<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q



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

                For the quarterly period ended December 12, 1998


[ ]   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 0-21397


                               COFFEE PEOPLE, INC.
             (Exact name of registrant as specified in its charter)


<TABLE>
<S>                                                    <C>
                 OREGON                                    93-1073218
    (State or other jurisdiction of                      (I.R.S Employer
     incorporation or organization)                    Identification No.)
</TABLE>


                 11480 COMMERCIAL PARKWAY, CASTROVILLE, CA 95012
          (Address of Principal Executive Offices, including Zip Code)


                                 (831) 633-4001
              (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 January 14, 1999, there were 10,762,757 shares of the registrant's Common
Stock outstanding.


<PAGE>   2

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                              PAGE
                                                                              ----
<S>               <C>                                                         <C>
PART I            FINANCIAL INFORMATION


Item 1.           Financial Statements........................................  1

Item 2.           Management's Discussion and Analysis of Financial
                      Condition and Results of Operation......................  5

Item 3.           Quantitative and Qualitative Disclosures about
                      Market Risk............................................. 12



PART II           OTHER INFORMATION


Item 1.           Legal Proceedings........................................... 13

Item 4.           Submission of Matters to a Vote of Security Holders......... 14

Item 6.           Exhibits and Reports on Form 8-K............................ 15


Signature    ................................................................. 16
</TABLE>



<PAGE>   3

                               COFFEE PEOPLE, INC.
                           CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                DECEMBER 12,         JUNE 27,
                                                                                   1998                1998
                                                                                -------------    -------------
                                                                                 (UNAUDITED)
<S>                                                                             <C>              <C>          
ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                                  $       2,224    $       2,822
     Accounts receivable, net                                                           5,184            3,262
     Inventories                                                                        4,304            4,052
     Prepaid expenses and other assets                                                    729              713
     Deferred income taxes                                                              2,681            2,621
                                                                                -------------    -------------
         TOTAL CURRENT ASSETS                                                          15,122           13,470

Property, plant and equipment, net                                                     12,240           12,711
Goodwill, net                                                                          25,684           25,967
Other assets                                                                              119              113
Deferred income taxes                                                                   3,448            3,434
                                                                                -------------    -------------
         TOTAL ASSETS                                                           $      56,613    $      55,695
                                                                                =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Current portion of long-term debt                                          $       1,238    $       1,279
     Current portion of capital lease obligations                                         130               --
     Accounts payable                                                                   2,007            1,421
     Payable to related party                                                             465              984
     Accrued liabilities                                                                2,479            2,572
     Provision for store closures                                                       1,159            1,291
     Franchisee deposits                                                                  563              459
     Deferred franchise fee income                                                         85              187
                                                                                -------------    -------------
         TOTAL CURRENT LIABILITIES                                                      8,126            8,193

Long-term debt                                                                          4,061            3,798
Capital lease obligations                                                                 792               --
Deferred rent expense                                                                     146              202

STOCKHOLDERS' EQUITY
Preferred stock, no par value; authorized 10,000,000 shares
   none issued or outstanding                                                              --               --
Common stock, no par value; authorized 50,000,000 shares
   issued and outstanding, 10,754,889 and 10,746,040                                   44,637           44,630
Stock subscription notes receivable                                                      (350)            (338)
Accumulated deficit                                                                      (799)            (790)
                                                                                -------------    -------------
         TOTAL STOCKHOLDERS' EQUITY                                                    43,488           43,502
                                                                                -------------    -------------
         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $      56,613    $      55,695
                                                                                =============    =============
</TABLE>


                                       1
<PAGE>   4

                              COFFEE PEOPLE, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                   Twelve Weeks Ended                 Twenty Four Weeks Ended
                                            -------------------------------       ------------------------------
                                              December 12,     December 13,        December 12,     December 13,
                                                 1998              1997               1998              1997
                                            --------------    -------------       -------------    -------------
                                             (unaudited)       (unaudited)         (unaudited)      (unaudited)
<S>                                         <C>               <C>                 <C>              <C>          
REVENUES:
     Franchise revenue                      $        1,860    $       1,781       $       3,067    $       2,995
     Corporate store sales                           7,767            2,415              14,863            4,132
     Wholesale revenue                               5,384            5,943               9,460           10,973
                                            --------------    -------------       -------------    -------------
         Total revenues                             15,011           10,139              27,390           18,100

EXPENSES:
     Cost of goods sold                              6,566            5,024              12,217            9,189
     Store and other operating expenses              5,765            2,157              11,205            4,070
     Depreciation and amortization                     329              382                 808              732
     General and administrative expenses             1,152              780               2,210            1,529
Acquisition and integration expenses                    --               --                 799               --
                                            --------------    -------------       -------------    -------------
         Total expenses                             13,812            8,343              27,239           15,520
                                            --------------    -------------       -------------    -------------
Operating Income                                     1,199            1,796                 151            2,580
                                            --------------    -------------       -------------    -------------

Interest and other income                               23               59                  56              139
Interest expense                                       133               --                 225               --
                                            --------------    -------------       -------------    -------------
INCOME (LOSS) BEFORE INCOME TAXES                    1,089            1,855                 (18)           2,718

Provision (benefit) for income taxes                   477              798                  (9)           1,169
                                            --------------    -------------       -------------    -------------
NET INCOME (LOSS)                           $          612    $       1,057       $          (9)   $       1,549
                                            ==============    =============       ============     =============
NET INCOME (LOSS) PER SHARE -
     BASIC AND DILUTED                      $         0.06    $        0.14       $       (0.00)   $        0.21
                                            ==============    =============       ============     =============

