<PAGE>   1
                       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 September 19, 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)

           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 October 31, 1998, there were 10,754,889 shares of the registrant's Common
Stock outstanding.
--------------------------------------------------------------------------------


<PAGE>   2
                               COFFEE PEOPLE, INC.

                                      INDEX


<TABLE>
<CAPTION>
                                                                      Page No.
                                                                      --------
<S>                                                                   <C>
PART I.           FINANCIAL INFORMATION

Item 1.           Financial Statements                                     3

Item 2.           Management's Discussion and Analysis
                  of Financial Condition and Results of
                  Operations                                               8

Item 3.           Quantitative and Qualitative Disclosures
                  About Market Risk                                       14

PART II.          OTHER INFORMATION

Item 1.           Legal Proceedings                                       16

Item 6.           Exhibits and Reports on Form 8-K                        17

Signatures                                                                18
</TABLE>


<PAGE>   3
PART I.           FINANCIAL INFORMATION

Item 1.  Financial Statements


                               COFFEE PEOPLE, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                         September 19,        June 27,
                                                             1998               1998
                                                       (Unaudited)
<S>                                                        <C>                <C>     
ASSETS
Current assets:
  Cash and cash equivalents                                $    843           $  2,822
  Accounts receivable, net                                    3,890              3,262
  Inventories                                                 4,886              4,052
  Prepaid expenses and other assets                             936                713
  Deferred income taxes                                       3,008              2,621
                                                           --------           --------
     Total current assets                                    13,563             13,470

Property, plant and equipment, net                           12,611             12,711
Goodwill, net                                                25,837             25,967
Other assets                                                     79                113
Deferred income taxes                                         3,529              3,434
                                                           --------           --------
     Total assets                                          $ 55,619           $ 55,695
                                                           ========           ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt                        $  1,267           $  1,279
  Accounts payable                                            2,706              1,421
  Payable to related party                                      543                984
  Accrued liabilities                                         2,805              2,572
  Accrual for store closures                                  1,204              1,291
  Franchise deposits                                            492                459
  Deferred franchise fee income                                 165                187
                                                           --------           --------
      Total current liabilities                               9,182              8,193

Long-term debt, less current portion                          3,343              3,798
Deferred rent expense                                           212                202
                                                           --------           --------
      Total liabilities                                      12,737             12,193
                                                           --------           --------
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                          (344)              (338)
  Accumulated deficit                                        (1,411)              (790)
                                                           --------           --------

     Total stockholders' equity                              42,882             43,502
                                                           --------           --------
     Total liabilities and stockholders' equity            $ 55,619           $ 55,695
                                                           ========           ========
</TABLE>



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

<PAGE>   4
                               COFFEE PEOPLE, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
             (Dollars in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                           Twelve Weeks Ended
                                                                  September 19,          September 20,
                                                                      1998                   1997
                                                                   (Unaudited)           (Unaudited)
<S>                                                               <C>                    <C>       
Revenues:
  Franchise revenue                                               $      1,207           $    1,214
  Corporate store sales                                                  6,966                1,696
  Wholesale revenue                                                      4,076                5,030
                                                                  ------------           ----------
     Total revenues                                                     12,249                7,940
                                                                  ------------           ----------
Expenses:
  Cost of goods sold                                                     5,926                4,454
  Store and other operating expenses                                     5,311                1,771
  Depreciation and amortization                                            479                  350
  General and administrative expenses                                      782                  581
  Acquisition and integration expenses                                     799                   --
                                                                  ------------           ----------
     Total expenses                                                     13,297                7,156
                                                                  ------------           ----------
  Income (loss) from operations                                         (1,048)                 784

Interest income                                                             33                   79
Interest expense                                                            92                   --
                                                                  ------------           ----------

Income (loss) before income taxes                                       (1,107)                 863

Provision (benefit) for income taxes                                      (486)                 371
                                                                  ------------           ----------
Net income (loss)                                                 $       (621)          $      492
                                                                  ============           ==========

Net income (loss) per share - basic and diluted                   $      (0.06)          $     0.07
                                                                  ============           ==========
Shares used in computing net income (loss) per
  share - basic and diluted                                         10,750,963            7,460,679
</TABLE>


