##### Table of Contents



---

---

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 6, 2002

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 0-21203

DIEDRICH COFFEE, INC.

(Exact Name of Registrant as Specified in Its Charter)


|                                                                        |  |                                             
|----------------------------------------------------------------------- |  | --------------------------------------------
|Delaware
(State or Other Jurisdiction of Incorporation or Organization) |  | 33-0086628
(IRS Employer Identification No.)

2144 Michelson Drive
Irvine, California 92612

(Address of Principal Executive Offices, Zip Code)


(949) 260-1600

(Registrants Telephone Number, including Area Code)


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[x] No[   ]

As of April 16, 2002, there were 5,161,271 shares of common stock of the
registrant outstanding.



---

---





---

TABLE OF CONTENTS



|                               |                                                                                                |                                                      |  |  |  |  |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements.                                                                 
|                               |                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                                | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                               | Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations.
|                               | Item 3. Quantitative And Qualitative Disclosures About Market Risk.                           
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings.                                                                    
|                               | Item 5. Other Information.                                                                    
|                               | Item 6. Exhibits and Reports on Form 8-K.                                                     
|SIGNATURES                    
|EXHIBIT 10.28                 



---



##### Table of Contents



DIEDRICH COFFEE, INC.

INDEX

|         |  |                                                                                       |  |         
|-------- |  | ------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                       |  | Page No.
|         |  |                                                                                       |  |         
|PART I - |  | FINANCIAL INFORMATION                                                                 |  |         
|        
|Item 1.  |  | Financial Statements                                                                  |  |         
|        
|         |  | Condensed Consolidated Balance Sheets (Unaudited)                                     |  | 1       
|        
|         |  | Condensed Consolidated Statements of Operations (Unaudited)                           |  | 2       
|        
|         |  | Condensed Consolidated Statements of Cash Flows (Unaudited)                           |  | 3       
|        
|         |  | Notes to Condensed Consolidated Financial Statements                                  |  | 4       
|        
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |  | 12      
|        
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 21      
|        
|PART II- |  | OTHER INFORMATION                                                                     |  |         
|        
|Item 1.  |  | Legal Proceedings                                                                     |  | 21      
|        
|Item 5.  |  | Other Information                                                                     |  | 21      
|        
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                      |  | 22      
|        
|         |  | Signatures                                                                            |  | 26      

i



---



##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Financial Statements.




DIEDRICH COFFEE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                                                                                                                       |                                                                                                                           |                                            |                                      |           |               |  |             |           |            |  | 
|-------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | --------- | ------------- |  | ----------- | --------- | ---------- |  | 
|                                                                                                                                       | ASSETS                                                                                                                    |                                            | March 6, 2002                        |           | June 27, 2001
|                                                                                                                                       |                                                                                                                           |                                            |                                      |           |              
|Current assets:                                                                                                                        |                                                                                                                           |                                            |                                      |           |               |  |             |          
|                                                                                                                                       | Cash                                                                                                                      |                                            | $                                    | 2,525,000 |               |  | $           | 3,063,000 |           
|                                                                                                                                       | Accounts receivable, less allowance for doubtful accounts
of $1,701,000 at March 6, 2002, and $2,007,000 at
June 27, 2001 |                                            |                                      | 1,033,000 |               |  |             | 1,718,000 |           
|                                                                                                                                       | Current portion of notes receivable (Note 2)                                                                              |                                            |                                      | 113,000   |               |  |             |          |           
|                                                                                                                                       | Inventories (Note 3)                                                                                                      |                                            |                                      | 2,802,000 |               |  |             | 2,843,000 |           
|                                                                                                                                       | Assets held for sale (Note 2)                                                                                             |                                            |                                      | 160,000   |               |  |             | 1,694,000 |           
|                                                                                                                                       | Prepaid expenses                                                                                                          |                                            |                                      | 602,000   |               |  |             | 233,000   |           
|                                                                                                                                       |                                                                                                                           |                                            |                                      |           |               |  |             |          
|Total current assets                                                                                                                   |                                                                                                                           |                                            | 7,235,000                            |           |               |  | 9,551,000   |          
|Property and equipment, net (Note 4)                                                                                                   |                                                                                                                           |                                            | 8,272,000                            |           |               |  | 9,364,000   |          
|Costs in excess of net assets acquired, net of amortization
of $1,413,000 at March 6, 2002, and $1,423,000 at
June 27, 2001 (Note 9)   |                                                                                                                           |                                            | 12,164,000                           |           |               |  | 12,250,000  |          
|Notes receivable (Note 2)                                                                                                              |                                                                                                                           |                                            | 257,000                              |           |               |  |            |          
|Other assets                                                                                                                           |                                                                                                                           |                                            | 481,000                              |           |               |  | 726,000     |          
|                                                                                                                                       |                                                                                                                           |                                            |                                      |           |               |  |             |          
|                                                                                                                                       |                                                                                                                           | Total assets                               |                                      | $         | 28,409,000    |  |             | $         | 31,891,000 | 
|                                                                                                                                       |                                                                                                                           |                                            |                                      |           |               |  |             |          
|                                                                                                                                       |                                                                                                                           |                                            | Liabilities And Stockholders Equity |           |               |  |             |           |            |  | 
|Current liabilities:                                                                                                                   |                                                                                                                           |                                            |                                      |           |               |  |             |          
|                                                                                                                                       | Current installments of obligations under capital leases                                                                  |                                            | $                                    | 225,000   |               |  | $           | 272,000   |           
|                                                                                                                                       | Current installments of long-term debt (Note 5)                                                                           |                                            |                                      | 3,894,000 |               |  |             | 2,040,000 |           
|                                                                                                                                       | Accounts payable                                                                                                          |                                            |                                      | 1,738,000 |               |  |             | 2,239,000 |           
|                                                                                                                                       | Accrued compensation                                                                                                      |                                            |                                      | 1,458,000 |               |  |             | 1,954,000 |           
|                                                                                                                                       | Accrued expenses                                                                                                          |                                            |                                      | 747,000   |               |  |             | 1,141,000 |           
|                                                                                                                                       | Franchisee deposits                                                                                                       |                                            |                                      | 558,000   |               |  |             | 648,000   |           
|                                                                                                                                       | Deferred franchise fee income                                                                                             |                                            |                                      | 587,000   |               |  |             | 704,000   |           
|                                                                                                                                       | Provision for store closure (Note 6)                                                                                      |                                            |                                      | 756,000   |               |  |             | 1,372,000 |           
|                                                                                                                                       |                                                                                                                           |                                            |                                      |           |               |  |             |          
|Total current liabilities                                                                                                              |                                                                                                                           |                                            | 9,963,000                            |           |               |  | 10,370,000  |          
|Obligations under capital leases, excluding current
installments                                                                       |                                                                                                                           |                                            | 784,000                              |           |               |  | 716,000     |          
|Long-term debt, excluding current installments (Note 5)                                                                                |                                                                                                                           |                                            |                                     |           |               |  | 3,503,000   |          
|Deferred rent                                                                                                                          |                                                                                                                           |                                            | 584,000                              |           |               |  | 689,000     |          
|                                                                                                                                       |                                                                                                                           |                                            |                                      |           |               |  |             |          
|Total liabilities                                                                                                                      |                                                                                                                           |                                            | 11,331,000                           |           |               |  | 15,278,000  |          
|                                                                                                                                       |                                                                                                                           |                                            |                                      |           |               |  |             |          
|Stockholders Equity:                                                                                                                  |                                                                                                                           |                                            |                                      |           |               |  |             |          
|Common stock, $0.01 par value; authorized 8,750,000
shares; issued and outstanding 5,161,000 shares at
March 6, 2002 and June 27, 2001 |                                                                                                                           |                                            | 52,000                               |           |               |  | 52,000      |          
|Additional paid-in capital                                                                                                             |                                                                                                                           |                                            | 57,972,000                           |           |               |  | 58,106,000  |          
|Accumulated deficit                                                                                                                    |                                                                                                                           |                                            | (40,946,000                          | )         |               |  | (41,545,000 | )        
|                                                                                                                                       |                                                                                                                           |                                            |                                      |           |               |  |             |          
|                                                                                                                                       |                                                                                                                           | Total stockholders equity                 |                                      |           | 17,078,000    |  |             |           | 16,613,000 | 
|Commitments and contingencies                                                                                                          |                                                                                                                           |                                            |                                     |           |               |  |            |          
|                                                                                                                                       |                                                                                                                           |                                            |                                      |           |               |  |             |          
|                                                                                                                                       |                                                                                                                           | Total liabilities and stockholders equity |                                      | $         | 28,409,000    |  |             | $         | 31,891,000 | 
|                                                                                                                                       |                                                                                                                           |                                            |                                      |           |               |  |             |          

See accompanying notes to condensed consolidated financial statements.

1



---



##### Table of Contents






DIEDRICH COFFEE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                        |                                                          |       |           |                     |            |                     |           |                     |            |                     |           |            |            |   |            |            |            | 
|------------------------------------------------------- | -------------------------------------------------------- | ----- | --------- | ------------------- | ---------- | ------------------- | --------- | ------------------- | ---------- | ------------------- | --------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                        |                                                          |       |           | Twelve Weeks        |            | Twelve Weeks        |           | Thirty-Six Weeks    |            | Thirty-Six Weeks   
|                                                        |                                                          |       |           | Ended March 6, 2002 |            | Ended March 7, 2001 |           | Ended March 6, 2002 |            | Ended March 7, 2001
|                                                        |                                                          |       |           |                     |            |                     |           |                     |            |                    
|Net Revenue:                                            |                                                          |       |           |                     |            |                     |           |                     |            |                     |           |            |            |   |            |           
|                                                        | Retail sales                                             |       | $         | 8,610,000           |            |                     | $         | 11,205,000          |            |                     | $         | 26,971,000 |            |   | $          | 33,444,000 |           
|                                                        | Wholesale and other                                      |       |           | 2,749,000           |            |                     |           | 3,037,000           |            |                     |           | 11,521,000 |            |   |            | 13,840,000 |           
|                                                        | Franchise revenue                                        |       |           | 1,701,000           |            |                     |           | 1,596,000           |            |                     |           | 4,700,000  |            |   |            | 4,826,000  |           
|                                                        |                                                          |       |           |                     |            |                     |           |                     |            |                     |           |            |            |   |            |           
|                                                        |                                                          | Total |           |                     | 13,060,000 |                     |           |                     | 15,838,000 |                     |           |            | 43,192,000 |   |            |            | 52,110,000 | 
|                                                        |                                                          |       |           |                     |            |                     |           |                     |            |                     |           |            |            |   |            |           
|Cost and Expenses:                                      |                                                          |       |           |                     |            |                     |           |                     |            |                     |           |            |            |   |            |           
|                                                        | Cost of sales and related occupancy costs                |       |           | 6,324,000           |            |                     |           | 7,729,000           |            |                     |           | 21,432,000 |            |   |            | 25,956,000 |           
|                                                        | Operating expenses                                       |       |           | 3,950,000           |            |                     |           | 4,444,000           |            |                     |           | 12,338,000 |            |   |            | 14,394,000 |           
|                                                        | Depreciation and amortization                            |       |           | 522,000             |            |                     |           | 1,081,000           |            |                     |           | 1,733,000  |            |   |            | 3,186,000  |           
|                                                        | General and administrative expenses                      |       |           | 1,995,000           |            |                     |           | 1,941,000           |            |                     |           | 6,411,000  |            |   |            | 8,130,000  |           
|                                                        | Provision for asset impairment and
restructuring reserve |       |           | 367,000             |            |                     |           | 780,000             |            |                     |           | 389,000    |            |   |            | 780,000    |           
|                                                        | (Gain)/Loss on asset disposals                           |       |           | (21,000             | )          |                     |           | 168,000             |            |                     |           | (118,000   | )          |   |            | 200,000    |           
|                                                        |                                                          |       |           |                     |            |                     |           |                     |            |                     |           |            |            |   |            |           
|                                                        |                                                          | Total |           |                     | 13,137,000 |                     |           |                     | 16,143,000 |                     |           |            | 42,185,000 |   |            |            | 52,646,000 | 
|                                                        |                                                          |       |           |                     |            |                     |           |                     |            |                     |           |            |            |   |            |           
|Operating income (loss)                                 |                                                          |       | (77,000   | )                   |            |                     | (305,000  | )                   |            |                     | 1,007,000 |            |            |   | (536,000   | )         
|Interest expense                                        |                                                          |       | (128,000  | )                   |            |                     | (317,000  | )                   |            |                     | (433,000  | )          |            |   | (1,032,000 | )         
|Interest and other income, net                          |                                                          |       | 15,000    |                     |            |                     | 6,000     |                     |            |                     | 41,000    |            |            |   | 24,000     |           
|                                                        |                                                          |       |           |                     |            |                     |           |                     |            |                     |           |            |            |   |            |           
|Income (loss) before income tax provision               |                                                          |       | (190,000  | )                   |            |                     | (616,000  | )                   |            |                     | 615,000   |            |            |   | (1,544,000 | )         
|Income tax provision                                    |                                                          |       |          |                     |            |                     | 16,000    |                     |            |                     | 16,000    |            |            |   | 37,000     |           
|                                                        |                                                          |       |           |                     |            |                     |           |                     |            |                     |           |            |            |   |            |           
|Net income (loss)                                       |                                                          | $     | (190,000  | )                   |            | $                   | (632,000  | )                   |            | $                   | 599,000   |            |            | $ | (1,581,000 | )         
|                                                        |                                                          |       |           |                     |            |                     |           |                     |            |                     |           |            |            |   |            |           
|Net income (loss) per share
 basic and diluted         |                                                          | $     | (0.04     | )                   |            | $                   | (0.20     | )                   |            | $                   | 0.12      |            |            | $ | (0.50      | )         
|                                                        |                                                          |       |           |                     |            |                     |           |                     |            |                     |           |            |            |   |            |           
|Weighted average shares outstanding
 basic and diluted |                                                          |       | 5,161,000 |                     |            |                     | 3,161,000 |                     |            |                     | 5,161,000 |            |            |   | 3,161,000  |           
|                                                        |                                                          |       |           |                     |            |                     |           |                     |            |                     |           |            |            |   |            |           

See accompanying notes to condensed consolidated financial statements.

