<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 March 6, 1999


[ ]  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)


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

                 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 March 16, 1999, there were 10,762,757 shares of the registrant's Common
Stock outstanding.


<PAGE>   2




                                      TABLE OF CONTENTS
<TABLE>
<CAPTION>



PART I         FINANCIAL INFORMATION                                                 PAGE
<S>            <C>                                                                   <C>


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........................................................13



PART II        OTHER INFORMATION


Item 1.        Legal Proceedings.....................................................14

Item 6.        Exhibits and Reports on Form 8-K......................................14


Signature ...........................................................................15

</TABLE>


<PAGE>   3




                               COFFEE PEOPLE, INC.
                           CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>

                                                                                   MARCH 6,          JUNE 27,
                                                                                     1999             1998
                                                                                 (UNAUDITED)
                                                                                   --------         --------
<S>                                                                                <C>              <C>     
ASSETS
CURRENT ASSETS:
    Cash and cash equivalents                                                      $  2,773         $  2,822
    Accounts receivable, net                                                          3,149            3,262
    Inventories                                                                       3,722            4,052
    Prepaid expenses and other assets                                                   926              713
    Deferred income taxes                                                             2,427            2,621
                                                                                   --------         --------
        TOTAL CURRENT ASSETS                                                         12,997           13,470

Property, plant and equipment, net                                                   12,262           12,711
Goodwill, net                                                                        25,530           25,967
Other assets                                                                            114              113
Deferred income taxes                                                                 3,385            3,434
                                                                                   --------         --------

        TOTAL ASSETS                                                               $ 54,288         $ 55,695
                                                                                   ========         ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
    Current portion of long-term debt                                              $  1,237         $  1,279
    Current portion of capital lease obligations                                        119               --
    Accounts payable                                                                  1,795            1,421
    Payable to related party                                                             --              984
    Accrued liabilities                                                               1,827            2,572
    Accrual for store closures                                                        1,102            1,291
    Franchisee deposits                                                                 538              459
    Deferred franchise fee income                                                        94              187
                                                                                   --------         --------

        TOTAL CURRENT LIABILITIES                                                     6,712            8,193

Long-term debt                                                                        2,727            3,798
Capital lease obligations                                                               784               --
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, 10,762,757 and 10,746,040                                  44,659           44,630
Stock subscription notes receivable                                                    (350)            (338)
Accumulated deficit                                                                    (390)            (790)
                                                                                   --------         --------

        TOTAL STOCKHOLDERS' EQUITY                                                   43,919           43,502
                                                                                   --------         --------

        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                 $ 54,288         $ 55,695
                                                                                   ========         ========
</TABLE>



                                       1
<PAGE>   4







                               COFFEE PEOPLE, INC.
                      CONSOLIDATED STATEMENTS OF OPERATION
                    (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                  TWELVE WEEKS ENDED          THIRTY SIX WEEKS ENDED
                                                ----------------------        ----------------------
                                                MARCH 6,      MARCH 7,        MARCH 6,       MARCH 7,
                                                  1999          1998            1999           1998
                                                -------        -------        -------        -------
                                               (unaudited)   (unaudited)     (unaudited)    (unaudited)
<S>                                             <C>            <C>            <C>            <C>    
REVENUES:
    Franchise revenue                           $ 1,689        $ 1,589        $ 4,756        $ 4,584
    Corporate store sales                         7,566          2,759         22,429          6,891
    Wholesale revenue                             3,484          3,047         12,944         14,020
                                                -------        -------        -------        -------

        Total revenues                           12,739          7,395         40,129         25,495
                                                -------        -------        -------        -------

EXPENSES:
    Cost of goods sold                            5,560          3,704         18,384         13,210
    Store and other operating expenses            5,007          1,982         15,605          5,735
    Depreciation and amortization                   345            377          1,152          1,109
    General and administrative expenses             842            602          3,052          2,131
    Acquisition and integration expenses            151             --            950             --
                                                -------        -------        -------        -------

        Total expenses                           11,905          6,665         39,143         22,185
                                                -------        -------        -------        -------

OPERATING INCOME                                    834            730            986          3,310

Interest and other income                            36             69             92            207
Interest expense                                    143             --            368             --
                                                -------        -------        -------        -------

INCOME BEFORE INCOME TAXES                          727            799            710          3,517

Provision for income taxes                          319            343            310          1,512
                                                -------        -------        -------        -------

