UNITED STATES

                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                FORM 10-KSB/A


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
     ACT OF 1934
                For the fiscal year ended: December 31, 1997
                                       or
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934
                For the transition period from       to
                                               -----    -----

                      Commission file Number: 0-21397


                           COFFEE PEOPLE, INC.
              (Name of small business issuer in its charter)
                                                          93-1073218
      Oregon                                          (I.R.S. Employer
(State of incorporation)                               Identification No.)
                         15100 SW Koll Parkway, Suite J
                             Beaverton, Oregon 97006
                    (Address of principal executive offices)

                   Issuer's telephone number: (503) 672-9603

       Securities registered under Section 12(b) of the Exchange Act: None

       Securities  registered  under  Section  12(g)  of  the Exchange Act:

                        Common Stock, without par value
                               (Title of class)

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 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 
             ----    ----

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-B contained in this Form 10-KSB, and no disclosure will
be contained,  to the best of  registrant's  knowledge,  in definitive  proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.    
                                      -----

         State issuer's revenues for its most recent fiscal year:  $20,422,000

         State  the  aggregate   market  value  of  the  voting  stock  held  by
nonaffiliates computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within 60
days  prior to the  date of  filing:  $6,749,133 aggregate  market  value as of
February 27, 1998, based on the price at which the stock was sold.

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common equity,  as of the latest  practicable  date: 3,268,718 shares
of Common Stock, without par value, on February 27, 1998.

<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

         Part III of this Form 10-KSB incorporates information from the issuer's
definitive  proxy statement for the 1998 annual meeting of shareholders. 

         Transitional Small Business Disclosure Format (Check One): Yes  ; No X
                                                                       --    --



<PAGE>






                                TABLE OF CONTENTS

                                                                            Page
Part I
------
Item 1.   Business............................................................ 1
Item 2.   Facilities.......................................................... 7
Item 3    Legal Proceedings................................................... 8
Item 4.   Submission of Matters to Vote of Securities' Holders................ 8


Part II
-------
Item 5.   Market for Common Equity and Related Stockholder Matters............ 8
Item 6.   Management's Discussion and Analysis................................ 9
Item 7.   Financial Statements................................................18
Item 8.   Changes in and Disagreements with Accountants
          on Accounting and Financial Disclosure..............................18


Part III
--------
(Items 9, 10, 11 and 12 are incorporated  herein by reference from the Company's
definitive Proxy Statement for its 1997 annual meeting of shareholders.)

Item 9.   Directors, Executive Offices, Promoters
          and Control Persons; Compliance with Section 16(a)
          of the Exchange Act.................................................18
Item 10.  Executive Compensation..............................................18
Item 11.  Security Ownership of Certain Beneficial
          Owners and Management...............................................19
Item 12.  Certain Relationships and Related Transactions......................19


Part IV
-------
Item 13.  Exhibits and Reports on Form 8-K. ..................................19

Signatures....................................................................41




<PAGE>






                                   PART I

ITEM 1:   BUSINESS

General
-------

         Coffee People,  Inc.  ("Coffee  People" or the "Company")  sells coffee
beverages, coffee beans, cookies, pastries, ice cream, shakes and coffee related
merchandise.  Coffee  People's  objective  is to be a leading  specialty  coffee
retailer and coffee house operator in selected  geographic  markets by providing
the highest quality coffee and related  products with superior  customer service
in a relaxed and inviting setting.

         Coffee People  distributes  products through its  company-owned  retail
stores,  including  neighborhood  coffee  houses,  drive-through  espresso bars,
mall-based stores and specialty kiosks.  During 1997, Coffee People grew from 22
to 41 stores,  25 of which were in Oregon,  14 of which were in Arizona and 2 of
which  were in  Colorado.  The two stores in  Colorado  are among  seven  stores
outside of Oregon and Arizona  which Coffee  People has  identified  for sale or
closure.  The Oregon  stores are  operated  under the Coffee  People  name.  The
Arizona  stores,  which were  purchased in May 1997, are operated under the name
Coffee Plantation.

         In November  1997,  the Company  entered into an agreement (the "Merger
Agreement")  with The  Second  Cup Inc.  ("Second  Cup")  pursuant  to which the
Company will acquire all of the stock of Gloria Jean's, Inc., a specialty coffee
roaster, retailer and franchising company based in California ("Gloria Jean's"),
in  exchange  for  issuing to Second Cup shares of Coffee  People  common  stock
constituting  69.5 percent of the total issued and outstanding  shares of Coffee
People common stock, after giving effect to the issuance (the "Merger").  Gloria
Jean's is the  second  largest  retail  specialty  coffee  company in the United
States, with 246 franchised stores and 31 company-owned  stores in 38 states and
6 foreign  countries.  The Second Cup Inc. is a  wholly-owned  subsidiary of The
Second Cup Ltd., an Ontario, Canada corporation.

         The  Merger is  subject to certain  conditions  to  closing,  including
obtaining the vote of Coffee  People's  shareholders in favor of the issuance of
shares to Second Cup. The Merger also is subject to obtaining the consent to the
transaction of certain third parties.  There can be no assurance that the Merger
will be completed on a timely basis, or at all.

         The specialty  coffee  retail  business in the United States is growing
rapidly and is undergoing  substantial  change.  Industry  sources estimate that
total retail  sales of  specialty  coffee will grow from $1.5 billion in 1993 to
$4.5 billion by 1999. It is estimated that the number of coffee cafes,  espresso
bars and espresso carts will increase from approximately 3,000 in 1995 to 10,000
by 1999.  Due to ease of entry into the business and the growing  popularity  of
specialty  coffee  nationwide,  there has been a  proliferation  of single  unit
operators  and small,  regional  coffee  companies,  many  having  fewer than 50
stores.

         Industry  studies  suggest that a high  proportion  of consumers in the
United States now recognize and  appreciate  the  difference in quality  between


                                      1
<PAGE>

instant and canned coffees and specialty  coffees,  which are made from superior
beans  roasted  to  specifications  that  produce  coffee  with more  flavor and
consumer  appeal.  Industry  sources  estimate that  approximately  31.0% of all
coffee consumed in the United States in 1995 was specialty  coffee,  an increase
from approximately 3.6% in 1983.

         Coffee People believes that the specialty coffee industry is entering a
period of consolidation,  as small to medium-sized  coffee companies  experience
growing demands for capital, management expertise and buying power in the market
for green coffee. Coffee People believes that, combined with Gloria Jean's after
the  Merger,  it can  continue  to grow the Coffee  People  concept in  selected
markets,  and that it can  participate  in the  consolidation  of the  specialty
coffee  industry  by  combining  with other  strong  regional  specialty  coffee
companies  throughout  the United  States.  In its core  markets,  Coffee People
believes it can be a leading specialty coffee retailer by differentiating itself
from  other  coffee  houses.   Coffee  People   believes  it  can  achieve  this
differentiation  by  being  more  customer  focused  than  the  competition,  by
providing superior coffee and service and by being constantly innovative.

         Coffee People was incorporated as an Oregon  corporation in 1991. Prior
to that time,  Coffee  People was  operated as a  partnership.  The first Coffee
People store opened in Portland, Oregon in 1983.

Company Strategy
----------------

         Coffee People's  objective is to be a leading specialty coffee retailer
and  coffee  house  operator  in  selected  markets  by  achieving   operational
excellence  and by  pursuing  development  opportunities  in its  core  markets.
Together with Gloria Jean's, Coffee People also will seek to grow in new markets
through selected acquisition of other specialty coffee retailers.

         The key elements of Coffee People's strategy include:

         Achieving  Operational  Excellence.  The  operating  strategy of Coffee
People is to cultivate  customer  loyalty and brand strength at the store level,
while closely  monitoring  store  economics and financial  results  system wide.
Coffee People  strives to foster  long-term  loyalty and a sense of ownership in
its  customers  by being  continually  receptive to evolving  customer  desires.
Coffee People is dedicated to providing its customers  with the highest  quality
of service,  emphasizing  speed,  consistency and courtesy in stores designed to
welcome customers in a friendly,  relaxing and inviting atmosphere. To this end,
Coffee People has developed and implemented  training and incentive  programs to
create knowledgeable and loyal employees. Coffee People's extensive product menu
is designed to appeal to a diverse blend of people, with unique brand names that
foster a high degree of market differentiation and customer loyalty.

         Coffee People  strives to achieve  exceptional  financial  results from
each of its stores by closely managing sales,  costs and customer  satisfaction.
Coffee  People's  senior  management  team  have  extensive  experience  in  the
specialty coffee  industry,  from selecting the beans to serving the cup. Coffee


                                       2
<PAGE>

People  expects that the  management  of Gloria Jean's and Second Cup will bring
additional strengths to store operations and development after the Merger.

         Opening New Stores in Superior Sites in Existing Markets. Coffee People
intends to continue  its store  growth by  selecting  new store sites within its
core markets of Oregon and Arizona. Coffee People intends initially to introduce
drive-through  espresso  bars  under the Motor  Moka name in  selected  sites in
Arizona,  and to continue  building Motor Mokas and neighborhood  stores both in
Arizona and Oregon on a selective  basis.  In addition,  Coffee People will open
mall-based  stores,  kiosks and Aero Moka airport outlets,  where  opportunities
arise.

         Successfully   Integrating   Regional   Operators.    Coffee   People's
acquisition  of  Coffee  Plantation  in May  1997  exemplifies  Coffee  People's
strategy of acquiring a regional coffee company with a solid local following and
a unique identity,  and integrating it within Coffee People's overall management
structure.  Coffee  Plantation  stores  offer an inviting  setting and  superior
customer  service similar to that found at Coffee People stores,  but have their
own  personality  and product  offerings.  Coffee People did not convert  Coffee
Plantation  stores into Coffee People stores,  but rather applied its management
controls and operations  know-how to the already existing and successful  Coffee
Plantation  concept.  Coffee People believes that this approach can successfully
be  replicated  in a  consolidation  strategy  that  seeks to  combine  local or
regional coffee companies, with strong brand identity and customer loyalty, into
the post-Merger Coffee People,  adding  efficiencies to the retail operations of
the acquired regional companies and capital resources for continued expansion.

         Profitably  Operating and Expanding  Gloria  Jean's.  After the Merger,
Gloria Jean's will be Coffee  People's  wholly-owned  subsidiary.  Gloria Jean's
will look to  further  improve  and  expand its  network  of  franchised  stores
throughout the United States and abroad,  and to further strengthen its position
as a leading supplier of roasted coffees.

Products
--------

           Coffee  People  offers  a  broad  product  line  including  specialty
coffees,  coffee  beans,  pastries and cookies,  ice cream and shakes and coffee
related  merchandise.  Caffeinated and decaffeinated  coffee and  espresso-based
drinks are offered at all of Coffee  People's  stores,  as are pastries.  Coffee
People's  neighborhood  stores  and  the  Coffee  Plantation   neighborhood  and
mall-based stores also sell whole coffee beans,  teas and accessories,  mugs and
other  merchandise.  Certain  Coffee  Plantation  stores offer an expanded  menu
including soups,  sandwiches and light meals. Sales of coffee beverages comprise
approximately  two-thirds of Coffee People's revenues, with bakery and ice cream
products accounting for approximately one-fifth of Coffee People's revenues.

Suppliers
---------

         Coffee.  Coffee People's current roasted coffee  supplier,  Coffee Bean
International,  Inc.,  purchases  coffee  from a  variety  of  coffee  producing
countries.  Coffee  People  has not in the past  roasted  any of its own  coffee


                                     3
<PAGE>

beans, but rather has contracted for the roasting of its coffees pursuant to its
own  proprietary  blends  and  specifications.  Following  the  Merger  and  the
expiration of its current supply  contract,  Coffee People  anticipates that its
coffee will be supplied by the Gloria Jean's  roasting  facility in Castroville,
California which has established supply relationships for quality coffees.

         Bakery Goods And Ice Cream.  Coffee People obtains bakery goods and ice
cream from local vendors with reputations for superior quality. Cookies are made
based on recipes developed by Coffee People. By offering alternative  selections
such as ice cream and  non-coffee  beverages for people who do not drink coffee,
Coffee  People  believes it creates an inclusive,  welcoming  setting for all to
enjoy its products.

Distribution Strategy And Store Types
-------------------------------------

         Coffee  People's  principal  distribution  channel  is  retail  stores,
including  neighborhood  coffee houses,  drive-through  espresso  bars,  airport
stores,  mall-based  stores  and  specialty  kiosks.  Coffee  People may seek to
develop  other  distribution  points such as mail order  catalogs,  airlines and
co-developed stores that feature coffee and other complementary products. Coffee
People  also  has  entered  into  a  licensing   agreement  with  an  ice  cream
manufacturer for the distribution of ice cream under Coffee People's brand names
in supermarkets and other grocery outlets.

         Coffee People has five store types:

         Neighborhood Coffee House.  Neighborhood coffee houses, located in both
urban and suburban  neighborhoods and business districts,  offer a complete line
of Coffee People  products and roasted  coffee  beans.  As of December 31, 1997,
Coffee  People had eight  neighborhood  coffee  houses:  seven in the  Portland,
Oregon area and one in Eugene,  Oregon.  In  addition,  as of December 31, 1997,
Coffee  People  operated six  neighborhood  coffee  houses in Phoenix and one in
Tucson,  Arizona under the Coffee  Plantation  name.  Coffee People also has two
coffee houses in Denver, Colorado which it plans to sell or close in 1998.

