2,283  |              |  |   | 2,212 
|Common share equivalent instruments for computing diluted earnings (loss) per share           |  |                                                         |         |   |              |   |        |              |  |   |       
|Dilutive effect of Series A Convertible Preferred stock                                       |  |                                                         |        |   |              |   |       |              |  |   | 2,192 
|Dilutive effect of Series B Convertible Preferred stock                                       |  |                                                         |        |   |              |   |       |              |  |   | 617   
|Dilutive effect of convertible promissory note                                                |  |                                                         |        |   |              |   |       |              |  |   | 104   
|Dilutive effect of stock options (treasury stock method)                                      |  |                                                         |        |   |              |   |       |              |  |   | 301   
|Dilutive effect of warrants (treasury stock method)                                           |  |                                                         |        |   |              |   |       |              |  |   | 1,008 
|                                                                                              |  |                                                         |         |   |              |   |        |              |  |   |       
|Total common share equivalent instruments for computing diluted earnings (loss) per share     |  |                                                         |        |   |              |   |       |              |  |   | 4,222 
|                                                                                              |  |                                                         |         |   |              |   |        |              |  |   |       
|Weighted average shares used in computing diluted earnings (loss) per share                   |  |                                                         | 2,917   |   |              |   | 2,283  |              |  |   | 6,434 
|                                                                                              |  |                                                         |         |   |              |   |        |              |  |   |       



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23. Subsequent Events

On August 1, 2008 the Company executed amendments (dated for reference purposes as of August 1, 2008) to its secured credit facility with Northrim Funding Services. The Northrim Facility provides a credit
facility of up to $5,000,000, subject to the amount of eligible accounts receivable and inventories. The extended term of the agreement is until October 31, 2008, unless terminated earlier by either party. Borrowings under this facility bear
interest at the prime rate plus six percent and are secured by the Companys inventories and the assignment, with recourse, of the Companys accounts receivable. Fees in the amount of $12,500 were paid to Northrim in relation to the
extension of the Northrim Facility.

The Benaroya credit facility ($7,071,000 in principal amount outstanding at March 30, 2008, net
of discount) was established as a short-term bridge financing to meet business needs prior to the anticipated completion of the proposed stock offering. Subsequent to the balance sheet date on September 11, 2008, the Company and
Benaroya Capital agreed to enter into a Forbearance Agreement. Under the Forbearance Agreement, Benaroya Capital has agreed to forbear from taking any action to collect on the Benaroya Note or to foreclose on its security interests. Pending closure
of the Asset Purchase Agreement with GMCR, the balances under both the Benaroya and Northrim facilities will be repaid.

On
February 4, 2008 we engaged an investment banking firm to assist in evaluating strategic alternatives to optimize company and shareholder value. The Company has evaluated a range of alternatives. As a result of this assessment, on
September 15, 2008, Tullys, its wholly-owned subsidiary Tullys Bellaccino, LLC, and GMCR, entered into the GMCR Agreement. Under the GMCR Agreement, GMCR will purchase the assets associated with Tullys wholesale business and
supply chain, including rights to use the Tullys brand worldwide (excluding Japan) and other Tullys trade names, trademarks and service marks, for a total consideration of $40.3 million in cash, subject to adjustment based on the value
of the assets as of the closing date. Of the cash proceeds payable to Tullys, $3.5 million will be placed in escrow for one year to satisfy Tullys post-closing indemnification obligations to GMCR under the GMCR Agreement. We plan to use
these proceeds to improve our liquidity, repay our indebtedness, and to fund our domestic retail and license businesses.

The GMCR
Agreement contemplates that, at the closing, GMCR will grant Tullys a license to use the Tullys brand and other trade names, trademarks and service marks in connection with certain (i) retail operations worldwide
(excluding Japan) and (ii) wholesale operations outside of North America, and that the parties will enter into an exclusive coffee supply arrangement. Tullys current shareholders and executive management team will continue to own and
operate the Companys domestic retail business (company owned, franchised and licensed retail store locations) and international retail and wholesale businesses.

Tullys and GMCR have made customary representations, warranties and covenants in the GMCR Agreement. Pursuant to the terms of the GMCR Agreement, except in certain limited circumstances Tullys may not
solicit or enter into discussions regarding, or provide information in connection with, alternative transactions. The GMCR Agreement specifies certain termination rights of the parties, and, under some circumstances, in the event of termination of
the GMCR Agreement, Tullys may be required to pay GMCR a termination fee of $1.6 million. In addition, if Tullys terminates the GMCR Agreement because GMCR is unable to obtain funding under its existing credit facility to complete the
asset purchase, then GMCR will be obligated to reimburse Tullys for up to $1.6 million in Tullys out-of-pocket costs and expenses.

Closing of the proposed asset sale is subject to certain conditions, including approval by Tullys shareholders.

The GMCR
Agreement was unanimously approved by Tullys board of directors. In addition, Tom T. OKeefe, our chairman of the board and founder, who beneficially owns approximately 20.2% of our outstanding common stock, has entered into a voting
agreement with GMCR pursuant to which he has agreed to vote his shares in favor of the transaction at the shareholders meeting at which our shareholders will be asked to approve the GMCR Agreement and the transactions contemplated therein.



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The transaction is expected to close before the end of the calendar year. Tullys expects to file a
preliminary proxy statement with regard to the GMCR Agreement in the next 30 days, which will include, among other things, information regarding the background of the boards decision to enter into the GMCR Agreement.

Tullys believes it will incur contractual costs associated with the sale of the assets of its wholesale business subject to the GMCR Agreement with
GMCR. At this time, however, these costs are subject to, and potentially contingent upon, the various conditions of, and successful completion of the closing process. If the GMCR Agreement and the transactions contemplated therein are not approved
by Tullys shareholders, or are approved but the asset sale is not successfully completed, then certain of these potential costs may not be incurred. Thus, we are currently unable to provide a reasonable estimate of these costs. Direct and
indirect costs associated with the sale, incurred subsequent to the signing of the GMCR Agreement, will be recorded during the period incurred or upon recognition of the closing of the transaction, if successful, depending on the nature of such
costs.

As all of the criteria of SFAS No. 144 were not met as of the balance sheet date, the Company has not classified the assets
and liabilities of its wholesale operations as held for sale and the results of operations for the wholesale operations will not be reported in discontinued operations. The Company will record the assets and liabilities as held for sale in our first
quarter Fiscal 2009 reporting in accordance with the guidance provided in SFAS No. 144, which were met on June 26, 2008. However, the assets and liabilities related to the wholesale business as of March 30, 2008 that were included in
the GMCR Agreement amount to $4,725,000 and $66,000, respectively. In addition, certain accounts receivable, current assets and liabilities and short-term credit facilities associated with our wholesale business will be retained and settled by the
Company upon closing of the proposed transaction.

Consistent with our past disclosure and in light of the proposed sale of our wholesale
business to GMCR, we continue to evaluate the business, operations, and prospects of our remaining business units and to work with our financial advisors to explore potential opportunities to optimize the value of the company to our shareholders,
including the sale of our retail and international businesses.

24. Selected Quarterly Financial Data (Unaudited)

Summarized quarterly financial information for Fiscal 2008 and Fiscal 2007 is as follows. Our sales are moderately seasonal.



|                                 |  |                                               |        |   |         |   |        |         |  |   |         |   |  |       |        |   |  |   |         |  
|-------------------------------- |  | --------------------------------------------- | ------ | - | ------- | - | ------ | ------- |  | - | ------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                 |  | 1st Qtr                                       |        |   | 2nd Qtr |   |        | 3rd Qtr |  |   | 4th Qtr |   |  | Total |       
|                                 |  | (dollars in thousands, except per share data) |       
|Fiscal 2008                      |  |                                               |        |   |         |   |        |         |  |   |         |   |  |       |        |   |  |   |         |  
|Net Sales                        |  | $                                             | 16,790 |   |         | $ | 18,210 |         |  | $ | 19,625  |   |  | $     | 14,452 |   |  | $ | 69,077  |  
|Gross Profit                     |  |                                               | 7,488  |   |         |   | 7,832  |         |  |   | 8,707   |   |  |       | 3,958  |   |  |   | 27,985  |  
|Net Loss                         |  |                                               | (2,194 | ) |         |   | (3,282 | )       |  |   | (2,423  | ) |  |       | (6,010 | ) |  |   | (13,909 | )
|Basic and Diluted Loss per Share |  |                                               |        |   |         |   |        |         |  |   |         |   |  |       |        |   |  |   |         |  
|Net Loss per basic share         |  | $                                             | (0.86  | ) |         | $ | (1.20  | )       |  | $ | (0.77   | ) |  | $     | (1.94  | ) |  | $ | (4.77   | )
|Net Loss per diluted share       |  | $                                             | (0.86  | ) |         | $ | (1.20  | )       |  | $ | (0.77   | ) |  | $     | (1.94  | ) |  | $ | (4.77   | )
|Fiscal 2007                      |  |                                               |        |   |         |   |        |         |  |   |         |   |  |       |        |   |  |   |         |  
|Net Sales                        |  | $                                             | 14,007 |   |         | $ | 16,509 |         |  | $ | 16,049  |   |  | $     | 15,317 |   |  | $ | 61,882  |  
|Gross Profit                     |  |                                               | 6,664  |   |         |   | 7,572  |         |  |   | 7,221   |   |  |       | 6,364  |   |  |   | 27,821  |  
|Net Loss                         |  |                                               | (2,354 | ) |         |   | (2,253 | )       |  |   | (2,767  | ) |  |       | (2,380 | ) |  |   | (9,754  | )
|Basic and Diluted Loss per Share |  |                                               |        |   |         |   |        |         |  |   |         |   |  |       |        |   |  |   |         |  
|Net Loss per basic share         |  | $                                             | (1.06  | ) |         | $ | (1.01  | )       |  | $ | (1.19   | ) |  | $     | (1.01  | ) |  | $ | (4.27   | )
|Net Loss per diluted share       |  | $                                             | (1.06  | ) |         | $ | (1.01  | )       |  | $ | (1.19   | ) |  | $     | (1.01  | ) |  | $ | (4.27   | )





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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

None.



|ITEM 9A(T). | CONTROLS AND PROCEDURES
|----------- | -----------------------

We maintain a set of
disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act) is
recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms in a manner that allows timely decisions regarding required disclosures. We carried out, under the
supervision and with the participation of management, including our President and principal executive officer (President) and our Chief Financial Officer and Vice President and principal financial officer (CFO), an evaluation
of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on their evaluation as of the end of the period covered by this Annual Report on
Form 10-K, our President and CFO concluded that the current disclosure controls and procedures are effective.