2



---



##### Table of Contents






DIEDRICH COFFEE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |            |           |            |  
|--------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------------------------- | --------------------------- | ---------- | ---------------- | -------- | ---------------- | ---------- | --------- | ---------- | -
|                                                    |                                                                                                |                                                 |                             |            | Thirty-Six Weeks |          | Thirty-Six Weeks
|                                                    |                                                                                                |                                                 |                             |            | Ended            |          | Ended           
|                                                    |                                                                                                |                                                 |                             |            | March 6, 2001    |          | March 7, 2000   
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                 
|Cash flows from operating activities:               |                                                                                                |                                                 |                             |            |                  |          |                  |           
|                                                    | Net income (loss)                                                                              |                                                 | $                           | 599,000    |                  |          | $                | (1,581,000 | )        
|                                                    | Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities: |                                                 |                             |            |                  |          |                  |            |          
|                                                    |                                                                                                | Depreciation and amortization                   |                             |            | 1,733,000        |          |                  |            | 3,186,000 |           
|                                                    |                                                                                                | Amortization of loan fees                       |                             |            | 129,000          |          |                  |            | 194,000   |           
|                                                    |                                                                                                | Provision for bad debt                          |                             |            | (306,000         | )        |                  |            | 478,000   |           
|                                                    |                                                                                                | Provision for asset impairment                  |                             |            |                 |          |                  |            | 317,000   |           
|                                                    |                                                                                                | Provision for store closure                     |                             |            | 42,000           |          |                  |            | 165,000   |           
|                                                    |                                                                                                | (Gain)/loss on disposal of assets               |                             |            | (118,000         | )        |                  |            | 200,000   |           
|                                                    |                                                                                                | Changes in operating assets and liabilities:    |                             |            |                  |          |                  |            |           |           
|                                                    |                                                                                                |                                                 | Accounts receivable         |            |                  | 991,000  |                  |            |           | (779,000   | )
|                                                    |                                                                                                |                                                 | Inventories                 |            |                  | (118,000 | )                |            |           | 1,200,000  |  
|                                                    |                                                                                                |                                                 | Prepaid expenses            |            |                  | (369,000 | )                |            |           | (407,000   | )
|                                                    |                                                                                                |                                                 | Income taxes receivable     |            |                  |         |                  |            |           | 16,000     |  
|                                                    |                                                                                                |                                                 | Other assets                |            |                  | 47,000   |                  |            |           | (323,000   | )
|                                                    |                                                                                                |                                                 | Accounts payable            |            |                  | (501,000 | )                |            |           | (3,433,000 | )
|                                                    |                                                                                                |                                                 | Accrued compensation        |            |                  | (496,000 | )                |            |           | 27,000     |  
|                                                    |                                                                                                |                                                 | Accrued expenses            |            |                  | (394,000 | )                |            |           | 6,000      |  
|                                                    |                                                                                                |                                                 | Provision for store closure |            |                  | (658,000 | )                |            |           | (139,000   | )
|                                                    | Deferred franchise income and franchisee deposits                                              |                                                 |                             | (224,000   | )                |          |                  | 144,000    |          
|                                                    |                                                                                                |                                                 | Deferred rent               |            |                  | 18,000   |                  |            |           | 59,000     |  
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |           
|Net cash provided by (used in) operating activities |                                                                                                |                                                 | 375,000                     |            |                  |          | (670,000         | )         
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |           
|Cash flows from investing activities:               |                                                                                                |                                                 |                             |            |                  |          |                  |           
|                                                    |                                                                                                | Principal payments received on notes receivable |                             |            | 145,000          |          |                  |            |          |           
|                                                    |                                                                                                | Capital expenditures for property and equipment |                             |            | (716,000         | )        |                  |            | (970,000  | )         
|                                                    | Proceeds from disposal of property and equipment                                               |                                                 |                             | 1,645,000  |                  |          |                  | 718,000    |          
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |           
|Net cash provided by (used in) investing activities |                                                                                                |                                                 | 1,074,000                   |            |                  |          | (252,000         | )         
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |           
|Cash flows from financing activities:               |                                                                                                |                                                 |                             |            |                  |          |                  |           
|                                                    | Stock issuance costs                                                                           |                                                 |                             | (134,000   | )                |          |                  |           |          
|                                                    | Payments on long-term debt                                                                     |                                                 |                             | (1,649,000 | )                |          |                  | (925,000   | )        
|                                                    | Payments on capital lease obligations                                                          |                                                 |                             | (204,000   | )                |          |                  | (203,000   | )        
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |           
|Net cash used in financing activities               |                                                                                                |                                                 | (1,987,000                  | )          |                  |          | (1,128,000       | )         
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |           
|Net decrease in cash                                |                                                                                                |                                                 | (538,000                    | )          |                  |          | (2,050,000       | )         
|Cash at beginning of period                         |                                                                                                |                                                 | 3,063,000                   |            |                  |          | 2,943,000        |           
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |           
|Cash at end of period                               |                                                                                                | $                                               | 2,525,000                   |            |                  | $        | 893,000          |           
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |           
|Supplemental disclosure of cash flow information:   |                                                                                                |                                                 |                             |            |                  |          |                  |           
|                                                    | Cash paid during the period for:                                                               |                                                 |                             |            |                  |          |                  |            |          
|                                                    |                                                                                                | Interest                                        |                             | $          | 298,000          |          |                  | $          | 907,000   |           
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |           
|                                                    |                                                                                                | Income taxes                                    |                             | $          | 18,000           |          |                  | $          | 20,000    |           
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |           
|Non-cash transactions:                              |                                                                                                |                                                 |                             |            |                  |          |                  |           
|                                                    |                                                                                                | Issuance of notes receivable                    |                             | $          | 515,000          |          |                  | $          |          |           
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |           
|                                                    |                                                                                                | Asset purchased under capital lease             |                             | $          | 225,000          |          |                  | $          | 180,000   |           
|                                                    |                                                                                                |                                                 |                             |            |                  |          |                  |           

See accompanying notes to consolidated financial statements.

3



---



##### Table of Contents






DIEDRICH COFFEE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 6, 2002
(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements of Diedrich
Coffee, Inc. (the Company) and its subsidiaries have been prepared in
accordance with generally accepted accounting principles, as well as the
instructions to Form 10-Q and Article 10 of Regulation S-X. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Companys Annual Report on Form 10-K for the year ended June 27, 2001.

In the opinion of management, all adjustments (consisting of normal,
recurring adjustments and accruals) considered necessary for a fair
presentation have been included. Operating results for interim periods are not
necessarily indicative of the results expected for a full year.

Reclassifications

Certain reclassifications have been made to the March 7, 2001 consolidated
financial statements to conform to the March 6, 2002 presentation.

2. NOTES RECEIVABLE

In October 2001, the Company sold eight of its coffeehouses in Phoenix,
Arizona for $1,382,000 in cash and $515,000 in notes receivable. Under the
terms of this sale, the buyers also assumed operation of four additional
coffeehouses on a sublease basis, with an option to purchase them in the future
at a predetermined price. Another term of the transaction provided the Company
the right to continue to use the Coffee Plantation trademarks and trade name on
a royalty-free basis for the Companys five remaining company-operated
locations. The buyers also executed a seven year exclusive coffee supply
agreement which provides, among other things, that the Company will supply
roasted coffee to the units noted above (and any other new Coffee Plantation
units that the buyers may acquire or develop during the term of the agreement).
Under the coffee supply agreement, the buyers are required to purchase certain
minimum levels of coffee annually.

Notes receivable at March 6, 2002 consist of the following:

|                                                                                                                                                                                                                                                                                |  |                 |         |                   |  |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ----------------- |  | - | ------- | 
|                                                                                                                                                                                                                                                                                |  | Current Portion |         | Long-Term Portion
|                                                                                                                                                                                                                                                                                |  |                 |         |                  
|Notes receivable from a corporation:                                                                                                                                                                                                                                            |  |                 |         |                   |  |   |         | 
|Notes receivable bearing interest at
rates from 0.0% to 10.0%, payable in
monthly installments varying between
$3,333.34 and $25,000.00. Due between
October 3, 2005 and October 5, 2006
Notes are secured by the assets purchased
under the Asset Purchase and Sale
Agreements |  | $               | 113,000 |                   |  | $ | 257,000 | 
|                                                                                                                                                                                                                                                                                |  |                 |         |                   |  |   |         | 

4



---



##### Table of Contents



All of the net assets relating to these stores were classified as Assets
Held for Sale as of June 27, 2001. In addition, Assets Held for Sale includes
a parcel of land located in Oregon, which the Company currently has listed for
sale.

|                             |  |               |         |               |  |   |           | 
|---------------------------- |  | ------------- | ------- | ------------- |  | - | --------- | 
|                             |  | March 6, 2002 |         | June 27, 2001
|                             |  |               |         |              
|Phoenix assets held for sale |  | $             |        |               |  | $ | 1,534,000 | 
|Oregon assets held for sale  |  |               | 160,000 |               |  |   | 160,000   | 
|                             |  |               |         |               |  |   |           | 
|Total assets held for sale   |  | $             | 160,000 |               |  | $ | 1,694,000 | 
|                             |  |               |         |               |  |   |           | 

3. INVENTORIES

Inventories consist of the following:

|                                  |  |               |           |               |  |   |           | 
|--------------------------------- |  | ------------- | --------- | ------------- |  | - | --------- | 
|                                  |  | March 6, 2002 |           | June 27, 2001
|                                  |  |               |           |              
|Unroasted coffee                  |  | $             | 1,074,000 |               |  | $ | 717,000   | 
|Roasted coffee                    |  |               | 381,000   |               |  |   | 733,000   | 
|Accessory and specialty items     |  |               | 479,000   |               |  |   | 316,000   | 
|Other food, beverage and supplies |  |               | 868,000   |               |  |   | 1,077,000 | 
|                                  |  |               |           |               |  |   |           | 
|                                  |  | $             | 2,802,000 |               |  | $ | 2,843,000 | 
|                                  |  |               |           |               |  |   |           | 

4. PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

|                                          |  |               |             |               |  |   |             |  
|----------------------------------------- |  | ------------- | ----------- | ------------- |  | - | ----------- | -
|                                          |  | March 6, 2002 |             | June 27, 2001
|                                          |  |               |             |              
|Land                                      |  | $             |            |               |  | $ | 190,000     |  
|Buildings                                 |  |               | 316,000     |               |  |   | 388,000     |  
|Leasehold improvements                    |  |               | 6,713,000   |               |  |   | 6,345,000   |  
|Equipment                                 |  |               | 11,982,000  |               |  |   | 11,544,000  |  
|Furniture and fixtures                    |  |               | 1,053,000   |               |  |   | 1,011,000   |  
|Construction in progress                  |  |               | 154,000     |               |  |   | 165,000     |  
|                                          |  |               |             |               |  |   |             |  
|                                          |  |               | 20,218,000  |               |  |   | 19,643,000  |  
|Accumulated depreciation and amortization |  |               | (11,946,000 | )             |  |   | (10,279,000 | )
|                                          |  |               |             |               |  |   |             |  
|                                          |  | $             | 8,272,000   |               |  | $ | 9,364,000   |  
|                                          |  |               |             |               |  |   |             |  

Property held under capitalized leases in the amount of $958,000 and
$733,000 at March 6, 2002 and June 27, 2001, respectively, is included in
equipment. Accumulated amortization of such equipment amounted to $541,000 at
March 6, 2002 and $446,000 at June 27, 2001.