Weighted average common
   shares - basic                                   10,755            7,461              10,753            7,461
Weighted average common and
   common equivalent shares
   outstanding - diluted                            10,760            7,461              10,764            7,461
</TABLE>




                                       2
<PAGE>   5

                               COFFEE PEOPLE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                 Twenty Four Weeks Ended
                                                                           ----------------------------------
                                                                            December 12,       December 13,
                                                                                1998               1997
                                                                           -------------       --------------
<S>                                                                        <C>                 <C>           
Cash flows from operating activities:
   Net income (loss)                                                       $          (9)      $        1,549
     Adjustments to reconcile net income (loss) to net
   cash provided by operating activities:
     Depreciation and amortization                                                   808                  732
     Provision for uncollectible accounts                                            120                   --
     Deferred income taxes                                                           (74)                 680
     Interest income on stock subscription notes receivable                          (12)                  --
     Change in assets and liabilities, net of amounts acquired:
       Accounts receivable                                                        (2,042)              (4,241)
       Receivable from/due to related party                                         (519)                 285
       Inventories                                                                  (252)                (672)
       Prepaid expenses and other assets                                             (22)                  (8)
       Accounts payable                                                              586                   19
       Accrued liabilities                                                           (93)                (891)
       Accrual for store closures                                                   (132)                (264)
       Income taxes payable                                                           --                  489
       Franchisee deposits                                                           104                  (14)
       Deferred franchise fee income                                                (102)                 (28)
       Deferred rent expense                                                         (56)                   5
                                                                           -------------       --------------
                                                                                  (1,695)              (2,359)
                                                                           -------------       --------------

Cash flows from investing activities:
   Purchase of property, plant and equipment                                         (29)              (1,223)
   Proceeds from disposal of property, plant and equipment                            --                   98
   Additions to goodwill                                                             (25)                  --
                                                                           -------------       --------------
                                                                                     (54)              (1,125)
                                                                           -------------       --------------
Cash flows from financing activities:
   Proceeds on issuance of shares                                                      7                   --
   Stock redemption from Second Cup, Inc.                                            (12)                  --
   Borrowings under capital lease obligation                                         922                   --
   Payment on long-term debt                                                      (1,178)                  --
                                                                           -------------       --------------
                                                                                   1,151                   --
                                                                           -------------       --------------
Decrease in cash and cash equivalents                                               (598)              (3,484)

Cash and cash equivalents, beginning of period                                     2,822                7,281
                                                                           -------------       --------------
Cash and cash equivalents, end of period                                           2,224                3,797
                                                                           =============       ==============
Supplemental cash flow information
   Interest                                                                          236                   --
   Cash paid for income taxes                                                          7                   --
</TABLE>



                                       3

<PAGE>   6

                               COFFEE PEOPLE, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             (AMOUNTS IN THOUSANDS)

As of December 12, 1998 and June 28, 1998.
                                               (unaudited)

NOTE 1.  FINANCIAL STATEMENT PRESENTATION

The interim financial data is unaudited; however, in the opinion of management,
the interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. The operating
results for interim periods are not necessarily indicative of results to be
expected for an entire year. The aforementioned statements should be read in
conjunction with the consolidated financial statements for the fiscal year ended
June 27, 1998, appearing in the Company's Annual Report on Form 10-K.

Certain reclassifications of prior period amounts have been made to conform with
the December 12, 1998 presentation.

NOTE 2.  INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                                  December 12,        June 27,
                                                      1998              1998
                                                  -------------    -------------
                                                   (unaudited)
<S>                                               <C>              <C>          
Coffee:
     Unroasted                                    $       1,513    $       2,169
     Roasted                                                569              368
Other merchandise held for sale                             799              898
Supplies                                                  1,423              617
                                                  -------------    -------------
                                                  $       4,304    $       4,052
                                                  =============    =============
</TABLE>

NOTE 3.  FRANCHISING STRATEGY

On September 1, 1998, the Company announced that it was adopting a franchising
strategy in which it would offer existing Coffee People (Oregon) and Coffee
Plantation stores for sale to franchisees as well as offering new franchise
opportunities for these brands. As of the date of filing this Form 10-Q, the
Company has sold one store and has entered into non-binding letters of intent to
sell an additional six stores. There can be no assurance that the Company will
be successful at selling any of its remaining stores, including the stores
currently held under the non-binding letters of intent, or that it will be
successful in franchising new stores.


                                       4
<PAGE>   7
As a result of the decision to hold all existing Coffee People (Oregon) and
Coffee Plantation stores for sale, depreciation on these stores was suspended
effective September 1, 1998. In addition, as of December 12, 1998, the Coffee
People (Oregon) and Coffee Plantation store assets are stated at the lower of
carrying value or fair market value less cost to sell. As of December 12, 1998,
the net book value of all store property, plant and equipment held for sale
totals $7,340,000.00. This amount is included in the net book value of property,
plant and equipment of $12,240,000.00 on the Consolidated Balance Sheet.

NOTE 4.  SALE-LEASEBACK TRANSACTION

On November 24, 1998, the Company entered into a sale-leaseback transaction
involving equipment at twelve company-operated Gloria Jean's retail stores. The
$922,000 proceeds received by the Company from the lease transaction were used
for general corporate purposes and working capital. The interest rate on the
capital lease obligation is 10.5%. The capital lease assets are recorded in
property, plant and equipment. At the end of the lease term, the Company has an
option to purchase the equipment for the greater of fair market value or 10% of
the lessor's original cost, or renew the lease for an additional eight months.

ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion contains forward-looking statements within the meaning
of the federal securities law and involves a number of risks and uncertainties.
Actual results and trends may differ materially from the statements contained in
this discussion, depending on a variety of factors. Such factors include, but
are not limited to, the Company's ability to integrate the Coffee People
operations and to execute its franchising strategy; the Company's ability to
control costs associated with planned store closures; the price and availability
of green coffee; effects of competition; availability of additional capital,
changes in applicable government regulations, and other risks detailed in the
Company's Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on April 24, 1998.

OVERVIEW

Coffee People, Inc. ("Coffee People" or the "Company") is the second largest
specialty coffee retailer in the United States. On May 19, 1998, Coffee People
("Coffee People Old") combined with Gloria Jean's Inc. ("Gloria Jean's") in a
transaction (the "Merger") in which Coffee People acquired all of the
outstanding common stock of Gloria Jean's in exchange for the issuance of
7,460,679 shares of Coffee People common stock to Second Cup USA Holdings Ltd.
("Second Cup"), a wholly owned subsidiary of The Second Cup Ltd., giving Second
Cup 69.5% ownership of the combined company. Following completion of the merger,
Coffee People relocated its corporate offices from Beaverton, Oregon to
Castroville, California, where Gloria Jean's offices are located.

The transaction has been accounted for as a reverse merger in which Gloria
Jean's is treated as the accounting acquiror. As a result of this accounting
treatment, the historical financial statements of Gloria Jean's became the
historical financial statements of the combined company. Also consistent with
this accounting treatment, the fiscal year end for Coffee People, Inc. was
changed from December 31 to the last Saturday in June, to conform to the
year-end used by Gloria Jean's. Because of the reverse merger accounting
treatment, the financial results for the twelve and twenty-four week periods
ended December 12, 1998 reflect the operations of the combined companies while
the financial results for the twelve and twenty-four week periods ended December
13, 1997 reflect the operations of Gloria Jean's only.


                                       5
<PAGE>   8

As of December 12, 1998, the Company had 257 franchised and 25 company-operated
stores operating under the Gloria Jean's name in 37 states, one U.S. territory,
and six foreign countries, 26 company-operated stores operating under the Coffee
People name in Oregon, and one franchised and 14 company-operated stores
operating under the Coffee Plantation name in Arizona. The Company also operates
a coffee roasting facility in Castroville, California.

Gloria Jean's retail outlets generally offer a full range of gourmet coffees,
hot and cold beverages, teas, and food, as well as a variety of related gifts,
supplies, equipment and accessories. Coffee People and Coffee Plantation stores
sell coffee beverages, coffee beans, cookies, pastries and coffee related
merchandise.

The Company previously announced plans to consolidate certain corporate
functions and to restructure Coffee People Old's operations. To date, most
Coffee People Old corporate employees have either been relocated to the
Company's Castroville, California headquarters or have been terminated.
Additionally, all coffee roasting is being performed at the Company's
Castroville roasting facility.

On October 27, 1998, the Company announced that it had engaged an investment
advisor to identify and evaluate alternatives to enhance shareholder value and
that it was involved in discussions with several other specialty coffee
companies about possible strategic combinations. These discussions are
consistent with and in furtherance of the Company's strategy to expand both by
opening new stores in core markets and also through the selected acquisition of
other regional specialty coffee companies or stores. Strategic alternatives
could include mergers or acquisitions that result in dilution to existing Coffee
People shareholders or that result in changes to the Company's organizational
structure. There can be no assurance that the Company will be successful in
pursuing discussions with other companies or that it will be successful in
pursuing other strategic alternatives.

TWELVE WEEKS ENDED DECEMBER 12, 1998 COMPARED TO TWELVE WEEKS ENDED DECEMBER 13,
1997

REVENUES. Total revenues increased 48.1% to $15,011,000 for the twelve week
period ended December 12, 1998, from $10,139,000 for the same period in fiscal
1998. The increase in total revenues was due primarily to an increase in retail
sales from company-operated stores.

Retail sales at company-operated stores increased 221.6% to $7,767,000 for the
fiscal 1999 twelve week period from $2,415,000 in the fiscal 1998 twelve week
period. The increase in retail sales was due primarily to sales of $5,702,000 at
the Company's Coffee People (Oregon) and Coffee Plantation stores acquired on
May 19, 1998.

Wholesale revenue consists primarily of sales of roasted coffee and other
products and supplies to franchisees. Wholesale revenue decreased 9.4% to
$5,384,000 for the twelve weeks ended December 12, 1998 from $5,943,000 for the
same twelve week period in fiscal 1998. The decrease was primarily due to
decreased sales to franchised stores as a result of lower sales volume.

Franchise revenue consists primarily of initial franchise fees and royalties
received by the Company on sales made at each Gloria Jean's and Coffee
Plantation franchise location. Franchise revenues increased 4.4% to $1,860,000
for the twelve week period ended December 12, 1998 from $1,781,000 for the same
twelve week period in fiscal 1998. The reason for this increase was primarily
the addition of a Coffee Plantation initial franchise fee and royalties of
$52,000. This


                                       6
<PAGE>   9

was offset slightly by a 0.7% decrease in domestic royalties of $1,550,000 in
the twelve week period ended December 12, 1998 compared to $1,562,000 for the
same period in fiscal 1998. The decrease in domestic royalties was due to lower
comparable store sales and fewer franchised stores.