         Drive-Through   Espresso   Bar.   The  second  type  of  store  is  the
drive-through  espresso  bar that  operates  under the Motor  Moka  name.  As of
December  31,  1997,  Coffee  People  operated 10 of these  stores in  Portland,
Oregon,  two of which have indoor seating.  Drive-through  stores without indoor
seating  generally have a walk-up window.  These stores are designed to maximize
customer  convenience  by  eliminating  the need to park a car and  walk  into a
store.  Coffee People  intends to introduce  Motor Mokas into  selected  Arizona
markets beginning in 1998.

         Airport Store.  The third type of store is designed for major airports.
Coffee  People  has  six of  these  stores  at  Portland  International  Airport
operating under the Aero Moka name,  with plans to open one more in 1998.  These
stores include quick grab-and-go  kiosks,  coffee bars and a sit-and-relax cafe.
Coffee People  believes  these types of stores  provide  visibility and increase
brand recognition.


                                      4
<PAGE>


         Mall-based  Store.  Coffee People began operating the mall-based  store
type with the acquisition of Coffee  Plantation.  Mall-based  stores are smaller
than  neighborhood  stores,  and have  limited  seating.  They are  full-service
stores, however,  including sales of coffee-related  merchandise and whole beans
along with  prepared  espresso-based  drinks.  As of December 31,  1997,  Coffee
People  had four  mall-based  stores  in the  Phoenix  area,  and one in  Tucson
operating under the Coffee Plantation name.

         Specialty  Kiosk or Cart.  The fifth type of Coffee  People  store is a
specialty  kiosk  or  cart  for  placement  in  high-traffic  locations  such as
supermarkets,  university campuses and office building lobbies. Kiosks primarily
sell coffee  beverages  and  pastries.  Coffee  People has three kiosks - one in
Portland,  Oregon  and two in  Phoenix,  Arizona  -- and  intends to add more as
attractive opportunities arise.

Marketing Strategy
------------------

         Coffee People's central marketing strategy is to offer quality products
and  service  that  create  customer  loyalty in a  satisfying  and  stimulating
environment.  To effect this  strategy,  Coffee People markets the Coffee People
Philosophy and the Coffee Plantation Experience.

         All Coffee People stores are imbued with the Coffee People  Philosophy,
which begins with a commitment to People and is expressed in its obsession  with

Coffee.  Coffee  People is dedicated to providing  its  customers  with superior
coffee -- the most flavorful, the most creatively blended, made with the highest
quality beans. High quality coffee, the basis for the name Coffee People. Coffee
                                                           ------
People also is dedicated to providing  its  customers  with the highest  quality
service,  combining  speed,  consistency  and courtesy in an atmosphere  that is
friendly,  relaxed and inviting.  High quality  service,  the basis for the name
Coffee People.
       ------
         Coffee People  emphasizes  the themes of energy and  naturalness in its
products and marketing.  For example, the Black Tiger brand connotes energy. The
organically  grown Human Being  coffee,  which forms the base of certain  Coffee
People espresso beverages,  is a natural product with positive  implications for
the world's  coffee  growing  regions.  Velvet Hammer  shakes,  made with Coffee
People's own ice cream blended with espresso, packs a punch with a smooth touch.

         Coffee People seeks to create new brands and products  associated  with
the brand.  Black Tiger, for example,  is a name Coffee People developed in 1987
for a  high-caffeine  coffee with a rustic Italian taste. It was first served as
brewed hot coffee and as a distinctive line of espresso drinks. Later, ice cream
featuring  Black Tiger coffee was  developed.  The ice cream was  combined  with
espresso and the Black Tiger  milkshake was created.  Coffee People has expanded
the product line to include Black Tiger Sparkling Coffee,  Black Tiger chocolate
truffles,  Black  Tiger  apparel,  and other  ancillary  products.  Black  Tiger
products now account for a significant amount of Coffee People's total revenues.
Coffee  People  believes  that  this  kind of  branded  expansion  line has been
successful  in  attracting  Coffee  People's  customers  to new  products and in
building  sales.  Coffee  People also seeks ways to weave its  branded  products


                                        5
<PAGE>

themes into the architectural elements in its stores,  creating an atmosphere of
immersion into the Coffee People culture.

         Like the Coffee People stores,  Coffee Plantation  locations have their
own distinct feel, products and brands,  making the Coffee Plantation Experience
entertaining,  as well as cup-filling.  Live music on evenings and weekends,  as
well as an expanded menu featuring soups and sandwiches,  has been successful at
encouraging  relatively  high customer  volumes at Coffee  Plantation  locations
during otherwise off-peak hours.

Competition
-----------

         The specialty  coffee market is intensely  competitive  and is becoming
more  so.  Many of  Coffee  People's  competitors  have  greater  financial  and
marketing  resources,  brand name  recognition  and a larger  customer base than
Coffee People.  The specialty  coffee industry is currently  characterized  by a
small number of large,  well-capitalized  companies  and a large number of small
companies and single-unit  operators.  The activities of large companies such as
Starbucks Corp. continue to increase the appreciation and awareness of specialty
coffee  across the country.  At the same time,  the  national  press has focused
attention on the growth  opportunities  associated with operating  coffee stores
and espresso carts.  This  attention,  combined with relative ease of entry into
this  business,  has  resulted  in a  rapid  increase  in the  number  of  small
independent specialty coffee companies and single-unit operators.

         Coffee People competes against  virtually all coffee sellers.  A number
of  nationwide  coffee  manufacturers,  such as Kraft General  Foods,  Proctor &
Gamble,  and Nestle,  distribute coffee products in supermarkets and convenience
stores,  which  may  serve as  substitutes  for  Coffee  People  coffees.  Other
specialty coffee companies,  such as Starbucks,  Seattle's Best Coffee, Brothers
Gourmet Coffees and Green Mountain Coffee  Roasters,  sell whole bean coffees in
supermarkets and variety and discount stores.  In the retail area, Coffee People
competes for whole bean and beverage  sales with  national and regional  chains,
franchise operators and local specialty coffee stores.

         Coffee  People also  competes  against  other  specialty  retailers and
restaurants for suitable sites for new retail stores.  There can be no assurance
that management will be able to secure suitable sites at acceptable rent levels.

Intellectual Property
---------------------

         The Company does not own any patents. Coffee People(R), Black Tiger(R),
Good  Coffee  No  Backtalk(R),   Java  Noir(R),  Motor  Moka(R),  Aero  Moka(R),
Coffeegram(R),   Motorist's  Espresso  Bar(R),  and  Coffee   Plantation(R)  are
registered in the United States Patent and Trademark  Office as service marks or
trademarks.  Coffee  People has  applications  pending  in the United  States to
register the names Change the World One Cup at a Time(SM),  Mile High Blend(TM),
and Velvet  Night(TM).  Coffee People has applied for trademark and service mark
protection  for the name Coffee  People and  related  marks in Canada and Japan.


                                         6
<PAGE>

Coffee  People is also the owner of a number of  common  law  service  marks and
trademarks   including  Human  Being  Organic   Espresso(TM),   Slammahamma(TM),
Mindsweeper(TM), Mindfreezer(TM), and Depth Charge(TM).

Government Regulation
---------------------

         The food service  industry is subject to extensive  federal,  state and
local  government  regulation  relating to the development and operation of food
service outlets, including laws and regulations relating to building and seating
requirements,  the  preparation  and sale of food,  cleanliness,  safety  in the
workplace,  accommodations for the disabled and the Company's  relationship with
its  employees,  such as minimum wage  requirements,  anti-discrimination  laws,
overtime and working  conditions and  citizenship  requirements.  The failure to
obtain or retain necessary food licenses,  substantial  increases in the minimum
wage or substantial  increases in payroll taxes to fund mandatory health-care or
employee benefit programs could have a material adverse effect on Coffee People.
In November 1996,  Oregon voters passed a ballot initiative to raise the State's
minimum  wage over a three  year  period  from $4.75 per hour to $6.50 per hour.
Coffee  People does not believe  that the minimum  wage  increase had a material
adverse effect in 1997. On January 1, 1998, the minimum wage in Oregon increased
to $6.00 per hour.  It is  uncertain  what  impact,  if any,  the  minimum  wage
increase will have on Coffee People's operating results in 1998 or beyond.

Employees
---------

         As of December 31, 1997,  the Company had 641  employees,  of which 283
were  full  time and 358 were  part  time  employees.  None of  Coffee  People's
employees are covered by a collective bargaining agreement. The Company believes
its employee relations are good.

ITEM 2:  FACILITIES

         Coffee People currently owns the land and buildings at which two of its
Motor Moka facilities are operated,  a total of approximately  1,600 square feet
of retail space.  In addition,  the Company owns the  buildings,  and leases the
underlying lands, for five additional facilities, a total of approximately 3,750
square feet of retail  space.  As of December 31,  1997,  Coffee  People  leased
facilities for the operation of 44 retail stores, 39 of which were in operation.
Since  December 31, 1997,  Coffee People has sold two stores located in southern
California and has assigned the leases  relating to those stores.  Coffee People
continues to seek to sell the three  additional  stores located outside its core
markets which were closed during the fourth  quarter of 1997, and the two stores
in Denver,  Colorado which continue to operate.  Coffee  People's  retail stores
range from 150 to 2,850 square feet with lease rates ranging from  approximately
$1,200 to $7,100 per month.  The monthly lease rate for certain  stores is based
on that store's monthly sales revenue.  Certain of Coffee People's leases expire
in the near  future.  There can be no  assurance  that  specific  leases  can be
renewed on terms acceptable to Coffee People, or at all.

         One of Coffee  People's  stores is  operated  at a  location,  within a
shopping  mall  undergoing  redevelopment,  for which there is currently no term


                                      7
<PAGE>

lease in  effect.  The lessor at such  location  could at any time  demand  that
Coffee People vacate the premises on 30 days prior written notice. Coffee People
has periodic  discussions  with the lessor relative to entering into a long-term
lease. There can be no assurance,  however,  that a lease for such location will
be  obtainable on  commercially  reasonable  terms,  or at all. The loss of this
store location could adversely affect Coffee People's earnings.

         As a requirement  under its lease with the Port of Portland for the six
Aero Moka stores at Portland International Airport, Coffee People is required to
enter into a joint venture with a certified  disadvantaged  business  enterprise
for one of Coffee People's  airport  stores.  Upon entry into the joint venture,
Coffee People would have a 49% ownership in that store.  Coffee People from time
to time has had  discussions  with the Port of Portland as to ways in which this
requirement can be met.

         Coffee People leases  approximately 9,400 square feet for its corporate
offices  in  Beaverton,  Oregon  under  a lease  which  expires  February  2004.
Approximately  2,660  square feet of that office  space is  subleased to a third
party.  Coffee People believes that the terms of its office lease are favorable.
Coffee People also occupies  approximately  1,888 square feet of office space in
Tempe,  Arizona as a regional support center for the Coffee  Plantation  stores.
After the Merger,  most of the corporate and support  functions of Coffee People
will be relocated to  Castroville,  California,  though Coffee People expects to
maintain  a smaller  regional  support  office  in the  Portland,  Oregon  area.
Therefore,  Coffee People may seek to sublet or assign the lease for its current
offices in Beaverton.

ITEM 3:  LEGAL PROCEEDINGS

         The Company is not involved in any material  litigation  or  proceeding
and is not aware of any material litigation or proceeding threatened against it.

ITEM 4:   SUBMISSION OF MATTERS TO VOTE OF SECURITIES' HOLDERS

         None.

                                  PART II

ITEM 5:   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The  Company's  Common Stock began trading on September 25, 1996 on the
Nasdaq National Market under the symbol "MOKA".

         The table below sets forth for the periods  indicated  the high and low
sale prices per share of Coffee People  common stock,  as reported by the Nasdaq
National Market.

                                      8
<PAGE>
<TABLE>
<CAPTION>

                                                                          High                    Low
                                                                          ----                    ---
Fiscal 1997 (Ended December 31, 1997):

<S>                                                                     <C>                     <C>

Fourth Quarter..........................................................$ 4.75                  $ 2.38
Third Quarter..........................................................   5.00                    3.13
Second Quarter.........................................................   7.25                    4.50
First Quarter...........................................................  8.00                    6.00

                                                                          High                    Low
                                                                          ----                    ---
Fiscal 1996 (Ended December 31, 1996):

Fourth Quarter........................................................ $  9.13                  $ 6.25
Third Quarter........................................................     9.38                    7.50
Second Quarter........................................................     N/A                     N/A
First Quarter.........................................................     N/A                     N/A
</TABLE>

         On February 27, 1998,  the closing price of Coffee People common stock,
as  reported  on  the  Nasdaq  National  Market,   was  $3.00,  and  there  were
approximately 506 record holders of Coffee People common stock

         No cash  dividends were declared or paid by Coffee People during any of
the periods  presented above. On July 26, 1996, Coffee People declared a 3-for-2
stock split, which has been retroactively reflected in Coffee People's financial
statements for all periods.  Coffee People  presently does not intend to pay any
cash dividends in the foreseeable future, and intends to retain all earnings for
use in  its  business  operations.  Coffee  People's  bank  credit  arrangements
currently prohibit the payment of cash dividends.