5



---



##### Table of Contents



5. LONG-TERM DEBT

Long-term debt consists of the following:

|                                                                                                                                                                                                                      |  |               |            |               |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ------------- |  | - | ---------- | -
|                                                                                                                                                                                                                      |  | March 6, 2002 |            | June 27, 2001
|                                                                                                                                                                                                                      |  |               |            |              
|Fleet National Bank                                                                                                                                                                                                   |  |               |            |               |  |   |            |  
|Note payable bearing interest at a rate of
5.55% as of March 6, 2002 and payable in
monthly installments of $100,000. Due
September 1, 2002. Note is secured by the
assets of the Company and its subsidiaries
stock |  | $             | 3,894,000  |               |  | $ | 5,543,000  |  
|Less: current installments                                                                                                                                                                                            |  |               | (3,894,000 | )             |  |   | (1,200,000 | )
|Less: 50% of proceeds from planned asset
sales, which are reflected as current
installments                                                                                                                           |  |               |           |               |  |   | (840,000   | )
|                                                                                                                                                                                                                      |  |               |            |              
|Long-term debt, excluding current installments                                                                                                                                                                        |  | $             |           |               |  | $ | 3,503,000  |  
|                                                                                                                                                                                                                      |  |               |            |              

On July 7, 1999, the Company entered into a Credit Agreement with
BankBoston, N.A. (subsequently merged into Fleet National Bank) which is
secured by a pledge of all of the Companys assets and its subsidiaries stock.
It initially provided for a $12 million term loan and a $3 million revolving
credit facility. The term loan provided for principal repayment based upon a
five-year amortization, with quarterly principal payments of $666,667 and
quarterly interest payments based upon a formula described below. The Company
has not drawn down any borrowings under the revolving credit facility since it
was established, although the credit facility currently backs $177,500 of
outstanding Letters of Credit. Amounts outstanding under the Credit Agreement
bear interest, at the Companys option, at Fleets base rate plus 1.25% or an
adjusted Eurodollar rate plus 3.0%. At March 6, 2002, the applicable interest
rate was 5.55%, which was based on the Eurodollar rate at the time. The rate
can be fixed over periods ranging from one to six months, at the Companys
discretion.

Due to various problems encountered in the year subsequent to the
acquisition of Coffee People, Inc., including the closure of 39 Gloria Jeans
locations, six of which were company-operated, the Company announced, on
June 29, 2000, that it expected to be in default under the Credit Agreement
because of its inability to satisfy certain financial covenants. The Company
simultaneously announced that it had entered into a Letter Agreement with Fleet
under which the bank agreed to extend the due date of the June 30, 2000
quarterly principal payment to July 31, 2000, and to forbear until July 31,
2000 from exercising any of its rights and remedies arising from financial
covenant defaults. The Company subsequently made its July 31, 2000 principal
payment on the extended due date. On August 17, 2000, the Company entered into
an extension of the June 27, 2000 Letter Agreement, which extended through
September 30, 2000 the banks forbearance from exercising any of its default
remedies.

On September 26, 2000, the Company entered into the First Amendment to
Credit Agreement with Fleet to amend certain terms of the original Credit
Agreement. The First Amendment to Credit Agreement provides for, among other
things: a significant reduction in the required minimum principal amortization
payments going forward, an acceleration in the maturity date of all amounts
owed under the Credit Agreement, an agreement between the Company and the bank
about certain assets that the Company intends to sell and about the payment of
future sale proceeds to the bank, the introduction of an additional event of
default, a reduction in the overall amount of the revolving credit facility,
new restrictions governing use of the facility and a modification of the
financial covenants going forward. The interest rate and the timing of
quarterly interest payments under the original Credit Agreement remained
unchanged under the First Amendment to Credit Agreement.

Specifically, under the terms of the First Amendment to Credit Agreement,
no further principal payments on the term loan were required from August 1,
2000 until January 31, 2001. The Company began making principal payments of
$25,000 per month on February 1, 2001, which payment amount increased to
$100,000 per month on

6



---



##### Table of Contents



July 1, 2001. Minimum monthly payments of $100,000 are required until all
amounts owed under the Credit Agreement are repaid. The First Amendment to
Credit Agreement accelerates the maturity date of all remaining amounts owed
under the Credit Agreement to September 1, 2002. In addition, the Company and
the bank identified certain assets that could be sold without interfering with
the Companys core business, including two pieces of Company owned real
property under existing retail locations and a parcel of Company owned real
property that is presently undeveloped. The Company and the bank also
identified certain company-operated coffeehouses outside of the Companys core
southern California market that could be refranchised. Under the terms of the
First Amendment to Credit Agreement, the bank is to receive 50% of the net
proceeds from any of the Companys asset or equity sales. In January 2001, two
of the aforementioned pieces of real property were sold in a sale-leaseback
transaction for $415,000. $208,000 of the proceeds of the transaction was
remitted to Fleet. In May 2001, three company-operated coffeehouses in Texas
were sold for an aggregate of $1,025,000. $448,500 of the proceeds of the sale
was remitted to Fleet. Also in May 2001, the Company sold 2,000,000 shares
(post-split) of Company common stock in a private sale. $3,600,000 of the
proceeds from the sale was remitted to Fleet. In October 2001, twelve
company-operated coffeehouses in Arizona were sold for an aggregate of
$1,382,000 in cash and $515,000 in notes receivable. One-half of the cash
payment, $596,000, was remitted to Fleet. In December 2001, a parcel of real
property and a building were sold in a sale-leaseback transaction for $325,000.
$140,000 of the proceeds from this sale was remitted to Fleet. The proceeds
from all five sales discussed above were applied solely to the Companys
principal note payable balance.

The First Amendment to Credit Agreement also introduced an additional
event of default under the Credit Agreement. The First Amendment specifies
that a materially adverse change in the financial condition of the Company or
any of its subsidiaries, as determined by the bank in its sole and exclusive
discretion, is an event of default. Under any event of default, the bank may
declare all amounts owed immediately due and payable. Additional changes under
the terms of the First Amendment to Credit Agreement include a reduction in the
maximum amount available under the revolving credit facility, a portion of
which the Company had previously been unable to access because of the covenant
defaults, from $3,000,000 to $1,293,000, and a restriction that the credit
facility be used only to back up existing and future standby Letters of Credit.
The First Amendment to Credit Agreement preserves the Companys ability to
obtain third party financing for capital projects and maintenance capital, and
increases its flexibility to obtain subordinated debt as a source of additional
working capital. Under the First Amendment to Credit Agreement, the bank
waived the previous financial covenant defaults and agreed to new financial
covenant ratios going forward based upon updated financial information and
projections prepared by the Company. In addition to resetting the ratios in
the financial covenants, the parties agreed to a new covenant under the First
Amendment to Credit Agreement that requires the Company to achieve certain
predetermined minimum levels of cumulative principal repayments in addition to
amounts already paid to date in fiscal 2001 or reflected in the new go forward
minimum monthly principal payment obligations discussed above: $283,333 by
March 2001; $708,333 by June 30, 2001; and $1,619,900 by September 30, 2001.
All such incremental principal repayment obligations due prior to the
accelerated maturity date have been met as of March 6, 2002, and were generated
primarily from the net proceeds paid to the bank from the above mentioned asset
sales and stock issuance.

6. PROVISION FOR STORE CLOSURE

The estimated cost associated with closing under-performing stores is
accrued in the period in which the store is identified for closure by
management under a plan of termination. Such costs primarily include the
estimated cost to terminate a lease.

|                                     |  |           |           |            |  |          |         |             |  |   |          |   |  |   |           | 
|------------------------------------ |  | --------- | --------- | ---------- |  | -------- | ------- | ----------- |  | - | -------- | - |  | - | --------- | 
|                                     |  |           |           |            |  | Amounts  |         |             |  |   |          |   |  |  
|                                     |  | Beginning |           | Charged    |  | Cash     |         |             |  |  
|                                     |  | Balance   |           | to Expense |  | Payments |         | End Balance
|                                     |  |           |           |            |  |          |         |            
|Year ended June 27, 2001             |  | $         | 1,387,000 |            |  | $        | 947,000 |             |  | $ | (962,000 | ) |  | $ | 1,372,000 | 
|Thirty-six weeks ended
March 6, 2002 |  | $         | 1,372,000 |            |  | $        | 42,000  |             |  | $ | (658,000 | ) |  | $ | 756,000   | 

7



---



##### Table of Contents



7. EARNINGS PER SHARE

The Company computes basic net income (loss) per share based on the
weighted average number of common shares outstanding during the periods
presented. Diluted net income (loss) per share is computed based on the
weighted average number of common and dilutive potential common shares
outstanding during the periods presented. The Company has granted certain
stock options and warrants, which have been treated as potential common shares.

The following table sets forth the computations of basic and diluted net
income (loss) per share:

|                                          |                                                    |   |             |           |             |   |             |           |             |   |      |           |  |   |       |            |  
|----------------------------------------- | -------------------------------------------------- | - | ----------- | --------- | ----------- | - | ----------- | --------- | ----------- | - | ---- | --------- |  | - | ----- | ---------- | -
|                                          |                                                    |   | Twelve      |           | Twelve      |   | Thirty-Six  |           | Thirty-Six 
|                                          |                                                    |   | Weeks Ended |           | Weeks Ended |   | Weeks Ended |           | Weeks Ended
|                                          |                                                    |   | March 6,    |           | March 7,    |   | March 6,    |           | March 7,   
|                                          |                                                    |   | 2002        |           | 2001        |   | 2002        |           | 2001       
|                                          |                                                    |   |             |           |             |   |             |           |            
|Numerator:                                |                                                    |   |             |           |             |   |             |           |             |   |      |           |  |   |       |           
|                                          | Net income (loss)                                  |   | $           | (190,000  | )           |   | $           | (632,000  | )           |   | $    | 599,000   |  |   | $     | (1,581,000 | )
|                                          |                                                    |   |             |           |             |   |             |           |             |   |      |           |  |   |       |           
|Denominator:                              |                                                    |   |             |           |             |   |             |           |             |   |      |           |  |   |       |           
|                                          | Basic weighted
average common
shares
outstanding   |   |             | 5,161,000 |             |   |             | 3,161,000 |             |   |      | 5,161,000 |  |   |       | 3,161,000  |  
|                                          | Effect of
dilutive
securities                      |   |             |          |             |   |             |          |             |   |      |          |  |   |       |           |  
|                                          |                                                    |   |             |           |             |   |             |           |             |   |      |           |  |   |       |           
|                                          | Diluted weighted
average common
shares
outstanding |   |             | 5,161,000 |             |   |             | 3,161,000 |             |   |      | 5,161,000 |  |   |       | 3,161,000  |  
|                                          |                                                    |   |             |           |             |   |             |           |             |   |      |           |  |   |       |           
|Basic and diluted
income (loss) per
share |                                                    | $ | (0.04       | )         |             | $ | (0.20       | )         |             | $ | 0.12 |           |  | $ | (0.50 | )         
|                                          |                                                    |   |             |           |             |   |             |           |             |   |      |           |  |   |       |           

All 467,592 options outstanding and all of the 730,000 warrants to
purchase shares of common stock outstanding during the twelve and the
thirty-six weeks ended March 6, 2002 were excluded from the calculation of
diluted net income (loss) per share as their inclusion would have been
anti-dilutive. All 671,870 outstanding options and all of the 230,000 warrants
to purchase shares of common stock outstanding during the twelve and the
thirty-six weeks ended March 7, 2001 were excluded from the calculation of
diluted net income (loss) per share as their inclusion would have been
anti-dilutive.

8. SEGMENT AND RELATED INFORMATION

The Company has three reportable segments: retail operations, wholesale
operations and franchise operations. The Company evaluates performance of its
operating segments based on income before provision for asset impairment and
restructuring costs, income taxes, interest expense, depreciation and
amortization, and general and administrative expenses.

Summarized financial information concerning the Companys reportable
segments is shown in the following table. The other total assets consist of
corporate cash, corporate notes receivable, corporate prepaid expenses, and
corporate property, plant and equipment. The other component of segment profit
before tax includes corporate general and administrative expenses, provision
for asset impairment and restructuring costs, depreciation and amortization
expense and interest expense.

8



---



##### Table of Contents



|                                 |  |            |            |            |  |            |            |       |  |       |           |  |  |   |            |   |  |   |            |  
|-------------------------------- |  | ---------- | ---------- | ---------- |  | ---------- | ---------- | ----- |  | ----- | --------- |  |  | - | ---------- | - |  | - | ---------- | -
|                                 |  | Retail     |            | Wholesale  |  | Franchise  |            |       |  |       |           |  |  |  
|                                 |  | Operations |            | Operations |  | Operations |            | Other |  | Total
|                                 |  |            |            |            |  |            |            |       |  |      
|Twelve Weeks Ended
March 6, 2002 |  |            |            |            |  |            |            |       |  |       |           |  |  |   |            |   |  |   |            |  
|Total Revenue                    |  | $          | 8,610,000  |            |  | $          | 2,749,000  |       |  | $     | 1,701,000 |  |  | $ |           |   |  | $ | 13,060,000 |  
|Interest expense                 |  |            | 16,000     |            |  |            |           |       |  |       | 17,000    |  |  |   | 95,000     |   |  |   | 128,000    |  
|Depreciation and
amortization    |  |            | 345,000    |            |  |            | 103,000    |       |  |       |          |  |  |   | 74,000     |   |  |   | 522,000    |  
|Segment profit
(loss) before tax |  |            | 483,000    |            |  |            | 47,000     |       |  |       | 1,775,000 |  |  |   | (2,495,000 | ) |  |   | (190,000   | )
|Total assets as of
March 6, 2002 |  | $          | 10,741,000 |            |  | $          | 10,672,000 |       |  | $     | 3,049,000 |  |  | $ | 3,947,000  |   |  | $ | 28,409,000 |  