COSTS AND EXPENSES. Cost of goods sold increased 30.7% to $6,566,000 for the
twelve weeks ended December 12, 1998, from $5,024,000 in the same period of
fiscal 1998, due to increases associated with the increase in retail sales
attributed to the Coffee People (Oregon) and Coffee Plantation stores acquired
on May 19, 1998. Cost of goods sold as a percentage of corporate store sales and
wholesale revenue decreased to 49.9% in the twelve week period ended December
12, 1998, from 60.1% in the twelve week period ended December 13, 1997. The
decrease was due primarily to a more favorable cost relationship associated with
retail sales generated at the Company's Coffee People (Oregon) and Coffee
Plantation stores acquired on May 19, 1998. Product costs as a percentage of
retail sales are lower at Coffee People (Oregon) and Coffee Plantation stores
than at Gloria Jean's company-operated stores due to differences in the product
mix.

Store and other operating expenses increased 167.3% to $5,765,000 in the twelve
week period ended December 12, 1998, from $2,157,000 in the same period of
fiscal 1998. The increase was due primarily to store operating expenses
attributed to the Coffee People (Oregon) and Coffee Plantation stores acquired
on May 19, 1998, increased store operating expenses at Gloria Jean's
company-operated stores, and increased franchise administration expenses
necessary to support the planned growth in the franchise business. As a
percentage of total revenues, store and other operating expenses increased to
38.4% in the fiscal 1999 twelve week period from 21.3% in the fiscal 1998 twelve
week period.

On September 1, 1998, the Company announced that it was adopting a franchising
strategy in which it would offer existing Coffee People (Oregon) and Coffee
Plantation stores for sale to franchisees as well as offering new franchise
opportunities for these brands. As a result of this decision, depreciation of
Coffee People (Oregon) and Coffee Plantation stores was suspended effective
September 1, 1998. Additionally, depreciation on Gloria Jean's company-operated
stores was suspended at the end of fiscal year 1998 in recognition of this 
strategy. Therefore, primarily as a result of this strategy, depreciation and
amortization, as a percentage of revenues, decreased to 2.2% for the twelve-week
period ended December 12, 1998 from 3.8% in the same twelve-week period of
fiscal 1998. For the twelve-week period ended December 12, 1998, depreciation
and amortization expense decreased to $329,000 compared to $382,000 in the same
period in fiscal 1998. The decrease in depreciation was due primarily to the
suspension of depreciation at the Gloria Jean's company-operated stores.

General and administrative expenses increased 47.7% to $1,152,000 in the
twelve-week period ended December 12, 1998 from $780,000 in the same period of
fiscal 1998 primarily as a result of general and administrative infrastructure
acquired as part of the Coffee People acquisition completed in May 1998. As a
percentage of total revenues, general and administrative expenses remained
constant at 7.7% in the fiscal 1999 twelve-week period compared to the same
period in fiscal 1998.

INTEREST INCOME. Interest income as a percentage of total revenues decreased to
0.2% for the twelve week period ended December 12, 1998 from 0.6% for the same
period in fiscal 1998, due to the overall increase in revenues and a reduction
in cash balances available for short-term investment in interest-bearing
instruments.


                                       7
<PAGE>   10

INTEREST EXPENSE. Interest expense as a percentage of total revenues increased
to 0.9% for the twelve week period ended December 12, 1998 from 0.0% for the
same period in fiscal 1998. The increase is as a result of interest incurred on
long-term debt obligations acquired as part of the Coffee People acquisition on
May 19, 1998, and additional borrowings under its line of credit and bank debt
facilities.

INCOME TAXES. The provision for income taxes was $477,000 for the twelve week
period ended December 12, 1998, compared to $798,000 for the same period in
fiscal 1998. The effective tax rates of 43.8% for the twelve week period ended
December 12, 1998 and 43.0% for the twelve week period ended December 13, 1997,
result from federal and state income taxes and nondeductible goodwill
amortization.

TWENTY-FOUR WEEKS ENDED DECEMBER 12, 1998 COMPARED TO TWENTY-FOUR WEEKS ENDED
DECEMBER 13, 1997

REVENUES. Total revenues increased 51.3% to $27,390,000 for the twenty-four week
period ended December 12, 1998, from $18,100,000 for the same period in fiscal
1998. The increase in total revenues was due primarily to an increase in retail
sales from company-operated stores, offset by a decrease in wholesale revenue.

Retail sales at company-operated stores increased 259.7% to $14,863,000 for the
fiscal 1999 twenty-four week period from $4,132,000 in the fiscal 1998
twenty-four week period. The increase in retail sales was due primarily to sales
of $11,135,000 at the Company's Coffee People Oregon and Coffee Plantation
stores acquired on May 19, 1998.

Wholesale revenue consists primarily of sales of roasted coffee and other
products and supplies to franchisees. Wholesale revenue decreased 13.8% to
$9,460,000 for the twenty-four weeks ended December 12, 1998 from $10,973,000
for the same twenty-four week period in fiscal 1998. The decrease was primarily
due to decreased sales to franchise stores as a result of lower sales volume and
a decrease in the amount of Christmas holiday gift packs produced and indirectly
sold to franchisees during the twenty-four week period ended December 12, 1998
compared to the same period in fiscal 1998.