Managements Report on Internal
Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) in reasonable
detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) provide reasonable assurance that our receipts and
expenditures are made in accordance with management authorization; and (iv) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on
the financial statements.

Because of its inherent limitations, internal control over financial reporting, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the controls will prevent or detect misstatements. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

The Public Company Accounting Oversight Board (United States) (PCAOB) defines a material weakness as a deficiency, or combination of
deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant
deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial
reporting. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A deficiency
in design exists when:



| |  |  | a control necessary to meet the control objective is missing; or
| | - |  | ----------------------------------------------------------------



| |  |  | an existing control is not properly designed such that, even if the control operates as designed, the control objective is not always met.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------

A deficiency in operation exists when a properly designed control does not operate as designed, or when the person
performing the control does not possess the necessary authority or qualifications to perform the control effectively.



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Management conducted an evaluation of the effectiveness of our internal control over financial reporting
as of March 30, 2008, based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (or the COSO criteria). Based on this evaluation, management
identified the two following significant deficiencies as defined by the PCAOB as of March 30, 2008:

LATE FILING: The Company was not
able to complete all necessary items required to file a complete Form 10-K in the required timeframe.

TAX PROVISION: The Company was not
able to support all beginning deferred tax balances on items necessary to rollforward our tax balances.

Management is committed to
improving its internal controls and will continue to work to put effective controls in place to file a complete regulatory filing requirements in a timely manner and has retained a third party specialists for preparation of its tax provision and
will perform extensive beginning balance review to support prior year balances related to deferred tax balances.

This annual report on
Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Additionally, managements report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only managements report in this annual report.

Changes in Internal Control Over Financial Reporting

There have been no significant changes
in our internal control over financial reporting that occurred during our fourth quarter ended March 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None.



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PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
|-------- | -------------------------------------------------------

The following table sets forth certain information regarding our executive officers and directors as of the date of this report:



|                           |  |     |  |                                                    |  |               
|-------------------------- |  | --- |  | -------------------------------------------------- |  | --------------
|Name                       |  | Age |  | Position with Tullys                              |  | Director Since
|Tom T. OKeefe(1*)         |  | 54  |  | Chairman of the Board                              |  | 1992          
|Carl W. Pennington, Sr.(2) |  | 70  |  | President and Director                             |  | 2008          
|Andrew M. Wynne            |  | 33  |  | Chief Financial Officer                            |  |               
|Mark E. DaCosta            |  | 41  |  | Vice President of Wholesale Operations & Logistics |  |               
|Ronald P. Gai              |  | 51  |  | Vice President of Wholesale Sales                  |  |               
|John J. Rader              |  | 58  |  | Vice President and General Manager of Supply Chain |  |               
|Marc Evanger(3*)(4)        |  | 53  |  | Director                                           |  | 1999          
|John M. Fluke(1)(2)(4*)    |  | 65  |  | Director                                           |  | 2005          
|Lawrence L. Hood(1)(2*)(4) |  | 49  |  | Director                                           |  | 1994          
|Gregory A. Hubert(1)       |  | 57  |  | Director                                           |  | 2004          



|(1) | Member of the Executive Committee
|--- | ---------------------------------

|(2) | Member of the Governance and Nominating Committee
|--- | -------------------------------------------------

|(3) | Member of the Compensation Committee
|--- | ------------------------------------

|(4) | Member of the Audit Committee
|--- | -----------------------------

|* | Designates committee chair
|- | --------------------------

Tom T.
OKeefeChairman of the Board and Founder. Tom T. OKeefe founded Tullys in 1992 and has served as a director and chairman of the Board of Directors since that date. Mr. OKeefe served as chief executive officer of
Tullys from 1992 until April 2001. Mr. OKeefe is also president and chief executive officer of OKeefe Development Corporation, a real estate development and investment firm he founded in 1986 after spending nine years as a
broker with Coldwell Banker Commercial Real Estate Services, now known as CB Richard Ellis. Mr. OKeefe and his wife Cathy have been actively involved in community organizations for over 25 years and their charitable efforts focus
largely on the health, education and welfare of the children in our community. The OKeefes were cofounders of the Patrons of Cystic Fibrosis and of the Juvenile Diabetes Foundation of Seattle guilds. The OKeefes have chaired
many fund-raisers for these and other similar entities that encompass grass roots campaigns to multi-million dollar earning galas. OKeefe is presently serving as a board member to the Seattle Preparatory Academy, Virginia Mason Hospital,
Juvenile Diabetes Guild of Seattle and is a Trustee of The Museum of Flight. OKeefe formerly served as a board member or trustee for the Villa Academy, Pacific Northwest Ballet, Leukemia and Lymphoma Society, Cystic Fibrosis Foundation,
Childrens Hospital and the Bellevue Boys and Girls Club.

Carl W. Pennington, Sr.President and Director.
Mr. Pennington was appointed President (principal executive officer) on January 15, 2008. Mr. Pennington was appointed to the Board of Directors in January 2008. From June, 2005 until January 15, 2008, Mr. Pennington founded
Pinnacle Management, a management company. From March 2001 to June 2007, Mr. Pennington was the founder and CEO of PinnPointe Consulting Group, a consulting company advising retail and wholesale companies. Mr. Pennington brings extensive
retail and wholesale expertise to Tullys, having previously served as Executive Vice President of Sales, Marketing and Merchandising at Albertsons, the nations second largest retail food chain, from 1995 to 2001. He directed and
had responsibility for leading the operations, sales, marketing, and merchandising functions of the Company. Mr. Pennington also held various other positions including division vice president and district manager with Albertsons from 1967
to 1995. Mr. Pennington graduated from Fullerton State College and the Graduate School of Business at Stanford University.



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Andrew M. WynneVice President and Chief Financial Officer.Mr. Wynne was promoted to
Vice President and Chief Financial Officer on January 28, 2008. Mr. Wynne, CPA, served as our controller from June 16, 2006 until January 27, 2008. From September 22, 2005 until June 16, 2006 he was our finance
director. From December 3, 2004 until September 22, 2005 Mr. Wynne served as Corporate Assistant Controller for Fisher Broadcasting, Inc., a Seattle-based communications company that owns or manages television stations and radio
stations. From August 26, 2002 until December 3, 2004, Mr. Wynne was our assistant controller. Mr. Wynne began his career at KPMG and holds a B.A. in Business Administration from Gonzaga University.

Mark E. DaCostaVice President, Wholesale Logistics and Operations.Mr. DaCosta has been our vice president of wholesale logistics and
operations since May 31, 2005. Previously, he served Impact Sales, Inc., a grocery brokerage firm as Director of Retail Initiative from January to May 2005. Mr. DaCosta served United States Bakeries, a Seattle-based commercial bread bakery
from June 1993 to December 2005, ultimately as a corporate account executive

Ronald P. GaiVice President, Wholesale Sales.Mr. Gai joined Tullys as National Grocery Director in May 2002 and was promoted to vice president of wholesale sales in April 2003. From 1975 to 2002, Mr. Gai served in various capacities with Gais Bakeries and Specialty
Foods, operators of regional bakeries in the Pacific Northwest, and related entities, ultimately serving as director of trade development.

John J. RaderVice President and General Manager of Supply Chain. Mr. Rader joined Tullys in January of 2008, and brings 35 years of experience in food manufacturing and distribution. Mr. Rader was a consultant
to various companies throughout 2007, engaged in matters of supply chain and operational logistics. From September 11, 2006 to December 30, 2006 he served as chief operating office of Elegant Gournal. From July 5, 2004 through
June 29, 2006, he was president and CEO of SoCal Bakeries in Santa Ana, California. From September 9, 2002 through March 17, 2004, Mr. Rader was the Vice President of Operations for Gold Medal Bakery in Fall River, Massachusetts.
Mr. Rader received holds a B.S. in Bakery Science and Management from Kansas State University, and a M.S. in Management from Rensselaer Polytechnic Institute.

Marc W. EvangerDirector.Mr. Evanger served as interim president and chief executive officer of Tullys from July 2001 through May 2002. Mr. Evanger has been a director of Tullys
since March 1999. From 1998 to July 2001, Mr. Evanger served Tullys as vice president of corporate planning and development, a part-time position. From 1984 to 1998, Mr. Evanger was with Quality Food Centers (QFC), a regional
supermarket company, and served as senior vice president of finance and administration and chief financial officer from 1987 to 1998. From 1978 to 1984, Mr. Evanger was with Price Waterhouse. Mr. Evanger is currently a director of Car
Toys, Inc. (a retailer of specialty automotive sound systems and cellular), Wireless Advocates, LLC (a retailer of cellular), Families Northwest, and the Boys & Girls Club of Bellevue and is active in other charitable and community
activities.

John M. FlukeDirector.Mr. Fluke is chairman of Fluke Capital Management, L.P., which he founded in 1976,
and was Chairman and CEO of the John Fluke Manufacturing Co. until 1990. Mr. Fluke serves on the boards of PACCAR Inc. (audit committee financial expert and compensation committee chair) and CellCyte Genetics Corporation (lead independent
director), and previously served on the boards of Cell Therapeutics, Primus International, and American Seafoods Group. Mr. Fluke is currently a trustee of the Museum of Flight, the Washington Policy Center and the Greater Seattle Chamber of
Commerce (formerly serving as its chairman). He chairs the board of Junior Achievement of Washington and serves on three advisory boards for the University of Washington. He is also a past president of the Seattle Council of Boy Scouts of America
and past chairman of the Washington State China Relations Council. Mr. Fluke has served as a director since March 2005.

Lawrence
L. HoodDirector.Mr. Hood is CEO and president of Pacific Wealth Advisors (founded in January 2006) and founder (1993), CEO and president of Pacific Portfolio Consulting, L.P., (which is now a wholly owned subsidiary of Pacific Wealth
Advisors). Prior to 1993, Mr. Hood was a principal in charge of the investment division of Kibble & Prentice, Inc. Mr. Hood serves as a director for Elliot Cove Capital Management and Pacific Wealth Advisors. Mr. Hood has
served as a director of Tullys since February 1994.



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Gregory A. HubertDirector. Mr. Hubert is president of Restaurant Development Company of
America. Mr. Hubert has been owner-operator of Red Robin franchised restaurants since 1989 (currently four locations) and operates two franchised Johnny Carinos Italian Restaurants. From 1978 to 1988, Mr. Hubert was employed by Red
Robin International, an operator and franchisor of upscale hamburger restaurants, and ultimately served as its president. From 1973 to 1978, Mr. Hubert was a CPA with Price Waterhouse. Mr. Hubert serves as president of Gonzaga University
Board of Regents and as trustee of Seattle Preparatory High School. Mr. Hubert was elected as a director at the 2004 Annual Meeting.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires that Tullys directors, executive officers and greater-than-10% stockholders file reports with the Securities and Exchange Commission reporting their initial beneficial ownership of Tullys equity securities and any
subsequent changes to their respective security holdings. They also must provide Tullys with copies of these reports. To the Companys knowledge, based solely on the review of the copies of such reports furnished to the Company and
written representations that no other reports were required, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with for the fiscal year ended March 30, 2008.