ITEM 6:   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 control costs
associated  with planned store  closures;  the price and  availability  of green
coffee;  timely  consummation of the Merger;  the impact on Coffee People if the
Merger is not  consummated;  effects of competition;  availability of additional
capital; and changes in applicable government regulations.

Overview
--------

         Coffee People sells coffee beverages,  coffee beans, cookies,  pastries
and coffee related merchandise. The first Coffee People store opened in 1983. As
of December 31, 1997, Coffee People operated 41 stores.

                                        9
<PAGE>

         In January  1996,  Coffee People raised net proceeds of $3,725,000 in a
private placement of Common Stock. In September 1996, Coffee People completed an
initial public  offering in which it raised net proceeds of $9,717,000  from the
sale of  1,225,000  shares of Common  Stock.  At the time of its initial  public
offering, Coffee People operated 19 stores, all of which were located in Oregon.
During the period from October 1996 through June 30, 1997,  Coffee People opened
14 new stores -- two in Denver, Colorado, three in southern California, seven in
the Portland,  Oregon  metropolitan area, and two in Chicago,  Illinois.  Coffee
People closed one store in Portland, Oregon, in April 1997, as anticipated, upon
expiration of the store lease.

         On May 21, 1997,  Coffee People acquired 15 Coffee Plantation stores in
Phoenix and Tucson, Arizona for cash consideration of approximately  $8,651,000.
The transaction  was an acquisition of assets,  accounted for under the purchase
method of accounting.  Assets acquired included property and equipment,  leases,
inventories,  prepaid expenses, wholesale business assets and intangible assets.
Of the total  purchase  price,  $6,000,000  was financed  with  proceeds  from a
five-year  term loan from  Coffee  People's  principal  bank.  One of the Coffee
Plantation  stores was closed at the end of August 1997,  as  anticipated,  upon
expiration of the store lease.

         During  the  second  quarter of 1997,  Coffee  People  took a charge of
$5,500,000  relating  to the  anticipated  closure  or sale of the seven  stores
located  outside  its  primary  Oregon  and  Arizona  markets  and  for  related
restructuring.  Such  stores  consisted  of the two  stores  located  in Denver,
Colorado,  the three stores located in southern  California,  and the two stores
located in Chicago,  Illinois. Coffee People intends to dispose of the stores as
expeditiously  as possible  while  endeavoring  to maximize  the amount of store
value and to minimize Coffee People's total future cash outlays.  As of December
31, 1997,  Coffee People had closed the three stores in southern  California and
the two stores in Chicago,  Illinois, but continued making payments on the lease
obligations with respect to such five stores. In February 1998, the Company sold
two of the stores in southern  California,  and assigned the leases with respect
to such stores.  The two stores in Denver,  Colorado continue to operate.  As of
the date of this Report,  Coffee People continues to work with local real estate
brokers to market,  re-lease  or sublease  the  remaining  five  stores  located
outside Oregon and Arizona.

         Coffee  People's  decision to dispose of or close the seven  stores was
made because sales at these stores had not developed as anticipated  and because
the stores were incurring  significant  operating losses. Coffee People believes
that by  disposing  of these  stores,  by focusing on its core  markets,  and by
making substantial reductions in general and administrative overhead expense, it
can return  itself to  profitability.  Due in part to  reductions in general and
administrative overhead expense, Coffee People did achieve profitable results in
the fourth quarter of 1997. There can be no assurance, however, that the actions
taken by Coffee  People  to  dispose  of  underperforming  stores  and to reduce
general and  administrative  expenses  will result in  profitable  operations in
future periods.

                                       10
<PAGE>

         After the closure or disposition of the seven stores outside Oregon and
Arizona, Coffee People will have a total of 39 stores -- 25 stores in Oregon and
14 in Arizona.

         On November 13, 1997, Coffee People entered into a definitive agreement
that  provides for the  combination  of Coffee  People with Gloria  Jean's.  The
Merger agreement is subject to the satisfaction or waiver of certain  conditions
to closing.  Because the Merger  will be treated  for  accounting  purposes as a
reverse acquisition of Coffee People by Gloria Jean's, the historical  financial
statements of Gloria Jean's will, after  consummation of the Merger,  become the
historical financial statements of Coffee People.
<TABLE>
<CAPTION>

Results Of Operations
---------------------

         The following table sets forth certain financial data for Coffee People
for the periods indicated as a percentage of total revenues, except as otherwise
indicated:

                                                           Year Ended December 31,
                                             --------------------------------------------------
                                               1993      1994      1995       1996      1997
                                               ----      ----      ----       ----      ----
<S>                                           <C>         <C>      <C>        <C>      <C>

Revenues:
  Retail sales                                 98.7%     98.4%     98.1 %     98.6 %    98.0%
  Wholesale and other                           1.3       1.6       1.9        1.4       2.0
                                             --------- --------- --------- ---------- ---------
      Total revenues                          100.0     100.0      100.0      100.0    100.0
Cost of sales and related
  occupancy expenses                           45.7      49.1      47.9       47.7      49.3
Store operating expenses(1)                    32.1      30.5      31.2       32.0      35.2
Other operating expenses                        0.5       0.5       0.6        0.4       0.0
Depreciation and amortization                   2.2       2.3       3.5        4.3       6.8
General and administrative expenses            14.6      15.7      13.8       15.2      14.3
Provision for store closures and
   restructuring                                -         -         -          -        26.9
                                             --------- --------- --------- ---------- ---------
Income (loss) from operations                   5.3       2.3       3.7        0.9     (31.9)
Other income, net                               0.0       0.5       0.4        2.4       1.5
Interest expense                               (0.8)     (1.1)     (1.2)      (0.6)     (1.8)
                                             --------- --------- --------- ---------- ---------
Income (loss) before (provision) benefit
    for income taxes                            4.5       1.7       2.9        2.7     (32.2)
(Provision) benefit for income taxes(2)         -        (0.2)     (1.0)      (1.0)      1.0
                                             ========= ========= ========= ========== =========
Net income (loss)                               4.5%      1.5%      1.9 %      1.7 %   (31.2)%
                                             ========= ========= ========= ========== =========
---------------------------------

(1)  As a percentage of retail sales.

(2)  Coffee  People  operated  for  income  tax  purposes,  as  a  Subchapter  S
     corporation under the Code from January 1, 1993 through August 22, 1994 and
     as a C corporation thereafter.
</TABLE>

1997 compared to 1996
---------------------

         Revenues.  Total revenues  increased  66.3% to $20,422,000 for the year
ended December 31, 1997 from  $12,281,000  for the year ended December 31, 1996.
Retail sales  increased  65.4% to $20,023,000 in 1997 from  $12,104,000 in 1996.
The increase in total  revenues was a result  largely of the  acquisition  of 14
stores in  Arizona  and the  addition  of one store in Oregon  during the fourth
quarter of 1996 and six new stores in Oregon during 1997.

                                      11
<PAGE>


         Comparable  store  sales for the 19 stores open for the full year ended
December 31, 1997 and 1996 were flat, declining 0.1%. Sales attributable to nine
stores  that were  closed or  targeted  for  closure  contributed  approximately
$640,000 of the  increase  in retail  sales.  Incremental  sales from the Oregon
store opened in October 1996  contributed  5.3% of the increase in retail sales.
Incremental sales from the 19 stores opened or acquired in 1997 and operating at
December 31, 1997 contributed the remainder of the increase.

         Wholesale  and other  sales  increased  125.4% to $399,000 in 1997 from
$177,000 in 1996.  The  increase  was due to sales from the  wholesale  business
acquired as part of the Coffee  Plantation  acquisition.  Sales from the Arizona
wholesale business accounted for $251,000 of total wholesale and other sales for
the year.  Coffee People  anticipates  a reduction in wholesale  sales in future
periods due to a change in relationship with its primary Arizona  customer.  The
overall  increase was offset by a decrease in Coffee People's  Oregon  wholesale
business due to Coffee  People's  decision in 1996 to turn over the servicing of
its Oregon  wholesale  business to an outside firm.  Sales made in Oregon to the
outside firm are made at a fixed mark-up over cost.

         Costs and expenses.  Cost of sales and related occupancy  expenses as a
percentage of total revenues  increased to 49.3% in 1997 as compared to 47.7% in
1996.  The primary  components  were an increase in cost of sales of 1.0% and an
increase  in  occupancy  expenses  of 0.6%.  The  increase in cost of sales as a
percentage  of sales was due  primarily to the effect of higher coffee prices in
1997 and to the effect of new stores opened in the first and second  quarters of
1997 which stores had higher  product costs as a percentage of sales than Coffee
People's more mature stores.  The increase in occupancy expenses as a percentage
of total revenues was due primarily to rent expenses incurred at Coffee People's
Arizona stores.  The Arizona  stores,  acquired in May 1997, have higher overall
occupancy costs than Coffee People's Oregon stores.

         Store  operating  expenses as a percentage of retail sales increased to
35.2% in 1997 from  32.0% in 1996.  The  increase  was due  primarily  to higher
operating  expenses  associated  with new stores  opened or acquired  during the
year.

         Depreciation  and  amortization  as  a  percentage  of  total  revenues
increased  to 6.8% in 1997 from 4.3% in 1996,  due to the impact of higher costs
for  stores  opened  or  acquired   during  1997.   These  stores  carry  higher
depreciation  expense as a percentage of total revenues than stores opened prior
to 1997.  The  increase in 1997 was  further  affected  by the  amortization  of
goodwill  associated  with the  acquisition of the Coffee  Plantation  stores in
Arizona.

         General and  administrative  expenses  increased to  $2,921,000 in 1997
from $1,868,000 in 1996 due to the higher overhead costs  associated with Coffee
People's growth in Oregon and Arizona as well as overhead costs through June 30,
1997  associated  with the  operation  of stores  slated for  closure or sale in
California,  Colorado and Illinois.  As a percentage of total revenues,  general
and  administrative  expenses  decreased to 14.3% in 1997 from 15.2% in 1996 due
primarily to the  absorption  of general and  administrative  expenses by higher
revenues.

                                        12
<PAGE>

         As discussed in the Overview  section above,  during the second quarter
of 1997 Coffee People took a charge of $5,500,000 to provide for store  closures
and restructuring.

         Average Stores Sales And Store  Contribution  Margin.  For 1997, Coffee
People's  12  neighborhood  and  drive-through  stores  open for the  full  year
achieved  average  store sales of  $722,000  and an average  store  contribution
margin of 18.7% compared to $729,000 and 20.0%, respectively,  for the 12 stores
open during the full year of 1996.  The six  airport  stores and one kiosk store
open for the full year in 1997  achieved  average store sales of $489,000 and an
average store contribution margin of 16.6%,  respectively,  compared to $464,000
and 13.1% for the six  airport  stores  and one kiosk  open for the full year in
1996. The difference  between the  contribution  margins  realized on the Coffee
People's  neighborhood  stores  compared  to its airport  stores is  primarily a
result of the percentage  rent paid at Portland  International  Airport on sales
generated at the airport stores.  The increase in average store sales for Coffee
People's  airport and kiosk stores resulted from higher  transaction  volumes at
the airport and from higher average transaction amounts  attributable to a price
increase  effected  in  September  1996  on  coffee  beverages.   The  increased
contribution  margin is  primarily  due to labor  efficiencies  and product cost
savings at the airport stores.

         Other Income.  Other income as a percentage of total revenues decreased
to 1.5% for the year ended  December 31, 1997 from 2.4% in 1996,  as a result of
reductions  in  interest-bearing  investments  during the year due to the use of
such resources for operations and expansion.

         Interest  Expense.  Interest  expense as a percentage of total revenues
increased  to 1.8% for the year ended  December  31, 1997 from 0.6% for the same
period in 1996,  as a result of interest  incurred on the bank loan  obtained to
finance part of the Coffee Plantation acquisition in May 1997.

1996 Compared to 1995

         Revenues.  Total revenues  increased  9.1% to $12,281,000  for the year
ended December 31, 1996 from  $11,257,000  for the year ended December 31, 1995.
Retail sales increased 9.6% to $12,104,000 in 1996 from $11,045,000 in 1995.

         Comparable  store  sales for the 17 stores open for the full year ended
December 31, 1996 and 1995 increased 2.0% primarily due to increased transaction
volumes, particularly at Coffee People's airport stores, and a price increase on
coffee  beverages  effected in September 1996 which resulted in an overall price
increase  of  approximately  4.0%.  Comparable  store  sales  during  1996  were
adversely  affected by a 19.9% decline in sales at one of Coffee People's stores
located in a shopping  center that is  undergoing  redevelopment  and by a 18.3%
decline in a store  located in close  proximity  to one of Coffee  People's  top
producing  stores.  The lease on the latter store  expired in the spring of 1997
and was not renewed.

         The increase in comparable  store sales represents 19.6% of the overall
increase  in  sales.  Incremental  sales  from the  stores  opened  during  1995
contributed 69.9% of the increase in retail sales and incremental sales from the
stores opened during 1996 contributed 10.5% of the increase.


                                     13
<PAGE>

         Wholesale  and other  sales  decreased  16.5% to  $177,000 in 1996 from
$212,000 in 1995. The decrease was expected due to Coffee  People's  decision to
turn over the  servicing  of Coffee  People's  wholesale  business to an outside
firm. These sales primarily  represent sales made to the outside firm at a fixed
mark-up over cost.