Franchise revenue consists primarily of initial franchise fees and royalties
received by the Company on sales made at each franchise location. Franchise
revenue increased 2.4% to $3,067,000 for the twenty-four week period ended
December 12, 1998 from $2,995,000 for the same twenty-four week period in fiscal
1998. The components of this increase were the addition of a Coffee Plantation
initial franchise fee and royalties of $52,000 and a 2.3% increase in royalties.
Royalty revenues increased from $2,555,000 to $2,614,000 due primarily to the
addition of 8 international stores, offset by a decrease of 6 domestic stores.
This was offset slightly by a decrease in franchise fees which were $401,000 in
the twenty-four week period ended December 12, 1998 compared to $441,000 for the
same period in fiscal 1998. The decrease in franchise fees was due to a decrease
of two new franchised stores during the twenty-four week period of fiscal year
1999 compared to fiscal year 1998.

COSTS AND EXPENSES. Cost of goods sold increased 33.0% to $12,217,000 for the
twenty-four weeks ended December 12, 1998, from $9,189,000 in the same period of
fiscal 1998, due to increases associated with the increase in retail sales
attributed to the Coffee People (Oregon) and Coffee Plantation stores acquired
on May 19, 1998. Cost of goods sold as a percentage of corporate store sales and
wholesale revenue decreased to 50.2% in the twenty-four week period ended
December 12, 1998, from 60.8% in the twenty-four week period ended December 13,
1997. The decrease was due primarily to a more favorable cost relationship
associated with retail


                                       8
<PAGE>   11

sales generated at the Company's Coffee People (Oregon) and Coffee Plantation
stores acquired on May 19, 1998.

Store and other operating expenses increased 175.3% to $11,205,000 in the
twenty-four week period ended December 12, 1998, from $4,070,000 in the same
period of fiscal 1998. The increase was due primarily to store operating
expenses attributable to the Coffee People (Oregon) and Coffee Plantation stores
acquired on May 19, 1998, increased store operating expenses at Gloria Jean's
company-operated stores, and increased franchise administration expenses
necessary to support the planned growth in the franchise business. As a
percentage of total revenues, store and other operating expenses increased to
40.9% in the fiscal 1999 twenty-four week period from 22.5% in the fiscal 1998
twenty-four week period.

Depreciation and amortization increased 10.4% to $808,000 in the twenty-four
week period ended December 12, 1998 from $732,000 in the twenty-four week period
ended December 13, 1997. Depreciation increased primarily due to an increase in
goodwill amortization resulting from the reverse merger with Gloria Jean's. As a
percentage of total revenues, depreciation and amortization expense decreased to
2.9% for the twenty-four week period ended December 12, 1998 from 4.0% in the
same twenty-four week period of fiscal 1998. The decrease in depreciation was
due primarily to the suspension of depreciation at the Gloria Jean's
company-operated stores.

General and administrative expenses increased 44.5% to $2,210,000 in the
twenty-four week period ended December 12, 1998 from $1,529,000 in the same
period of fiscal 1998 primarily as a result of general and administrative
infrastructure acquired as part of the Coffee People acquisition completed in
May 1998. As a percentage of total revenues, general and administrative expenses
remained relatively constant at 8.1% in the fiscal 1999 twenty-four week period
compared to 8.4% for the same period in fiscal 1998.

Acquisition and integration expenses of $799,000 in the fiscal 1999 twenty-four
week period consist of one-time costs associated with integrating Coffee People
operations and a portion of costs associated with exiting certain Coffee People
activities, including relocating and/or terminating Coffee People's employees at
the Portland headquarters and franchising Coffee People (Oregon) and Coffee
Plantation retail stores.

INTEREST INCOME. Interest income as a percentage of total revenues decreased to
0.2% for the twenty-four week period ended December 12, 1998 from 0.8% for the
same period in fiscal 1998, due to the overall increase in revenues and a
reduction in cash balances available for short-term investment in
interest-bearing instruments.

INTEREST EXPENSE. Interest expense as a percentage of total revenues increased
to 0.8% for the twenty-four week period ended December 12, 1998 from 0.0% for
the same period in fiscal 1998, as a result of interest incurred on long-term
debt obligations acquired as part of the Coffee People acquisition on May 19,
1998.

INCOME TAXES. The benefit for income taxes was $9,000 for the twenty-four week
period ended December 12, 1998, compared to a provision for income taxes of
$1,169,000 for the same period in fiscal 1998. The effective tax rates of 50.0%
for the twenty-four week period ended December 12, 1998 and 43.0% for the
twenty-four week period ended December 13, 1997, result from federal and state
income taxes and nondeductible goodwill amortization.



                                       9
<PAGE>   12

LIQUIDITY AND CAPITAL RESOURCES

As of December 12, 1998, all seven of the Coffee People (Oregon) stores located
outside of Oregon that Coffee People had identified for closure or disposition
in its quarter ended June 30, 1997 had been closed. Of these stores, three had
been sold and their store leases assigned and one store lease had been
terminated by agreement. The Company identified eight Gloria Jean's stores for
disposal during fiscal year 1997. Five were disposed of during fiscal year 1998
pursuant to lease termination agreements. Of the three remaining Gloria Jean's
stores, one was disposed of after June 27, 1998 pursuant to a lease termination
agreement and two remain open. The Company continues to make payments on the
lease obligations for the three remaining Coffee People stores and for the two
remaining Gloria Jean's stores. The Company will continue to make cash outlays
for these stores for such items as rent, utilities and insurance until such time
as it is able to sell the stores or until it can negotiate satisfactory
arrangements with landlords for re-leasing the store premises or for otherwise
terminating the leases. Such costs are charged against the accrual for store
closures. There can be no assurance that the Company will be successful at
selling these stores or in negotiating with landlords for the re-leasing of the
store premises or for terminating the leases. If the Company is not successful
in these efforts, such cash outlays could continue for an indeterminate period
during the term of the store leases. The Company is working with local real
estate brokers to market, re-lease or sublease these stores. The lease terms for
these stores range from two and one-half to nine years with expiration dates
ranging from January 2001 through May 2007. Minimum future rental payments as of
December 12, 1998 under the five leases total $1,317,000.