|                                 |  |            |            |            |  |            |            |       |  |       |           |  |  |   |            |   |  |   |            |  
|-------------------------------- |  | ---------- | ---------- | ---------- |  | ---------- | ---------- | ----- |  | ----- | --------- |  |  | - | ---------- | - |  | - | ---------- | -
|                                 |  | Retail     |            | Wholesale  |  | Franchise  |            |       |  |       |           |  |  |  
|                                 |  | Operations |            | Operations |  | Operations |            | Other |  | Total
|                                 |  |            |            |            |  |            |            |       |  |      
|Twelve Weeks Ended
March 7, 2001 |  |            |            |            |  |            |            |       |  |       |           |  |  |   |            |   |  |   |            |  
|Total Revenue                    |  | $          | 11,205,000 |            |  | $          | 3,037,000  |       |  | $     | 1,596,000 |  |  | $ |           |   |  | $ | 15,838,000 |  
|Interest expense                 |  |            | 17,000     |            |  |            |           |       |  |       | 17,000    |  |  |   | 283,000    |   |  |   | 317,000    |  
|Depreciation and
amortization    |  |            | 624,000    |            |  |            | 202,000    |       |  |       |          |  |  |   | 255,000    |   |  |   | 1,081,000  |  
|Segment profit
(loss) before tax |  |            | 879,000    |            |  |            | 247,000    |       |  |       | 1,311,000 |  |  |   | (3,053,000 | ) |  |   | (616,000   | )
|Total assets as of
March 7, 2001 |  | $          | 16,581,000 |            |  | $          | 12,561,000 |       |  | $     | 3,492,000 |  |  | $ | 1,996,000  |   |  | $ | 34,630,000 |  

|                                     |  |            |            |            |  |            |            |       |  |       |           |  |  |   |            |   |  |   |            | 
|------------------------------------ |  | ---------- | ---------- | ---------- |  | ---------- | ---------- | ----- |  | ----- | --------- |  |  | - | ---------- | - |  | - | ---------- | 
|                                     |  | Retail     |            | Wholesale  |  | Franchise  |            |       |  |       |           |  |  |  
|                                     |  | Operations |            | Operations |  | Operations |            | Other |  | Total
|                                     |  |            |            |            |  |            |            |       |  |      
|Thirty-Six Weeks
Ended March 6, 2002 |  |            |            |            |  |            |            |       |  |       |           |  |  |   |            |   |  |   |            | 
|Total Revenue                        |  | $          | 26,971,000 |            |  | $          | 11,521,000 |       |  | $     | 4,700,000 |  |  | $ |           |   |  | $ | 43,192,000 | 
|Interest expense                     |  |            | 46,000     |            |  |            |           |       |  |       | 49,000    |  |  |   | 338,000    |   |  |   | 433,000    | 
|Depreciation and
amortization        |  |            | 1,055,000  |            |  |            | 444,000    |       |  |       |          |  |  |   | 234,000    |   |  |   | 1,733,000  | 
|Segment profit
(loss) before tax     |  |            | 1,214,000  |            |  |            | 1,853,000  |       |  |       | 4,786,000 |  |  |   | (7,238,000 | ) |  |   | 615,000    | 

9



---



##### Table of Contents



|                                     |  |            |            |            |  |            |            |       |  |       |           |  |  |   |             |   |  |   |            |  
|------------------------------------ |  | ---------- | ---------- | ---------- |  | ---------- | ---------- | ----- |  | ----- | --------- |  |  | - | ----------- | - |  | - | ---------- | -
|                                     |  | Retail     |            | Wholesale  |  | Franchise  |            |       |  |       |           |  |  |  
|                                     |  | Operations |            | Operations |  | Operations |            | Other |  | Total
|                                     |  |            |            |            |  |            |            |       |  |      
|Thirty-Six Weeks
Ended March 7, 2001 |  |            |            |            |  |            |            |       |  |       |           |  |  |   |             |   |  |   |            |  
|Total Revenue                        |  | $          | 33,444,000 |            |  | $          | 13,840,000 |       |  | $     | 4,826,000 |  |  | $ |            |   |  | $ | 52,110,000 |  
|Interest expense                     |  |            | 51,000     |            |  |            |           |       |  |       | 62,000    |  |  |   | 919,000     |   |  |   | 1,032,000  |  
|Depreciation and
amortization        |  |            | 1,844,000  |            |  |            | 574,000    |       |  |       |          |  |  |   | 768,000     |   |  |   | 3,186,000  |  
|Segment profit
(loss) before tax     |  |            | 2,348,000  |            |  |            | 2,530,000  |       |  |       | 3,985,000 |  |  |   | (10,407,000 | ) |  |   | (1,544,000 | )

9. INTANGIBLE ASSETS

Effective June 28, 2001, the Company adopted Statements of Financial
Accounting Standards (SFAS) Nos. 141 and 142, Business Combinations and
Goodwill and Other Intangible Assets, respectively, which require that the
Company prospectively cease amortization of goodwill and instead conduct
periodic tests of goodwill for impairment. The Company has completed a
transitional test for goodwill impairment, and has determined that no goodwill
impairment was indicated as of June 28, 2001. The following table shows, on a
pro-forma basis, what earnings and earnings per share would have been if the
new accounting standards had been applied for the periods indicated:

|                                |  |                    |          |                     |  |   |            |  
|------------------------------- |  | ------------------ | -------- | ------------------- |  | - | ---------- | -
|                                |  | Twelve Weeks Ended |          | Thirty-Six Weeks   
|                                |  | March 7, 2001      |          | Ended March 7, 2001
|                                |  |                    |          |                    
|Reported net income (loss)      |  | $                  | (632,000 | )                   |  | $ | (1,581,000 | )
|Add back: goodwill amortization |  |                    | 185,000  |                     |  |   | 555,000    |  
|                                |  |                    |          |                     |  |   |            |  
|Adjusted net income (loss)      |  | $                  | (447,000 | )                   |  | $ | (1,026,000 | )
|                                |  |                    |          |                     |  |   |            |  
|Per share information:          |  |                    |          |                     |  |   |            |  
|Basic and Diluted:              |  |                    |          |                     |  |   |            |  
|Reported net income (loss)      |  | $                  | (0.20    | )                   |  | $ | (0.50      | )
|Goodwill amortization           |  |                    | 0.06     |                     |  |   | 0.18       |  
|                                |  |                    |          |                     |  |   |            |  
|Adjusted net income (loss)      |  | $                  | (0.14    | )                   |  | $ | (0.32      | )
|                                |  |                    |          |                     |  |   |            |  

SFAS Nos. 141 and 142 also require that we disclose the following
information related to our intangible assets still subject to amortization and
our goodwill. The following table details the balances of our amortizable
intangible assets as of March 6, 2002:

|                    |  |                 |        |              |  |                 |        |  |  |   |        | 
|------------------- |  | --------------- | ------ | ------------ |  | --------------- | ------ |  |  | - | ------ | 
|                    |  | Gross           |        | Accumulated  |  | Net            
|                    |  | Carrying Amount |        | Amortization |  | Carrying Amount
|                    |  |                 |        |             
|Leasehold interests |  | $               | 3,000  |              |  | $               | 2,000  |  |  | $ | 1,000  | 
|Leasehold rights    |  | $               | 23,000 |              |  | $               | 20,000 |  |  | $ | 3,000  | 
|Trademarks          |  | $               | 32,000 |              |  | $               | 5,000  |  |  | $ | 27,000 | 

10



---



##### Table of Contents



The weighted average amortization period for the intangible assets is
approximately 25 years. The following table shows the estimated amortization
expense for these assets for each of the five succeeding fiscal years:

|             |  |   |       | 
|------------ |  | - | ----- | 
|Fiscal year: |  |   |       | 
|             |  |   |       | 
|2002         |  | $ | 3,000 | 
|2003         |  | $ | 3,000 | 
|2004         |  | $ | 1,000 | 
|2005         |  | $ | 1,000 | 
|2006         |  | $ | 1,000 | 

Changes in the carrying amount of goodwill for the thirty-six weeks ended
March 6, 2002 are summarized as follows:

|                            |  |   |            |  
|--------------------------- |  | - | ---------- | -
|Balance as of June 27, 2001 |  | $ | 12,250,000 |  
|Goodwill acquired           |  |   |           |  
|Goodwill dispositions, net  |  |   | (86,000    | )
|Impairment losses           |  |   |           |  
|                            |  |   |            |  
|Balance as of March 6, 2002 |  | $ | 12,164,000 |  
|                            |  |   |            |  

11



---



##### Table of Contents






Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations.

A Warning About Forward Looking Statements.

We make forward-looking statements in this quarterly report that are
subject to risks and uncertainties. These forward-looking statements include
information about possible or assumed future results of Diedrich Coffees
financial condition, operations, plans, objectives and performance. When we
use the words believe, expect, anticipate, estimate or similar
expressions, we are making forward-looking statements. Many possible events or
factors could affect our future financial results and performance. This could
cause our results or performance to differ materially from those expressed in
our forward-looking statements.

You should consider these risks when you review this document, along with
the following possible events or factors:



| |  |  | the financial and operating performance of our retail operations       
| | - |  | -----------------------------------------------------------------------
|
| |  |  | our ability to maintain profitability over time                        
|
| |  |  | our ability to perform within the terms of our amended credit agreement
|
| |  |  | the successful execution of our growth strategies                      
|
| |  |  | the impact of competition                                              
|
| |  |  | the availability of working capital                                    

Foreseeable risks and uncertainties are described elsewhere in this report
and in detail under the caption Risk Factors and Trends Affecting Diedrich
Coffee and Its Business in our Annual Report on Form 10-K for the fiscal year
ended June 27, 2001 and in other reports that we file with the Securities and
Exchange Commission.

General.

Diedrich Coffee, Inc. is a specialty coffee roaster, wholesaler and
retailer. We sell brewed, espresso-based and various blended beverages
primarily made from our own fresh roasted premium coffee beans, as well as
light food items, whole bean coffee and accessories, through our
company-operated and franchised retail locations. We also sell whole bean and
ground coffees on a wholesale basis in the Office Coffee Service market and to
other wholesale customers, including restaurant chains and other retailers,
through a network of distributors. Our brands include Diedrich Coffee, Gloria
Jeans Coffees and Coffee People. We operate a limited number of kiosks under
the Coffee Plantation brand name. As of March 6, 2002, Diedrich Coffee owned
and operated 72 retail locations and franchised 297 other retail locations
under these brands, for a total of 369 retail coffee outlets. Our retail units
are located in 37 states and 11 foreign countries. We have 394 wholesale
accounts with Office Coffee Service distributors, chain and independent
restaurants and others. We operate a large coffee roasting facility in central
California that supplies freshly roasted coffee to our retail locations and
wholesale accounts.

Retail Outlets

Our retail outlet distribution channel can be divided into two
sub-channels, each with its own business model distinguished by differences in
revenue, cost structure, overhead and capital requirements. These two retail
sub-channels are company-operated retail outlets and franchised retail outlets.
We view retail outlets as a single distribution channel, despite the
differences noted above, primarily because our retail customers do not make any
distinction between company and franchise operated locations. The critical
success factors  quality of product, service and atmosphere  are, therefore,
the same for each type of retail location. The economic model and cost
structures are also the same for each type of location at the retail unit
level, notwithstanding their different direct financial impacts on us as both
an operator and franchiser of retail outlets. Furthermore, the potential
contribution of any given outlet, as measured by the amount of roasted coffee
produced through our roasting plant, is the same.

Our largest brand is Gloria Jeans, and over 93% of our Gloria Jeans
retail units are franchised. Our Diedrich Coffee brand has a higher
concentration of company-operated units, with 69% of retail locations operated

12



---



##### Table of Contents



by us. Retail coffee outlets operated under the Coffee People and Coffee
Plantation brands are 100% company-operated at this time. A table summarizing
the relative sizes of each of our brands, on a unit count basis, and changes in
unit count for the thirty-six weeks ended March 6, 2002, is set forth below:

|                      |                           |  |          |     |          |  |        |   |        |  |           |    |       |  |             |     |             |  |               |    |   |  |     |     | 
|--------------------- | ------------------------- |  | -------- | --- | -------- |  | ------ | - | ------ |  | --------- | -- | ----- |  | ----------- | --- | ----------- |  | ------------- | -- | - |  | --- | --- | 
|                      |                           |  |          |     |          |  |        |   |        |  |           |    |       |  |             |     |             |  | Net transfers |    |   |  |    
|                      |                           |  | Units at |     |          |  |        |   |        |  |           |    |       |  |             |     | between the |  | Units at     
|                      |                           |  | June 27, |     |          |  |        |   |        |  |           |    | Sold/ |  | Company and |     | March 6,   
|                      |                           |  | 2001     |     | Acquired |  | Opened |   | Closed |  | Franchise |    | 2002 
|                      |                           |  |          |     |          |  |        |   |        |  |           |    |      
|Gloria Jeans Brand   |                           |  |          |     |          |  |        |   |        |  |           |    |       |  |             |     |             |  |               |    |   |  |     |    
|                      | Company-operated          |  |          | 19  |          |  |        |  |        |  |           |   |       |  |             | (2  | )           |  |               | 3  |   |  |     | 20  | 
|                      | Franchise  Domestic      |  |          | 177 |          |  |        |  |        |  |           | 2  |       |  |             | (16 | )           |  |               | (3 | ) |  |     | 160 | 
|                      | Franchise 
International |  |          | 95  |          |  |        |  |        |  |           | 35 |       |  |             | (4  | )           |  |               |   |   |  |     | 126 | 
|                      |                           |  |          |     |          |  |        |   |        |  |           |    |       |  |             |     |             |  |               |    |   |  |     |    
|                      | Subtotal Gloria Jeans    |  |          | 291 |          |  |        |  |        |  |           | 37 |       |  |             | (22 | )           |  |               |   |   |  |     | 306 | 
|                      |                           |  |          |     |          |  |        |   |        |  |           |    |       |  |             |     |             |  |               |    |   |  |     |    
|Diedrich Coffee Brand |                           |  |          |     |          |  |        |   |        |  |           |    |       |  |             |     |             |  |               |    |   |  |     |    
|                      | Company-operated          |  |          | 26  |          |  |        |  |        |  |           |   |       |  |             | (1  | )           |  |               |   |   |  |     | 25  | 
|                      | Franchise  Domestic      |  |          | 14  |          |  |        |  |        |  |           | 1  |       |  |             | (4  | )           |  |               |   |   |  |     | 11  | 
|                      |                           |  |          |     |          |  |        |   |        |  |           |    |       |  |             |     |             |  |               |    |   |  |     |    
|                      | Subtotal Diedrich         |  |          | 40  |          |  |        |  |        |  |           | 1  |       |  |             | (5  | )           |  |               |   |   |  |     | 36  | 
|                      |                           |  |          |     |          |  |        |   |        |  |           |    |       |  |             |     |             |  |               |    |   |  |     |    
|Other Brands          |                           |  |          |     |          |  |        |   |        |  |           |    |       |  |             |     |             |  |               |    |   |  |     |    
|                      | Company-operated          |  |          | 42  |          |  |        |  |        |  |           | 1  |       |  |             | (16 | )           |  |               |   |   |  |     | 27  | 
|                      |                           |  |          |     |          |  |        |   |        |  |           |    |       |  |             |     |             |  |               |    |   |  |     |    
|Total                 |                           |  | 373      |     |          |  |       |   |        |  | 39        |    |       |  | (43         | )   |             |  |              |    |   |  | 369 |    
|                      |                           |  |          |     |          |  |        |   |        |  |           |    |       |  |             |     |             |  |               |    |   |  |     |    