         Costs and expenses.  Cost of sales and related occupancy  expenses as a
percentage  of total  revenues  remained  relatively  stable at 47.7% in 1996 as
compared  to 47.9% in 1995.  The primary  components  were a decrease of 0.5% in
cost of sales and an increase of 0.3% in occupancy  costs.  The decrease in cost
of sales as a percentage  of total  revenues was due  primarily to the effect of
the price increase  effected in September 1996 which helped absorb  increases in
the costs of milk, chocolate and pastry. The increase in occupancy expenses as a
percentage of total  revenues was due primarily to the  percentage  rent paid on
sales generated at Coffee People's stores at Portland  International Airport and
to the effect of occupancy expenses at the three new stores opened in the fourth
quarter of 1996.

         Store  operating  expenses as a percentage of retail sales increased to
32.0% in 1996 from 31.2% in 1995.  The  increase is  primarily  due to operating
expenses associated with the three new stores opened in the fourth quarter.

         Depreciation  and  amortization  as  a  percentage  of  total  revenues
increased  to 4.3% in 1996 from 3.5% in 1995,  due  primarily  to the  impact of
higher design and build-out costs for the stores opened in 1995 and 1996.  These
stores carry higher depreciation  expense as a percentage of total revenues than
stores opened prior to 1995.

         General and  administrative  expenses  increased to  $1,868,000 in 1996
from  $1,550,000  in 1995,  due  primarily  to the  addition  of key  management
personnel, and other costs necessary to achieve Coffee People's growth plans. As
a percentage of total revenues, general and administrative expenses increased to
15.2% in 1996 from 13.8% in 1995.

         Average Store Sales And Store  Contribution  Margin.  For 1996,  Coffee
People's  12  neighborhood  and  drive-through  stores  open for the  full  year
achieved  average  store sales of  $729,000  and an average  store  contribution
margin of 20.0% compared to $736,000 and 20.5%, respectively,  for the 11 stores
open during the full year of 1995.  The six  airport  stores and one kiosk store
open for the full year  achieved  average store sales of $464,000 and an average
store contribution margin of 13.1%, respectively, compared to $417,000 and 13.9%
for five  airport  stores  and one  kiosk  open for the full  year of 1995.  The
difference  between  the  contribution   margins  realized  on  Coffee  People's
neighborhood  stores compared to its airport stores is primarily a result of the
percentage rent paid at Portland International Airport on sales generated at the
airport  stores.  The decline in store  contribution  margin at Coffee  People's
airport stores is due primarily to higher labor costs and depreciation  expenses
incurred at these airport stores.

                                       14
<PAGE>

         Other Income.  Other income as a percentage of total revenues increased
to 2.4% for the year ended  December  31,  1996 from 0.4% for the same period in
1995 due to interest earned on the proceeds from Coffee People's  initial public
offering in September 1996 and the private placement completed in January 1996.

         Interest  expense.  Interest  expense as a percentage of total revenues
decreased  to 0.6% for the year ended  December  31, 1996 from 1.2% for the same
period in 1995, primarily as a result of utilizing portions of the proceeds from
Coffee People's private placement to reduce interest-bearing obligations.

Quarterly Comparisons
---------------------

         The following  tables set forth certain  unaudited  financial  data for
each of the  quarters  in 1996 and  1997.  In the  opinion  of  Coffee  People's
management,  such unaudited  information  has been prepared on the same basis as
the  audited  financial  information  appearing  elsewhere  in this  Report  and
includes  all  adjustments,  consisting  only of normal  recurring  adjustments,
necessary  for the fair  presentation  of the  results of  operations  for those
periods. The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>


                                                                   Three months ended
          ------------------------------------------------------------------------------------------------------------------------
                                 March 31,    June 30,  Sept. 30,  Dec. 31,   March 31,  June 30,   Sept. 30,  Dec. 31,
                                                                                                       
                                  1996         1996       1996       1996       1997       1997       1997       1997
                                ----------   ---------  ---------  ---------  ---------- ---------  ---------- --------
                                                                      (in thousands)

          <S>                      <C>          <C>      <C>          <C>       <C>         <C>       <C>       <C>

          Statement of Income Data:
          Revenues:
             Retail Sales           $2,793      $2,983    $3,107      $3,221     $3,160     $4,798    $5,868    $6,197
             Wholesale and              52          48        41          36         33         91       123       152
          other
                                ----------------------------------------------------------------------------------------
                  Total              2,845       3,031     3,148       3,257      3,193      4,889     5,991     6,349
          revenues
          Cost of sales and
          related                    1,334       1,449     1,542       1,535      1,559      2,412     2,975     3,125
               occupancy                                                                          
          expenses
          Store operating              873         931       976       1,093      1,134      1,814     2,095     2,005
          expenses                                                                                     
          Other operating               13          12         5          14           -         1         1         2
          expenses
          Depreciation and
               amortization            114         118       132         166        203        344       421       423
          General and
          administrative               419         436       443         570        717        884       725       595
                expenses
          Provision for store
               closures and
               restructuring         -            -          -          -          -         5,500          -         -
                                ----------------------------------------------------------------------------------------
          Income (loss) from
               operations               92          85        50        (121)      (420)    (6,066)     (226)      199
          Other income, net             37          45        49         167        126         89        56        41
          Interest expense             (22)        (21)      (22)         (8)       (15)       (77)     (150)     (141)
                                ----------------------------------------------------------------------------------------
          Income (loss) before
               (provision)
          benefit for                  107         109        77          38       (309)    (6,054)     (320)       99
               income
          taxes
          (Provision) benefits
          for                          (41)        (42)      (30)        (14)       119           -         -       89
               income taxes
                                ----------------------------------------------------------------------------------------
           Net income (loss)      $     66    $     67    $   47    $     24    $  (190)   $(6,054)    $(320)     $188
                                ========================================================================================

          Number of stores
          open for
                the full period         19          19        19          19         22         29        46        41
          Number of stores
          open at
                end of period           19          19        19          22         29         47        46        41
          ----------------------
</TABLE>
                   15 
<PAGE>
<TABLE>
<CAPTION>
                                                               Three months ended
-------------------------------------------------------------------------------------------------------------------------------
                            March 31,    June 30,  Sept. 30,   Dec. 31,    March 31,    June 30,    Sept. 30,   Dec. 31,
                              1996        1996       1996        1996        1997         1997        1997        1997
                            ---------   ---------   --------   ---------   --------     --------    --------   ---------

<S>                            <C>         <C>         <C>        <C>        <C>          <C>         <C>         <C>

Statement of Income Data:
Revenues:
  Retail sales                 98.2%       98.4%       98.7%      98.9%       99.0%       98.1%        97.9%       97.6%
  Wholesale and other           1.8         1.6         1.3        1.1         1.0         1.9          2.1         2.4
                           -----------------------------------------------------------------------------------------------
      Total revenues          100.0       100.0       100.0      100.0       100.0       100.0        100.0       100.0
Cost of sales and related
     occupancy expenses        46.9        47.8        49.0       47.1        48.8        49.3         49.7        49.2
Store operating                31.3        31.2        31.4       33.9        35.9        37.8         35.7        32.4
expenses(1)
Other operating expenses        0.5         0.4         0.2        0.4          -           -            -         -
Depreciation and                4.0         3.9         4.2        5.1         6.4         7.0          7.0         6.7
amortization
General and
administrative                 14.7        14.4        14.1       17.5        22.5        18.1         12.1         9.4
    expenses
Provision for store
closure and                     -           -           -          -           -         112.5          -           -
    restructuring
                           -----------------------------------------------------------------------------------------------
  Income (loss) from
     operations                 3.2         2.8         1.6       (3.7)      (13.2)     (124.0)        (3.8)        3.1
Other income, net               1.4         1.5         1.6        5.1         4.0         1.8          0.9         0.7
Interest expense               (0.8)       (0.7)       (0.7)      (0.3)       (0.5)       (1.6)        (2.5)       (2.2)
                           -----------------------------------------------------------------------------------------------
Income (loss) before
    (provision) benefit
for                             3.8         3.6         2.5        1.1        (9.7)     (123.8)        (5.4)        1.6
     income taxes
(Provision) benefit  for
     income taxes              (1.5)       (1.4)       (1.0)      (0.4)        3.7          -            -          1.4
                           -----------------------------------------------------------------------------------------------
Net income  (loss)              2.3%        2.2%        1.5%       0.7%        6.0%     (123.8)%       (5.4)%       3.0%
                           ===============================================================================================

---------------------------

(1)   As a percentage of retail sales.

</TABLE>


Liquidity And Capital Resources
-------------------------------

         As of December 31, 1997,  Coffee  People had closed the three stores in
southern  California  and the two  stores in  Chicago,  Illinois,  but was still
making  payments on the lease  obligations  for such stores.  In February  1998,
Coffee  People sold two of its stores in southern  California  and ceased making
lease  payments on such stores.  With respect to the remaining five of the seven
stores identified for sale, disposition or closure,  Coffee People will continue
to make cash outlays for store losses and for such items as rent,  utilities and
insurance  until  such  time as it is able to sell  the  store  or  until it can
negotiate  satisfactory  arrangements  with  landlords for  re-leasing the store
premises or for otherwise  terminating the lease. There can be no assurance that
Coffee People will be successful  at selling its stores or in  negotiating  with
landlords  for the  re-leasing  of the store  premises  or for  terminating  the
leases.  If Coffee People is not successful in these efforts,  such cash outlays
could continue for an indeterminate  period during the term of the store leases.
The two  stores in Denver,  Colorado,  continue  to  operate.  Coffee  People is
working  with local real estate  brokers to market,  re-lease  or  sublease  the
remaining  stores  outside of Oregon and  Arizona.  The lease terms for the five
remaining stores range from six to nine years with expiration dates ranging from
August 2003 through May 2007.  Minimum  future  rental  payments as of March 31,
1998 under the five remaining leases total $2,060,000.

                                       16

<PAGE>


         Coffee  People has  suspended  its plans to open or acquire new stores,
pending  the  disposition  of its stores  outside  its core  Oregon and  Arizona
markets,  although  Coffee People has  committed to build an additional  unit at
Portland International Airport during the second quarter of 1998.

         As of  December  31,  1997  Coffee  People had  $2,545,000  in cash and
equivalents.

         Coffee People had a working  capital deficit of $526,000 as of December
31, 1997, as compared to positive  working capital of $9,472,000 at December 31,
1996.

         For the year ended December 31, 1997, cash used by operating activities
was $182,000,  as compared to cash provided by operating  activities of $458,000
for the year ended December 31, 1996.

         For the  year  ended  December  31,  1997  Coffee  People  had net cash
provided by  financing  activities  of  $5,234,000  primarily as a result of the
$6,000,000  bank  loan  obtained  to  finance  the  acquisition  of  the  Coffee
Plantation  stores in May 1997.  For the year ended  December 31, 1996, net cash
provided by financing  activities totaled  $13,229,000  primarily as a result of
net proceeds of $9,717,000 received from Coffee People's initial public offering
in  September  1996 and from net  proceeds of  $3,725,000  from Coffee  People's
private placement completed in January 1996.

         Coffee People has a line of credit with its primary bank  providing for
borrowings through August 1, 1998 of up to $500,000. Borrowings bear interest at
the rate of 0.5% over the bank's  prime rate (9.0% as of December  31, 1997) and
are secured by substantially all of Coffee People's assets,  including  accounts
receivable,  inventories, trade fixtures and equipment. As of December 31, 1997,
there were no borrowings outstanding under the line of credit, however,  $73,000
of the line was reserved for a letter of credit dated August 1, 1997.

         For the  years  ended  December  31,  1997 and  1996,  net cash used in
investing  activities was $12,781,000 and $3,673,000  respectively.  The primary
use of net cash used in  investing  activities  was for the  acquisition  of the
Coffee Plantation stores in May 1997 for which Coffee People paid  approximately
$8,651,000.  The  remaining  cash used in investing  activities  was for capital
expenditures  for new retail stores.  Except for the additional unit at Portland
International Airport,  Coffee People currently anticipates that any significant
capital expenditures for early 1998 will be curtailed pending activities related
to the  disposition or closure of the seven stores outside of Oregon and Arizona
and consummation of the Merger.

         Coffee People  believes  that  anticipated  cash flow from  operations,
existing  cash and bank debt will be  sufficient  to meet Coffee  People's  cash
requirements through the end of 1998.

                                      17

<PAGE>


Seasonality
-----------

         Coffee People's  business is subject to seasonal  fluctuations,  due to
seasonal  changes  and  general  economic   conditions,   among  other  factors.
Historically,  Coffee People's net sales have been highest during the second and
third quarters,  which include the spring and summer months. Coffee Plantation's
net sales  typically  have been highest during the fourth  calendar  quarter and
lowest during the third calendar quarter.  Therefore,  results of operations for
any  individual  quarter may not be indicative of results to be achieved for the
full year.

ITEM 7:   FINANCIAL STATEMENTS

         See pages 23 through 40.

ITEM 8:   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 
          ACCOUNTING AND FINANCIAL DISCLOSURE

         During  the years  ended  December  31,  1997 and 1996,  there  were no
disagreements  with  the  Company's  auditors,   Arthur  Andersen  LLP  ("Arthur
Andersen"),  on any matter of  accounting  principles  or  practices,  financial
statement  disclosure or auditing scope or procedure  which,  if not resolved to
the  satisfaction  of Arthur  Andersen would have caused Arthur Andersen to make
reference  thereto on their report on the financial  statements  for such years.
Upon  consummation of the Merger, it is anticipated that the Company will change
its independent accountants to be Price Waterhouse, LLP, which currently acts as
independent accountants for Gloria Jean's.