As of December 12, 1998, the Company had $2,224,000 in cash and equivalents.

The Company had working capital of $6,996,000 as of December 12, 1998, as
compared to working capital of $5,277,000 at June 27, 1998.

For the twenty-four week period ended December 12, 1998, cash used by operating
activities was $1,695,000, as compared to cash used by operating activities of
$2,259,000 for the same period in fiscal 1998.

For the twenty-four week periods ended December 12, 1998 and December 13, 1997,
net cash used in investing activities was $54,000 and $1,125,000, respectively,
primarily as a result of the purchase of property, plant and equipment.

For the twenty-four week period ended December 12, 1998, the Company had net
cash provided by financing activities of $1,151,000, primarily as a result of
borrowings under long-term debt in the amount of $1,400,000, offset by principal
payments on long-term debt in the amount of $1,178,000. For the twenty-four week
period ended December 13, 1997, the Company had neither cash used or generated
by financing activities.

The Company has a line of credit with one of its primary banks providing for
borrowings through August 1, 1999 of up to $500,000. Borrowings bear interest at
the rate of 0.5% over the bank's reference rate (7.75% as of December 12, 1998)
and are secured by substantially all of Coffee People assets, including accounts
receivable, inventories, trade fixtures and equipment. As of December 12, 1998,
there were no borrowings outstanding under the line of credit; however, $73,000
of the line was reserved for a letter of credit dated September 1998.



                                       10
<PAGE>   13

Contemporaneously with the closing of the Merger, Coffee People entered into a
loan agreement with The Second Cup Ltd., which provides for a credit facility of
up to $4,000,000 over a five year term. The facility expires May 19, 2003. The
interest rate for amounts drawn under the line is 11.5%. As of December 12,
1998, the Company had borrowed $1,000,000 under this agreement.

On November 24, 1998, the Company entered into a sale-leaseback transaction
involving equipment at twelve company-operated Gloria Jean's retail stores. The
$922,000 proceeds received by the Company from the lease transaction were used
for general corporate purposes and working capital. The interest rate on the
capital lease obligation is 10.5%. The capital lease assets are recorded in
property, plant and equipment. At the end of the lease term, the Company has an
option to purchase the equipment for the greater of fair market value or 10% of
the lessor's original cost, or renew the lease for an additional eight months.

Coffee People believes that anticipated cash flow from operations, existing cash
and bank debt and the credit facility will be sufficient to meet its cash
requirements through the end of the next twelve months.

SEASONALITY

The Company's business is subject to seasonal fluctuations, due to seasonal
changes and general economic conditions, among other factors. Historically, net
sales from Coffee People (Oregon) stores have been highest during the first and
fourth fiscal quarters, which include the spring and summer months.
Historically, Gloria Jean's highest sales and earnings have occurred in the
second and third fiscal quarters which include the peak holiday shopping months.
Coffee Plantation sales are also seasonal with higher sales and earnings
occurring in the second and third fiscal quarters when the weather is cooler and
more favorable to drinking hot beverages. In addition, quarterly results have,
and in the future are likely to be, substantially affected by the timing of new
store openings. Because of the seasonality of Gloria Jean's business and the
impact of new store openings, results for any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year and cannot
be used to indicate financial performance for an entire year.

YEAR 2000

The "Year 2000 Problem" refers to the possible failure of many computer systems
that may arise as a result of many existing computer programs using only the
last two digits to refer to a year. The Company has undertaken an initial review
of the potential effects on it of the Year 2000 problem. These potential
problems are being addressed on a system-by-system basis.

The Company has determined that its general accounting system (which includes
invoicing, accounts receivable and inventory control) must be upgraded to make
the system Year 2000 compliant. The Company estimates that the cost of upgrading
the accounting system will be approximately $10,000 and that the upgrade will be
completed before the end of the current fiscal year. As of December 12, 1998,
the Company had expended approximately $5,000 to remedy this problem.

The Company is continuing to review its information technology ("IT") hardware
and software, including personal computers, application and network software for
Year 2000 compliance readiness. The review process entails evaluation of
hardware/software and testing. The Company believes its IT review will be
completed by the end of the current fiscal year. While the review


                                       11
<PAGE>   14

process is ongoing, the Company believes that the cost to bring its IT systems
into Year 2000 compliance will be under $50,000 and it does not foresee any
material difficulties with completing the necessary changes prior to January 1,
2000.

The Company expects that its review of non-IT systems (including voice
communications and security) will be completed before the end of the current
fiscal year. The estimated cost to remedy non-IT systems is not expected to be
material.

The Company expects that the source of funds for evaluation and remediation of
Year 2000 compliance issues will be cash flows from operations.

The Company believes that its most significant internal risk posed by the Year
2000 Problem is the possibility of a failure of its accounting system. If the
accounting system were to fail, the Company would have to implement manual
processes, which may slow the timeliness of information needed to manage the
business. As discussed above, the Company plans to avoid this risk by upgrading
its accounting systems; however, there can be no assurance that such actions
will avoid problems that may arise.