NET INCOME                                      $   408        $   456        $   400        $ 2,005
                                                =======        =======        =======        =======


NET INCOME PER SHARE - BASIC
    AND DILUTED                                 $  0.04        $  0.06        $  0.04        $  0.27
                                                =======        =======        =======        =======


Weighted average common
  shares outstanding - basic                     10,761          7,461         10,755          7,461

Weighted average common and
  common equivalent shares
  outstanding - diluted                          10,776          7,461         10,771          7,461
</TABLE>


                                       2
<PAGE>   5




                               COFFEE PEOPLE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                      Thirty Six Weeks Ended
                                                                      ----------------------
                                                                      March 6,        March 7,
                                                                        1999            1998
                                                                      -------         -------
                                                                      (unaudited)    (unaudited)
<S>                                                                   <C>             <C>    
Cash flows from operating activities:
  Net income                                                          $   400         $ 2,005
    Adjustments to reconcile net income to net
  cash provided by operating activities:
    Depreciation and amortization                                       1,152           1,109
    Provision for uncollectible accounts                                  190              --
    Deferred income taxes                                                 243             880
    Interest income on stock subscription notes receivable                (12)             --
    Change in assets and liabilities, net of amounts acquired:
      Accounts receivable                                                 (77)            (88)
      Receivable from/due to related party                               (984)            312
      Inventories                                                         330            (503)
      Prepaid expenses and other assets                                  (214)            221
      Accounts payable                                                    374            (247)
      Accrued liabilities                                                (745)           (603)
      Accrual for store closures                                         (189)           (264)
      Franchisee deposits                                                  79              76
      Deferred franchise fee income                                       (93)            (28)
      Deferred rent expense                                               (56)              5
                                                                      -------         -------
                                                                          398           2,875
                                                                      -------         -------

Cash flows from investing activities:
  Purchase of property, plant and equipment                              (752)         (1,400)
  Proceeds from disposal of property, plant and equipment                 511              98
  Additions to goodwill                                                   (25)             --
                                                                      -------         -------
                                                                         (266)         (1,302)
                                                                      -------         -------

Cash flows from financing activities:
  Proceeds on issuance of shares                                           29              --
  Borrowings under capital lease obligation                               922              --
  Borrowings under long-term debt                                       1,412              --
  Payment on capital lease obligation                                     (19)             --
  Payment on long-term debt                                            (2,525)             --
                                                                      -------         -------
                                                                         (181)             --
                                                                      -------         -------

Decrease in cash and cash equivalents                                     (49)          1,573

Cash and cash equivalents, beginning of period                          2,822           7,281
                                                                      -------         -------

Cash and cash equivalents, end of period                                2,773           8,854
                                                                      =======         =======

Supplemental cash flow information
  Interest                                                                297              --
  Cash paid for income taxes                                               26              --
</TABLE>


                                       3
<PAGE>   6




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

As of March 6, 1999 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 March 6, 1999 presentation.

NOTE 2.  INVENTORIES

Inventories consist of the following:
<TABLE>
<CAPTION>

                                       March 6,       June 27,
                                        1999            1998
                                     (unaudited)
                                       ------        ------
Coffee:
<S>                                    <C>           <C>   
    Unroasted                          $1,429        $2,169
    Roasted                               289           368
Other merchandise held for sale           703           898
Supplies                                1,301           617
                                       ------        ------
                                       $3,722        $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.



                                       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 March 6, 1999, 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 a result of the proposed and
pending merger with Diedrich Coffee, Inc., the Company has temporarily deferred
execution of this strategy. (See Note 5)

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.

NOTE 5.  DIEDRICH COFFEE, INC. MERGER

On March 16, 1999, Coffee People, Inc. entered into an Agreement and Plan of
Merger with Diedrich Coffee, Inc. (NASDAQ:DDRX). Pursuant to the merger
agreement, Coffee People has agreed to merge with a subsidiary of Diedrich
Coffee. After the merger is effective Coffee People will be a wholly owned
subsidiary of Diedrich Coffee. Under the terms of the merger agreement, Coffee
People shareholders will receive $17.75 million in cash, 1,500,000 shares of
Diedrich Coffee common stock, and an additional $5.25 million in cash or a
combination of cash and stock based on the net proceeds of a public equity
offering planned by Diedrich Coffee prior to the completion of the merger.
Closing of the merger is subject to a number of conditions, including completion
of the public equity offering by Diedrich Coffee upon certain specified terms,
receipt of regulatory approvals and approval by the shareholders of Coffee
People and Diedrich Coffee. If these conditions are met, the transaction is
expected to close during July 1999.