                                  PART III

ITEM 9:   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL 
          PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         There is hereby  incorporated  by reference the  information  under the
caption "Election of Coffee People Directors" in the Company's  definitive Proxy
Statement to be filed pursuant to Regulation  14A, which Proxy Statement will be
filed with the Securities and Exchange  Commission not later than 120 days after
the end of the  Company's  fiscal year ended  December  31,  1997.  The required
information  concerning compliance with Section 16(a) of the Securities Exchange
Act of 1934, as amended,  is incorporated herein by reference to the information
under the caption  "Compliance with Section 16(a) of Securities Exchange Act" in
the Company's  definitive  Proxy Statement to be filed within 120 days after the
end of the Company's fiscal year.

ITEM 10:  EXECUTIVE COMPENSATION

         There is hereby  incorporated  by reference the  information  under the
caption "Coffee People Executive Compensation" in the Company's definitive Proxy
Statement to be filed with the Securities  Exchange  Commission  within 120 days
after the end of the Company's fiscal year.

                                     18

<PAGE>


ITEM 11:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         There is hereby  incorporated  by reference the  information  under the
caption  "Beneficial  Ownership of Coffee People Common Shares" in the Company's
definitive  Proxy  Statement  to be  filed  with  the  Securities  and  Exchange
Commission within 120 days after the end of the Company's fiscal year.

ITEM 12:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         There is hereby  incorporated  by reference the  information  under the
caption "Certain Relationships and Related Transactions of Coffee People" in the
Company's  definitive  Proxy  Statement  to be  filed  with the  Securities  and
Exchange Commission within 120 days after the end of the Company's fiscal year.

                                 PART IV

ITEM 13:  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits




Exhibit No.    Description
-----------    -----------

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)).

4              See Article 2 of Exhibit 3(i) and Article II of Exhibit 3(ii)

10.1*          Registrant's 1993 Stock Option Plan (incorporated by reference to
               Exhibit  10.1 to the  Company's  Registration  Statement  on Form
               SB-2,    effective   September   25,   1996   (Registration   No.
               333-5376-LA)).

10.2*          Registrant's 1994 Stock Option Plan (Incorporated by reference to
               Exhibit  10.2 to the  Company's  Registration  Statement  on Form
               SB-2,    effective   September   25,   1996   (Registration   No.
               333-5376-LA)).

10.3*          Registrant's 1995 Stock Option Plan (incorporated by reference to
               Exhibit  10.3 to the  Company's  Registration  Statement  on Form
               SB-2,    effective   September   25,   1996   (Registration   No.
               333-5376-LA)). 

                                             19

<PAGE>

Exhibit No.    Description
-----------    -----------

10.4*          Registrant's 1996 Stock Option Plan (incorporated by reference to
               Exhibit  10.4 to the  Company's  Registration  Statement  on Form
               SB-2,    effective   September   25,   1996   (Registration   No.
               333-5376-LA)).

10.5*          Form of Incentive Stock Option  Agreement  related to 1993, 1994,
               1995 and 1996 Stock  Option Plans  (incorporated  by reference to
               Exhibit  10.5 to the  Company's  Registration  Statement  on Form
               SB-2,    effective   September   25,   1996   (Registration   No.
               333-5376-LA)).

10.6*          Form of  Nonstatutory  Stock  Option  Agreement  related to 1993,
               1994, 1995 and 1996 Stock Option Plans (incorporated by reference
               to Exhibit 10.6 to the Company's  Registration  Statement on Form
               SB-2,    effective   September   25,   1996   (Registration   No.
               333-5376-LA)).

10.7*          Registrant's   Employee  Stock  Purchase  Plan  (incorporated  by
               reference to Exhibit 10.7 to the Company's Registration Statement
               on Form SB-2,  effective  September  25, 1996  (Registration  No.
               333-5376-LA)).

10.8           Supply  Agreement dated February 17, 1997 between  Registrant and
               Coffee Bean International, Inc., as amended (incorporated in part
               by  reference  to Exhibit  10.8 of the Registrant's  Annual
               Report on Form 10-KSB for the year ended December 31, 1996)**

10.9           Form of Indemnity Agreement (incorporated by reference to Exhibit
               10.9  to the  Company's  Registration  Statement  on  Form  SB-2,
               effective  September 25, 1996  (Registration  No.  333-5376-LA)).
               

10.9(a)        Business  Loan  Agreement  with Bank of  America  NT & SA,  dated
               August 3, 1995, as amended  (incorporated by reference to Exhibit
               10.10  to the  Company's  Registration  Statement  on Form  SB-2,
               effective  September 25, 1996 (Registration No.  333-5376-LA) and
               the  Company's quarterly  report  on Form  10-QSB  for the
               quarter ended September 30, 1997).

10.10          Security  Agreement with Bank of America NT & SA, dated August 3,
               1995  (incorporated  by  reference  to  Exhibit  10.10(a)  to the
               Company's   Registration   Statement  on  Form  SB-2,   effective
               September 25, 1996 (Registration No. 333-5376-LA)).

10.11*         Employment Agreement with James L. Roberts, Chairman of the Board
               and Chief Executive Officer (incorporated by reference to Exhibit
               10.11  to the  Company's  Registration  Statement  on Form  SB-2,
               effective September 25, 1996 (Registration No. 333-5376-LA)).

                                           20

<PAGE>

Exhibit No.    Description
-----------    -----------

10.12*         Employment  Agreement with Taylor H. Devine,  President and Chief
               Executive Officer  (incorporated by reference to Exhibit 10.12 to
               the  Company's  Registration  Statement  on Form SB-2,  effective
               September 25, 1996 (Registration No. 333-5376-LA)).

10.13*         Terms of  employment  with Taylor H. Devine,  effective as of the
               closing of the Merger.

10.14*         Terms  of  employment  with  Kenneth  B.  Ross,  Chief  Financial
               Officer, effective as of the closing of the Merger.

10.15*         Employment  Agreement  with Matthew J. Kimble,  Vice President --
               Human  Relations  (incorporated  by reference to Exhibit 10.13 of
               the Registrant's Annual Report on Form 10-KSB for the year
               ended December 31, 1996).

10.16*         Employment  Agreement  with Steven P. Crantz,  Vice  President --
               Development  (incorporated  by reference to Exhibit  10.14 to the
               Company's   Registration   Statement  on  Form  SB-2,   effective
               September 25, 1996 (Registration No. 333-5376-LA)).

10.17          Redemption   agreement,   dated   January  4,  1993  between  the
               Registrant  and Gary G.  Talboy  (incorporated  by  reference  to
               Exhibit  10.15 to the  Company's  Registration  Statement on Form
               SB-2,    effective   September   25,   1996   (Registration   No.
               333-5376-LA)).

10.17(a)       Promissory Note, dated January 4, 1993, payable to Gary G. Talboy
               in  original  principal  amount  of  $245,000   (incorporated  by
               reference  to Exhibit  10.15(a))  to the  Company's  Registration
               Statement   on  Form   SB-2,   effective   September   25,   1996
               (Registration No. 333-5376-LA)).

10.18          Security Agreement,  dated January 4, 1993, among the Registrant,
               Jeffrey M. Ferguson and Gary G. Talboy (incorporated by reference
               to Exhibit 10.17 to the Company's  Registration Statement on Form
               SB-2,    effective   September   25,   1996   (Registration   No.
               333-5376-LA)).

10.19          Food and  Beverage  Concession  Lease  Agreement;  dated June 10,
               1994,   between   the   Registrant   and  the  Port  of  Portland
               (incorporated  by  reference  to Exhibit  10.18 to the  Company's
               Registration Statement on Form SB-2, effective September 25, 1996
               (Registration No. 333-5376-LA)).

                                         21
<PAGE>



Exhibit No.    Description
-----------    -----------

10.20          Common Stock  Purchase  Agreement,  dated as of January 11, 1996,
               among the  Registrant  and certain  purchasers  (incorporated  by
               reference  to  Exhibit  10.19  to  the   Company's   Registration
               Statement   on  Form   SB-2,   effective   September   25,   1996
               (Registration No. 333-5376-LA)).

10.21          Warrant  Agreement,  dated as of January  23,  1996,  between the
               Registrant and International Capital Partners, Inc. (Incorporated
               by  reference  to  Exhibit  10.20 to the  Company's  Registration
               Statement   on  Form   SB-2,   effective   September   25,   1996
               (Registration No. 333-5376-LA)).

10.22          Form  of  Warrant  Agreement,  dated  September  30,  1996,  with
               representations  of the  several  underwriters  of the  Company's
               initial public offering (incorporated by reference to Exhibit 1.2
               to the Company's  Registration  Statement on Form SB-2, effective
               September 25, 1996 (Registration No. 333-5376-LA)).

10.23          Agreement  and Plan of Merger  between the Company and The Second
               Cup Inc., dated February 19, 1998.

23             Consent of Arthur Andersen LLP, Independent Public Accountants.

27             Financial Data Schedule



*   Management contract or compensatory plan or arrangement.
**  Certain  portions  of this  exhibit  are  omitted  pursuant  to an  Order of
    Confidential Treatment.


(b)      Reports on Form 8-K

         None.



                                          22

<PAGE>



                               COFFEE PEOPLE, INC.

                              FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 1997 AND 1996
                         TOGETHER WITH AUDITORS' REPORT


                                       23
<PAGE>



                     REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Stockholders and Board of Directors
  of Coffee People, Inc.:

We have  audited the  accompanying  balance  sheets of Coffee  People,  Inc. (an
Oregon corporation) as of December 31, 1997 and 1996, and the related statements
of operations,  changes in  stockholders'  equity and cash flows for each of the
three years in the period ended December 31, 1997.  These  financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of Coffee  People,  Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.

                                              ARTHUR ANDERSEN LLP



Portland, Oregon,
February 4, 1998


                                       24
<PAGE>


                                                COFFEE PEOPLE, INC.
                                                -------------------

                                                  BALANCE SHEETS
                                                  --------------

                                         AS OF DECEMBER 31, 1997 AND 1996
                                         --------------------------------

                                              (Dollars in thousands)

                                                      ASSETS
                                                      ------
<TABLE>
<CAPTION>

<S>                                                                                     <C>           <C>  

                                                                                           1997          1996
                                                                                        --------      --------
CURRENT ASSETS:
  Cash and cash equivalents (Note 1)                                                     $ 2,545       $10,274
  Accounts receivable                                                                        227            26
  Inventories (Notes 1 and 2)                                                                632           205
  Prepaid expenses (Note 2)                                                                  205           141
  Income taxes receivable                                                                    157             -
  Deferred tax assets (Notes 1 and 6)                                                          -            28
  Other current assets                                                                        20            96
                                                                                        --------      --------
          Total current assets                                                             3,786        10,770

  Property and equipment, net (Notes 1, 2 and 3)                                           7,338         5,513
  Goodwill, net (Notes 1 and 2)                                                            5,781             -
  Other assets                                                                               118           129
                                                                                        --------      --------
          Total assets                                                                   $17,023       $16,412
                                                                                        ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Current portion of long-term debt and capital lease obligations
    (Notes 2 and 5)                                                                      $ 1,285        $  115
  Current portion of long-term debt to related parties (Note 5)                               22            20
  Accounts payable                                                                         1,011           533
  Construction accounts payable                                                                -           321
  Accrued liabilities                                                                        560           262
  Provision for store closures and restructuring (Note 16)                                 1,434             -
  Income taxes payable (Notes 1 and 6)                                                         -            47
                                                                                        --------      --------
          Total current liabilities                                                        4,312         1,298

DEFERRED TAX LIABILITY (Notes 1 and 6)                                                         -            86
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Notes 2 and 5)                               4,298           267
LONG-TERM DEBT TO RELATED PARTIES (Note 5)                                                   137           159

COMMITMENTS (Note 8)

STOCKHOLDERS' EQUITY (Notes 9, 10, 13 and 15):
  Preferred Stock, no par value; authorized 10,000,000 shares, none
    issued or outstanding                                                                      -             -
  Common Stock, no par value; authorized, 50,000,000 shares;
    3,263,872 and 3,237,432 shares issued and outstanding                                 14,563        14,492
  Stock subscription notes receivable (Note 10)                                             (302)         (281)
  Warrants outstanding (Note 13)                                                               -             -
  Retained earnings (accumulated deficit)                                                 (5,985)          391
                                                                                        --------      --------
          Total stockholders' equity                                                       8,276        14,602
                                                                                        --------      --------
          Total liabilities and stockholders' equity                                     $17,023       $16,412
                                                                                        ========      ========
The accompanying notes are an integral part of these financial statements.
</TABLE>

                                      25
<PAGE>

<TABLE>
<CAPTION>




                                                COFFEE PEOPLE, INC.
                                                -------------------

                                             STATEMENTS OF OPERATIONS
                                             ------------------------

                               FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                               ----------------------------------------------------

                                   (Dollars in thousands, except per share data)


<S>                                                                <C>              <C>            

                                                                       1997             1996            1995
                                                                   -----------      -----------    -----------
                                                                                   