The third parties whose Year 2000 problems could have the greatest effect on the
Company are believed by the Company to be banks that maintain the Company's
depository accounts and credit card processing systems, the company that
processes the Company's payroll and which maintains the Company's human resource
databases, and companies that supply or distribute coffee beans and other goods.
The Company is in the process of confirming the state of Year 2000 readiness of
these parties. It is anticipated the Company will complete this process prior to
the end of the fiscal year.

The Company is in the process of developing a "contingency plan" to address
potential Year 2000 problems. The contingency plan is anticipated to be
completed prior to the end of the fiscal year.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Instruments. The supply and price of green coffee beans is subject to
significant volatility, generally caused by multiple factors beyond the
Company's control, including weather, political and economic conditions in
coffee producing countries, and other supply-related matters. Because the
Company's coffee roasting operation supplies products to franchisees on a
cost-plus basis, the Company believes that its gross profit on wholesale sales
is generally insulated from the risk of volatility in prices of green coffee
beans, except to the extent that such fluctuation affects the demand for
specialty coffee. Company-operated stores are not so similarly insulated. In
addition, other factors may affect gross profit, such as production efficiencies
or inefficiencies (including roasting shrinkage) and write-offs of excess coffee
inventories. During fiscal year 1997, worldwide coffee prices increased
significantly.

In order to avoid speculation on spot coffee prices, the Company typically
undertakes to lock in the cost of a portion of its future coffee purchases by
entering into contracts to purchase green coffee over future periods at fixed
prices, or at future prices to be determined within one to 12 months from the
time of the actual purchase. At December 12, 1998, these purchase commitments
totaled approximately $2,630,000 for approximately 2,190,000 pounds of green
coffee, at an average contract cost per pound of $1.20. These commitments
together with existing inventory represent approximately 96% of the Company's
estimated coffee requirements through


                                       12
<PAGE>   15
December 11, 1999. These commitments are not currently favorable to market at
December 12, 1998 as the current market price for a pound of green coffee is
approximately $1.15 per pound. The Company does not use commodity based
financial instruments to hedge coffee purchases.

Financial Market Risk. The Company does not maintain a substantial investment
portfolio. However, it does have arrangements with its primary bank to invest
monies on deposit in overnight repurchase agreements and in other marketable
short-term securities with maturities of generally less than 90 days. Based upon
the current portfolio, a 100 basis point move in short-term interest rates would
not have a material effect on the Company's financial condition or results of
operations.

The Company's principal market risk with respect to its financial debt
instruments is to changes in the prime rate charged by major banks in the United
States and to other benchmark rates to which interest rates under the Company's
loan agreements may be tied. In June 1998, the Company elected to have a portion
of its term loan with Bank of America bear interest at 2.25% over the Interbank
Offered Rate ("IBOR rate"), an offshore rate used by the Bank that is similar to
the London Interbank Offered Rate (LIBOR rate). Under the current arrangement,
this rate will be adjusted periodically. On December 8, 1998, the Company
elected to have the interest rate on $3,000,000 of its term loan continue to be
referenced to the IBOR rate. The rate on $2,000,000 and $1,000,000 has been
fixed at 7.5625% and 7.25%, respectively, through February 8, 1999. The rate on
the remaining balance of $1,100,000 is 8.25% (0.5% over the bank's prime rate of
7.75% as of December 12, 1998). At December 12, 1998, a 100 basis point increase
in the IBOR rate would result in additional interest expense of $41,000 on an
annualized basis. A return to the 8.25% floating rate tied to the prime rate
(7.75% at December 12, 1998) would have a similar impact on the Company's
results of operations.


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is a defendant and a plaintiff in various lawsuits from time to
time. No legal proceedings are in progress or pending against the Company, other
than proceedings set forth below or proceedings incidental to carrying on its
business and operations in the ordinary course which, individually or in the
aggregate, are not material to the Company.

Sugai Products, Inc. v. Kona Kai Farms, Inc., Regton Companies, Inc., Starbucks
Corp., Peet's Coffee and Tea, Inc., Gloria Jean's Gourmet Coffees Corp. (the
"Kona litigation"). On January 9, 1997, the plaintiffs filed a putative class
action against the defendants alleging violation of the Lanham Act, the Hawaii
Uniform Deceptive Trade Practices Act and the Hawaii Unfair Trade Practices Act.
The plaintiffs, who purport to represent a class of Kona coffee growers,
wholesalers and retailers, allege that the defendants sold coffee beans grown in
Central America under the false label "Kona coffee" and seek an injunction,
unspecified damages, attorneys' fees and costs. In March, Gourmet Coffees Corp.
and certain other defendants moved to dismiss the complaint or, in the
alternative, for a more definitive statement of the claim. The plaintiffs filed
a motion for class certification in July 1997. In January 1998, the United
States District Court for the District of Hawaii denied class certification.

Yamane Enterprises, et al. v. Kona Kai Farms, Inc., Regton Companies, Inc.,
Starbucks Corp., Peet's Coffee and Tea, Inc., Gloria Jean's Gourmet Coffees
Corp. (the "Kona litigation"). On or


                                       13
<PAGE>   16

about October 23, 1998, the plaintiffs filed an action virtually identical to
the action described above in the Sugai Products case. Defendants, including
Gloria Jean's have moved to consolidate this action with the Sugai Products
case. The motion is presently pending.