Code of Ethics

Since 2001,
Tullys has had a code of business conduct. In June 2004 our Board of Directors adopted a new Code of Business Conduct (replacing the previous code), applicable to all employees including our principal executive officer, principal financial
officer, controller and other finance leaders, which is a code of ethics as defined by applicable rules of the Securities and Exchange Commission.

If Tullys makes any amendments to this code other than technical, administrative, or other non-substantive amendments, or grants any waivers, including implicit waivers, from a provision of this code to our
principal executive officer, principal financial officer, controller or other finance leaders, we will disclose the nature of the amendment or waiver, its effective date and to whom it applies in a report on Form 8-K filed with the Securities and
Exchange Commission.

Financial Expert

In May 2005, the Board of Directors appointed Mr. Evanger to serve on the Audit Committee, and determined that he met the qualifications (determined by the Securities and Exchange Commission) to serve as an audit committee financial
expert.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

COMPENSATION DISCUSSION AND ANALYSIS

The primary goals of the Compensation Committee of our board of directors with respect to executive compensation are to attract, retain
and motivate the most talented and dedicated executives possible, to tie annual and long-term cash and stock incentives to achievement of specified performance objectives, and to align executives incentives with stockholder value creation. To
achieve these goals, the Compensation Committee intends to implement and maintain compensation plans that tie a substantial portion of executives overall compensation to key strategic goals such as increasing store count as well as other
financial and operational performance, as measured by metrics such as net sales, comparable store sales, average unit volume, EBITDA and Adjusted EBITDA. The Compensation Committee evaluates individual executive performance with a goal of setting
compensation at levels the committee believes are comparable with executives in other companies of similar size and stage of development operating in the retail food and beverage industry while taking into account our relative performance and our
own strategic goals.



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There are several elements of our executive compensation package. A significant portion of our overall
compensation to officers is tied to company performance. The Compensation Committee believes that a portion of the total cash compensation for executive officers should be based on our success in meeting our short-term performance objectives and
contributions by the executive officers that enable us to meet our long-term objectives, and has structured the executive compensation program to reflect this philosophy. This approach creates a direct incentive for executive officers to achieve
desired short-term corporate goals that also further our long-term objectives, and places a portion of each executive officers annual compensation at risk. Stock option awards are designed to retain executive officers and to motivate them to
optimize shareholder value by aligning the financial interests of executive officers with those of shareholders. We make stock option grants in an effort to encourage an ownership culture among our employees and to provide longer term performance
and retention rewards.

Elements of Compensation

Executive compensation consists of following elements:

Base Salary. Base salaries for
our executives are established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions. Generally, we believe that executive base salaries should be targeted
near the median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies, in line with our compensation philosophy. Base salaries are reviewed generally once per year, and adjusted from time
to time to realign salaries with market levels after taking into account individual responsibilities, contractual requirements, performance and experience, as well as the Companys financial condition. During Fiscal 2004 and Fiscal 2005, when
our operations continued to be negatively impacted from earlier years, we generally did not raise the base salaries of our executive officers. During Fiscal 2006 we devoted our capital resources to an expansion plan. Because we did not realize the
benefits of this plan during that year, we again chose generally not to increase our executive officers base salaries. No base salary adjustments were made for our executives in Fiscal 2007. In the fourth quarter of Fiscal 2007, the
Compensation Committee reviewed these factors for each executive officer and, effective for Fiscal 2008, increased the base salaries of certain executive officers as necessary to competitively compensate and retain them. As of March 30, 2008,
the Compensation Committee has no plans to change the base salaries of executive officers for Fiscal 2009.

Incentive and
Discretionary Bonus Plans. The Compensation Committee has the authority to develop and recommend to the board annual incentive bonus plan awards and to award discretionary annual bonuses to our executive officers. The Compensation
Committee will continue to have the authority to award bonuses, set the terms and conditions of those bonuses and take all other actions necessary to administer the bonus program. These awards are intended to compensate officers for achieving
financial and operational goals and for achieving individual annual performance objectives. These objectives vary depending on the individual executive, but relate generally to strategic factors such as retail sales proficiency and wholesale growth,
and to financial factors such as raising capital, improving our results of operations and EBITDA growth. The particular performance criteria are not pre-determined for any given year. In Fiscal 2004 through Fiscal 2006, incentive bonus plans based
on EBITDA targets were established but no payments were made because the targets were not achieved. No incentive bonus plan was established for Fiscal 2007 or Fiscal 2008. As of March 30, 2008, the Compensation Committee has not established and
does not expect to establish an incentive bonus plan for our executive officers for Fiscal 2009.

The Compensation Committee may award a
discretionary bonus to executive officers to reward outstanding personal achievement during the year. The actual amount of discretionary bonus is determined following a review of each executives individual performance and contribution to our
strategic goals; this review is conducted during the first quarter of the subsequent fiscal year. The Compensation Committee has not fixed a maximum payout for any officers annual discretionary bonus. No discretionary bonuses were paid to our
executive officers for Fiscal 2006, Fiscal 2007 or Fiscal 2008.



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Stock Options. The Compensation Committee believes that periodic grants of
stock options are a key component of our executive compensation program. Stock options are awarded by the Board of Directors to executive officers based on the executives responsibilities, and his or her actual historical contributions and
anticipated future contributions to the attainment of our strategic goals.

Our stock option plan authorizes us to grant options to
purchase shares of common stock to our employees, directors and consultants. Our Compensation Committee is the administrator of the stock option plan. Stock option grants are sometimes made at the commencement of employment or following a
significant change in job responsibilities. The Compensation Committee reviews and approves stock option awards to executive officers based upon a review of competitive compensation data, its assessment of individual performance, a review of each
executives existing long-term incentives, and retention considerations. Periodic stock option grants are made at the discretion of the Compensation Committee to eligible employees and, in appropriate circumstances, the Compensation Committee
considers the recommendations of our president, our vice president and chief financial officer, and our chairman. Periodic grants are made generally once per year for eligible employees. In Fiscal 2008, one named executive officer was awarded stock
options in the amounts indicated in the section entitled Grants of Plan-Based Awards. Stock options granted by us have an exercise price not less than the fair market value of our common stock on the date of grant, typically vest
33.33% per annum based upon continued employment over a three-year period, and generally expire ten years after the date of grant. Incentive stock options also include certain other terms necessary for compliance with the Internal Revenue Code
of 1986, as amended (the Code).

Given the absence of a trading market for our common stock, our board of directors, the
members of which we believe had extensive business and finance experience, was required to estimate the fair value of our common stock at the time of each option grant. Our board of directors has considered objective and subjective factors in
determining the value of our common stock at each option grant date, including the following factors: (1) contemporaneous valuation analysis using the income and market approaches; (2) the fact that the option grants involved illiquid
securities; (3) contemporaneous, arms-length sales of common stock by us; and (4) the likelihood of achieving a liquidity event, such as an underwritten public offering or sale of the Company, given prevailing market conditions. In
addition to the factors identified above, our board engaged outside valuation advisors to assist in its estimate of the fair value of our common stock as of February 2007.

Other Compensation. Consistent with our compensation philosophy, we intend to continue to maintain our current benefits and
perquisites for our executive officers; however, the Compensation Committee in its discretion may revise, amend or add to the officers benefits and perquisites, which currently consist of a car allowance, if it deems it advisable. We believe
these executive officer benefits and perquisites are currently lower than median competitive levels for comparable companies. We currently have no plans to change either the employment agreements (except as required by law or as required to clarify
the benefits to which our executive officers are entitled as set forth herein) or levels of benefits and perquisites provided thereunder.

Compensation
Committees Processes and Procedures for Consideration and Determination of Executive Compensation

The Compensation Committee
oversees all of our executive compensation policies and decisions, including the administration and interpretation of our benefit plans, including the 2004 Stock Option Plan. The Compensation Committee also reviews and approves executive officer
compensation, including, as applicable, salary, bonus and incentive compensation levels, equity compensation, severance arrangements, change-in-control agreements, special or supplemental benefits and other forms of executive officer compensation.
The Committee periodically reviews regional and industry-wide compensation practices and trends to assess the adequacy and competitiveness of our compensation programs. The Committees membership is determined annually by the full board and
includes only independent directors. The Committee meets as often as it deems appropriate, but not less frequently than annually.



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The board has delegated authority to the Compensation Committee to review and make recommendations with
respect to compensation matters, but has retained the authority to approve and take final action on all executive compensation awards.

Role of Executive Officers in Compensation Process

The Compensation Committee also solicits appropriate input from our
chairman, our principal executive officer, and our principal financial officer regarding base salary and equity grants for our other executive officers and regarding the administration of our benefit plans.

External Advisors

The Compensation
Committee has the authority to engage the services of outside advisors and purchase independent salary surveys to assist the Committee in fulfilling its duties. It did not do so in Fiscal 2008.

Employee Benefit Plans

Our employees,
including our executive officers, are entitled to various employee benefits. These benefits include the following: medical and dental care plans; flexible spending accounts for healthcare; life, accidental death and dismemberment and disability
insurance; employee assistance programs (confidential counseling); benefit advocacy counseling; a 401(k) plan; and paid time off.

401(k) Plan

During the fiscal year ended April 2, 2000, we adopted a 401(k) savings plan for employees. Eligible employees may contribute
up to 20% of their salaries to the plan. Eligible employees are employees over the age of 18 who have been employed by Tullys for six months. There is no mandatory match from Tullys and no match was made for Fiscal 2008. Most plan
administrative costs are paid by the 401(k) savings plan.

We do not have a policy requiring recovery of bonus payments or other
compensation in the event that our performance measures or financial statements are restated or adjusted. For a description of the employment agreements executed by our executive officers and potential payments to them upon termination or a change
in control of our company, see Employment Agreements and Employment Letters; and Potential Payments Upon Termination or Change of Control.

Section 162(m) Treatment Regarding Performance-Based Equity Awards

Section 162(m) of the Code limits the
deductibility of certain compensation paid to the chief executive officer and certain other highly compensated executive officers to the extent the compensation for any such individual exceeds one million dollars for the tax year. Compensation that
qualifies as performance-based compensation is, however, exempt from the deductibility limitation. For compensation to qualify for the performance-based exemption, among other things, the performance goals must be determined by a
compensation committee, which must be comprised solely of outside directors as defined for purposes of Section 162(m) of the Code, the material terms under which the compensation is to be paid must be disclosed to and approved by
shareholders in a separate vote prior to payment, and the compensation must be paid solely on account of the attainment of pre-established, objective performance goals, as determined by a compensation committee. Our Compensation Committee intends to
preserve the deductibility of compensation payable to our executives, although deductibility will be only one among a number of factors considered in determining appropriate levels or modes of compensation.