Wholesale Distribution

We currently have 394 wholesale accounts not affiliated with our retail
locations, which purchase coffee from us under both the Diedrich Coffee and
Gloria Jeans brands. Our current wholesale accounts are in the Office Coffee
Service market, chain restaurants, independent restaurants, other hospitality
industry enterprises and specialty retailers. Additionally, our franchise
agreements require both Diedrich Coffee and Gloria Jeans franchisees to
purchase substantially all of their coffee from us.

Seasonality And Quarterly Results

Historically, we have experienced variations in sales from
quarter-to-quarter due to the peak November-December holiday season, as well as
from a variety of other factors, including, but not limited to, general
economic trends, the cost of green coffee, competition, marketing programs,
weather and special or unusual events.

Results of Operations.

Twelve Weeks Ended March 6, 2002 Compared with the Twelve Weeks Ended March 7, 2001

Total Revenue.Total revenue for the twelve weeks ended March 6, 2002
decreased by $2,778,000, or 17.5%, to $13,060,000 from $15,838,000 for the
twelve weeks ended March 7, 2001. This decrease consisted of decreases in
retail sales and wholesale sales, partially offset by an increase in franchise
revenue. Each component is discussed below.

Retail sales for the twelve weeks ended March 6, 2002 decreased by
$2,595,000, or 23.2%, to $8,610,000 from $11,205,000 for the prior year period.
This decrease represented the combined impact of two factors. First, the
number of company store operating weeks decreased in the current year period
versus the earlier period. This resulted primarily from the closure of sixteen
poorly performing company-operated locations since the prior year period (six
Diedrich Coffee carts, one Diedrich Coffee company store, two Coffee People
stores, two Coffee Plantation stores, four Gloria Jeans mall stores and one
Gloria Jeans kiosk), combined with the sale of three company-operated Diedrich
coffeehouses to a franchisee and the sale of twelve company-operated Coffee
Plantation coffeehouses. The net impact of the reduction in retail sales from
the unit closures and sales noted above, slightly offset by increases in the
number of operating weeks from certain other company-operated stores, was a
$2,417,000 decrease in retail sales versus the prior year. The balance of the
$2,595,000 decrease resulted from a 1.9% decrease

13



---



##### Table of Contents



in comparable store sales for company-operated units during the twelve
weeks ended March 6, 2002 as compared to the prior year period.

Wholesale revenue decreased $288,000, or 9.5%, to $2,749,000 for the
twelve weeks ended March 6, 2002 from $3,037,000 for the prior year period.
This decrease was primarily the result of two factors: a reduction in Keurig
K-cup sales due to a manufacturing malfunction and a reduction in the sale of
most non-coffee products to our Gloria Jeans franchisees.

Keurig K-cup sales. Keurig K-cup and other Office Coffee Service
sales decreased by $343,000 to $761,000 for the twelve weeks ended March 6,
2002, a 31.1% decrease over the prior year period. Shortly after the end of
the third fiscal quarter we became aware of a potential product failure
regarding certain production runs of Keurig K-Cups produced and shipped during
the third quarter. We immediately notified our wholesale distribution
customers of the potential problem and offered to replace any inventory which
could be affected. The total impact of the product exchange on third quarter
sales was $582,000. Revenue associated with the replacement product will be
recognized upon shipment. We expect to ship the majority of the replacement
product in the fourth fiscal quarter of the current fiscal year. If this
product defect had not occurred, total Keurig K-cup sales for the third
quarter would have increased by $239,000, or 21.6% versus the year ago period,
rather than decreasing by 31.1%. Likewise, total wholesale revenue would have
increased by $294,000, or 9.7% versus the year ago period, rather than
decreasing by 9.5%.

Sale of non-coffee products to Gloria Jeans franchisees. Sales of
non-coffee products decreased by $140,000 for the twelve weeks ended March 6,
2002, a 90.4% decrease versus the prior year period. These products include
paper cups, napkins, sweetener packets, coffee stirrers and coffee related
merchandise, such as ceramic mugs and novelties sold in our Gloria Jeans
mall-based coffee stores. We began eliminating most of these lower margin or
lower turnover products during fiscal 2001 in order to increase our focus on
our core coffee operations. Franchisees now purchase these items directly from
outside distributors.

Franchise revenue increased slightly by $105,000 to $1,701,000 for the
twelve weeks ended March 6, 2002, a 6.6% increase from the prior year period.
This increase represented the combined impact of three factors. Franchise
revenue consists of initial franchise fees, franchise renewal fees, area
development fees, royalties received on sales at franchised locations and other
franchise income including coordination fees received from product suppliers.
Initial franchise fees and franchise renewal fees increased by $56,000 for the
twelve weeks ended March 6, 2002 versus the prior year as a result of the
opening of several new international franchises. Supplier coordination fees
increased by $19,000 for the twelve weeks ended March 6, 2002 over the prior
year period due primarily to the timing of such payments. Franchise royalties
increased by $30,000 for the twelve weeks ended March 6, 2002 versus the prior
year period which was the net impact of an increase in international franchises
and a decrease in domestic franchises.

Cost of Sales and Related Occupancy Costs.Cost of sales and related
occupancy costs for the twelve weeks ended March 6, 2002 decreased 18.2% to
$6,324,000 from $7,729,000 for the prior year period. On a margin basis, cost
of sales and related occupancy costs decreased to 48.4% of total revenue for
the twelve weeks ended March 6, 2002 from 48.8% of total revenue for the twelve
weeks ended March 7, 2001. This represents a 0.4 favorable margin basis point
change versus the prior year period. This 0.4 favorable margin basis point
change was the net impact of a 2.0 unfavorable cost of sales margin basis point
change, and a 2.4 favorable occupancy costs margin basis point change. The
unfavorable cost of sales component is primarily due to the K-cup return
discussed above because $297,000 of additional cost of sales was recognized to
write off the defective inventory. The favorable occupancy cost component of
the change is primarily due to improvement resulting from the sale and closure
of certain under-performing units with high occupancy costs as a percentage of
sales, as discussed in the explanation of the change in retail sales above.

Operating Expenses.Operating expenses for the twelve weeks ended March
6, 2002 decreased 11.1% to $3,950,000 from $4,444,000 for the prior year
period. This was primarily due to a decrease in the number of company store
operating weeks caused by the closure of sixteen locations and the sale of
fifteen other locations since the prior year period as noted above. On a margin
basis, operating expenses increased to 30.2% of total

14



---



##### Table of Contents



revenue during the twelve-week period from 28.1% for the year ago quarter.
This 2.1 unfavorable margin basis point change for the twelve weeks ended March
6, 2002 as compared with the prior year period resulted from several factors.
As previously disclosed in the year ago quarter, we recorded a significant
reduction in our group benefit insurance accruals based on our claims
experience at that time. Accordingly, a $408,000 credit was recorded to
operating expenses during the prior year quarter. In addition, hourly labor
costs for company retail units increased as a percentage of sales because of a
$0.75 per hour increase in the federal minimum wage since the year ago quarter.
Finally, comparable company store sales decreased by 1.9% versus the prior
year period. Many operating expenses in a retail unit are semi-fixed and
therefore represent a higher percentage of revenue when retail sales decline.
Largely offsetting these unfavorable factors were the beneficial impact of the
improvement in average operating margins from the closure of sixteen poorly
performing locations and the sale of fifteen other locations as discussed
above, as well as a reduction in wholesale and franchise bad debt expense. Bad
debt expense declined significantly as a result of a number of new collection
policy initiatives implemented since the prior year period.

Depreciation and Amortization.Depreciation and amortization decreased by
$559,000 to $522,000 for the twelve weeks ended March 6, 2002 from $1,081,000
for the prior year period. $185,000 of this decrease is due to our adoption of
SFAS 142 as of the beginning of the current fiscal year. As required under
Statement No. 142, we have completed a transitional goodwill impairment test,
determined that there is no indication of goodwill impairment as of the date of
adoption and discontinued periodic amortization of goodwill. In addition,
depreciation decreased due to the closure of sixteen locations and the sale of
fifteen locations discussed above.

General and Administrative Expenses.General and administrative expenses
increased by $54,000, or 2.8%, to $1,995,000 for the twelve weeks ended March
6, 2002 from $1,941,000 for the prior year period. On a margin basis, general
and administrative expenses increased to 15.3% of total revenue for the twelve
weeks ended March 6, 2002 from 12.3% of total revenue for the twelve weeks
ended March 7, 2001. The 3.0 unfavorable margin basis point change for the
twelve weeks ended March 6, 2002 as compared with the prior year resulted from
several factors. As previously disclosed in the prior year, we recorded a
significant reduction in our group benefit insurance accruals based on our
claims experience at that time. This increase was largely offset by a
restructuring plan specifically intended to reduce overhead. This restructuring
plan eliminated ten support center positions in January 2002.

Interest Expense.Interest expense decreased by $189,000 to $128,000 for
the twelve weeks ended March 6, 2002 from $317,000 for the twelve weeks ended
March 7, 2001. This decrease is primarily due to the reduction in our bank note
payable from $9,742,000 at March 7, 2001 to $3,894,000 at March 6, 2002, and
to a lesser degree to a reduction in our interest rate.

Thirty-Six Weeks Ended March 6, 2002 Compared with the Thirty-Six Weeks Ended March 7, 2001

Total Revenue.Total revenue for the thirty-six weeks ended March 6, 2002
decreased by $8,918,000, or 17.1%, to $43,192,000 from $52,110,000 for the
thirty-six weeks ended March 7, 2001. This decrease consisted of decreases in
retail sales, wholesale sales and franchise revenue. Each component is
discussed below.

Retail sales for the thirty-six weeks ended March 6, 2002 decreased by
$6,473,000, or 19.4%, to $26,971,000 from $33,444,000 for the prior year
period. This decrease represented the combined impact of two factors. First,
the number of company store operating weeks decreased in the current year
versus the earlier period. This decrease resulted primarily from the closure
of sixteen poorly performing company locations since the prior year period,
combined with the sale of three company-operated Diedrich coffeehouses to a
franchisee, and the sale of twelve company-operated Coffee Plantation
coffeehouses. The net impact of the reduction in retail sales from the
closures and sales of units noted above, slightly offset by increases in the
number of operating weeks from certain other company stores, was a $5,593,000
decrease in retail sales versus the prior year. The balance of the decrease
resulted from a 4.7% decrease in comparable store sales for company-operated
units during the thirty-six weeks ended March 6, 2002 as compared to the prior
year period.

15



---



##### Table of Contents



Wholesale revenue for the thirty-six weeks ended March 6, 2002 decreased
by $2,319,000, or 16.8%, to $11,521,000 from $13,840,000 for the prior year
period. This decrease was the net impact of the five factors listed below, in
declining order of magnitude:



| |  |  | the decision to stop distributing most non-coffee products to our Gloria Jeans franchisees
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | a decrease in roasted coffee sales to our franchisees                                      
|
| |  |  | a decrease in roasted coffee sales to restaurants and specialty retailers                  
|
| |  |  | an increase in our Keurig K-cup sales                                                    
|
| |  |  | an increase in holiday gift basket sales to franchisees                                    

Sale of non-coffee products to Gloria Jeans franchisees. Sales of
non-coffee products decreased by $1,439,000 for the thirty-six weeks ended
March 6, 2002, an 88.8% decrease versus the prior year period. This decrease
was due to our decision to eliminate the sale of these lower margin or lower
turnover products since the prior year period as mentioned above.

Roasted coffee sales to franchisees. Sales of roasted coffee to our
franchisees decreased $921,000 for the thirty-six week period ended March 6,
2002 primarily because there were fewer domestic franchise store operating
weeks in the current year period. This resulted from the net closure of 19
domestic franchise operated Gloria Jeans stores since the year ago period. The
reduction in coffee sales due to fewer units was compounded by lower sales
volumes at open stores. Gloria Jeans system comparable store sales decreased
4.6% versus the prior year period further reducing roasted coffee usage.