REVENUES:
  Retail sales                                                      $  20,023        $  12,104      $  11,045
  Wholesale and other                                                     399              177            212
                                                                   -----------      -----------    -----------
          Total revenues                                               20,422           12,281         11,257

COST OF SALES and related occupancy expenses
  (cost of sales and occupancy expenses paid to
  related parties of $332, $239 and $187)                              10,071            5,860          5,388

STORE OPERATING EXPENSES                                                7,048            3,873          3,451

OTHER OPERATING EXPENSES                                                    4               44             63

DEPRECIATION AND AMORTIZATION                                           1,391              530            391

GENERAL AND ADMINISTRATIVE EXPENSES                                     2,921            1,868          1,550

PROVISION FOR STORE CLOSURES AND RESTRUCTURINGS                         5,500                -              -
                                                                   -----------      -----------    -----------
          Income (loss) from operations                                (6,513)             106            414

OTHER INCOME, net                                                         312              298             43

INTEREST EXPENSE (interest expense to related
  parties of $18, $20 and $35)                                           (383)             (73)          (134)
                                                                   -----------      -----------    -----------
          Income (loss) before  benefit (provision)
           for income taxes                                            (6,584)              331            323

BENEFIT (PROVISION) FOR INCOME TAXES (Notes 1 and 6)                      208              (127)          (112)
                                                                   -----------      -----------    -----------
NET INCOME (LOSS)                                                    $ (6,376)       $     204      $     211
                                                                       =======          =======        =======

EARNINGS (LOSS) PER SHARE - BASIC (Note 1)                           $  (1.96)       $    0.09      $    0.15
                                                                       =======          =======        =======
SHARES USED IN COMPUTING EARNINGS (LOSS)
  PER SHARE - BASIC (Note 1)                                        3,249,984        2,316,537      1,418,601

EARNINGS (LOSS) PER SHARE - DILUTED (Note 1)                         $  (1.96)       $    0.09      $   0.14
                                                                       =======          =======        =======
SHARES USED IN COMPUTING EARNINGS (LOSS)
  PER SHARE - DILUTED (Note 1)                                      3,249,984        2,349,702      1,500,975

The accompanying notes are an integral part of these financial statements.
</TABLE>
                                         26

<PAGE>
<TABLE>
<CAPTION>


                                                COFFEE PEOPLE, INC.
                                                -------------------

                                   STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                   ---------------------------------------------

                               FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                               ----------------------------------------------------

                                              (Dollars in Thousands)
<S>                              <C>                <C>          <C>         <C>                 <C>            <C>

                                                                                  Stock            Retained
                                         Common Stock                           Subscription       Earnings
                                      -------------------       Treasury           Notes          (Accumulated
                                       Shares        Amount       Stock         Receivable         Deficit)       Total
                                      ---------     ---------   ---------     ---------------    --------------   -------
                                   

BALANCE, December 31, 1994            1,378,204       $1,417     $(467)            $ (257)           $  (24)      $  669

  Exercise of stock
    options
    (Notes 9 and 10)                     26,850           59         -                (58)                -            1
  Interest income on stock
    subscription notes at
    8.5% per annum
    (Note 10)                                 -            -         -                (26)                -          (26)
  Net income                                  -            -         -                  -               211          211
                                  -------------    ---------    ------            -------           -------      -------
BALANCE, December 31, 1995            1,405,054        1,476      (467)              (341)              187          855

  Private Placement
    (Note 13)                           596,250        3,258       467                  -                 -        3,725
  Initial public offering
    (Note 13)                         1,225,000        9,717         -                  -                 -        9,717
  Exercise of stock
    options (Note 9)                     11,128           25         -                  -                 -           25
  Repayment of stock
    subscription note and
    accrued interest
    (Note 10)                                 -            -         -                 84                 -           84
  Income tax benefit of
    disqualifying
    dispositions                              -           16         -                  -                 -           16
  Interest income on stock
    subscription notes at
    8.5% per annum
    (Note 10)                                 -            -         -                (24)                -          (24)
  Net income                                  -            -         -                  -               204          204
                                  -------------   ----------     -----           --------          --------      -------
BALANCE, December 31, 1996            3,237,432       14,492         -               (281)              391       14,602

  Exercise of stock
    options (Note 9)                     26,440           71         -                  -                 -           71
  Interest income on stock
    subscription notes at
    8.5% per annum
    (Note 10)                                 -            -         -                (21)                -          (21)
  Net loss                                    -            -         -                  -            (6,376)      (6,376)
                                  -------------   ----------     -----           --------          --------     --------
BALANCE, December 31, 1997            3,263,872      $14,563       $ -              $(302)          $(5,985)     $ 8,276
                                      =========       ======       ===               ====            ======       ======
The accompanying notes are an integral part of these financial statements.

</TABLE>
                                      27
<PAGE>


<TABLE>
<CAPTION>



                                                COFFEE PEOPLE, INC.
                                                -------------------

                                             STATEMENTS OF CASH FLOWS
                                             ------------------------

                               FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                               ----------------------------------------------------


                                              (Dollars in thousands)
<S>                                                                        <C>       <C>        <C> 

                                                                              1997       1996      1995
                                                                           --------   --------   --------

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                        $(6,376)     $ 204     $ 211
  Adjustments to reconcile net income (loss) to net cash
    (used in) provided by operating activities-
      Depreciation and amortization                                          1,391        530       391
      Deferred (benefit) provision for income taxes                            (58)         5        49
      Interest income on stock subscriptions                                   (21)       (14)      (26)
      Provision for store closures and restructuring                         4,700          -         -
      Changes in operating assets and liabilities:
        (Increase) decrease in accounts receivable                            (201)       (17)        3
        (Increase) decrease in inventories                                    (188)        59       (60)
        (Increase) decrease in prepaid expenses                                (77)       (29)      (26)
        Increase in income taxes receivable                                   (157)         -         -
        Decrease (increase) in other current assets                             76        (96)       14
        Increase (decrease) in accounts payable                                478       (242)     (166)
        Increase in accrued liabilities                                        298         66        16
        (Decrease) increase in income taxes payable                            (47)        (8)       43
        Decrease in other current liabilities                                    -          -       (33)
                                                                           --------   --------   --------
          Net cash (used in)provided by operating
            activities                                                        (182)       458       416

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment, net                                   (3,784)    (3,888)     (933)
  Acquisition of Coffee Plantation, net of cash acquired                    (8,614)         -         -
  (Increase) decrease in other assets                                          (62)      (106)       73
  (Decrease) increase in construction accounts payable                        (321)       321         -
                                                                           --------   --------   --------
          Net cash used in investing activities                            (12,781)    (3,673)     (860)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from long-term debt obtained for acquisition                      6,000          -         -
  Proceeds from long-term debt                                                   -          -       682
  Repayment of debt and capital lease obligations                             (817)      (275)     (168)
  Repayment of debt to related parties                                         (20)       (53)     (227)
  Repayment of stock subscription note receivable
    and interest                                                                 -         74         -
  Proceeds from private placement, net                                           -      3,725         -
  Proceeds from initial public offering, net                                     -      9,717         -
  Issuance of common stock, net                                                 71         25         1
  Income tax benefit of disqualifying dispositions                               -         16         -
  Dividends                                                                      -          -      (56)
                                                                           --------   --------   --------
          Net cash provided by financing activities                          5,234     13,229      232
                                                                           --------   --------   --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                            (7,729)    10,014     (212)
CASH AND CASH EQUIVALENTS, beginning of the period                          10,274        260      472
                                                                           --------   --------   --------
CASH AND CASH EQUIVALENTS, end of the period                               $ 2,545    $10,274    $ 260
                                                                             =====     ======      ===
The accompanying notes are an integral part of these financial statements.
</TABLE>

                                       28
<PAGE>







                                                COFFEE PEOPLE, INC.
                                                -------------------

                                           NOTES TO FINANCIAL STATEMENTS
                                           -----------------------------

                                   (Dollars in thousands, except per share data)



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
    -------------------------------------------

The Company
-----------

Coffee  People,  Inc.  (the  Company),  an  Oregon  corporation,   sells  coffee
beverages, coffee beans, cookies, pastries, ice cream, shakes and coffee-related
merchandise.  Twenty-five  of the  Company's  forty-one  stores  are  located in
Oregon, fourteen are located in Arizona and two are located in Denver, Colorado.
A downturn in  economic  conditions  in Oregon or Arizona  could have a material
adverse effect on the Company.

On November 13, 1997,  the Company  entered  into a  definitive  agreement  with
Second Cup Inc.  (Second Cup) that provides for the  combination  of the Company
with Gloria Jean's  Inc.  (Gloria  Jean's) a wholly-owned  subsidiary of Second
Cup. (See Note 17.)

Use of Estimates
----------------

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

Fair Value of Financial Instruments
-----------------------------------

The  Company's  financial  instruments  consist  of cash and  cash  equivalents,
accounts receivable, accounts payable and debt instruments. At December 31, 1997
and 1996,  the fair value of the  Company's  receivables  and debt  under  loans
approximated the carrying value.

Advertising
-----------

Advertising  costs are  expensed as incurred.  For the years ended  December 31,
1997, 1996 and 1995, advertising costs were $242, $144 and $49, respectively.

Cash and Cash Equivalents
-------------------------

Cash and cash equivalents include cash and short-term  investments with original
maturity dates of three months or less.

Inventories
-----------

Inventories are stated at the lower of cost (first-in,  first-out) or market and
consist of roasted coffee beans, food, beverages, supplies and other merchandise
held for sale.

                                       29

<PAGE>

Property and Equipment
----------------------

Property  and  equipment  is  stated  at cost less  depreciation  and  valuation
reserves.  Depreciation on equipment is computed on the straight-line basis over
the  estimated  useful  lives of the assets  ranging  from three to seven years.
Leasehold  improvements  are capitalized and amortized on a straight-line  basis
over the shorter of the initial lease term or the estimated  useful lives of the
assets,  generally  three to ten  years.  See Notes 3 and 16 for  discussion  of
property and equipment write-downs taken during the year.

Maintenance  and repairs are charged to expense as incurred.  Major  repairs and
improvements are capitalized and depreciated.

Goodwill
--------

Amortization of goodwill is computed on the  straight-line  basis over 15 years.
Accumulated amortization as of December 31, 1997 and 1996 was $234 and $0.

Management's policy is to review the ongoing value of the goodwill on a periodic
basis by comparing  undiscounted future projected earnings to the carrying value
of  goodwill.  Any  difference  would be recorded as an  impairment  adjustment.
Management  is of the  opinion  that  there  has been no  decline  in the  value
assigned to goodwill.

Impairment of Long-lived Assets
-------------------------------

Effective as of the  beginning of 1996,  the Company  adopted the  provisions of
Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of":
(SFAS 121),  on a  prospective  basis.  SFAS 121  requires the Company to review
long-lived assets and certain identifiable intangibles,  including goodwill, for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be recoverable. The assessment of impairment
is  based  on the  estimated  undiscounted  future  cash  flows  from  operating
activities  compared with the carrying value of the assets.  If the undiscounted
future cash flows of an asset are less than the  carrying  value,  a  write-down
would be recorded, measured by the amount of the difference between the carrying
value of the asset and the fair value of the  assets.  Assets to be  disposed of
are recorded at the lower of carrying amount or fair value less cost to sell.

Store Opening Costs
-------------------

Costs  incurred in  connection  with  start-up  and  promotion of new stores are
expensed as incurred.

Income Taxes
------------

Income taxes are provided  for on the basis of earnings  reported for  financial
reporting purposes.  Deferred taxes are determined based on the estimated future
tax effects of  differences  between the  financial  statement  and tax bases of
assets and  liabilities  given the provisions of enacted tax laws and tax rates.
Deferred  income  tax  expenses  or  credits  are  based on the  changes  in the
financial  statement  basis  versus  the tax  basis in the  Company's  assets or
liabilities  from  year to year.  See Note 6 for  additional  discussion  of the
Company's tax accounts, including valuation adjustments.

Earnings Per Share
------------------

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards No. 128,  "Earnings Per Share" (SFAS 128). SFAS
128  establishes  new standards for computing and disclosing  earnings per share
(EPS).  SFAS 128 is effective for both interim and annual  periods  ending after
December 15, 1997. Upon adoption,  the Company was required to restate all prior
period EPS disclosures with dual presentation of "Basic" and "Diluted" EPS.

                                    30

<PAGE>


Basic EPS is based on the average  number of shares of Common Stock  outstanding
during the year.  Diluted EPS amounts are based on the average  number of shares
of Common Stock and diluted  Common  Stock  equivalents  outstanding,  using the
treasury stock method.  Common stock  equivalents  include shares  issuable upon
exercise of outstanding stock options.