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Section 409A of the Code

Section 409A of the Code imposes certain restrictions on amounts deferred under non-qualified deferred compensation plans and imposes a 20% excise tax on amounts that are subject to, but do not comply with,
Section 409A. Section 409A includes a broad definition of non-qualified deferred compensation plans, which may extend to awards granted under the 2004 Stock Option Plan. The Internal Revenue Service, or IRS, has only recently finalized
regulations describing the effect of Section 409A on the types of awards that were or may be issued pursuant to our stock option plan. Our failure to administer our stock option plan in accordance with Section 409A and the regulations
promulgated thereunder could subject us to penalties and interest for failing to make required withholdings in connection with option grants that do not comply with Section 409A.

Compensation Committee Interlocks and Insider Participation

During Fiscal 2008, management
compensation issues generally were reviewed and approved by the Compensation Committee, which was composed of Mr. Evanger who is a non employee director. During Fiscal 2008, no executive officer of Tullys served on the board of directors
or compensation committee of another entity that had an executive officer serve on Tullys board or its compensation committee. Mr. Evanger served as interim President and CEO of Tullys from July 2001 to May 2002.

Summary Compensation Table

The following
table sets forth information regarding compensation awarded or paid to, or earned by, the two individuals who served as our principal executive officer during portions of Fiscal 2008, the two individuals who served as our chief financial officer,
our chairman, our two executive officers with total compensation greater than $100,000 in Fiscal 2008 (collectively, the Named Executive Officers).



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SUMMARY COMPENSATION TABLE FOR FISCAL 2008



|                                                                        |  |      |  |            |         |          |   |                    |  |                          |         |           |   |       |  |   |        
|----------------------------------------------------------------------- |  | ---- |  | ---------- | ------- | -------- | - | ------------------ |  | ------------------------ | ------- | --------- | - | ----- |  | - | -------
|Name and principal position                                             |  | Year |  | Salary ($) |         | Bonus($) |   | OptionAwards($)(9) |  | All OtherCompensation($) |         | Total ($)
|Carl W. Pennington, Sr. President(1)                                    |  | 2008 |  | $          | 60,417  |          | $ |                   |  | $                        | 18,776  |           | $ | 1,500 |  | $ | 80,693 
|Andrew M. Wynne Chief Financial Officer(2)                              |  | 2008 |  |            | 111,673 |          |   |                   |  |                          | 14,482  |           |   | 1,500 |  |   | 127,655
|Tom T. OKeefe Founder and Chairman of the Board(3)                     |  | 2008 |  |            | 129,071 |          |   |                   |  |                          |        |           |   | 9,000 |  |   | 138,071
|Ronald P. Gai Vice President of Wholesale Sales(4)                      |  | 2008 |  |            | 135,000 |          |   |                   |  |                          | 20,084  |           |   | 7,200 |  |   | 162,284
|Mark E. DaCosta Vice President of Wholesale Operations and Logistics(5) |  | 2008 |  |            | 135,000 |          |   |                   |  |                          | 28,583  |           |   | 7,200 |  |   | 170,783
|John K. Buller Chief Executive Officer and President(6)                 |  | 2008 |  |            | 187,692 |          |   |                   |  |                          | 128,369 |           |   | 6,500 |  |   | 322,561
|Kristopher S. Galvin Chief Financial Officer(7)                         |  | 2008 |  |            | 171,730 |          |   |                   |  |                          | 40,289  |           |   | 6,000 |  |   | 218,019



|(1) | Mr. Pennington was appointed President and principal executive officer on January 15, 2008. Mr. Penningtons base salary for Fiscal 2008 is $290,000 paid to
Pinnacle Management Inc. A car allowance of $1,500 appears in the All Other Compensation column.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Mr. Wynne was appointed Chief Financial Officer on January 28, 2008. Mr. Wynnes base salary for Fiscal 2008 is $135,000. A car allowance of $1,500 appears in
the All Other Compensation column.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Mr. OKeefes base salary is $200,000 as of January 1, 2008. A car allowance of $9,000 appears in the All Other Compensation column.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(4) | Mr. Gais base salary for Fiscal 2008 is $135,000. A car allowance of $7,200 appears in the All Other Compensation column.
|--- | --------------------------------------------------------------------------------------------------------------------------

|(5) | Mr. DaCostas base salary for Fiscal 2008 is $135,000. A car allowance of $7,200 appears in the All Other Compensation column.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(6) | Mr. Buller served as our Chief Executive Officer from September 14, 2006 to February 8, 2008. Mr. Bullers option expense excludes forfeitures of $148,176
due to his termination. A car allowance of $6,500 appears in the All Other Compensation column.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Mr. Galvin served as our Chief Financial Officer from February 25, 2002 to January 25, 2008. Mr. Galvins option expense excludes forfeitures of $44,127 due
to his termination. A car allowance of $7,200 appears in the All Other Compensation column.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | These amounts were calculated utilizing the provisions of SFAS No. 123R, Share-Based Payments, excluding the effects of estimated forfeitures. See Note 17 of the
Notes to the Consolidated Financial Statements regarding the assumptions underlying valuation of equity awards.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Agreements
and Employment Letters; Potential Payments Upon Termination or Change-in-Control

Carl W. Pennington, Sr. On March 10,
2008, we entered into a service agreement with Pinnacle Management, Inc. and Mr. Pennington, regarding Mr. Penningtons service as President of Tullys effective January 15, 2008. Pinnacle Management is a corporation through
which Mr. Penningtons provides personal services.

Under the terms of the agreement, Tullys will pay Pinnacle Management a
fee of $24,166.66 per month (the Monthly Fee), or $290,000 annually, in consideration for Mr. Penningtons service to Tullys. In addition, Tullys will grant Mr. Pennington an option to purchase 62,500 shares of
Tullys common stock, which option will vest and become exercisable in five equal increments of 12,500 shares, beginning on the first anniversary of



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the grant date. The exercise price per share for the option is the fair market value of Tullys common stock as of the grant date, as determined by the
Board of Directors. Tullys will pay Pinnacle Management an additional $600 per month for Mr. Penningtons monthly vehicle costs and reimburse Mr. Pennington for actual out of pocket expenses reasonably related to carrying on his
duties and responsibilities as Tullys President. Mr. Pennington will not be eligible for medical, dental, and certain other employee benefits that Tullys provides to its employees.

The agreement provides further that, in the event of change in control, Pinnacle Management will be entitled to receive a termination fee
equal to the greater of (a) $145,000 or (b) the aggregate Monthly Fee for the remaining term of the Agreement. In addition, Mr. Penningtons options will vest and become fully exercisable upon a change in control. The agreement
defines change in control to mean (x) a sale of substantially all of the assets of Tullys to a third party other than as part of a transfer of said assets to an entity directly or indirectly controlled by existing Tullys
shareholders holding a majority of the outstanding shares of the common voting stock of Tullys, or (y) a sale of more than fifty percent (50%) of the outstanding voting stock of Tullys to one or more third parties in a single
transaction or series of transactions.

The service agreement has a term of one year, renewing annually based on mutual agreement between
Tullys and Mr. Pennington.

Andrew M. Wynne.Tullys promoted Mr. Wynne to Vice President and Chief Financial
Officer in January 2008 at a base salary of $135,000, with a monthly car allowance of $600. Mr. Wynnes annual compensation will increase to $150,000 on January 28, 2009. Mr. Wynne also is entitled to all benefits offered
generally to our employees.

In the event of change in control, Mr. Wynne will be entitled to his current base salary for
an additional nine months following the event. The agreement defines change in control to mean (x) a sale of substantially all of the assets of Tullys to a third party other than as part of a transfer of said assets to an
entity directly or indirectly controlled by existing Tullys shareholders holding a majority of the outstanding shares of the common voting stock of Tullys, or (y) a sale of more than fifty percent (50%) of the outstanding
voting stock of Tullys to one or more third parties in a single transaction or series of transactions.

Tom T. OKeefe.Mr. OKeefe is our founder and has served as chairman of the board since 1992. Although Mr. OKeefe does not serve in a full-time paid position with us, his duties as chairman require a substantially greater participation by
Mr. OKeefe than for other members of the board of directors. Mr. OKeefe does not participate in the compensation plan for non-employee directors, but instead receives compensation as a salaried employee of the Company. In March
2002, our board of directors set Mr. OKeefes annual base salary at $100,000 and he receives an additional $500 per month to mitigate a change in the employee benefits furnished to Mr. OKeefe. Mr. OKeefe also
receives an automobile allowance of $750 per month and is entitled to all benefits offered generally to our employees. There is no written employment agreement or severance agreement between Mr. OKeefe and us. Mr. OKeefes
annual base salary effective on January 1, 2008 is $200,000.

We do not have formal employment agreements with any of our other
executive officers; however, certain elements of these executives compensation and other arrangements are set forth in employment letters provided to each of them. These employment letters are described below.

Ronald P. Gai. Tullys promoted Mr. Gai to Vice President of Wholesale Division in April 2003 at the base salary of $90,000, with a
monthly car allowance of $600. In May, 2005, Mr. Gai became Vice President of Wholesale Sales. Mr. Gais base salary for Fiscal 2009 is $135,000. In the event of change in control, Mr. Gai will be entitled to his
current base salary for an additional three months following the event.

Mark E. DaCosta. Tullys engaged Mr. DaCosta as
Vice President of Wholesale Operations in May 2005 at the base salary of $100,000, with a monthly car allowance of $600. Mr. DaCostas base salary for Fiscal 2009 is $135,000. In the event of change in control, Mr. DaCosta
will be entitled to his current base salary for an additional three months following the event.



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John J. Rader. Tullys engaged Mr. Rader as Vice President and General Manager of Supply
Chain in January 2008 at the base salary of $135,000, with a monthly car allowance of $600.

Under our stock option plan, vesting and
exercise of employee stock options, including those of the executive officers, accelerate in the event of certain change of control events. Also, pursuant to the employment letters for members of Tullys senior management team, Tullys has
agreed to pay severance compensation to these executives in the event that there is a change in control. The amount of severance to be paid would depend upon the rate of salary at the time of termination and other factors. As of March 30, 2008,
the contingent obligation for severance to these individuals for the change in control provision was as follows: Mr. Pennington $224,850; Mr. Wynne $101,250; Mr. Gai $33,750 and Mr. DaCosta $33,750.