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 execute its franchising strategy;
the price and availability of green coffee; effects of competition; availability
of additional capital; changes in applicable government regulations as they
pertain to franchising; ability to attract and retain key personnel; 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


                                       5
<PAGE>   8




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 acquiror for financial statement purposes. 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 thirty-six week
periods ended March 6, 1999 reflect the operations of the combined companies
while the financial results for the twelve and thirty-six week periods ended
March 7, 1998 reflect the operations of Gloria Jean's only.

As of March 6, 1999, the Company had 254 franchised and 26 company-operated
stores operating under the Gloria Jean's name in 38 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 13 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. Certain Coffee Plantation stores also offer an expanded menu
including soups, salads and light meals.

The Company previously announced plans to consolidate certain corporate
functions and to restructure Coffee People Old's operations. To date, all Coffee
People Old corporate positions have either been moved to the Company's
Castroville, California headquarters or have been eliminated. Additionally, all
coffee roasting for Gloria Jean's, Coffee People (Oregon) and Coffee Plantation
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.

On March 16, 1999, Coffee People, Inc. entered into an Agreement and Plan of
Merger with Diedrich Coffee, Inc. (See note 5). Pursuant to the merger
agreement, Coffee People has agreed to merge with a subsidiary of Diedrich
Coffee. After the merger is effective Coffee People will be a wholly owned
subsidiary of Diedrich Coffee. Closing of the merger is subject to a number of
conditions, including completion of the public equity offering by Diedrich
Coffee upon certain specified terms, receipt of regulatory approvals and
approval by the shareholders of Coffee People and Diedrich Coffee. If these
conditions are met, the transaction is expected to close during July 1999.



                                       6
<PAGE>   9





TWELVE WEEKS ENDED MARCH 6, 1999 COMPARED TO TWELVE WEEKS ENDED MARCH 7, 1998

REVENUES. Total revenues increased 72.3% to $12,739,000 for the twelve-week
period ended March 6, 1999, from $7,395,000 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 174.2% to $7,566,000 for the
fiscal 1999 twelve-week period from $2,759,000 in the fiscal 1998 twelve-week
period. The increase in retail sales was due primarily to sales of $5,428,000 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 increased 14.3% to
$3,484,000 for the twelve weeks ended March 6, 1999 from $3,047,000 for the same
twelve-week period in fiscal 1998. The increase was primarily due to higher
coordination fees.

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 6.3% to $1,689,000
for the twelve-week period ended March 6, 1999 from $1,589,000 for the same
twelve-week period in fiscal 1998. The reason for this increase was primarily
the final of three payments for a territory fee from an international franchisee
in the amount of $150,000 and transfer and development fees in the amount of
$50,000, offset by an 8.4% decrease in domestic royalties to $1,398,000 in the
twelve week period ended March 6, 1999 compared to $1,526,000 for the same
period in fiscal 1998. The decrease in domestic royalties was due to lower
comparable store sales.

COSTS AND EXPENSES. Cost of goods sold increased 50.1% to $5,560,000 for the
twelve weeks ended March 6, 1999, from $3,704,000 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 50.3% in the twelve week period ended March 6, 1999, from
63.8% in the twelve week period ended March 7, 1998. 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.
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 152.6% to $5,007,000 in the
twelve-week period ended March 6, 1999, from $1,982,000 in the same period of
fiscal 1998. Of the $3,025,000 increase, $2,715,000 was due to store operating
expenses attributed to the Coffee People (Oregon) and Coffee Plantation stores
acquired on May 19, 1998. As a percentage of total revenues, store and other
operating expenses increased to 39.3% in the fiscal 1999 twelve-week period from
26.8% 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


                                       7
<PAGE>   10




as a result of this strategy, depreciation and amortization, as a percentage of
revenues, decreased to 2.7% for the twelve-week period ended March 6, 1999 from
5.1% in the same twelve-week period of fiscal 1998. For the twelve-week period
ended March 6, 1999, depreciation and amortization expense decreased to $345,000
compared to $377,000 in the same period in fiscal 1998.