Coffee sales to restaurants and specialty retailers. Wholesale coffee
sales to restaurants and specialty retailers decreased $840,000 for the
thirty-six week period ended March 6, 2002 versus the same time period a year
ago primarily due to the loss of two chain restaurant accounts since the year
ago period.

Keurig K-cup and other Office Coffee Service sales. Keurig K-cup and
other Office Coffee Service sales increased by $600,000 to $3,749,000 for the
thirty-six weeks ended March 6, 2002, a 19.1% increase over the prior year
period. This is a continuation of a trend over the past 18 months as we
continue to experience solid growth in this line of business. As noted in the
discussion of quarterly results, shortly after the end of the third fiscal
quarter, we became aware of a product defect regarding certain production runs
of Keurig K-Cups produced and shipped during the third quarter. The impact of
the product defect on third quarter sales was $582,000. If this product defect
had not occurred, total Keurig sales for the third quarter would have increased
$1,182,000, or 37.5% versus the year ago period, rather than the 19.1%
increase for the year to date period noted above.

Holiday gift basket sales. Holiday gift basket sales increased $281,000,
or 46.0%, for the thirty-six weeks ended March 6, 2002 versus the prior year
period due to a change in the gift basket program. During the prior year, we
sold only the roasted coffee component of the holiday gift baskets to a
distributor, who purchased the remaining components of the gift baskets and
sold the finished product to our franchisees. During the current year, we
purchased all non-coffee components and sold the finished gift baskets directly
to our franchisees.

Franchise revenue decreased $126,000 to $4,700,000 for the thirty-six
weeks ended March 6, 2002, a 2.6% decrease from the prior year period, which
was the net impact of several factors. Initial franchise fees and franchise
renewal fees decreased $133,000 for the thirty-six weeks ended March 6, 2002
versus the prior year, as a result of fewer franchise agreements signed.
Franchise royalties increased by $13,000 for the thirty-six weeks ended March
6, 2002 versus the prior year period. This was the net impact of a reduction
in domestic franchise royalties and an increase in international royalties.
Domestic royalties decreased because of the closure of 19 domestic franchise
stores and a decline in comparable store sales. International royalties
increased because of an increase in the number of units.

16



---



##### Table of Contents



Cost of Sales and Related Occupancy Costs.Cost of sales and related
occupancy costs for the thirty-six weeks ended March 6, 2002 decreased 17.4% to
$21,432,000 from $25,956,000 for the prior year period. On a margin basis, cost
of sales and related occupancy costs decreased to 49.6% of total revenue for
the thirty-six weeks ended March 6, 2002 from 49.8% of total revenue for the
thirty-six weeks ended March 7, 2001. This represents a 0.2 favorable margin
basis point change for the thirty-six weeks ended March 6, 2002 as compared
with the prior year period. This is the net impact of an approximately 0.3
margin basis point increase in cost of sales and a 0.5 margin point decrease in
occupancy costs. The cost of sales increase resulted from the unfavorable
impact of the K-cup product exchange charge discussed in the quarterly results
above, partially offset by the favorable impact of the discontinuation of lower
margin non-coffee product sales. The occupancy cost improvement component of
the margin basis point change primarily resulted from the sale and closure of
certain under-performing units with high occupancy costs as a percentage of
sales, as discussed in the explanation of the change in retail sales above,
partially offset by scheduled rent increases based on the Consumer Price Index
in certain of our company-operated coffeehouses versus the prior year.

Operating Expenses.Operating expenses for the thirty-six weeks ended
March 6, 2002 decreased 14.3% to $12,338,000 from $14,394,000 for the prior
year period, primarily due to the decrease in the number of company store
operating weeks which resulted from the closure of sixteen locations and the
sale of fifteen locations as discussed above. On a margin basis, operating
expenses increased to 28.6% of total revenue during the thirty-six week period
from 27.6% for the year ago period. The unfavorable 1.0 margin basis point
change for the thirty-six weeks ended March 6, 2002 as compared with the prior
year resulted from the several factors previously discussed above for the
twelve weeks ended March 6, 2002.

Depreciation and Amortization.Depreciation and amortization decreased by
$1,453,000 to $1,733,000 for the thirty-six weeks ended March 6, 2002 from
$3,186,000 for the prior year period. $555,000 of this decrease is due to our
adoption of SFAS No. 142 as of the beginning of the current fiscal year.
Depreciation and amortization also decreased due to the closure of sixteen
locations and the sale of fifteen locations discussed above.

General and Administrative Expenses.General and administrative expenses
decreased by $1,719,000, or 21.1%, to $6,411,000 for the thirty-six weeks ended
March 6, 2002 from $8,130,000 for the prior year period. On a margin basis,
general and administrative expenses represent 14.8% of total revenue for the
thirty-six weeks ended March 6, 2002, down from 15.6% of total revenue for the
thirty-six weeks ended March 7, 2001. The 0.8 margin basis point improvement
for the thirty-six weeks ended March 6, 2002 is primarily due to the overhead
reductions previously noted in the discussion of quarterly results.

Interest Expense.Interest expense decreased by $599,000 to $433,000 for
the thirty-six weeks ended March 6, 2002 from $1,032,000 for the thirty-six
weeks ended March 7, 2001 for the same reasons as discussed above for the
twelve weeks ended March 6, 2002.

Liquidity and Capital Resources.

We had a working capital deficit of $2,728,000 as of March 6, 2002
compared to working capital deficit of $819,000 as of June 27, 2001. Cash
provided by operating activities for the thirty-six weeks ended March 6, 2002
totaled $375,000 as compared to $670,000 used in operating activities for the
thirty-six weeks ended March 7, 2001. This decrease in cash used is the net
result of many factors more fully detailed in the unaudited consolidated
statements of cash flows in the accompanying financial statements, including
improved accounts receivable collections.

Net cash provided by investing activities for the thirty-six weeks ended
March 6, 2002 totaled $1,074,000, as compared to the $252,000 in net cash used
in investing activities for the thirty-six weeks ended March 7, 2001. During
the thirty-six weeks ended March 6, 2002, we received $1,645,000 in proceeds
from the sale of assets, including $1,203,000 for the sale of twelve
company-operated locations in Arizona and $307,000 for the sale of land and a
building in Oregon. We also received $145,000 in principal payments on notes
receivable that were issued by the buyer of the twelve locations in Arizona.
These proceeds and notes receivable payments were partially offset by

17



---



##### Table of Contents



$716,000 in property and equipment expenditures. For the thirty-six weeks
ended March 7, 2001, the net cash used in investing activities was used for
property and equipment expenditures.

Net cash used in financing activities for the thirty-six weeks ended March
6, 2002 totaled $1,987,000 as compared to the $1,128,000 net cash used in
financing activities for the thirty-six weeks ended March 7, 2001. For both
periods the net cash used in financing activities consisted of repayment of
long-term debt and capital leases. During the thirty-six weeks ended March 6,
2002, net cash used in financing activities also included $134,000 in payments
related to transaction costs associated with our issuance of common stock
during our fiscal year ended June 27, 2001.

On July 7, 1999, we entered into a Credit Agreement with BankBoston, N.A.
(subsequently merged into Fleet National Bank) which is secured by a pledge of
all of our assets and our subsidiaries stock. It initially provided for a $12
million term loan and a $3 million revolving credit facility. We have not
drawn down any borrowings under the revolving credit facility since it was
established, although the credit facility currently backs $177,500 of
outstanding Letters of Credit. Amounts outstanding under the Credit Agreement
bear interest, at our option, at Fleets base rate plus 1.25% or an adjusted
Eurodollar rate plus 3.0%. At March 6, 2002, the applicable interest rate was
5.55%, which was based on the Eurodollar rate at the time. The rate can be
fixed over periods ranging from one to six months, at the Companys discretion.

On September 26, 2000, we entered into the First Amendment to Credit
Agreement with Fleet to amend certain terms of the original Credit Agreement.
Under the terms of the First Amendment to Credit Agreement, we began making
principal payments of $25,000 per month on February 1, 2001, which payment
amount increased to $100,000 per month on July 1, 2001. Minimum monthly
payments of $100,000 are required until all amounts owed under the Credit
Agreement are repaid. The First Amendment to Credit Agreement accelerates the
maturity date of all remaining amounts owed under the Credit Agreement to
September 1, 2002. In addition, we and the bank identified certain assets that
could be sold without interfering with our core business, including two pieces
of company owned real property under existing company retail locations and a
parcel of company owned real property that is presently undeveloped. We and
the bank also identified certain company-operated coffeehouses outside of our
core southern California market that could be refranchised. Under the terms of
the First Amendment to Credit Agreement, the bank receives 50% of the net
proceeds from any of our asset or equity sales. In January 2001, two of the
aforementioned pieces of real property were sold in a sale-leaseback
transaction for $415,000. $208,000 of the proceeds from the transaction was
remitted to Fleet. In May 2001, three company-operated coffeehouses in Texas
were sold for an aggregate of $1,025,000. $448,500 of the proceeds from the
sale was remitted to Fleet. Also in May 2001, we sold 2,000,000 shares
(post-split) of our common stock in a private sale. $3,600,000 of the proceeds
from the sale was remitted to Fleet. In October 2001, twelve company-operated
coffeehouses in Arizona were sold for an aggregate of $1,382,000 in cash and
$515,000 in notes receivable. One-half of the cash payment, $596,000, was
remitted to Fleet. In December 2001, a parcel of real property and a building
were sold for $325,000. $140,000 of the proceeds from this sale was remitted to
Fleet. The proceeds from all five sales discussed above were applied solely to
our principal note payable balance.

The First Amendment to Credit Agreement also introduced an additional
event of default under the Credit Agreement. The First Amendment specifies
that a materially adverse change in our financial condition or any of our
subsidiaries, as determined by the bank in its sole and exclusive discretion,
is an event of default. Under any event of default, the bank may declare all
amounts owed immediately due and payable. Additional changes under the terms
of the First Amendment to Credit Agreement include a reduction in the maximum
amount available under the revolving credit facility, a portion of which we had
previously been unable to access because of the covenant defaults, from
$3,000,000 to $1,293,000, and a restriction that the credit facility be used
only to back up existing and future standby Letters of Credit. The First
Amendment to Credit Agreement preserves our ability to obtain third party
financing for capital projects and maintenance capital, and increases our
flexibility to obtain subordinated debt as a source of additional working
capital. Under the First Amendment to Credit Agreement, the bank waived the
previous financial covenant defaults and agreed to new financial covenant
ratios going forward based upon updated financial information and projections
prepared by us. In addition to resetting the ratios in the financial
covenants, we agreed to a new covenant under the First Amendment to Credit
Agreement that required us to achieve certain predetermined minimum levels of
cumulative principal repayments in addition to amounts already paid to date in

18



---



##### Table of Contents



fiscal 2001 or reflected in the new go forward minimum monthly principal
payment obligations discussed above: $283,333 by March 2001; $708,333 by June
30, 2001; and $1,619,900 by September 30, 2001. All such incremental principal
repayment obligations have been met as of March 6, 2002 and were generated
primarily from the net proceeds paid to the bank from the above mentioned asset
sales and stock issuance.

We have commenced discussions with our current lender and other potential
lenders regarding the refinancing of our existing obligations to Fleet National
Bank, all of which are due on the September 1, 2002 maturity date. While there
can be no assurance of a successful outcome, based upon the nature of the
discussions to date we believe that we will be able to obtain new financing
arrangements on acceptable terms in order to fully comply with all requirements
of our existing Credit Agreement, as amended.

We believe, therefore, that cash from operations, debt refinancing and/or
asset sales will be sufficient to satisfy our working capital needs at the
anticipated operating levels, including our obligations under our Credit
Agreement, as amended, for the next twelve months.

Critical Accounting Policies.

The financial results that we report are impacted by the application of a
several accounting policies that require us to make subjective and complex
judgments. We are required to estimate the effect of matters that are
inherently uncertain. Changes in our estimates or judgments could materially
impact our results of operations, financial condition and cash flows in future
years. Descriptions of our critical accounting policies are as follows.

Impairment of long lived assets and goodwill. We evaluate the carrying
value of assets for impairment when the operations of one or more of our brands
experience a negative event, including, but not limited to, a
significant down turn in sales, a substantial loss of customers, an
unfavorable change in demographics or unit closures. Upon the occurrence of a negative event, we estimate the future
undiscounted cash flows for the individual units that are affected by the
negative event. If the projected cash flows do not exceed the carrying value
of the assets allocated to each unit, including goodwill, we write-down the
assets to fair value based on: the estimated net proceeds we believe we can
obtain for the unit upon sale, the discounted projected cash flows derived from
the unit or the historical net proceeds obtained from sales of similar units.
The most significant assumptions in our analysis are those used when we
estimate a units future cash flows. We generally use the assumptions in our
strategic plan and modify them as necessary based on unit specific information.
If our assumptions are incorrect, the carrying value of our operating unit
assets may be overstated or understated.