Accordingly, in the event that a termination of the employment of the foregoing named executive officers had occurred as of March 28, 2008, the last
business day of Fiscal 2008, we would not have been obligated to make any contractual severance payments to any of those officers, except that if we had terminated certain officers. Pursuant to the employment letters for members of Tullys
senior management team, Tullys has agreed to pay severance compensation to these executives in the event their employment by Tullys is terminated for reasons other than certain excluded circumstances. The amount of severance to be paid
would depend upon the rate of salary at the time of termination and other factors. As of March 30, 2008, the contingent obligation for severance to these individuals was as follows: Mr. Pennington $72,500; Mr. Wynne $67,500;
Mr. Gai $33,750 and Mr. DaCosta $33,750.

In the event that a change of control transaction described in our 1994 and our 2004
stock option plans had occurred as of March 28, 2008, holders of unvested options, including the Named Executive Officers, would have had the right to exercise the full number of shares covered by those options. The value of that right for the
Named Executive Officers as of March 28, 2008 would have been as follows: Mr. Pennington $750,000; Mr. DaCosta $76,000 and Mr. Wynne $47,000.

Grants of Plan-Based Awards

The Compensation Committee recommended, and our board approved, awards under our 2004
stock option plan to one of our Named Executive Officers in Fiscal 2008. Our Compensation Committee has not established guidelines for the grant of plan-based awards for Fiscal 2009. Set forth below is information regarding awards granted during
Fiscal 2008:

GRANTS OF PLAN-BASED AWARDS TABLE FOR FISCAL 2008



|                                  |  |                  |  |                                                                |  |                                                 |  |                                    |        
|--------------------------------- |  | ---------------- |  | -------------------------------------------------------------- |  | ----------------------------------------------- |  | ---------------------------------- | -------
|Name                              |  | Grant Date       |  | All OtherOptionAwards:Number ofSecuritiesUnderlyingOptions (#) |  | Exerciseor BasePrice ofOptionAwards($/Share)(1) |  | GrantDate FairValue ofOptionAwards
|Carl W. Pennington, Sr. President |  | January 15, 2008 |  | 62,500                                                         |  | 12.00                                           |  | $                                  | 457,394



|(1) | The exercise or base price or our option awards are based on the valuation of our common stock on the grant date.
|--- | -----------------------------------------------------------------------------------------------------------------

We have not adopted any equity incentive plan (other than our stock option plans) nor any non-equity incentive plan.



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Outstanding Equity Awards At Fiscal Year-End

We had no outstanding stock awards at fiscal year end. The following table summarizes the outstanding equity award holdings held by our Named Executive
Officers:

OUTSTANDING EQUITY AWARDS AT FISCAL 2008 YEAR-END



|                                                 |             |                                                                                                                     |               |                                                          |                                                          |  |                                                                                                                                            |  |                                                                                                                                                                                                                                                                                
|------------------------------------------------ | ----------- | ------------------------------------------------------------------------------------------------------------------- | ------------- | -------------------------------------------------------- | -------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                 |             | OPTION AWARDS                                                                                                      
|Name                                             |             | Number ofSecuritiesUnderlyingUnexercisedOptions(#)                                                                  |               | Number ofSecuritiesUnderlyingUnexercisedOptions(1)(#)    |                                                          |  | OptionExercisePrice($)(a)                                                                                                                  |  | OptionExpirationDate                                                                                                                                                                                                                                                           
|                                                 | Exercisable |                                                                                                                     | Unexercisable |                                                          |                                                          | 
|Carl K. Pennington, Sr. President                |             |                                                                                                                    |               | 62,500                                                   | (b)                                                      |  | 12.00                                                                                                                                      |  | 1/15/2018                                                                                                                                                                                                                                                                      
|                                                 |             |                                                                                                                     |               |                                                         
|Andrew M. Wynne Chief Financial Officer          |             | 2,083                                                                                                               |               | 4,167                                                    | (c)                                                      |  | 11.28                                                                                                                                      |  | 2/22/2017                                                                                                                                                                                                                                                                      
|                                                 |             |                                                                                                                     |               |                                                         
|Tom T. OKeefe Founder and Chairman of the Board |             | 1871,156 437 20,245 125 62 11,961 437 17,979 62 62
1,449 62 1,620 62 1,14462 62 724 62 62 906 62 724 62 62 62 62 62 |               |                             | ** * * * * * * * * * * * * * * * * * * * * * * * * * * * |  | 0.0818.00 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.080.080.080.080.080.080.08 |  | 3/31/20084/1/2008 3/29/2009 3/29/2009 11/29/2009 4/3/2010 4/3/2010 4/2/2011 4/2/2011 4/4/2011 4/25/2011 4/27/2011 5/31/2011 6/1/2011 6/28/2011 6/29/20117/12/20117/26/20117/27/20118/2/20118/20/20118/31/2011 9/26/20119/28/201110/12/201110/18/201112/5/20111/24/20123/21/2012



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|                                                                          |             |                                                    |               |                                                       |            |  |                                 |  |                                                            
|------------------------------------------------------------------------- | ----------- | -------------------------------------------------- | ------------- | ----------------------------------------------------- | ---------- |  | ------------------------------- |  | -----------------------------------------------------------
|                                                                          |             | OPTION AWARDS                                     
|Name                                                                      |             | Number ofSecuritiesUnderlyingUnexercisedOptions(#) |               | Number ofSecuritiesUnderlyingUnexercisedOptions(1)(#) |            |  | OptionExercisePrice($)(a)       |  | OptionExpirationDate                                       
|                                                                          | Exercisable |                                                    | Unexercisable |                                                       |            | 
|                                                                          |             |                                                    |               |                                                      
|Ronald Gai Vice President of Wholesale Sales                              |             | 6,2503,125 1,666 2,083                             |               |  834 4,167                                          | ** (d) (c) |  | 0.082.48 12.00 11.28            |  | 2/20/201310/23/2013 5/16/2015 2/22/2017                    
|                                                                          |             |                                                    |               |                                                      
|Mark E. DaCosta Vice President of Wholesale Operations and Logistics      |             | 1,6661,666 2,500                                   |               | 834834 5,000                                          | (e)(e) (c) |  | 12.0012.00 11.28                |  | 8/15/20158/15/2015 2/22/2017                               
|                                                                          |             |                                                    |               |                                                      
|John J. Rader Vice President and General Manager of Supply Chain          |             |                                                   |               |                                                      | *          |  |                                |  |                                                           
|                                                                          |             |                                                    |               |                                                      
|John K. Buller Chief Executive Officer and President                      |             | 911,250 25,500 480                                 |               |                                                   | ** * *     |  | 2.4012.00 12.00 12.00           |  | 10/11/20156/30/2016 9/1/2016 5/14/2017                     
|                                                                          |             |                                                    |               |                                                      
|Kristopher S. Galvin Chief Financial Officer and Executive Vice President |             | 4,1666,250 9,375 8,333 6,250 1,666                 |               |                                                 | ** * * * * |  | 0.0820.00 14.24 2.48 2.48 12.00 |  | 6/10/20126/10/2012 6/10/2012 5/12/2013 10/23/2013 5/16/2015



|(a) | Amounts represent the exercise price of the stock option awards which is equal to the fair market value of our common stock on the grant date.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(b) | The underlying options vest ratably over a three year period beginning on the grant date of 1/15/08.
|--- | ----------------------------------------------------------------------------------------------------

|(c) | The underlying options vest ratably over a three year period beginning on the grant date of 2/22/07.
|--- | ----------------------------------------------------------------------------------------------------

|(d) | The underlying options vest ratably over a three year period beginning on the grant date of 5/16/05.
|--- | ----------------------------------------------------------------------------------------------------

|(e) | The underlying options vest ratably over a three year period beginning on the grant date of 8/15/05.
|--- | ----------------------------------------------------------------------------------------------------

|* | The underlying options related to this grant are fully vested.
|- | --------------------------------------------------------------

Option Exercises and Stock Vested

Our Named Executive Officers did not exercise any stock options in Fiscal 2008. We
have no outstanding restricted stock, stock appreciation rights or similar instruments and accordingly no vesting of such awards during Fiscal 2008.

Pension Benefits

None of our Named Executive Officers participate in or have account balances in qualified or
non-qualified defined benefit plans sponsored by us.

Nonqualified Deferred Compensation

None of our Named Executive Officers participate in or have account balances in non-qualified defined contribution plans or other deferred compensation
plans maintained by us. The Compensation Committee, which will be comprised solely of outside directors as defined for purposes of Section 162(m) of the Internal Revenue Code, may elect to provide our officers and other employees
with non-qualified defined contribution or deferred compensation benefits if the Compensation Committee determines that doing so is in our best interests.



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Director Compensation

The Governance and Nominating Committee of the board of directors, which is comprised of our president and two independent directors, is responsible for evaluating compensation levels and compensation programs for our
board of directors and for making recommendations to the board of directors regarding appropriate compensation awards for directors. The board of directors compensation program is designed to attract, retain and motivate experienced non-employee
(outside) directors, to optimize long-term shareholder value and reward members of the board of directors based on the extent of their participation on the board of directors and its committees. Generally, the Governance and Nominating Committee
makes an annual recommendation regarding the structure of the non-employee director compensation program, considering the factors described above and considering information regarding director compensation programs for other comparable companies.

In June 2006, the board of directors approved a director compensation policy applicable for Fiscal 2007. The policy provides that
non-employee directors shall receive an annual cash payment of $10,000 plus a per-meeting cash fee of $1,000 per board of directors meeting and $500 per committee meeting (for meetings of the Audit, Compensation, Executive, and Governance and
Nominating committees), paid after completion of the fiscal year. For Fiscal 2007, non-employee directors also receive an annual grant of nonqualified options to purchase 1,250 shares of common stock (plus 500 additional shares for the chairs of the
Audit, Compensation, Executive, and Governance and Nominating committees), with an exercise price equal to the value of the stock at the beginning of the fiscal year and a term of ten years. The directors annual stock option grant would be
cancelled if the director does not attend at least 75% of the board of directors and applicable committee meetings of record for the year, but otherwise are fully vested upon completion of the fiscal year. Compensation amounts are generally subject
to prorating for directors whose terms commence or expire during the fiscal year. Further, after the completion of the fiscal year, the Governance and Nominating Committee shall consult with the members of the board of directors, and with
management, to assess whether any members of the board of directors may have provided services to us which may not adequately be considered in the compensation determined by the formulae set forth above, and if so, additional cash compensation or
stock options may be awarded if approved by the board of directors. In May 2007, the board of directors decided to continue the same director compensation policy for Fiscal 2008. In June 2008, the board of directors completed its evaluation under
the above-referenced criteria and approved payment of the awards set forth below for Fiscal 2008

Directors are reimbursed for reasonable
expenses incurred in attending board of directors and committee meetings.