General and administrative expenses increased 39.9% to $842,000 in the
twelve-week period ended March 6, 1999 from $602,000 in the same period of
fiscal 1998. In 1998 the Company received reimbursement for pre-merger related
expenses in the amount of $276,000 from Brothers Gourmet Coffee. As a result of
this reimbursement, general and administrative expenses decreased to 6.6% in the
fiscal 1999 twelve-week period compared to 8.1% for the same period in fiscal
1998.

Acquisition and integration expenses of $151,000 in the fiscal 1999 twelve-week
week period consist of costs associated with the anticipated merger with
Diedrich Coffee. It is anticipated additional expenses will be incurred relating
to the planned merger.

INTEREST AND OTHER INCOME. Interest income as a percentage of total revenues
decreased to 0.3% for the twelve week period ended March 6, 1999 from 0.9% 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 1.1% for the twelve week period ended March 6, 1999 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, additional borrowings under its line of credit and bank debt
facilities, and the sale-leaseback transaction initiated in November 1998.

INCOME TAXES. The provision for income taxes was $319,000 for the twelve-week
period ended March 6, 1999, compared to $343,000 for the same period in fiscal
1998. The effective tax rates of 43.9% for the twelve week period ended March 6,
1999 and 42.9% for the twelve week period ended March 7, 1998, result from
federal and state income taxes and nondeductible goodwill amortization.

THIRTY-SIX WEEKS ENDED MARCH 6, 1999 COMPARED TO THIRTY-SIX WEEKS ENDED MARCH 7,
1998

REVENUES. Total revenues increased 57.4% to $40,129,000 for the thirty-six week
period ended March 6, 1999, from $25,495,000 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 225.5% to $22,429,000 for the
fiscal 1999 thirty-six week period from $6,891,000 in the fiscal 1998 thirty-six
week period. The increase in retail sales was due primarily to sales of
$16,563,000 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 7.7% to
$12,944,000 for the thirty-six weeks ended March 6, 1999 from $14,020,000 for
the same thirty-six 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
shift from the sale of whole beans to drink sales.


                                       8
<PAGE>   11





Franchise revenue consists primarily of initial franchise fees and royalties
received by the Company on sales made at each franchise location. Franchise
revenue increased 3.8% to $4,756,000 for the thirty-six week period ended March
6, 1999 from $4,584,000 for the same thirty-six week period in fiscal 1998. The
components of this increase were an increase in franchise and other fees in the
amount of $202,000, offset by a reduction of $30,000 in royalty revenue. The
increase in franchise fees was primarily from a territory fee in the amount of
$150,000 and a Coffee Plantation initial franchise fee in the amount of $50,000.
Royalty revenues remained relatively constant at $4,050,000 in 1999 compared to
$4,080,000 for the same period in 1998, due primarily to the addition of one
Coffee Plantation store and 8 international stores, offset by a decrease of 5
domestic stores.

COSTS AND EXPENSES. Cost of goods sold increased 39.2% to $18,384,000 for the
thirty-six weeks ended March 6, 1999, from $13,210,000 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 52.0% in the thirty-six week period ended March
6, 1999, from 63.2% in the thirty-six week period ended March 7, 1998. 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.

Store and other operating expenses increased 172.1% to $15,605,000 in the
thirty-six week period ended March 6, 1999, from $5,735,000 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
38.9% in the fiscal 1999 thirty-six week period from 22.5% in the fiscal 1998
thirty-six week period.

Depreciation and amortization increased 3.9% to $1,152,000 in the thirty-six
week period ended March 6, 1999 from $1,109,000 in the thirty-six week period
ended March 7, 1998. Depreciation and amortization 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 thirty-six week period ended March 6, 1999 from 4.3%
in the same thirty-six 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, which are being held for sale to franchisees.

General and administrative expenses increased 43.2% to $3,052,000 in the
thirty-six week period ended March 6, 1999 from $2,131,000 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.
Additionally, general and administrative expenses were favorably impacted in
1998 due to a reimbursement from Brothers Gourmet Coffee in the amount of
$276,000. As a percentage of total revenues, general and administrative expenses
decreased to 7.6% in the fiscal 1999 thirty-six week period compared to 8.4% for
the same period in fiscal 1998.

Acquisition and integration expenses amounted to $950,000 in the fiscal 1999
thirty-six week period. This consists of $799,000 in 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


                                       9
<PAGE>   12




and franchising Coffee People (Oregon) and Coffee Plantation retail stores, and
$151,000 in expenses relating to the anticipated merger with Diedrich Coffee.