Store closure reserves. We decide whether to close a unit based on its
recent cash flows and its future estimated profitability. We evaluate each
units performance each financial period. When units perform poorly, we
consider the demographics of the location as well as our ability to cause an
unprofitable unit to become profitable. Based on managements judgment, we
estimate the future cash flows of the unit. If we determine that the unit will
not be profitable, and there are no contractual requirements that require us to
continue to operate the unit, we close the unit. We establish a reserve for
the net present value of the units future rents and other fixed costs. The
most significant assumptions we make in determining store closure reserves are
assumptions regarding the estimated costs to maintain vacant properties.
Additionally, the amount of the reserve established for future lease payments
on leased vacant units is dependent on our ability to successfully negotiate
early termination lease agreements with our landlords. If the costs to
maintain properties rise or if it takes longer than anticipated to sell
properties or terminate leases, we may need to record additional reserves.

Franchise operations. Initial franchise fees are recognized when a
franchised coffeehouse begins operations, at which time the Company has
performed its obligations related to such fees. Fees received pursuant to area
development agreements, which grant the right to develop franchised units in
future periods in specific geographic areas, are deferred and recognized on a
pro rata basis as the franchised units subject to the development agreements
begin operations. In light of our revenue recognition policies, we have little
or no control over when we recognize revenue related to these initial franchise
fees and area development fees. We monitor the financial condition of
franchisees and record provisions for estimated losses on receivables when we
believe that our franchisees are unable to make required payments to us.
Additionally, we cease recording royalties from franchisees that are delinquent
in paying us until we have a history of payments being made when due. If sales
or economic

19



---



##### Table of Contents



conditions worsen for our franchisees, their financial performance may
worsen, our collection rates may decline and we may be required to assume their
responsibility for lease payments on franchised restaurants.

New Accounting Pronouncements.

In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, Business Combinations, and Statement No. 142, Goodwill and Other
Intangible Assets. Statement No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement No. 141 also specifies the criteria that intangible assets acquired
in a purchase method business combination must meet to be recognized and
reported apart from goodwill. Statement No. 142 requires that intangible
assets with estimable useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with FAS Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. We adopted the provisions of Statement No. 141
and Statement No. 142 in the first quarter of fiscal 2002.

In connection with the transitional goodwill impairment evaluation,
Statement No. 142 required us to perform an assessment of whether there is an
indication that our unamortized goodwill at June 28, 2001 of $12,250,000 was
impaired as of the date of adoption. To accomplish this, we identified our
reporting units and determined the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill, to those
reporting units as of the date of adoption. We then had up to six months from
the date of adoption to determine the fair value of each reporting unit and
compare it to the reporting units carrying amount. To the extent a reporting
units carrying amount exceeds its fair value, an indication exists that the
reporting units goodwill may be impaired and we must perform the second step
of the transitional impairment test. In the second step, we must compare the
implied fair value of the reporting units goodwill, determined by allocating
the reporting units fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price
allocation in accordance with Statement No. 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in our statement of
operations.

As of the date of adoption, we had unamortized goodwill in the amount of
$12,250,000 all of which is subject to the transition provisions of Statement
Nos. 141 and 142. The impact in fiscal year 2002 of adopting Statement No. 142
will be to eliminate the amortization of goodwill. Such goodwill amortization
totaled $803,000 in the fiscal year 2001.

We performed an assessment for goodwill impairment in accordance with
Statement No. 142 in the second quarter of fiscal 2002. Discounted cash flow
models were used for determining reporting unit valuations. The result of the
test showed that the fair value of our reporting units exceeded the carrying
values and, therefore, there was no indication of goodwill impairment.

The Financial Accounting Standards Board issued Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, in October
2001. Statement No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and is effective for fiscal years
beginning after December 15, 2001. Statement No. 144 will be effective for our
fiscal year 2003. We have not assessed whether the application of this
standard will have a material effect on our financial position, results of
operations or liquidity.

20



---



##### Table of Contents






Item 3. Quantitative And Qualitative Disclosures About Market Risk.

Market Risk Sensitive Items Entered
Into for Trading Purposes.

None.

Market Risk Sensitive Items Entered
Into for Other Than Trading Purposes.

Interest Rate Risk

We are exposed to market risk from changes in interest rates on our
outstanding bank debt. At March 6, 2002, we had $3,894,000 in bank debt that
was tied to changes in short term interest rates. At the end of our third
fiscal quarter of fiscal 2002, the interest rate was the adjusted Eurodollar
rate plus 3%, or 5.55%. The rate can be fixed over periods ranging from one to
six months, at our discretion. At March 6, 2002, a hypothetical 100 basis
point increase in the adjusted Eurodollar rate would result in additional
interest expense of $39,000 on an annualized basis.

Commodity Price Risk

Green coffee, the principal raw material for our products, is subject to
significant price fluctuations caused by a number of factors, including
weather, political, and economic conditions. To date, we have not used
commodity based financial instruments to hedge against fluctuations in the
price of coffee. To ensure that we have an adequate supply of coffee, however,
we enter into agreements to purchase green coffee in the future that may or may
not be fixed as to price. At March 6, 2002, we had commitments to purchase
coffee through fiscal year 2005, totaling $5,674,000 for 4,276,000 pounds of
green coffee, all of which were fixed as to price. The coffee scheduled to be
delivered to us in this fiscal year pursuant to these commitments will satisfy
approximately 90% of our anticipated green coffee requirements for this fiscal
year. Assuming we require approximately 100,000 additional pounds of green
coffee during 2002 for which no price has yet been fixed, each $0.01 per pound
increase in the price of green coffee would likely result in $1,000 of
additional cost. However, because the price we pay for green coffee is
negotiated with suppliers, we believe that the commodity market price for green
coffee would have to increase significantly, by as much as $0.25 per pound,
before suppliers would increase the price they charge us.




PART II  OTHER INFORMATION




Item 1. Legal Proceedings.

In the ordinary course of our business, we may become involved in legal
proceedings from time to time. During the thirty-six week period ending March
6, 2002, we were not a party to any material legal proceedings.




Item 5. Other Information.

Minimum Advance Notice of Stockholder Proposals

Diedrich Coffee stockholders are advised that we must be notified by July
1, 2002 (120 days prior to the month and day of mailing the last years proxy
statement) of any proposal or solicitation that any stockholder intends to
present at the 2002 annual meeting of stockholders and which the stockholder
has not sought to have included in our proxy statement for the meeting in
accordance with Rule 14a-8 under the Securities Exchange Act of 1934, as
amended. If a proponent fails to notify us before the required deadline,
management proxies will be allowed to use their discretionary voting authority
when the proposal is raised at the 2002 annual meeting, without any discussion
of the matter in the proxy statement.

21



---



##### Table of Contents






Item 6. Exhibits and Reports on Form 8-K.



| | (a) |  | Exhibits.
| | --- |  | ---------

Set forth below is a list of the exhibits included as part of this
quarterly report.

|            |  |                                                                                                                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                 
|2.1         |  | Agreement and Plan of Merger dated as of March 16, 1999, by and among Diedrich
Coffee, CP Acquisition Corp., a wholly owned subsidiary of Diedrich Coffee, and
Coffee People (1)                                
|3.1         |  | Restated Certificate of Incorporation of the Company, dated May 11, 2001 (2)                                                                                                                                    
|3.2         |  | Bylaws of the Company (3)                                                                                                                                                                                       
|4.1         |  | Purchase Agreement for Series A Preferred Stock dated as of December 11, 1992 by and
among Diedrich Coffee, Martin R. Diedrich, Donald M. Holly, SNV Enterprises and
D.C.H., L.P. (3)                           
|4.2         |  | Purchase Agreement for Series B Preferred Stock dated as of June 29, 1995 by and
among Diedrich Coffee, Martin R. Diedrich, Steven A. Lupinacci, Redwood Enterprises
VII, L.P. and Diedrich Partners I, L.P. (3)
|4.3         |  | Specimen Stock Certificate (4)                                                                                                                                                                                  
|4.4         |  | Form of Conversion Agreement in connection with the conversion of Series A and Series
B Preferred Stock into Common Stock (3)                                                                                   
|10.1        |  | Form of Indemnification Agreement (3)                                                                                                                                                                           
|10.2        |  | Amended and Restated Diedrich Coffee 1996 Stock Incentive Plan (5)                                                                                                                                              
|10.3        |  | Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan (3)                                                                                                                                               
|10.4        |  | Agreement of Sale dated as of February 23, 1996 by and among Diedrich Coffee (as
purchaser) and Brothers Coffee Bars, Inc. and Brothers Gourmet Coffees, Inc. (as
sellers) (3)                                  
|10.5        |  | Employment Agreement by and between the Company and Timothy J. Ryan retaining Mr.
Ryan as Chief Executive Officer, dated as of November 17, 1997 (6)                                                            
|10.6        |  | Form of Warrant Agreement made in favor of Nuvrty, Inc., the Ocean Trust and the
Grandview Trust (7)                                                                                                            
|10.7        |  | Form of Common Stock and Option Purchase Agreement with Franchise Mortgage Acceptance
Company dated as of April 3, 1998 (8)                                                                                     
|10.8        |  | Employment Agreement with Catherine Saar dated June 11, 1998 (9)                                                                                                                                                
|10.9        |  | Form of Franchise Agreement (10)                                                                                                                                                                                

22



---



##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|10.10       |  | Form of Area Development Agreement (10)                                                                                                                                                                                                                                                                                                                                                                 
|10.11       |  | Employment Agreement with Martin R. Diedrich dated June 29, 2001 (11)                                                                                                                                                                                                                                                                                                                                   
|10.12       |  | Credit Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich
Coffee and its subsidiaries (12)                                                                                                                                                                                                                                                                                    
|10.13       |  | Security Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich
Coffee and its subsidiaries (12)                                                                                                                                                                                                                                                                                  
|10.14       |  | Securities Pledge Agreement, dated as of July 7, 1999, by and among BankBoston, N.A.,
Diedrich Coffee and its subsidiaries (12)                                                                                                                                                                                                                                                                         
|10.15       |  | Trademark Security Agreement, dated as of July 7, 1999, by and among BankBoston,
N.A., Diedrich Coffee and its subsidiaries (12)                                                                                                                                                                                                                                                                        
|10.16       |  | Form of Term Note made in favor of BankBoston, N.A. (12)                                                                                                                                                                                                                                                                                                                                                
|10.17       |  | Form of Revolving Note made in favor of BankBoston, N.A. (12)                                                                                                                                                                                                                                                                                                                                           
|10.18       |  | Employment Agreement with Matt McGuinness dated effective March 13, 2000 (13)                                                                                                                                                                                                                                                                                                                           
|10.19       |  | First Amendment to Credit Agreement dated as of September 26, 2000 (13)                                                                                                                                                                                                                                                                                                                                 
|10.20       |  | Second Amendment to Credit Agreement dated as of February 26, 2001 (14)                                                                                                                                                                                                                                                                                                                                 
|10.21       |  | Letter Agreement re: employment with J. Michael Jenkins dated September 22, 2000 (13)                                                                                                                                                                                                                                                                                                                   
|10.22       |  | Letter Agreement re: employment with Carl Mount dated October 29, 1999 (15)                                                                                                                                                                                                                                                                                                                             
|10.23       |  | Letter Agreement re: employment with Edward A. Apffel dated May 25, 2000 (15)                                                                                                                                                                                                                                                                                                                           
|10.24       |  | Diedrich Coffee, Inc. 2000 Non-Employee Directors Stock Option Plan (16)                                                                                                                                                                                                                                                                                                                                
|10.25       |  | Stock Option Plan and Agreement with J. Michael Jenkins, dated September 22, 2000 (17)                                                                                                                                                                                                                                                                                                                  
|10.26       |  | Diedrich Coffee, Inc. 2000 Equity Incentive Plan (17)                                                                                                                                                                                                                                                                                                                                                   
|10.27       |  | Common Stock and Warrant Purchase Agreement by and among Diedrich Coffee, Inc.,
Westcliff Partners, L.P., Westcliff Foundation, Westcliff Long/Short, L.P., Westcliff
Small Cap Fund, L.P., Westcliff Aggressive Growth, L.P., Westcliff Profit Sharing
Plan, Westcliff Master Fund, Ltd., Peninsula Capital, L.P., Common Sense Partners,
L.P. and Sequoia Enterprises, L.P., dated March 14, 2001 (18)
|10.28       |  | Philip Hirsch Employment Agreement, dated March 20, 2002                                                                                                                                                                                                                                                                                                                                                

23



---



##### Table of Contents



|            |  |                          
|----------- |  | -------------------------
|Exhibit No. |  | Description              
|            |  |                          
|21.1        |  | List of Subsidiaries (13)