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DIRECTOR COMPENSATION FOR FISCAL 2008 (paid in Fiscal 2009):



|                         |  |                             |        |                       |   |          |  |   |       
|------------------------ |  | --------------------------- | ------ | --------------------- | - | -------- |  | - | ------
|Name                     |  | FeesEarned orPaid inCash($) |        | OptionAwards(1)(2)($) |   | Total($)
|Kathi Ainsworth-Jones(3) |  | $                           | 14,500 |                       | $ | 11,991   |  | $ | 26,491
|Marc W. Evanger          |  | $                           | 28,500 |                       | $ | 8,565    |  | $ | 37,065
|John M. Fluke            |  | $                           | 25,500 |                       | $ | 11,991   |  | $ | 37,491
|Lawrence L. Hood         |  | $                           | 28,500 |                       | $ | 11,991   |  | $ | 40,491
|Gregory A. Hubert        |  | $                           | 26,000 |                       | $ | 8,565    |  | $ | 34,565



|(1) | The amounts in this column were calculated with respect to the 2008 fiscal year utilizing the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123R,
Share-Based Payments, excluding the effects of estimated forfeitures. See Note 17 of the Notes to the Consolidated Financial Statements regarding assumptions underlying valuation of equity awards. The full grant date fair value of the
Fiscal 2008 awards to each director is as follows:
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                      |  |                          |  |                        |       
|--------------------- |  | ------------------------ |  | ---------------------- | ------
|Name                  |  | Option Shares Granted(#) |  | Option Awards Value($)
|Kathi Ainsworth-Jones |  | 1,750                    |  | $                      | 11,991
|Marc W. Evanger       |  | 1,250                    |  | $                      | 8,565 
|John M. Fluke         |  | 1,750                    |  | $                      | 11,991
|Lawrence L. Hood      |  | 1,750                    |  | $                      | 11,991
|Gregory A. Hubert     |  | 1,250                    |  | $                      | 8,565 



|(2) | The aggregate numbers of option awards outstanding for each director in the table set forth above as of March 30, 2008 were as follows:
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



|                      |  |                                  
|--------------------- |  | ---------------------------------
|Name                  |  | Aggregate Options Outstanding (#)
|Kathi Ainsworth-Jones |  | 3,637                            
|Marc W. Evanger       |  | 57,802                           
|John M. Fluke         |  | 3,260                            
|Lawrence L. Hood      |  | 9,736                            
|Gregory A. Hubert     |  | 2,887                            



|(3) | Ms. Ainsworth-Jones resigned as a director effective on December 31, 2007.
|--- | --------------------------------------------------------------------------

Indemnification of Officers and Directors

Our articles of incorporation and bylaws allow us to
indemnify our officers and directors to the fullest extent permitted by the Washington Business Corporation Act, or WBCA. It also contains provisions that provide for the indemnification of directors of the Company for third party actions and
actions by or in the right of the Company that mirror applicable provisions of the WBCA.

In addition, our articles of incorporation state
that we may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, against any liability asserted against such person or incurred by such person in any such capacity, or arising out of
such persons status as such, and related expenses, whether or not the corporation would have the power to indemnify such person against such liability under the WBCA. We also have and intend to maintain director and officer liability
insurance, if available on reasonable terms.



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Insofar as indemnification for liabilities arising under the Securities Act may be permitted to
directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is
therefore unenforceable.

Report of Compensation Committee on Executive Compensation

The Compensation Committee of the Board has reviewed and discussed the Compensation Discussion and Analysis section of this Form 10-K with the Companys management and, based on such review and discussions, the
Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.



Compensation CommitteeMarc Evanger, Chair




|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The following table shows information regarding the beneficial ownership of shares of our common stock, Series A preferred stock and Series B preferred
stock as of March 30, 2008 and shows the number of and percentage owned by:



| |  |  | each person who is known by us to own beneficially more than 5% of our common stock, Series A preferred stock and Series B preferred stock;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | each member of our board of directors;
| | - |  | --------------------------------------



| |  |  | each of our named executive officers; and
| | - |  | -----------------------------------------



| |  |  | all members of our board of directors and our executive officers as a group.
| | - |  | ----------------------------------------------------------------------------

Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each shareholder named
in this table has sole voting and investment power with respect to the shares indicated as beneficially owned thereby, and such shareholders address is c/o Tullys Coffee Corporation, 3100 Airport Way S., Seattle, WA 98134.



|                                                         |  |                        |      |  |                          |   |  |                          |  |                 |   |  |                        |  |                 |  
|-------------------------------------------------------- |  | ---------------------- | ---- |  | ------------------------ | - |  | ------------------------ |  | --------------- | - |  | ---------------------- |  | --------------- | -
|                                                         |  | Common Stock           |      |  | Series A Preferred Stock |   |  | Series B Preferred Stock | 
|                                                         |  | BeneficialOwnership(1) |      |  | PercentOf Total          |   |  | BeneficialOwnership(1)   |  | PercentOf Total |   |  | BeneficialOwnership(1) |  | PercentOf Total |  
|Tom T. OKeefe                                           |  | 679,150                | (2)  |  | 20.2                     | % |  |                         |  |                |   |  |                       |  |                |  
|Estate of Keith McCaw                                    |  | 282,984                | (3)  |  | 5.1                      | % |  | 2,000,000                |  | 15.5            | % |  |                       |  |                |  
|Marc W. Evanger                                          |  | 71,906                 | (4)  |  | 2.2                      | % |  | 10,000                   |  |                 | * |  |                       |  |                |  
|Kristopher S. Galvin                                     |  | 48,541                 | (5)  |  | 1.5                      | % |  |                         |  |                |   |  |                       |  |                |  
|Lawrence L. Hood                                         |  | 34,608                 | (6)  |  | 1.0                      | % |  | 10,000                   |  |                 | * |  | 40,000                 |  |                 | *
|John K. Buller                                           |  | 26,821                 | (7)  |  |                          | * |  |                         |  |                |   |  |                       |  |                |  
|Ronald P. Gai                                            |  | 14,624                 | (8)  |  |                          | * |  |                         |  |                |   |  |                       |  |                |  
|Gregory A. Hubert                                        |  | 7,516                  | (9)  |  |                          | * |  |                         |  |                |   |  |                       |  |                |  
|John M. Fluke.                                           |  | 6,941                  | (10) |  |                          | * |  | 15,000                   |  |                 | * |  |                       |  |                |  
|Mark E. DaCosta                                          |  | 5,832                  | (11) |  |                          | * |  |                         |  |                |   |  |                       |  |                |  
|Andrew M. Wynne                                          |  | 2,083                  | (12) |  |                         |   |  |                         |  |                |   |  |                       |  |                |  
|Carl W. Pennington, Sr.                                  |  |                       |      |  |                         |   |  |                         |  |                |   |  |                       |  |                |  
|John J. Rader                                            |  |                       |      |  |                         |   |  |                         |  |                |   |  |                       |  |                |  
|                                                         |  |                        |      |  |                          |   |  |                          |  |                 |   |  |                        |  |                 |  
|Executive officers and directors as a group (12 persons) |  | 898,022                |      |  | 27.6                     | % |  | 40,000                   |  |                 | * |  | 40,000                 |  |                 | *



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|* | Less than 1%.
|- | -------------

|(1) | Beneficial ownership is determined in accordance with the rules and regulations of the Securities and Exchange Commission and generally requires that the shareholder have voting or
investment power with respect to the securities in question. Shares of common stock issuable upon exercise of options and warrants that are exercisable within 60 days of March 30, 2008, are deemed to be beneficially owned by the holder of such
securities but are not outstanding for the purpose of computing the percentage ownership of any other shareholder. As of March 30, 2008, we had 3,251,891 shares of common stock, 12,930,374 shares of Series A preferred stock, and 3,613,349
shares of Series B preferred stock issued and outstanding.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes 546,091 shares of common stock owned by TTOK, LLC, a limited liability company owned by Mr. OKeefe and his wife (Mr. OKeefe contributed his personal
shareholdings to TTOK, LLC, in October 2005). Also includes 17,813 shares of common stock held by the OKeefe Childrens Trust, 9,356 shares of common stock held by the Tullys Foundation, and 105,890 shares of common stock issuable
upon exercise of options and warrants.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 125,068 shares of common stock issuable upon exercise of options and warrants and 32,500 shares of common stock issuable upon conversion of 2,000,000 shares of
Series A preferred stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 69,894 shares of common stock issuable upon exercise of options and warrants and 163 shares of common stock issuable upon conversion of 10,000 shares of Series A
preferred stock.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 36,042 shares of common stock issuable upon exercise of options.
|--- | -------------------------------------------------------------------------

|(6) | Includes 21,828 shares of common stock issuable upon exercise of options and warrants. Also includes 163 shares of common stock issuable upon the conversion of 10,000 Series A
preferred stock.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Includes 26,821 shares of common stock issuable upon exercise of options.
|--- | -------------------------------------------------------------------------

|(8) | Includes 13,124 shares of common stock issuable upon exercise of options.
|--- | -------------------------------------------------------------------------

|(9) | Includes 2,887 shares of common stock issuable upon exercise of options.
|--- | ------------------------------------------------------------------------

|(10) | Includes 3,260 shares of common stock issuable upon exercise of options and warrants and 244 shares of common stock issuable upon conversion of 15,000 shares of Series A
preferred stock.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Includes 5,832 shares of common stock issuable upon exercise of options.
|---- | ------------------------------------------------------------------------

|(12) | Includes 2,083 shares of common stock issuable upon exercise of options.
|---- | ------------------------------------------------------------------------

Information regarding securities authorized for issuance under our equity compensation plans is set forth in Part II, Item 5.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|-------- | ------------------------------------------------------------------------

Our board of directors recognizes that transactions or other arrangements between us and any of our directors, executive officers or principal shareholders may present potential or actual conflicts of interest.
Accordingly, as a general matter, it is our boards preference to avoid such transactions and other arrangements. Nevertheless, our board recognizes that there are circumstances where such transactions or other arrangements may be in, or not
inconsistent with, our best interests. Any transaction, arrangement or relationship in which we will be a participant and the amount involved exceeds $120,000, and in which any related person (directors, executive officers, shareholders owning at
least 5% of any class of our voting securities, and the immediate family members or any person sharing the household of any such director, executive officer or shareholder) had or will have a direct or indirect material interest, we will submit to
our board of directors for review, consideration and approval. We further expect that the policy will provide for periodic monitoring of pending and ongoing transactions. In approving or rejecting the proposed transaction, our board will consider
the relevant facts and circumstances relating to the proposed transaction, arrangement or relationship, including:



| |  |  | the related persons relationship to us and interest in the transaction,
| | - |  | ------------------------------------------------------------------------



| |  |  | the material facts of the proposed transaction, including the proposed aggregate value of the transaction,
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the benefits to us,
| | - |  | -------------------



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| |  |  | the availability of other sources for comparable services or products (if applicable), and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | an assessment of whether the proposed transaction is on terms that are comparable to the terms available to an unrelated third party or to our employees generally.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our board of directors will approve only those transactions that, in light of known circumstances, are in, or are not
inconsistent with, our best interests and are consistent with applicable legal requirements.