Patrick, et al., v. Kona Kai Farms, Inc., Regton Companies, Inc., Starbucks
Corp., Peet's Coffee and Tea, Inc., Gloria Jean's Gourmet Coffees Corp. (the
"Kona litigation"). In an action filed in the Superior Court of the State of
California, County of San Diego, four named plaintiffs, on behalf of themselves
and the general public, has sued Gloria Jean's and numerous other retail and
non-retail defendants alleging violations of California Business and Professions
Code and common law unfair business practices, arising out of the alleged sale
of Panamanian coffee as Kona coffee.

In July of this year, Gloria Jean's and Brothers Gourmet Coffees agreed on
present and future indemnification in connection with the settlement of the
escrow account established pursuant to The Second Cup's purchase of Gloria
Jean's stock from Brothers. As consideration for the settlement, Gloria Jean's
has released Brothers from further liability for all pending and future legal
proceedings. Brothers has agreed to continued indemnification of Gloria Jean's
in connection with the Kona litigation as it relates to the period ended
November 9, 1995 and for amounts owed on California and Illinois sales tax
audits, currently under way, in excess of $130,000. On August 27, 1998, Brothers
filed a voluntary petition for relief under Chapter 11 of Title 11 of the United
States Code with the United States Bankruptcy Court for the District of
Delaware. The Company intends to take all legal measures to protect any claims
it may have against Brothers.

Charles Walker, Phyllis Jean Walker, Buckeye's Best Bean Corp. d/b/a Gloria
Jean's Gourmet Coffee v. Gloria Jean's Gourmet Coffees Franchising Corp. et al.
On or about December 9, 1998, Charles Walker, Phyllis Jean Walker and Buckeye's
Best Bean Corp. (the "Walkers") filed a Demand for Arbitration in Cincinnati,
Ohio against the Company alleging common law fraud, negligent misrepresentation,
violations of the Ohio Business Opportunity Purchasers Protection Act,
violations of the Illinois Franchise Act and breach of contract. The Walkers
also asserted claims for unjust enrichment and punitive damages. These claims
all allegedly arise from the Company's sale of a former Company store to the
Walkers in or around May of 1995. The Walkers are seeking damages in excess of
$500,000.00. The parties agreed to transfer the arbitration to Chicago, Illinois
pursuant to the terms of the parties' Arbitration Agreement. On or about
December 18, 1998, the Walkers filed an Amended Demand for Arbitration
containing similar allegations to the first and demanding the same relief.


Item 4. Submission of Matters to a Vote of Security Holders

At the annual meeting of stockholders of Coffee People, Inc. on November 24,
1998, the stockholders voted on three proposals. The first was a proposal to
elect Michael Bregman, Alton McEwen, Douglas L. Ayer, Robert M. Haft, Gary
Talboy, and Kathy A. Welsh as directors of Coffee People, Inc. The following
table sets forth the votes in such election:





                                       14
<PAGE>   17


<TABLE>
<CAPTION>
                                                                  Percent                       Percent
                                                    For            Voted         Withheld         Voted
                                                 ---------        -------        --------       -------
<S>                                              <C>               <C>             <C>            <C> 
Michael Bregman                                  8,061,035         98.84           94,701         1.16
Alton McMcEwen                                   8,061,035         98.84           94,701         1.16
Douglas L. Ayer                                  8,048,912         98.69          106,824         1.31
Robert M. Haft                                   8,046,735         98.66          109,001         1.34
Gary Talboy                                      8,061,035         98.84           94,701         1.16
Kathy A. Welsh                                   8,049,835         98.70          105,901         1.30
</TABLE>

The shareholders voted on a proposal to change the state of incorporation from
Oregon to Delaware. The following table sets forth the votes in such election:

<TABLE>
<CAPTION>
                                                   Percentage of
                                    Votes           Outstanding
                                 ---------         -------------
<S>                              <C>               <C>  
For                              8,055,750              74.90
Against                             99,166               0.92
Abstain                                820               0.01
Broker non-votes                         0               0.00
Other unvoted                    2,599,153              24.17
</TABLE>

The shareholders also voted on a proposal to amend the 1998 stock incentive
plan. The following table sets forth the votes in such election:

<TABLE>
<CAPTION>
                                                   Percentage of
                                    Votes           Outstanding
                                 ---------         -------------
<S>                              <C>               <C>  
For                              7,759,831              72.15
Against                            392,730               3.65
Abstain                              3,175               0.03
Broker non-votes                         0               0.00
Other unvoted                    2,599,153              24.17
</TABLE>

All nominees were elected by a majority of shareholders. Additionally, the
proposal to change the state of incorporation from Oregon to Delaware and the
proposal to amend the 1998 stock incentive plan were approved by a majority of
shareholders.


Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

<TABLE>
<CAPTION>
    EXHIBIT NO.   DESCRIPTION
    -----------   -----------
<S>               <C>
      10.27       Lease Agreement, dated November 24, 1998, between Gloria Jean's, Inc., and
                  Total Lease Concepts.
      27          Financial Data Schedule
</TABLE>

(b)      Reports on Form 8-K

                  None



                                       15
<PAGE>   18

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.

COFFEE PEOPLE, INC.



/s/ Mark J. Archer                                   Dated: January 26, 1999
-----------------------------------------
Mark J. Archer
Executive Vice President,
Chief Financial Officer and Secretary

Signing on behalf of the registrant and
as principal financial officer





                                       16