INTEREST AND OTHER INCOME. Interest income as a percentage of total revenues
decreased to 0.2% for the thirty-six week period ended March 6, 1999 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 0.9% for the thirty-six week period ended March 6, 1999 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
and the November 1998 sale-leaseback transaction.

INCOME TAXES. The provision for income taxes was $310,000 for the thirty-six
week period ended March 6, 1999, compared to $1,512,000 for the same period in
fiscal 1998. The effective tax rates of 43.7% for the thirty six week period
ended March 6, 1999 and 43.0% for the thirty six week period ended March 7,
1998, result from federal and state income taxes and nondeductible goodwill
amortization.

LIQUIDITY AND CAPITAL RESOURCES

As of March 6, 1999, 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
March 6, 1999 under the five leases total $1,272,000.

As of March 6, 1999, the Company had $2,773,000 in cash and equivalents.

The Company had working capital of $6,285,000 as of March 6, 1999, as compared
to working capital of $5,277,000 at June 27, 1998.

For the thirty-six week period ended March 6, 1999, cash provided by operating
activities was $398,000, as compared to cash provided by operating activities of
$2,875,000 for the same period in fiscal 1998. Cash provided by operating
activities for the thirty-six week period ended March


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6, 1999, consisted primarily of net income and depreciation, offset by accrued
liabilities, prepaid expenses and a decrease in payable to a related party.

For the thirty-six week periods ended March 6, 1999 and March 7, 1998, net cash
used in investing activities was $266,000 and $1,302,000, respectively,
primarily as a result of the purchase of property, plant and equipment, offset
by proceeds from disposal of equipment.

For the thirty-six week period ended March 6, 1999, the Company had cash used in
financing activities of $181,000, primarily as a result of borrowings under
long-term debt and a capital lease obligation in the amount of $2,334,000,
offset by principal payments on long-term debt in the amount of $2,525,000. For
the thirty-six week period ended March 7, 1998, 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 March 6, 1999) and
are secured by substantially all of Coffee People assets, including accounts
receivable, inventories, trade fixtures and equipment. As of March 6, 1999,
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.

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 March 6, 1999,
there were no borrowings 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
to pay down long term debt. 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.


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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 March 6, 1999, 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 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.



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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 March 6, 1999, these purchase commitments
totaled approximately $2,930,000 for approximately 2,540,000 pounds of green
coffee, at an average contract cost per pound of $1.21. These commitments
together with existing inventory represent approximately 80% of the Company's
estimated coffee requirements through March 3, 1999. These commitments are not
currently favorable to market at March 6, 1999, as the current market price for
a pound of green coffee is approximately $1.03 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 April 9, 1999, the Company elected
to have the interest rate on $3,000,000 of its term loan continue to be
referenced to IBOR. The rate has been fixed at 7.18% through May 10, 1999. The
rate on the remaining balance of $674,500 is 8.25% (0.5% over the bank's prime
rate of 7.75% as of March 6, 1999). At March 6, 1999, a 100 basis point increase
in the IBOR rate would result in additional interest expense of $30,000 on an
annualized basis. A return to the 8.25% floating rate tied to the prime rate
(7.75% at March 6, 1998) would have a similar impact on the Company's results of
operations.



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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 which,
whether individually or in the aggregate, are material to the Company.


Item 6. Exhibits and Reports on Form 8-K

(a)     Exhibits

   EXHIBIT NO. DESCRIPTION

      27       Financial Data Schedule

(b)     Reports on Form 8-K

        Report on Form 8-K dated February 11, 1999, containing the Company's
press release dated February 9, 1999, with respect to its acquisition by
Diedrich Coffee, and the Letter of Intent, dated February 8, 1999 between
Diedrich Coffee, Inc. and Coffee People, Inc.

        Report on Form 8-K dated March 30, 1999, containing the Company's press
release dated March 17, 1999, announcing the execution of a Definitive Agreement
between Diedrich Coffee, Inc. and Coffee People, Inc., and the Plan of Merger,
dated March 16, 1999 between Diedrich Coffee, Inc. and Coffee People, Inc.




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                                    SIGNATURE


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: April 19, 1999
-----------------------------------------
Mark J. Archer
Executive Vice President,
Chief Financial Officer and Secretary

Signing on behalf of the registrant and
as principal financial officer



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