The following is a summary of transactions
since the beginning of Fiscal 2008 to which we have been a party, in which the amount involved exceeded, or will exceed, $120,000 and in which any related person had or will have a direct or indirect material interest, other than compensation
arrangements (including employment and change-in-control arrangements) which are described under the section of this report captioned Compensation Discussion and Analysis. All of the transactions described below were entered into prior
to the adoption of a formal written policy regarding related party transactions.

In July 2007, we established a $10,000,000 credit
facility with Benaroya Capital, as described in Note 11 of the Notes to the Consolidated Financial Statements. Our chairman, Tom T. OKeefe, has guaranteed our obligations under the Benaroya credit facility, and another shareholder (Ms. Mary
Kay McCaw, an affiliate of the estate of Mr. Keith McCaw) has guaranteed up to $3,000,000 under the Benaroya credit facility. Our chairman is not being compensated for his guaranty. We have agreed to compensate the second guarantor through the
cash payment of a $167,100 commitment fee and a grant of warrants to purchase 21,000 shares of our common stock at an exercise price of $2.64 per share (these warrants become exercisable on July 12, 2008). We will recognize non-cash
warrant costs of approximately $181,400 and the $167,100 commitment fee as loan guaranty costs during the period that this second guaranty is in effect. Additionally, we will pay a facility draw fee to this second guarantor at the annualized rate of
2% on the average amount of guaranteed debt outstanding. We have agreed to indemnify these guarantors from all claims, liabilities, costs and expenses incurred by them arising from or related to Benaroya Capitals demands under these
guarantees. We also have agreed not to increase the amount of our Northrim credit facility or grant any other security interest in our assets without the prior written consent of these guarantors.

In February 2006, an affiliate of Northrim acquired a 24% ownership interest in Pacific Wealth Advisors, LLC (PWA), a newly formed company
which is the successor by merger to Pacific Portfolio Consulting (Pacific Portfolio). PWA is a wealth management and investment advisory services holding company. Lawrence L. Hood, a member of the Tullys Board of Directors, is the
president of PWA and Pacific Portfolio and has an ownership interest of more than 10% in PWA. During Fiscal 2008, Tullys paid approximately $441,000 to Northrim for interest on the amounts borrowed, and the outstanding debt to Northrim at
March 30, 2008 was $4,650,000. Pacific Portfolio provided investment advisory consulting services for the Tullys employee 401(k) savings plan (see Note 20) and received fees of approximately $6,700 for this service in Fiscal 2008 and
$8,200 in Fiscal 2007.

Carl Pennington, Sr. was appointed as a board member, effective as of January 15, 2008 and as Tullys
President, effective as of January 15, 2008. Before joining Tullys, Mr. Pennington founded Pinnacle Management, a management company, and PinnPointe Consulting Group, a consulting company advising retail and wholesale companies.
Mr. Pennington is a shareholder of Pinnacle Management, which manages Impact Sales, Inc., a grocery broker, and Pinnacle Coffee, a franchisee of six Tullys franchised stores as of March 30, 2008. Mr. Pennington serves as a board
member of Impact Sales, a grocery broker for Tullys. Impact Sales received $566,000 in fiscal year 2008 from Tullys as brokerage commission on grocery sales. He receives no compensation from Impact Sales. Carl has no ownership interest
in Pinnacle Coffee. Mr. Penningtons base salary as Tullys president is $290,000 per year.

The Board has determined that
each of Messrs. Evanger, Fluke, Hood and Hubert is an independent director as such term is defined under the Marketplace Rules of The NASDAQ Stock Market, Inc.



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|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

Fees Paid to Moss Adams LLP

The following table shows the fees billed to us by Moss Adams LLP in Fiscal 2008 and Fiscal
2007:



|                      |  |            |         |            |   |        
|--------------------- |  | ---------- | ------- | ---------- | - | -------
|                      |  | Fiscal2008 |         | Fiscal2007
|Audit Fees(1)         |  | $          | 412,500 |            | $ | 152,000
|Audit-Related Fees(2) |  |            | 29,100  |            |   | 30,900 
|All Other Fees(3)     |  |            | 15,100  |            |   | 14,900 
|                      |  |            |         |            |   |        
|Total Fees            |  | $          | 456,700 |            | $ | 197,800
|                      |  |            |         |            |   |        



|(1) | Audit services consisted of the examination of our consolidated financial statements, quarterly reviews of interim financial statements and consultation in connection with the
evaluation of a possible business integration opportunity and the attempted initial public offering.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-related fees relate primarily to consultation in connection with the UCC settlement and other various matters.
|--- | --------------------------------------------------------------------------------------------------------------------

|(3) | Tax services of Moss Adams were for state, federal, and international tax compliance and tax advice services.
|--- | -------------------------------------------------------------------------------------------------------------

Audit Committee Preapproval Policy

The Audit Committee does not have a written preapproval policy. However, as a matter of practice, prior to engaging our independent registered public accounting firm for any services, we obtain the prior approval of
the Audit Committee. All of the audit, audit-related, tax and other fees were approved by the Audit Committee.



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



| | (a) | The following documents are filed as part of this Annual Report on Form 10-K.
| | --- | -----------------------------------------------------------------------------



| | 1. | Financial StatementsThe following financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K:
| | -- | ---------------------------------------------------------------------------------------------------------------------------

Consolidated Balance Sheets as of March 30, 2008 and April 1, 2007;

Consolidated Statements of Operations for the years ended March 30, 2008, April 1, 2007, and April 2, 2006;

Consolidated Statements of Changes in Stockholders Equity for the years ended March 30, 2008, April 1, 2007, and April 2,
2006;

Consolidated Statements of Cash Flows for the years ended March 30, 2008, April 1, 2007, and April 2, 2006;

Notes to Consolidated Financial Statements; and

Report of Independent Registered Public Accounting Firm



| | 2. | Financial Statement SchedulesAll schedules have been omitted, as they are either not required or not applicable or because the information required to be presented is
included in the Consolidated Financial Statements and related notes.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Exhibits
| | -- | --------



| |  | The Exhibits listed in the Exhibit Index, which appears immediately following the signature page and is incorporated herein by reference, are filed or incorporated by reference as
part of this Annual Report on Form 10-K. Each management contract or compensatory plan or agreement listed on the Exhibit Index is identified by an asterisk.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in Seattle, Washington on September 16, 2008.



TULLYS COFFEE CORPORATIONBy:

/S/    ANDREW M. WYNNEVice President and Chief Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on September 16, 2008 on behalf of the Registrant and in the capacities indicated:



|                                                       |  |                                                                                        
|------------------------------------------------------ |  | ---------------------------------------------------------------------------------------
|Signature                                              |  | Title                                                                                  
|                                                       | 
|/S/    CARL W. PENNINGTON, SR. Carl W. Pennington, Sr. |  | Director, President (principal executive officer)                                      
|                                                       | 
|/S/    TOM T. OKEEFE Tom T. OKeefe                   |  | Chairman of the Board and Director                                                     
|                                                       | 
|/S/    MARC EVANGER Marc Evanger                       |  | Director                                                                               
|                                                       | 
|/S/    JOHN M. FLUKE John M. Fluke                     |  | Director                                                                               
|                                                       | 
|/S/    LARRY HOOD Larry Hood                           |  | Director                                                                               
|                                                       | 
|/S/    GREGORY A. HUBERT Gregory A. Hubert             |  | Director                                                                               
|                                                       | 
|/S/    ANDREW M. WYNNE Andrew M. Wynne                 |  | Vice President and Chief Financial Officer (principal accounting and financial officer)



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                            
|3.1           |  | Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on October 26, 1999 (Filed with the Registrants Annual Report on Form 10-K for the year
ended April 1, 2001 as filed with the SEC on October 19, 2001 and incorporated herein by reference)                                                                               
|              | 
|3.1(a)        |  | Articles of Amendment of the Restated Articles of Incorporation containing the Statement of Rights and Preferences of Series B Preferred Stock filed with the Washington Secretary of State on
June 27, 2000 (incorporated by reference to the Companys Annual Report on Form 10-K for the year ended April 1, 2001, as filed with the Commission on October 19, 2001)
|              | 
|3.1(b)        |  | Articles of Correction to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on August 8, 2000 (Filed with the Registrants Form 10-K for the year
ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)                                                                         
|              | 
|3.1(c)        |  | Articles of Correction to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on August 8, 2000 (Filed with the Registrants Form 10-K for the year
ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)                                                                         
|              | 
|3.1(d)        |  | Articles of Amendment to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on December 16, 2004 (Filed with the Registrants Form 10-K for the year
ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)                                                                       
|              | 
|3.1(e)        |  | Articles of Amendment to Amended and Restated Articles of Incorporation filed with the Washington Secretary of State on June 27, 2007 (Filed with the Registrants Form 10-K for the year
ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)                                                                           
|              | 
|3.2           |  | Amended and Restated Bylaws adopted on July 18, 2007 (Filed with the Registrants Form 10-Q for the quarter ended July 1, 2007, as filed with the SEC on July 26, 2007, and incorporated
herein by reference)                                                                                                                                                          
|              | 
|4.1           |  | Description of capital stock contained in the Amended and Restated Articles of Incorporation (see Exhibit 3.1)                                                                                                                                                                                                                                                         
|              | 
|4.2           |  | Description of rights of security holders contained in the Bylaws (see Exhibit 3.2)                                                                                                                                                                                                                                                                                    
|              | 
|4.2(a)*       |  | Form of Common Stock Purchase Warrants issued in Series A Preferred Stock financing                                                                                                                                                                                                                                                                                    
|              | 
|4.2(b)*       |  | Common Stock Purchase Warrant, dated December 14, 2000, issued to KWM Investments LLC                                                                                                                                                                                                                                                                                  
|              | 
|4.2(c)*       |  | Form of Common Stock Purchase Warrants issued to Guarantors of Kent Central, LLC Promissory Note                                                                                                                                                                                                                                                                       
|              | 
|4.2(d)*       |  | Common Stock Purchase Warrant dated April 26, 2007, issued to Benaroya Capital Company, L.L.C.                                                                                                                                                                                                                                                                         
|              | 
|4.2(e)        |  | Stock Purchase Warrant dated July 12, 2007, issued to Benaroya Capital Company, L.L.C. (Filed with the Registrants Form 10-K for the year ended April 1, 2007, as filed with the SEC on July
13, 2007, and incorporated herein by reference)                                                                                                                          
|              | 
|4.2(f)        |  | Form of Stock Purchase Warrant issued July 12, 2007 to Guarantor of Benaroya Capital credit facility (Filed with the Registrants Form 10-K for the year ended April 1, 2007, as filed with
the SEC on July 13, 2007, and incorporated herein by reference)                                                                                                            
|              | 
|4.3*          |  | Form of Registration Rights Agreement with Series A Preferred Shareholders                                                                                                                                                                                                                                                                                             
|              | 
|4.4*          |  | Registration Rights Agreement, dated December 14, 2000 between Tullys and KWM Investments LLC                                                                                                                                                                                                                                                                         