In 1997, the Company adopted SFAS 128, effective December 15, 1997. As a result,
the Company's  reported earnings per share for 1996 and 1995 were restated.  The
effect of this accounting change on previously reported EPS is as follows:

<TABLE>
<CAPTION>
                    <S>                                                          <C>            <C>

                                                                                   1996           1995
                                                                                 --------       -------
                    Per share amounts:
                      Primary EPS as reported                                      $0.09         $0.14
                      Effect of SFAS 128                                             -            0.01
                                                                                  ------         ------
                        Basic EPS as restated                                      $0.09         $0.15
                                                                                   ====           ====

                      Fully diluted EPS as reported                                $0.09         $0.14
                      Effect of SFAS 128                                             -             -
                                                                                  -------        ------
                        Diluted EPS as restated                                    $0.09         $0.14
                                                                                   =====          ====

</TABLE>

Stock-Based Compensation Plans
------------------------------

The Company  accounts for its stock-based  compensation  plans under  Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25).  Effective in 1996, the Company adopted the disclosure  option of Statement
of  Financial   Accounting   Standards  No.  123,  "Accounting  for  Stock-Based
Compensation"  (SFAS 123).  SFAS 123 requires that companies which do not choose
to account for stock-based  compensation as prescribed by this statement,  shall
disclose the pro forma effects on earnings and earnings per share as if SFAS 123
had been  adopted.  Additionally,  certain other  disclosures  are required with
respect to stock  compensation  and the  assumptions  used to determine  the pro
forma effects of SFAS 123.

2.  ACQUISITION OF COFFEE PLANTATION:
    ---------------------------------

On May 21 1997, the Company acquired certain assets from The Coffee  Plantation,
Inc. (a wholly-owned  subsidiary of Second Cup Inc.) for $8,651. Acquired assets
consisted of inventory,  certain prepaid accounts and property and equipment for
15 coffeehouse  stores (the Acquired  Stores).  The Company also assumed certain
operating  lease  obligations.  The purchase  price was paid upon  closing.  The
results of operations of the Acquired Stores have been included in the Company's
results of operations since the acquisition date.

The following is the purchase price allocation:
<TABLE>
<CAPTION>
           <S>                                                                    <C> 

           Cash paid for the acquired stores                                      $ 2,651
           Cash from borrowings                                                     6,000
                                                                                 ---------
             Total purchase price                                                 $ 8,651

                                    31

<PAGE>



           Assets acquired:
             Cash                                                                  $ 37
             Inventories                                                            239
             Prepaid expenses                                                        23
             Property, plant and equipment                                        2,337
                                                                                --------
             Cost in excess of net assets acquired                              $ 6,015
                                                                                  ======
</TABLE>

The Company  financed the transaction  with a $6,000 term note payable to a bank
over 60 months in equal monthly  principal amounts of $100 plus interest at 0.5%
over the bank's reference rate beginning June 1, 1997. (See Note 5)

The  following  pro  forma  information  is  presented  to show the  results  of
operations had the acquisition occurred December 31, 1995:


<TABLE>
<CAPTION>
      <S>                                                            <C>                             <C> 

                                                                     December 31, 1997            December 31, 1996
                                                                        (Unaudited)                  (Unaudited)

      Total Revenues                                                      $23,645                     $ 21,701
      Income (loss) from operations                                        (6,561)                         277
      Net Income                                                           (6,649)                         (46)      
      Loss per share - basic and diluted                                   $(2.05)                     $ (0.02)


The above results of operations are not intended to be indicative of the results
of  operations  which  actually  would have been  realized  had the  acquisition
occurred as of December 31, 1995, nor of the future results of operations of the
combined Company.
</TABLE>

3.  PROPERTY AND EQUIPMENT:
    -----------------------

Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
<S>                                                 <C>           <C> 

                                                        1997          1996
                                                     --------       --------

Land                                                   $   868       $   868
Buildings                                                1,099             -
Leasehold improvements                                   6,046         2,634
Machinery and equipment                                  4,379         1,842
Capital leases                                              45           116
Construction in progress                                     1         1,492
                                                     ---------     ---------
                                                        12,438         6,952
Less- Accumulated depreciation                          (5,100)       (1,439)
                                                     ---------     ---------
                                                       $ 7,338       $ 5,513
                                                         =====        ======
</TABLE>

At December 31, 1997,  included in  accumulated  depreciation  is $3,157 for the
impact of the write  down of fixed  assets  related to the  provision  for store
closures. (See Note 16.)

                                    32

<PAGE>

4.  LINE OF CREDIT:
    ---------------

In August 1997, the Company renewed its line of credit  agreement with a bank in
the amount of $500.  The interest  rate for amounts drawn under the line is 0.5%
over the prime rate (9.0% at December 31, 1997).  There is no amount outstanding
under the line of credit at December 31, 1997. Of the $500 credit line,  a total
of $73 is reserved for use under a letter of credit dated  September  1997.  The
line expires in August 1998.

5.  DEBT:
    -----

Debt consists of the following at December 31:
<TABLE>
<CAPTION>
<S>                                                                                 <C>        <C>

                                                                                      1997       1996
                                                                                    --------   -------

Note payable to bank, payable in monthly installments of $6 each, plus
  interest at 9%, commencing September 1, 1995, due August 1, 1998                   $   46    $ 115

Note  payable  to bank,  payable in  monthly  installments  of $100  each,  plus
  interest at 0.5% over the prime rate (9% at December 31, 1997),
  commencing June 1, 1997, due May 1, 2002                                            5,300        -

Note payable to stockholder,  payable in monthly  installments of $3,  including
  interest at 2% over the prime rate (10.50% at December 31,
  1997), due December 1, 2002                                                           159      179

Note payable to the Port of  Portland,  payable in monthly  installments  of $5,
  commencing April 8, 1995, including interest at 12%, due
  March 8, 2003                                                                         216      244
                                                                                  ---------  -------
                                                                                      5,721      538
Less- Current portion                                                                (1,299)    (117)
                                                                                  ---------  -------
                                                                                     $4,422    $ 421
                                                                                  =========  =======
</TABLE>

The bank notes and line of credit (Note 4) are secured by  substantially  all of
the Company's assets including accounts receivable,  inventories, trade fixtures
and equipment.  These debt agreements contain restrictions relating to specified
financial ratios as well as the lender's standard covenants and restrictions. As
of December 31, 1997, the Company was in compliance with all debt covenants.

The stockholder note is secured by substantially all of the Company's assets and
is subordinated to the bank note.

The principal payments on long-term debt are as follows at December 31, 1997:

   1998                                          $1,299
   1999                                           1,259
   2000                                           1,267
   2001                                           1,272
   2002                                             584
Thereafter                                           40
                                               --------
                                                 $5,721
                                                  =====

                                     33
<PAGE>


The Company has capital leases for certain  equipment.  Future minimum  payments
under the capital leases are as follows at December 31, 1997:

1998                                                                  $ 10
1999                                                                     5
2000                                                                     4
2001                                                                     4
2002                                                                     2
                                                                     -----
                                                                        25
Less- Portion representing interest                                     (4)
                                                                     -----
Present value of net minimum lease payments                             21

Less- Current portion                                                   (8)
                                                                     -----
Long-term obligations under capital leases                            $ 13
                                                                       ===

6.  INCOME TAXES:
    -------------

The  components  of the  (benefit)  provision  for income  taxes  consist of the
following:

                                                 1997    1996     1995
                                               ------  ------   ------
Current:
  Federal                                       $(150)   $100     $ 59
  State                                             -      22        4
                                               ------  ------   ------
                                                 (150)    122       63
Deferred                                          (58)      5       49
                                               ------  ------   ------
          Total (benefit) provision             $(208)   $127     $112
                                                 ====     ===      ===

The  reconciliation  of the statutory  federal income tax rates to the Company's
effective income tax rates is as follows:
<TABLE>
<CAPTION>
<S>                                                                   <C>          <C>         <C>

                                                                         1997        1996       1995
                                                                        ------      ------     ------

Federal statutory rate                                                  (34.0)%      34.0%      34.0%
State income taxes, net of federal benefit                               (2.3)        2.3        2.6
Effect of graduated tax rates                                             -           -         (1.3)
Other                                                                    (1.0)        2.1       (0.6)
Change in valuation allowance                                            34.1         -          -
                                                                        ------      ------     ------
                                                                         (3.2)%      38.4%      34.7%

</TABLE>
                                       34

<PAGE>


The  components  of the net deferred tax assets and  liabilities  consist of the
following at December 31:
<TABLE>
<CAPTION>
<S>                                                                               <C>        <C> 
                                                                                   1997       1996
                                                                                 --------    ------

Current deferred tax assets:
  Basis difference in accrued liabilities                                         $1,645      $ 17
  Tax deduction carryforwards                                                          -        11
                                                                                 --------    ------
                                                                                   1,645        28
Less - valuation allowance                                                                       -
                                                                                  (1,645)
                                                                                 --------    ------
          Total current deferred tax asset                                        $    -      $ 28
                                                                                 ========      ===
Long-term deferred tax assets:
  Tax credit carryforwards                                                        $   14      $
  Net operating loss carryforward                                                    639         -
  Basis difference in property, plant and equipment                                   64         -
Long-term deferred tax liability-
  Basis difference in property, plant and equipment                                    -       (86)
                                                                                 --------    ------
                                                                                     717       (86)
Less - valuation allowance                                                          (717)        -
                                                                                 --------    ------
          Net long-term deferred tax assets
            (liability)                                                           $    -      $(86)
                                                                                  =======      ===
</TABLE>

As of December 31, 1997, a valuation  allowance  has been  provided  against the
deferred tax assets, as the Company believes that it is not more likely than not
that the deferred tax assets will be realized.

7.  OPERATING LEASES:
    -----------------

The Company leases certain retail store,  office and warehouse  facilities under
operating leases expiring  through the year 2013. Most lease agreements  contain
renewal  options  and  rent  escalation  clauses.  Certain  leases  provide  for
contingent rentals based upon gross sales.

Rental expense under these lease agreements for the years ended December 31, was
as follows:

                                   1997       1996       1995
                                  ------     ------     ------

Minimum rentals                   $1,871     $1,051       $828
Contingent rentals                    91         69         84
                                  ------     ------     ------
                                  $1,962     $1,120       $912
                                   =====      =====        ===

                                     35

<PAGE>


The Company has sublet certain retail store and office  facilities,  whereby the
sublease  tenants are responsible  for the lease payments.  Minimum future lease
payments under these agreements as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
      <S>                 <C>                <C>                           <C>  

                           Gross Minimum     Less - amount             Net Minimum Lease
                          Lease Payments     under subleases               Payments
                          --------------     ---------------           -----------------

           1998             $  2,055               $ 46                     $ 2,009
           1999                2,051                 43                       2,008
           2000                1,843                 23                       1,820
           2001                1,640                 24                       1,616
           2002                1,438                 25                       1,413
      Thereafter               4,261                 17                       4,244
                            ----------          ----------                 ----------
                             $13,288               $178                     $13,110
                            ==========          ==========                 ========== 
</TABLE>

8.  COMMITMENTS:
    ------------

The Company has an agreement  with a supplier to purchase  substantially  all of
the Company's coffee  requirements  through May 1998.  Management  believes that
other  suppliers  could  provide  similar  products.  Any supplier from whom the
Company might  purchase  coffee is subject to volatility in the supply and price
of  coffee  beans.  A change  in  suppliers,  however,  could  affect  the terms
currently received by the Company. Such a change could have a negative impact on
operating results.

As a  requirement  under the lease  with the Port of  Portland,  the  Company is
committed  to  enter  into a joint  venture  with a third  party  for one of the
Company's  stores at  Portland  International  Airport.  Once the  agreement  is
finalized, the Company will have a 49% ownership interest in that store.

9.  INCENTIVE PLANS:
    ----------------

Authorized Stock
----------------

In June 1995, the Company  restated its Articles of  Incorporation  to authorize
50,000,000  shares of no par value Common Stock and 10,000,000  shares of no par
value Preferred Stock.

Stock Option Plans
------------------

At December 31,  1997,  the Company had four Stock Option Plans - the 1993 Stock
Option Plan  adopted in December  1993,  the 1994 Stock  Option Plan  adopted in
March 1994,  the 1995 Stock Option Plan adopted in June 1995, and the 1996 Stock
Option Plan adopted in May 1996 (collectively,  the Plans). Under the Plans, key
employees  and  consultants  may be granted  either  incentive  stock options or
nonqualified  stock  options.  Incentive  stock  options  must  comply  with the
requirements  of the Internal  Revenue  Code (the Code),  may be granted only to
employees and may be granted at not less than the fair market value of the stock
at the date of grant.  Nonqualified  options  may be  granted to  employees  and
consultants  at not less than 85% of the fair  market  value of the stock at the
date of grant. Canceled options are available for future grant.