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

<PAGE>   5
                               COFFEE PEOPLE, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                            Twelve Weeks Ended
                                                       September 19,    September 20,
                                                           1998             1997
                                                       (Unaudited)       (Unaudited)
<S>                                                     <C>               <C>    
Cash flows from operating activities:
  Net income (loss)                                     $  (621)          $   492
  Adjustments to reconcile net income
    (loss)to net cash from operating
    activities:
      Depreciation and amortization                         479               350
      Deferred income taxes                                (482)              371
      Interest income on stock subscription
        notes receivable                                     (6)               --
      Changes in assets and liabilities:
         Accounts receivable                               (628)           (1,903)
         Inventories                                       (834)              560
         Prepaid expenses and other assets                 (189)              (84)
         Accounts payable                                 1,285               487
         Payable to related party                          (441)               --
         Accrued and other liabilities                      221              (430)
         Accrual for store closures                         (87)               --
         Franchise deposits                                  33               (24)
                                                        -------           -------
                                                         (1,270)             (181)
                                                        -------           -------
Cash flows from investing activities:
   Purchase of property, plant and equipment               (305)           (1,202)
   Proceeds from disposal of property, plant
     and equipment                                           81                --
   Additions to goodwill                                    (25)               --
                                                        -------           -------
                                                           (249)           (1,202)
                                                        -------           -------
Cash flows from financing activities:
   Proceeds on issuance of shares                             7                --
   Payments on long-term debt                              (467)               --
                                                        -------           -------
                                                           (460)               --
                                                        -------           -------
Decrease in cash and cash equivalents                    (1,979)           (1,383)

Cash and cash equivalents, beginning of period            2,822             7,281
                                                        -------           -------
Cash and cash equivalents, end of period                $   843           $ 5,898
                                                        =======           =======
</TABLE>

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


<PAGE>   6
                               COFFEE PEOPLE, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             (Dollars in thousands)

        For the 12 Weeks Ended September 19, 1998 and September 20, 1997
                                   (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 September 19, 1998 presentation.

NOTE 2.  Inventories

Inventories consist of the following:

<TABLE>
<CAPTION>
                                      September 19,      June 27,
                                          1998            1998
                                       (Unaudited)
<S>                                      <C>             <C>   
Coffee:
   Unroasted                             $2,655          $2,169
   Roasted                                  754             368
Other merchandise held for sale           1,049             898
Supplies                                    428             617
                                         ------          ------
                                         $4,886          $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 had not sold any of its existing Coffee People (Oregon) or
Coffee Plantation stores and had not entered into any letters of intent or
definitive agreements to do so nor had the Company entered into any letters of
intent or definitive agreements to 



<PAGE>   7

sell new franchises for these brands. There can be no assurance that the Company
will be successful at selling any of its existing stores or that it will be
successful in franchising new stores.

         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 September 19, 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.



<PAGE>   8



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 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 with the year end used by Gloria Jean's. Because of the reverse 
purchase accounting treatment, the financial results for the 12 weeks ended 
September 19, 1998 reflect the operations of the combined companies while the 
financial results for the 12 weeks ended September 20, 1997 reflect the 
operations of Gloria Jean's only.

        As of September 19, 1998, the Company had 247 franchised and 30
company-operated stores operating under the Gloria Jean's name in 36 states, one
U.S. territory, and six foreign countries, 25 company-operated stores operating
under the Coffee People name in Oregon, and 15 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.

         On October 27, 1998, the Company announced that it had engaged an
investment advisor to identify and evaluate alternatives to enhance 


<PAGE>   9

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 SEPTEMBER 19, 1998 COMPARED TO TWELVE WEEKS ENDED SEPTEMBER
20, 1997

        REVENUES. Total revenues increased 54.3% to $12,249,000 for the twelve
week period ended September 19, 1998, from $7,940,000 for the same period in
1997. 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 310.7% to $6,966,000
for the fiscal 1999 twelve week period from $1,696,000 in the fiscal 1998 twelve
week period. The increase in retail sales was due primarily to sales of
$5,340,000 at the Company's Coffee People Oregon and Coffee Plantation stores
acquired on May 19, 1998.

        Wholesale revenue consist primarily of sales of roasted coffee and other
products and supplies to franchisees. Wholesale revenue decreased 19.0% to
$4,076,000 for the twelve weeks ended September 19, 1998 from $5,030,000 for the
same twelve week period in fiscal 1998 primarily due to the seasonal timing of
product sales to franschisees. A higher volume of coffee and seasonal gift packs
were sold in the fiscal 1998 period than in the fiscal 1999 period. The Company
expects additional gift pack sales to occur in the second quarter of the current
fiscal year.

         Franchise revenues consists primarily of initial franchise fees and
royalties received by the Company on sales made at each Gloria Jean's franchise
location. Franchise revenues decreased 0.6% to $1,207,000 for the twelve week
period ended September 19, 1998 from $1,214,000 for the same twelve week period
in fiscal 1998. The components of this decrease were a 34.7% decrease in
franchise fees to $145,000 in the fiscal 1999 period from $222,000 in the fiscal
1998 period and a 7.1% increase in royalties to $1,062,000 in the fiscal 1999
period from $992,000 in the fiscal 1998 period. The decrease in franchise fees
was due to a decrease in the number of new stores franchised during the fiscal
1999 period as compared to the number franchised in the fiscal 1998 period.