---

|(1)  |  | Previously filed as Appendix A to Diedrich Coffees Registration
Statement on Form S-4, filed with the Securities and Exchange Commission
on April 23, 1999.                                              
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Previously filed as an exhibit to Diedrich Coffees Current Report on
Form 8-K, filed with the Securities and Exchange Commission on May 16,
2001.                                                        
|    
|    
|    
|    
|(3)  |  | Previously filed as an exhibit to Diedrich Coffees Registration
Statement on Form S-1 (No. 333-08633), as amended, as declared effective
by the Securities and Exchange Commission on September 11, 1996.
|    
|    
|    
|    
|(4)  |  | Previously filed as an exhibit to Diedrich Coffees Quarterly Report on
Form 10-Q for the period ended September 22, 1999, filed with the
Securities and Exchange Commission on November 5, 1999.         
|    
|    
|    
|    
|(5)  |  | Previously filed as an exhibit to Diedrich Coffees Registration
Statement on Form S-3 (No. 333-66744) filed on August 3, 2001.                                                                           
|    
|    
|    
|    
|(6)  |  | Previously filed as an exhibit to Diedrich Coffees Current Report on
Form 8-K, filed with the Securities and Exchange Commission on November
25, 1997.                                                   
|    
|    
|    
|    
|(7)  |  | Previously filed as an exhibit to Diedrich Coffees Quarterly Report on
Form 10-Q for the period ended October 29, 1997, filed with the Securities
and Exchange Commission on December 11, 1997.          
|    
|    
|    
|    
|(8)  |  | Previously filed as an exhibit to Diedrich Coffees Annual Report on Form
10-K for the fiscal year ended January 28, 1998.                                                                                
|    
|    
|    
|    
|(9)  |  | Previously filed as an exhibit to Diedrich Coffees Quarterly Report on
Form 10-Q for the period ended July 29, 1998, filed with the Securities
and Exchange Commission on September 10, 1998.            
|    
|    
|    
|    
|(10) |  | Previously filed as an exhibit to Diedrich Coffees Quarterly Report on
Form 10-Q for the period ended April 28, 1999, filed with the Securities
and Exchange Commission on December 11, 1998.            
|    
|    
|    
|    
|(11) |  | Previously filed as an exhibit to Diedrich Coffees Annual Report on Form
10-K for the year ended June 27, 2001, filed with the Securities and
Exchange Commission on September 25, 2001.                 
|    
|    
|    
|    
|(12) |  | Incorporated by reference to Diedrich Coffees Transition Report on Form
10-Q for the period from January 28, 1999 to June 30, 1999, filed with the
Securities and Exchange Commission on August 16, 1999.
|    
|    
|    
|    
|(13) |  | Previously filed as an exhibit to Diedrich Coffees annual report on Form
10-K for the fiscal year ended June 28, 2000.                                                                                   
|    
|    
|    
|    
|(14) |  | Previously filed as an exhibit to Diedrich Coffees Quarterly Report on
Form 10-Q for the period ended March 7, 2001, filed with the Securities
and Exchange Commission on April 23, 2001.                
|    
|    
|    
|    
|(15) |  | Previously filed as an exhibit to Diedrich Coffees Report on Form 10-Q
for the period ended September 20, 2000, filed with the Securities and
Exchange Commission on November 6, 2000.                   

24



---



##### Table of Contents





|(16) |  | Previously filed as an exhibit to Diedrich Coffees Registration
Statement on Form S-8, filed with the Securities and Exchange Commission
on November 21, 2000.                       
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(17) |  | Previously filed as an exhibit to Diedrich Coffees Report on Form 10-Q
for the period ended December 13, 2000, filed with the Securities and
Exchange Commission on January 29, 2001.
|    
|    
|    
|    
|(18) |  | Previously filed as an exhibit to the Definitive Proxy Statement, filed
with the Securities and Exchange Commission on April 12, 2001.                                                



| | (b) |  | Reports on Form 8-K.
| | --- |  | --------------------

On March 22, 2002, we announced that our Chief Executive Officer, J. Michael
Jenkins, was stepping down from his day-to-day role with Diedrich Coffee in
order to continue to pursue a course of medical treatment prescribed by his
physicians, and that he would continue to serve us in an advisory capacity. We
also announced that, as an interim measure and to assist senior management
during the transition, our board of directors had asked Philip G. Hirsch to
assume the role of Chief Executive Officer until a successor is appointed.

25



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements 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.



|Dated: April 19, 2002 | DIEDRICH COFFEE, INC.
|--------------------- | ---------------------



| | /s/ Philip G. Hirsch
Philip G. Hirsch
Chief Executive Officer
(Principal Executive Officer)
| | -------------------------------------------------------------------------------------------



| | /s/ Matthew C. McGuinness
Matthew C. McGuinness
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
| | -------------------------------------------------------------------------------------------------------------------------------------------------

26



---



##### Table of Contents



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                 
|2.1         |  | Agreement and Plan of Merger dated as of March 16, 1999, by and among Diedrich
Coffee, CP Acquisition Corp., a wholly owned subsidiary of Diedrich Coffee, and
Coffee People (1)                                
|3.1         |  | Restated Certificate of Incorporation of the Company, dated May 11, 2001 (2)                                                                                                                                    
|3.2         |  | Bylaws of the Company (3)                                                                                                                                                                                       
|4.1         |  | Purchase Agreement for Series A Preferred Stock dated as of December 11, 1992 by and
among Diedrich Coffee, Martin R. Diedrich, Donald M. Holly, SNV Enterprises and
D.C.H., L.P. (3)                           
|4.2         |  | Purchase Agreement for Series B Preferred Stock dated as of June 29, 1995 by and
among Diedrich Coffee, Martin R. Diedrich, Steven A. Lupinacci, Redwood Enterprises
VII, L.P. and Diedrich Partners I, L.P. (3)
|4.3         |  | Specimen Stock Certificate (4)                                                                                                                                                                                  
|4.4         |  | Form of Conversion Agreement in connection with the conversion of Series A and Series
B Preferred Stock into Common Stock (3)                                                                                   
|10.1        |  | Form of Indemnification Agreement (3)                                                                                                                                                                           
|10.2        |  | Amended and Restated Diedrich Coffee 1996 Stock Incentive Plan (5)                                                                                                                                              
|10.3        |  | Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan (3)                                                                                                                                               
|10.4        |  | Agreement of Sale dated as of February 23, 1996 by and among Diedrich Coffee (as
purchaser) and Brothers Coffee Bars, Inc. and Brothers Gourmet Coffees, Inc. (as
sellers) (3)                                  
|10.5        |  | Employment Agreement by and between the Company and Timothy J. Ryan retaining Mr.
Ryan as Chief Executive Officer, dated as of November 17, 1997 (6)                                                            
|10.6        |  | Form of Warrant Agreement made in favor of Nuvrty, Inc., the Ocean Trust and the
Grandview Trust (7)                                                                                                            
|10.7        |  | Form of Common Stock and Option Purchase Agreement with Franchise Mortgage Acceptance
Company dated as of April 3, 1998 (8)                                                                                     
|10.8        |  | Employment Agreement with Catherine Saar dated June 11, 1998 (9)                                                                                                                                                
|10.9        |  | Form of Franchise Agreement (10)                                                                                                                                                                                
|10.10       |  | Form of Area Development Agreement (10)                                                                                                                                                                         

27



---



##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|10.11       |  | Employment Agreement with Martin R. Diedrich dated June 29, 2001 (11)                                                                                                                                                                                                                                                                                                                                   
|10.12       |  | Credit Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich
Coffee and its subsidiaries (12)                                                                                                                                                                                                                                                                                    
|10.13       |  | Security Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich
Coffee and its subsidiaries (12)                                                                                                                                                                                                                                                                                  
|10.14       |  | Securities Pledge Agreement, dated as of July 7, 1999, by and among BankBoston, N.A.,
Diedrich Coffee and its subsidiaries (12)                                                                                                                                                                                                                                                                         
|10.15       |  | Trademark Security Agreement, dated as of July 7, 1999, by and among BankBoston,
N.A., Diedrich Coffee and its subsidiaries (12)                                                                                                                                                                                                                                                                        
|10.16       |  | Form of Term Note made in favor of BankBoston, N.A. (12)                                                                                                                                                                                                                                                                                                                                                
|10.17       |  | Form of Revolving Note made in favor of BankBoston, N.A. (12)                                                                                                                                                                                                                                                                                                                                           
|10.18       |  | Employment Agreement with Matt McGuinness dated effective March 13, 2000 (13)                                                                                                                                                                                                                                                                                                                           
|10.19       |  | First Amendment to Credit Agreement dated as of September 26, 2000 (13)                                                                                                                                                                                                                                                                                                                                 
|10.20       |  | Second Amendment to Credit Agreement dated as of February 26, 2001 (14)                                                                                                                                                                                                                                                                                                                                 
|10.21       |  | Letter Agreement re: employment with J. Michael Jenkins dated September 22, 2000 (13)                                                                                                                                                                                                                                                                                                                   
|10.22       |  | Letter Agreement re: employment with Carl Mount dated October 29, 1999 (15)                                                                                                                                                                                                                                                                                                                             
|10.23       |  | Letter Agreement re: employment with Edward A. Apffel dated May 25, 2000 (15)                                                                                                                                                                                                                                                                                                                           
|10.24       |  | Diedrich Coffee, Inc. 2000 Non-Employee Directors Stock Option Plan (16)                                                                                                                                                                                                                                                                                                                                
|10.25       |  | Stock Option Plan and Agreement with J. Michael Jenkins, dated September 22, 2000 (17)                                                                                                                                                                                                                                                                                                                  
|10.26       |  | Diedrich Coffee, Inc. 2000 Equity Incentive Plan (17)                                                                                                                                                                                                                                                                                                                                                   
|10.27       |  | Common Stock and Warrant Purchase Agreement by and among Diedrich Coffee, Inc.,
Westcliff Partners, L.P., Westcliff Foundation, Westcliff Long/Short, L.P., Westcliff
Small Cap Fund, L.P., Westcliff Aggressive Growth, L.P., Westcliff Profit Sharing
Plan, Westcliff Master Fund, Ltd., Peninsula Capital, L.P., Common Sense Partners,
L.P. and Sequoia Enterprises, L.P., dated March 14, 2001 (18)
|10.28       |  | Philip Hirsch Employment Agreement, dated March 20, 2002                                                                                                                                                                                                                                                                                                                                                
|21.1        |  | List of Subsidiaries (13)                                                                                                                                                                                                                                                                                                                                                                               

28



---



##### Table of Contents





---

|(1)  |  | Previously filed as Appendix A to Diedrich Coffees Registration
Statement on Form S-4, filed with the Securities and Exchange Commission
on April 23, 1999.                                              
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Previously filed as an exhibit to Diedrich Coffees Current Report on
Form 8-K, filed with the Securities and Exchange Commission on May 16,
2001.                                                        
|    
|    
|    
|    
|(3)  |  | Previously filed as an exhibit to Diedrich Coffees Registration
Statement on Form S-1 (No. 333-08633), as amended, as declared effective
by the Securities and Exchange Commission on September 11, 1996.
|    
|    
|    
|    
|(4)  |  | Previously filed as an exhibit to Diedrich Coffees Quarterly Report on
Form 10-Q for the period ended September 22, 1999, filed with the
Securities and Exchange Commission on November 5, 1999.         
|    
|    
|    
|    
|(5)  |  | Previously filed as an exhibit to Diedrich Coffees Registration
Statement on Form S-3 (No. 333-66744) filed on August 3, 2001.                                                                           
|    
|    
|    
|    
|(6)  |  | Previously filed as an exhibit to Diedrich Coffees Current Report on
Form 8-K, filed with the Securities and Exchange Commission on November
25, 1997.                                                   
|    
|    
|    
|    
|(7)  |  | Previously filed as an exhibit to Diedrich Coffees Quarterly Report on
Form 10-Q for the period ended October 29, 1997, filed with the Securities
and Exchange Commission on December 11, 1997.          
|    
|    
|    
|    
|(8)  |  | Previously filed as an exhibit to Diedrich Coffees Annual Report on Form
10-K for the fiscal year ended January 28, 1998.                                                                                
|    
|    
|    
|    
|(9)  |  | Previously filed as an exhibit to Diedrich Coffees Quarterly Report on
Form 10-Q for the period ended July 29, 1998, filed with the Securities
and Exchange Commission on September 10, 1998.            
|    
|    
|    
|    
|(10) |  | Previously filed as an exhibit to Diedrich Coffees Quarterly Report on
Form 10-Q for the period ended April 28, 1999, filed with the Securities
and Exchange Commission on December 11, 1998.            
|    
|    
|    
|    
|(11) |  | Previously filed as an exhibit to Diedrich Coffees Annual Report on Form
10-K for the year ended June 27, 2001, filed with the Securities and
Exchange Commission on September 25, 2001.                 
|    
|    
|    
|    
|(12) |  | Incorporated by reference to Diedrich Coffees Transition Report on Form
10-Q for the period from January 28, 1999 to June 30, 1999, filed with the
Securities and Exchange Commission on August 16, 1999.
|    
|    
|    
|    
|(13) |  | Previously filed as an exhibit to Diedrich Coffees annual report on Form
10-K for the fiscal year ended June 28, 2000.                                                                                   
|    
|    
|    
|    
|(14) |  | Previously filed as an exhibit to Diedrich Coffees Quarterly Report on
Form 10-Q for the period ended March 7, 2001, filed with the Securities
and Exchange Commission on April 23, 2001.                
|    
|    
|    
|    
|(15) |  | Previously filed as an exhibit to Diedrich Coffees Report on Form 10-Q
for the period ended September 20, 2000, filed with the Securities and
Exchange Commission on November 6, 2000.                   
|    
|    
|    
|    
|(16) |  | Previously filed as an exhibit to Diedrich Coffees Registration
Statement on Form S-8, filed with the Securities and Exchange Commission
on November 21, 2000.                                           
|    
|    
|    
|    
|(17) |  | Previously filed as an exhibit to Diedrich Coffees Report on Form 10-Q
for the period ended December 13, 2000, filed with the Securities and
Exchange Commission on January 29, 2001.                    
|    
|    
|    
|    
|(18) |  | Previously filed as an exhibit to the Definitive Proxy Statement, filed
with the Securities and Exchange Commission on April 12, 2001.                                                                    

29