                                      36


<PAGE>


The following table summarizes the activity for the aforementioned  stock option
plans:
<TABLE>
<CAPTION>
<S>                                                             <C>              <C>                  <C>    

                                                                   Number of        Price per         Weighted Average
                                                                    Shares            Share            Price per Share
                                                                   ---------        ----------        -----------------

Outstanding at December 31, 1994                                     204,600      $2.22 - $8.00            $4.60
  Granted                                                            196,500       8.00 - 10.00             9.54
  Exercised                                                          (26,850)         2.22                  2.22
  Canceled                                                           (22,237)      2.22 - 8.00              6.12
                                                                  ----------    ----------------        -------------
Outstanding at December 31, 1995                                     352,013       2.22 - 10.00             7.44
  Granted                                                            197,225       9.00 - 10.00             9.63
  Exercised                                                          (11,128)         2.22                  2.22
  Canceled                                                          (115,547)      2.22 - 10.00             6.53
                                                                 -----------    ----------------        -------------
Outstanding at December 31, 1996                                     422,563       2.22 - 10.00             8.85
  Granted                                                             70,500        4.75 - 7.00              6.50
  Exercised                                                          (17,944)         2.22                  2.22
  Canceled                                                          (127,806)      2.22 - 10.00             9.42
                                                                  ----------    ----------------        -------------
Outstanding at December 31, 1997                                     347,313      $2.22 - 10.00            $8.51
                                                                  ==========    =================       =============

</TABLE>


For all four plans,  there were 271,765 shares of unissued Common Stock reserved
for  issuance at December  31,  1997.  Options to purchase  131,248,  94,489 and
46,796 shares of Common Stock were  exercisable  at December 31, 1997,  1996 and
1995, respectively.  The weighted average share price for shares of Common Stock
exercisable  at December  31, 1997,  1996 and 1995 were $8.48,  $7.24 and $4.07,
respectively.
<TABLE>
<CAPTION>

Options outstanding by grant price as of December 31 were as follows:
<S>       <C>                      <C>                         <C>                     <C>              

           Option Price          December 31, 1997           December 31, 1996         December 31, 1995
           ------------          -----------------           -----------------         -----------------

            $  2.22                   26,813                       45,338                   65,513
               4.00                       -                         -                       30,000
               4.75                    5,000                        -                            -
               5.37                    3,000                        -                            -
               5.56                    2,000                        -                            -
               6.50                   30,000                        -                            -
               6.94                   16,500                        -                            -
               8.00                   21,000                       30,000                  105,000
               9.00                   63,000                       72,475                        -
              10.00                  180,000                      274,750                  151,500
                                   ----------                    ----------               ----------     
                                     347,313                      422,563                  352,013
                                  ============                  ============             ============
</TABLE>

Employee Stock Purchase Plan
----------------------------

In June 1994, the Board of Directors  adopted and the  shareholders  approved an
Employee  Stock  Purchase  Plan (the ESPP).  Under the ESPP,  150,000  shares of
Common Stock have been reserved for issuance to and purchase by employees of the
Company.  All  employees  with over four months of service who work more than 20
hours per week and who do not own stock  and stock  options  for more than 5% of
the  Company's  stock are  eligible  to  participate  in the  ESPP.  The ESPP is
intended to qualify as an "employee  stock  purchase  plan" under Section 423 of


                                     37

<PAGE>

the Internal Revenue Code (the Code). Under that section of the Code,  employees
may not be granted options if,  immediately after the grant, such employee would
own stock or hold options to purchase stock  possessing 5% or more of the voting
power or value of all stock of the  Company,  nor may any  participant  purchase
Common Stock having a fair market value exceeding  $25,000 in any calendar year.
As of December 31, 1997,  8,496 shares had been issued and  purchased  under the
ESPP.

Statement Financial Accounting Standards No. 123
------------------------------------------------

During 1995,  the  Financial  Accounting  Standards  Board  issued  Statement of
Financial  Accounting  Standards  No.  123  (SFAS  123),  which  defines  a fair
value-based  method of accounting for an employee stock option or similar equity
instrument  and  encourages  all entities to adopt that method of accounting for
all of their  employee  stock  compensation  plans.  However,  it also allows an
entity to continue to measure compensation cost for those plans using the method
of accounting  prescribed by APB 25. Entities  electing to retain the accounting
treatment  in APB 25 must make pro  forma  disclosures  of net  income  and,  if
presented,  earnings per share, as if the fair value-based  method of accounting
defined in SFAS 123 had been applied.

The Company has elected to account for its stock-based  compensation plans under
APB 25; however,  the Company has computed for pro forma disclosure purposes the
value of all options granted during 1997, 1996 and 1995 using the  Black-Scholes
option-pricing  model as  prescribed  by SFAS 123 using the  following  weighted
average assumptions for grants:
<TABLE>
<CAPTION>
<S>                                                <C>            <C>         <C> 

                                                      1997         1996         1995
                                                     -------      -------      -----

Average risk-free interest rate                       6.00%        6.36%        6.45%
Expected dividend yield                               0.00%        0.00%        0.00%
Expected lives                                        5 years      5 years      5 years
Expected volatility                                  57.80%       63.13%       63.13%

</TABLE>
The total value of options  granted  during 1997,  1996 and 1995 was computed as
approximately $201, $994 and $1,025, respectively, which would be amortized on a
pro forma basis over the five-year vesting period of the options. If the Company
had  accounted  for these plans in  accordance  with SFAS 123, the Company's net
income  (loss)  and pro forma net  income  (loss)  per share  would have been as
follows:
<TABLE>
<CAPTION>
        <S>                                                                     <C>             <C> 

                                                                                     As             Pro
                                                                                  Reported         Forma
                                                                                  --------         -----
         1997 -
           Net (loss)                                                            $(6,376)        $(6,735)
           Net (loss) per share - basic and diluted                                (1.96)          (2.07)

         1996 -
           Net income (loss)                                                    $    204        $    (63)
           Net income (loss) per share - basic and
             diluted                                                                0.09           (0.03)

         1995 -
           Net income                                                            $   211         $    76
           Net income per share - basic and diluted                                 0.14            0.05
</TABLE>

10.  STOCK SUBSCRIPTION NOTES RECEIVABLE:
     ------------------------------------

During December 1993, upon exercise of incentive stock options by an officer and
by a key employee,  the Company issued 75,000 shares of Common Stock in exchange
for notes. On January 4, 1994, a key employee exercised  incentive stock options
for 37,500 shares of Common Stock in exchange for notes. The notes bear interest
at the rate of 8.5% per annum from the dates of exercise, and are due in full on

                                      38

<PAGE>

December 31, 1998.  During January 1995, an officer  exercised  incentive  stock
options for 26,250 shares of Common Stock in exchange for notes.  The notes bear
interest at the rate of 8.5% per annum from the date of exercise  and are due in
full on December 31, 1999.

The notes  provide  that in the event any of the stock is sold  before the notes
mature,  all accrued  interest and a pro rata portion of the  principal  balance
must be paid.  During  1996,  the key  employee  sold  25,000  shares and repaid
$84,000,  which represented all accrued interest and the pro rata portion of the
principal balance.

11.  RETIREMENT PLAN:
     ----------------

Effective on May 1, 1994, the Company  adopted a tax deferred  savings plan (the
401(k) Plan). All employees with over six months service and who work an average
of 30 hours per week or more are  eligible to  participate  in the 401(k)  Plan.
Participants  who choose to participate may contribute up to 20% of their pretax
compensation  to the 401(k) Plan subject to the  statutorily  prescribed  annual
limits. All contributions to the 401(k) Plan,  including Company  contributions,
are fully vested and nonforfeitable at all times. The Company made contributions
of $12, $16 and $10 during 1997, 1996 and 1995, respectively.

12.  STATEMENTS OF CASH FLOWS:
     -------------------------

The Company made the following cash payments:
<TABLE>
<CAPTION>
<S>                                                                                       <C>      <C>     <C>

                                                                                          1997     1996     1995
                                                                                          ----     ----     ----
Interest (includes $18, $20 and $35 paid to related
  parties)                                                                                 $354    $  75     $134
Taxes                                                                                        46      101       32

Noncash investing and financing activities are as follows:

                                                                                           1997    1996     1995
                                                                                           ----    ----     ----

Issuance of Common Stock                                                                   $  -   $  -     $  58
Purchase of property under capital lease obligations                                         18      -         -

</TABLE>

13.  STOCKHOLDERS' EQUITY:
     ---------------------

Initial Public Offering
-----------------------

On September  25, 1996,  the Company  completed its initial  public  offering in
which it raised $11,025 through the issuance of 1,225,000 shares of Common Stock
at $9.00 per share.  The  Company's  proceeds from the initial  public  offering
included in the financial statements are net of offering costs.

As part of the initial public  offering,  the Company also issued warrants which
entitle  the holders to purchase  122,500  shares of Common  Stock at $10.80 per
share.  The warrants are  exercisable  for a period of four years  beginning one
year from the date of the initial public offering.  The warrants are callable by
the Company upon 90 days notice  following the first time when the closing price
of the Common Stock exceeds $15.12 per share for 30 consecutive days.

Private Placement
-----------------

In January 1996, the Company  completed a private placement of equity securities
in which it raised $3,975 through the issuance of 596,250 shares of Common Stock
at $6.67 per share. The Company's  proceeds from the private placement of equity
securities included in the financial statements are net of offering costs.

                                      39

<PAGE>

14.  RELATED PARTY TRANSACTIONS:
     ---------------------------

As of December 31, 1997,  the Company had a lease with a  stockholder,  who is a
director of the Company.

During  1997 and  1996,  the  Company  purchased  approximately  $256 and  $133,
respectively, of products from a company that is 50% owned by a stockholder, who
is also a director and an officer of the Company.

15.  STOCK SPLIT:
     ------------

On July 26, 1996,  the Board of Directors  approved a 3-for-2  stock split.  The
effect of this stock split has been  retroactively  reflected in these financial
statements and notes for all periods presented.

16.  PROVISION FOR STORE CLOSURES AND RESTRUCTURING:
     -----------------------------------------------

On June 30, 1997,  the Company  provided for a $5,500  charge for the closure of
the seven stores outside its primary Oregon and Arizona markets, and for related
restructuring.  The primary portion of the liability  established by the Company
relates to payments under existing  lease  agreements for closed stores,  net of
anticipated  recoveries from subleases and wind-down of closed store operations.
As of  December  31,  1997,  the  Company  had  incurred  approximately  $800 in
expenditures,  which had been charged to the  provision.  Two of the stores were
located  in  Denver,  Colorado;  three of the stores  were  located in  southern
California;  and two of the stores were located in Chicago, Illinois. The charge
included the write-down of $3,157 in fixed assets,  $36 in prepaid  assets,  and
$73 in other  assets,  and  established  a  current  liability  of  $2,234  as a
provision for store closure and restructuring costs. The Company intends to sell
or close these stores.

As of December  31,  1997,  the two stores in Chicago,  Illinois,  and the three
stores in southern California have been closed. The Company continues to operate
the two  stores in Denver,  Colorado.  The  Company  is working  with local real
estate brokers to market, re-lease or sublease all seven of these locations.

17.  MERGER WITH GLORIA JEAN'S:
     --------------------------

On November 13, 1997,  the Company  entered  into a  definitive  agreement  with
Second Cup  Inc.  (Second Cup).  The  agreement  provides for the merger of the
Company with Gloria Jean's  Inc. (Gloria Jean's), a wholly-owned  subsidiary of
Second Cup.

Under the agreement,  the Company will issue  approximately  7,500,000 shares of
the Company's common stock to Second Cup in exchange for 100% of the outstanding
common stock of Gloria  Jean's.  The number of shares to be issued is subject to
adjustment  upward or downward  under certain  circumstances  based on financial
performance of each company.  The merger  requires  shareholder  approval and is
expected to close in May 1998. After the merger Second Cup will own 69.5% of the
outstanding common stock of the Company.

The Company's  bank loan includes a provision  which requires the bank's consent
to any  combination in which there is a change of control.  Currently,  the bank
has not consented to the merger.

For accounting  purposes the merger will be accounted as a reverse  merger.  The
historical  records of Gloria Jean's will become the  historical  records of the
Company,  and the purchase  method of  accounting  will be applied to the Coffee
People assets acquired and  liabilities  assumed which will be recorded at their
fair  values on the books of Gloria  Jean's.  The results of  operations  of the
Company  will  be  included  with  those  of  Gloria  Jean's  beginning  on  the
acquisition date.

The combined  company will continue as Coffee People,  Inc. The combined company
is  expected  to change the Coffee  People  year-end to a fiscal year ending the
last Saturday in June.

                                    40

<PAGE>



                                   SIGNATURES
                                   ----------

         In accordance  with Section 13 or 15(d) of the Securities  Exchange Act
of 1934,  the  Registrant  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                               COFFEE PEOPLE, INC.


Dated May 5, 1998               By /s/ Taylor H. Devine
                                  --------------------
                                 Taylor H. Devine
                                 Chief Executive Officer

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  Registrant  and in
the capacities and on the dates indicated.

Dated May 5, 1998                /s/ Taylor H. Devine
                                 ------------------------
                                 Taylor H. Devine
                                 Chief Executive Officer and Director


Dated May 5, 1998                /s/ Kenneth B. Ross
                                 ------------------------
                                 Kenneth B. Ross, Chief Financial Officer
                                 (Principal Financial and Accounting Officer)


Dated May 5, 1998                /s/ James L. Roberts
                                 ------------------------
                                 James L. Roberts
                                 Chairman of the Board and Director


Dated May 5, 1998                /s/ Douglas L. Ayer
                                 -------------------------
                                 Douglas L. Ayer, Director


Dated May 5, 1998                /s/ Jeffrey M. Ferguson
                                 --------------------------
                                 Jeffrey M. Ferguson, Director


Dated May 5, 1998                /s/ Gary G. Talboy
                                 --------------------------
                                 Gary G. Talboy, Director


                                      41

<PAGE>


                            INDEX TO EXHIBITS


Exhibit Number              Exhibit
--------------              -------

10.8                Supply Agreement Amendment No. 1

10.13               Terms of employment with Taylor Devine, effective as of the 
                    closing of the Merger.

10.14               Terms of employment with Kenneth B. Ross, Chief Financial
                    Officer, effective as of the closing Merger.

10.23               Agreement and Plan of Merger between the Company and The 
                    Second Cup Inc., dated February 19, 1998.

23                  Consent of Arthur Andersen LLP, Independent Public 
                    Accountants.

27                  Financial Data Schedule.


                                       42