        COSTS AND EXPENSES. Cost of goods sold increased 33.0% to $5,926,000 for
the twelve weeks ended September 19, 1998, from $4,454,000 in the same period of
fiscal 1998, due to increases associated with the increase in retail sales. Cost
of goods sold as a percentage of corporate store sales and wholesale revenue
decreased to 53.7% in 


<PAGE>   10

the twelve week period ended September 19, 1998, from 66.2% in the twelve week
period ended September 20, 1997, 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 199.9% to $5,311,000 in the
twelve week period ended September 19, 1998, from $1,771,000 in the same period
of fiscal 1998 primarily as a result of increased store operating expenses at
Gloria Jean's company-operated stores, store operating expenses attributable to
the Coffee People (Oregon) and Coffee Plantation stores acquired on May 19,
1998, 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 43.4% in the fiscal 1999 twelve
week period from 22.3% in the fiscal 1998 twelve week period.

        Depreciation and amortization increased 36.9% to $479,000 in the twelve
week period ended September 19, 1998 from $350,000 in the twelve week period
ended September 20, 1997, due to depreciation and amortization expense
associated with the Coffee People (Oregon) and Coffee Plantation stores acquired
in May 1998 which was offset by a reduction in depreciation on Gloria Jean's
company-operated stores. Depreciation on Gloria Jean's company-operated stores
was suspended at the end of fiscal year 1998 when the Company decided to
actively market all of these stores to franchisees. 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. As a percentage of
total revenues, depreciation and amortization expense decreased to 3.9% for the
twelve-week period ended September 19, 1998 from 4.4% in the same twelve-week
period of fiscal 1998.

         General and administrative expenses increased 34.6% to $782,000 in the
twelve-week period ended September 19, 1998 from $581,000 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 decreased to
6.4% in the fiscal 1999 twelve-week period from 7.3% in the fiscal 1998
twelve-week period as a result of revenues increasing by a greater percentage
than the percentage increase in general and administrative overhead.

         Acquisition and integration expenses of $799,000 consist of costs
associated with integrating Coffee People operations and a portion of costs
associated with exiting Coffee People activities, including 


<PAGE>   11

relocating and terminating Coffee People employees and reflects all remaining 
expenses associated with integrating the operations of the two companies.

        INTEREST INCOME. Interest income as a percentage of total revenues
decreased to 0.3% for the twelve week period ended September 19, 1998 from 1.0%
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 twelve week period ended September 19, 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 $486,000 for the twelve
week period ended September 19, 1998, compared to a provision for income taxes
of $371,000 for the same period in fiscal 1998. The effective tax rates of 43.9%
for the twelve week period ended September 19, 1998 and 43.0% for the twelve
week period ended September 20, 1997, result from federal and state income taxes
and nondeductible goodwill amortization.

LIQUIDITY AND CAPITAL RESOURCES

        As of September 19, 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. Of the eight Gloria Jean's stores identified
for disposal during fiscal year 1997 five were disposed of during fiscal year
1998 pursuant to the 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 September 19, 1998 under the five leases total $1,362,000.


<PAGE>   12

        As of September 19, 1998, the Company had $843,000 in cash and
equivalents.

        The Company had working capital of $4,381,000 as of September 19, 1998,
as compared to working capital of $5,277,000 at June 27, 1998.

        For the twelve week period ended September 19, 1998, cash used by
operating activities was $1,270,000, as compared to cash used by operating
activities of $181,000 for the same period in fiscal 1998.

        For the twelve week periods ended September 19, 1998 and September 20,
1997, net cash used in investing activities was $249,000 and $1,202,000,
respectively, primarily as a result of the purchase of property, plant and
equipment.

        For the twelve week period ended September 19, 1998, the Company had net
cash used by financing activities of $460,000 primarily as a result of principal
payments on long-term debt. For the twelve week period ended September 20, 1997,
the Company had neither cash used nor 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 prime rate (9.0% as of September
19, 1998) and are secured by substantially all of Coffee People's assets,
including accounts receivable, inventories, trade fixtures and equipment. As of
September 19, 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. At September 19, 1998, the Company was not in compliance with a
loan agreement covenant that requires the Company to maintain a current ratio of
1.50. The Company's current ratio was 1.48. The bank waived the compliance
requirement on a one-time basis. Management expects to bring the current ratio
into compliance by the next quarterly compliance reporting date.