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|              |  |                                                                                                                                                                                                                                                             
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                 
|              | 
|10.1*         |  | Tullys 1999 Employee Stock Purchase Plan                                                                                                                                                                                                                   
|              | 
|10.2*         |  | Tullys Second Amended and Restated 1994 Stock Option Plan                                                                                                                                                                                                  
|              | 
|10.3*         |  | Tullys 2004 Stock Option Plan                                                                                                                                                                                                                              
|              | 
|10.4*         |  | Form of Non-Qualified Stock Option Agreement                                                                                                                                                                                                                
|              | 
|10.5*         |  | Form of Incentive Stock Option Agreement                                                                                                                                                                                                                    
|              | 
|10.6*         |  | Form of Founders Plan Option Agreement                                                                                                                                                                                                                     
|              | 
|10.7(a)       |  | Lease Agreement between Tullys and Kent Central, LLC, as amended (Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended April 2, 2000, as filed
with the SEC on July 3, 2000)                                        
|              | 
|10.7(b)*      |  | First Lease Amendment between Tullys and Kent Central, LLC, dated December 17, 1999                                                                                                                                                                        
|              | 
|10.7(c)*      |  | Second Lease Amendment between Tullys and Kent Central, LLC, dated June 6, 2000                                                                                                                                                                            
|              | 
|10.7(d)*      |  | Third Lease Amendment between Tullys and Kent Central, LLC, dated November 7, 2000                                                                                                                                                                         
|              | 
|10.7(e)*      |  | Fourth Lease Amendment between Tullys and Kent Central, LLC, dated February 21, 2001                                                                                                                                                                       
|              | 
|10.7(f)*      |  | Fifth Lease Amendment between Kent Central, LLC and Tullys, dated November 1, 2002                                                                                                                                                                         
|              | 
|10.7(g)*      |  | Sixth Amendment to Lease Agreement between Tullys and Rainier Commons, LLC, dated June 26, 2003                                                                                                                                                            
|              | 
|10.7(h)*      |  | Seventh Amendment to Lease Agreement between Tullys and Rainier Commons, LLC, dated July 23, 2004                                                                                                                                                          
|              | 
|10.7(i)*      |  | Eighth Amendment to Lease Agreement between Tullys and Rainier Commons, LLC, dated October 7, 2004                                                                                                                                                         
|              | 
|10.7(j)*      |  | Ninth Amendment to Lease Agreement between Tullys and Rainier Commons, LLC, dated October 7, 2004                                                                                                                                                          
|              | 
|10.7(k)*      |  | Tenth Amendment to Lease Agreement between Tullys and Rainier Commons, LLC, dated December 16, 2005                                                                                                                                                        
|              | 
|10.8*         |  | Tullys Coffee Exclusive License Agreement, dated April 11, 2001 between Tullys and UCC Ueshima Coffee Company, LTD                                                                                                                                        
|              | 
|10.9*         |  | Tullys Coffee Corporation Employment Summary dated June 21, 2002 for Kristopher S. Galvin                                                                                                                                                                  
|              | 
|10.10         |  | Letter of Employment for John D. Dresel (Incorporated by reference to the Companys Current Report on Form 8-K, dated September 30, 2004, as filed with the Commission on
October 5, 2004)                                                                  
|              | 
|10.11         |  | Termination Of Agreement Between Tullys Coffee and Guarantors Re Kent Central Financing dated August 15, 2005 (incorporated by reference to the Registrants Current Report on Form
8-K, dated August 31, 2005, as filed with the SEC on September 2, 2005)
|              | 
|10.12(a)*     |  | Asset Purchase Agreement by and between Tullys Coffee Japan Co., Ltd. and Tullys Coffee Corporation, dated August 19, 2005                                                                                                                                
|              | 
|10.12(b)*     |  | First Amendment of Asset Purchase Agreement between Tullys Coffee Japan Co., Ltd. and Tullys Coffee Corporation dated August 31, 2005                                                                                                                     



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|              |  |                                                                                                                                                                                                                                                                                              
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                  
|              | 
|10.13(a)      |  | Contract of Sale & Security Agreement between Tullys Coffee Corporation and Northrim Funding Services dated November 9, 2006 (incorporated by reference to the Registrants
Quarterly Report on Form 10-Q for the quarter ended October 1, 2006, as filed with the SEC on November 15, 2006)
|              | 
|10.13(b)*     |  | Amendment #1 to Northrim Funding Services Contract of Sale & Security Agreement, dated June 25, 2007                                                                                                                                                                                         
|              | 
|10.14(a)      |  | Inventory Security Agreement between Tullys Coffee Corporation and Northrim Funding Services dated November 9, 2006 (incorporated by reference
to the Registrants Quarterly Report on Form 10-Q for the quarter ended October 1, 2006, as filed with the SEC on November 15,
2006)         
|              | 
|10.14(b)      |  | Amendment #2 to Inventory Security Agreement between Tullys Coffee Corporation and Northrim Funding Services, dated June 25, 2007 (Filed with the Registrants Form 10-K for the year
ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)    
|              | 
|10.15*        |  | Employment Agreement for John K. Buller dated September 1, 2006.                                                                                                                                                                                                                             
|              | 
|10.16*        |  | Employment Summary, dated April 15, 2003, as amended September 16, 2005 for Ronald Gai                                                                                                                                                                                                       
|              | 
|10.17*        |  | Offer Letter for Robert Martin, dated December 1, 2004                                                                                                                                                                                                                                       
|              | 
|10.18*        |  | Offer Letter for Mark E. DaCosta, dated May 25, 2005                                                                                                                                                                                                                                         
|              | 
|10.19*        |  | 15% Senior Subordinated Secured Promissory Note in favor of Benaroya Capital Company, L.L.C. dated April 26, 2007                                                                                                                                                                            
|              | 
|10.20         |  | Amendment to Secured Promissory Note and Security Agreement, dated as of July 12, 2007, in favor of Benaroya Capital Company, L.L.C. (Filed with the Registrants Form 10-K for the year
ended April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)  
|              | 
|10.21(a)*     |  | Guaranty Agreement between Tom T. OKeefe and Benaroya Capital Company, L.L.C., dated April 25, 2007                                                                                                                                                                                         
|              | 
|10.21(b)      |  | Amendment to Guaranty Agreement between Tom T. OKeefe and Benaroya Capital Company, L.L.C., dated as of July 12, 2007 (Filed with the Registrants Form 10-K for the year ended
April 1, 2007, as filed with the SEC on July 13, 2007, and incorporated herein by reference)                
|              | 
|10.21(c)      |  | Form of Guaranty Agreement dated July 12, 2007 between Guarantor and Benaroya Capital (Filed with the Registrants Form 10-K for the year ended April 1, 2007, as filed with the SEC on July
13, 2007, and incorporated herein by reference)                                                 
|              | 
|10.22*        |  | Form of Security Agreement in favor of Benaroya Capital Company, L.L.C., dated April 26, 2007 (Filed herewith)                                                                                                                                                                               
|              | 
|10.23*        |  | Agreement between Tullys Coffee Corporation and Guarantor Re Benaroya Capital Financing, dated April 25, 2007 (Filed herewith)                                                                                                                                                              
|              | 
|10.24*        |  | Agreement between Tullys Coffee Corporation and Guarantor re Benaroya Capital Financing, dated July 12, 2007                                                                                                                                                                                
|              | 
|10.25         |  | Services Agreement between Tullys Coffee Corporation, Pinnacle Management, Inc., and Carl Pennington, Sr., regarding Mr. Penningtons services as President of Tullys (Filed with
the Registrants Form 8-K filed with the SEC on March 11, 2008 and incorporated herein by reference)     
|              | 
|10.26         |  | Tullys Coffee Exclusive License Agreement between Tullys Coffee Corporation and its wholly-owned subsidiary Tullys Coffee Asia Partners, Inc. dated October 12, 2007 (Filed with
the Registrants Form 8-K filed with the SEC on January 11, 2008 and incorporated herein by reference)   



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                       
|              | 
|10.27         |  | Settlement Agreement between Tullys Coffee Corporation and UCC Ueshima Coffee Co. Ltd. dated December 28, 2007 (Filed with the Registrants Form 8-K filed with the SEC on January 11,
2008 and incorporated herein by reference)                                
|              | 
|10.28         |  | Non-Recourse Guaranty by Tullys Coffee Corporation to and for the benefit of UCC Ueshima Coffee Co. Ltd. dated December 28, 2007 (Filed with the Registrants Form 8-K filed with
the SEC on January 11, 2008 and incorporated herein by reference)              
|              | 
|10.29         |  | Security Agreement by Tullys Coffee Corporation and Tullys Coffee Asia Pacific, Inc. in favor of UCC Ueshima Co. Ltd. dated December 28, 2007 (Filed with the Registrants Form
8-K filed with the SEC on January 11, 2008 and incorporated herein by reference)
|              | 
|10.30         |  | Amendment to License by Tullys Coffee Corporation, Tullys Coffee Asia Pacific, Inc., and UCC Ueshima Co. Ltd. dated January 14, 2008 (Filed with the Registrants Form 8-K filed
with the SEC on January 11, 2008 and incorporated herein by reference)         
|              | 
|14.1          |  | Tullys Coffee Corporation Code of Business Conduct (incorporated by reference to the Companys Annual Report on Form 10-K for the year ended March 28, 2004, as filed with the SEC
on June 28, 2004)                                                             
|              | 
|21.1          |  | Subsidiaries of the Company                                                                                                                                                                                                                                       
|              | 
|23.1*         |  | Consent of Registered Independent Public Accounting Firm                                                                                                                                                                                                          
|              | 
|31.1*         |  | Certification of principal executive officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                 
|              | 
|31.2*         |  | Certification of principal financial officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                 
|              | 
|32.1*         |  | Certification of principal executive officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                             
|              | 
|32.2*         |  | Certification of principal financial officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                             



|* | Filed herewith
|- | --------------



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