        Contemporaneously with the closing of the merger with Gloria Jean's,
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 September 19, 1998, no amounts had been borrowed under the
credit facility.

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


<PAGE>   13


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. 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 calendar year. As of
September 19, 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 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
calendar year. The estimated costs 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 

<PAGE>   14

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 has not confirmed the state of Year 2000 readiness of
these parties.

        The Company has not yet established a "contingency plan" to address
potential Year 2000 problems and is currently considering the extent to which it
will develop a formal contingency plan.

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 September 19, 1998, these
purchase commitments totaled approximately $3,210,000 for approximately
2,550,000 pounds of green coffee at an average contract cost per pound of $1.26.
These commitments together with existing inventory represent approximately 108%
of the Company's estimated coffee requirements through September 18, 1999.
Because of the significant decline in worldwide coffee prices from their 1997
highs, these commitments are not currently favorable to market at September 19,
1998.

        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 


<PAGE>   15

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
$4,400,000 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). As a result of this
election, the interest rate on $4,400,000 of the Company's term loan was reduced
from the 9% floating rate (0.5% over the bank's prime rate of 8.5%) to 7.9375%
(2.25% over the IBOR rate of 5.6875%). Under the current arrangement, this rate
will be adjusted each 90 days. On September 9, 1998, the Company elected to have
the interest rate on $4,100,000 of its term loan continue to be referenced to
the IBOR rate. The rate on the $4,100,000 balance has been fixed at 7.8125%
through December 8, 1998. At September 19, 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 9% floating rate tied to the prime rate (8.5%
at September 19, 1998) would have a similar impact on the Company's results of
operations.



<PAGE>   16
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.

        Security Trust Company v. Gloria Jean's Gourmet Coffees Corporation. The
claimant filed a claim in the Superior Court of the State of California, County
of Contra Costa, asking for unpaid rent and late charges for a Gloria Jean's
store in Richmond, California vacated by the Company. Gloria Jean's has
requested that the landlord mitigate damages caused by early termination of the
lease by seeking to relet the premises. Unpaid rent plus rent through the
remainder of the original lease term would be approximately $175,000. Management
does not believe the outcome of this litigation will have a material adverse
effect on the Company.

        KKW Enterprises, Inc. v. Gloria Jean's Gourmet Coffee Franchising Corp.
On or about May 7, 1998, plaintiff filed a complaint against Franchising Corp.
in the Superior Court of the State of Rhode Island for Providence County
alleging that Franchising Corp. by making certain misrepresentations
fraudulently induced plaintiff to enter into franchise agreements for Gloria
Jean's stores. Plaintiff seeks damages for the losses it purportedly incurred in
obtaining and operating its Gloria Jean's stores and recission of its two
remaining franchise agreements. On Franchising Corp.'s motion, the case was
removed to the United States District Court for the District of Rhode Island.
Franchising Corp. has filed a Demand for Arbitration with the Chicago office of
the American Arbitration Association, seeking a declaration that Franchising
Corp. has no liability for the claims asserted and has demanded that plaintiff
submit the claims pending in the District Court to arbitration in accordance
with the franchising agreements. This case is still in the early stages of
litigation and there can be no assurance that a favorable outcome will be
obtained or that if the matter were resolved in favor of the plaintiff there
would not be a material adverse effect on 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 


<PAGE>   17

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.

        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.

Item 6.  Exhibits and Reports on Form 8-K

         (a)    Exhibits

                3.1     Registrant's Restated Articles of Incorporation
                        (incorporated by reference to Exhibit 3.1 to the
                        Company's Registration Statement on Form SB-2, effective
                        September 25, 1996 (Registration No. 333- 5376-LA)).

                3.2     Registrants' Bylaws, as amended (incorporated by
                        reference to Exhibit 3.2 to the Company's Registration
                        Statement on Form SB-2, effective September 25, 1996
                        (Registration No. 333-5376-LA)).

                10.1    Business Loan Agreement with Bank of America, dated July
                        30, 1998.

                10.2    Amendment No. 1 to Business Loan Agreement with Bank of
                        America, dated July 31, 1998.

                27      Financial Data Schedule


         (b)    Report on Form 8-K

                The Registrant filed one Current Report during the quarter ended
September 19, 1998.

                A Current Report on Form 8-K dated September 16, 1998 was filed
to report under Item 8 a change in the Registrant's fiscal year from December 31
to the last Saturday in June of each year.

<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
                                       -----------------------------------------
                                       Mark J. Archer
                                       Executive Vice President,
                                       Chief Financial Officer and Secretary

                                       Signing on behalf of the registrant and 
                                       as principal financial officer