8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of The

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): May 11, 2010

1-12340

(Commission File Number)

GREEN MOUNTAIN COFFEE ROASTERS, INC.

(Exact name of registrant as specified in its charter)

Delaware	03-0339228
(Jurisdiction of Incorporation)	(IRS Employer Identification Number)
33 Coffee Lane, Waterbury, Vermont 05676
(Address of registrant’s principal executive office)

(802) 244-5621

(Registrant’s telephone number)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 9.01 Financial Statements and Exhibits.

The following financial statements and pro forma financial information omitted from the Current Report on Form 8-K dated May 11, 2010, in reliance upon Item 9.01 (a) and 9.01 (b) of Form 8-K are filed herewith.

(a) Financial Statements of Business Acquired

The following audited consolidated financial statements of Diedrich Coffee, Inc. (“Diedrich”) are filed herewith as Exhibit 99.2:

1. Report of Independent Registered Public Accounting Firm

2. Consolidated Balance Sheets for Diedrich as of June 24, 2009 and June 25, 2008

3. Consolidated Statements of Operations for Diedrich for the years ended June 24, 2009 and June 25, 2008

4. Consolidated Statements of Stockholders’ Equity for Diedrich for the years ended June 24, 2009 and June 25, 2008

5. Consolidated Statements of Cash Flows for Diedrich for the years ended June 24, 2009 and June 25, 2008

6. Notes to Consolidated Financial Statements

The following unaudited consolidated interim financial statements of Diedrich are filed herewith as Exhibit 99.3:

1. Condensed Consolidated Balance Sheets (Unaudited) for Diedrich as of March 3, 2010 and June 24, 2009

2. Condensed Consolidated Statements of Operations (Unaudited) for Diedrich for the twelve weeks ended March 3, 2010 and March 4, 2009, and for the thirty-six weeks ended March 3, 2010 and March 4, 2009

3. Condensed Consolidated Statements of Cash Flows (Unaudited) for Diedrich for the thirty-six weeks ended March 3, 2010 and March 4, 2009

4. Notes to Condensed Consolidated Financial Statements (Unaudited)

(b) Pro Forma Financial Information

Pro forma condensed combined financial information of Green Mountain Coffee Roasters, Inc. are filed herewith as Exhibit 99.4:

1. Introduction to Pro Forma Condensed Combined Financial Information (Unaudited)

2. Pro Forma Condensed Combined Balance Sheet (Unaudited) as of March 27, 2010

3. Pro Forma Condensed Combined Statement of Operations (Unaudited) for the twenty-six weeks ended March 27, 2010

4. Pro Forma Condensed Combined Statement of Operations (Unaudited) for the fifty-two weeks ended September 26, 2009

5. Notes to Pro Forma Condensed Combined Financial Statements (Unaudited)

(d) Exhibits

2.1	Agreement and Plan of Merger, dated as of December 7, 2009, by and among Green Mountain Coffee Roasters, Inc., Pebbles Acquisition Sub, Inc. and Diedrich Coffee, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on December 8, 2009).
23.1	Consent of BDO USA, LLP
99.1*	Press Release dated May 11, 2010
99.2	Consolidated Balance Sheets of Diedrich Coffee, Inc. and related Consolidated Statements of Operations, Stockholders’ Equity and Cash Flows
99.3	Unaudited Condensed Consolidated Balance Sheets of Diedrich Coffee, Inc. and related Unaudited Condensed Consolidated Statements of Operations and Cash Flows
99.4	Unaudited Pro Forma Condensed Combined Financial Information of Green Mountain Coffee Roasters, Inc.

* Previously filed as an exhibit to the Current Report on Form 8-K filed on May 11, 2010.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

GREEN MOUNTAIN COFFEE ROASTERS, INC.
By:	/S/    FRANCES G. RATHKE
Name:	Frances G. Rathke
Title:	Chief Financial Officer

Date: July 12, 2010

EXHIBIT INDEX

2.1	Agreement and Plan of Merger, dated as of December 7, 2009, by and among Green Mountain Coffee Roasters, Inc., Pebbles Acquisition Sub, Inc. and Diedrich Coffee, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on December 8, 2009).
23.1	Consent of BDO USA, LLP
99.1*	Press Release dated May 11, 2010
99.2	Consolidated Balance Sheets of Diedrich Coffee, Inc. and related Consolidated Statements of Operations, Stockholders’ Equity and Cash Flows
99.3	Unaudited Condensed Consolidated Balance Sheets of Diedrich Coffee, Inc. and related Unaudited Condensed Consolidated Statements of Operations and Cash Flows
99.4	Unaudited Pro Forma Condensed Combined Financial Information of Green Mountain Coffee Roasters, Inc.

* Previously filed as an exhibit to the Current Report on Form 8-K filed on May 11, 2010.

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

Green Mountain Coffee Roasters, Inc.

Waterbury, VT

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-29641, No. 333-65321, No. 333-78937, No. 333-70116, No. 333-123255, No. 333-135237, No. 333-141567, No. 333-150929 and No. 333-163544) and on Form S-3 (No. 333- 160974) of Green Mountain Coffee Roasters, Inc. of our report dated September 22, 2009, relating to the consolidated financial statements of Diedrich Coffee, Inc. as of and for the year ended June 24, 2009 appearing in this Form 8-K/A of Green Mountain Coffee Roasters Inc.

/s/ BDO USA, LLP

(formerly known as BDO Seidman, LLP)

Costa Mesa, CA

July 12, 2010

EX-99.2

Exhibit 99.2

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Stockholders’ Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-8
Schedule II – Valuation and Qualifying Accounts	F-26

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Diedrich Coffee, Inc.:

We have audited the accompanying consolidated balance sheets of Diedrich Coffee, Inc. and subsidiaries (the “Company”) as of June 24, 2009 and June 25, 2008, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended June 24, 2009. In connection with our audits of the consolidated financial statements, we also have audited the supplementary information included in Schedule II. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Diedrich Coffee, Inc. and subsidiaries as of June 24, 2009 and June 25, 2008, and the consolidated results of their operations and their cash flows for each of the two years in the period ended June 24, 2009, in conformity with accounting principles generally accepted in the United States.

Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ BDO USA, LLP

(formerly known as BDO Seidman, LLP)

Costa Mesa, California

September 22, 2009

F-2

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 24, 2009			June 25, 2008 (Restated)
Assets
Current assets:
Cash	$	3,572,000		$	670,000
Restricted cash and short term investments		623,000			623,000
Accounts receivable, less allowance for doubtful accounts of $266,000 at June 24, 2009 and $508,000 at June 25, 2008		6,335,000			5,015,000
Inventories		5,510,000			4,652,000
Income tax refund receivable		40,000			—
Current portion of notes receivable, less allowance of $75,000 at June 24, 2009 and $247,000 at June 25, 2008		3,604,000			1,074,000
Advertising fund assets, restricted		—			6,000
Prepaid expenses		293,000			412,000
Total current assets		19,977,000			12,452,000
Property and equipment, net		5,416,000			6,757,000
Notes receivable, less allowance of $0 at June 24, 2009 and June 25, 2008		812,000			2,663,000
Cash surrender value of life insurance policy		—			162,000
Other assets		723,000			132,000
Total assets	$	26,928,000		$	22,166,000
Liabilities and Stockholders’ Equity
Current liabilities:
Note payable, net of discount	$	2,687,000		$	1,741,000
Accounts payable		5,228,000			5,169,000
Accrued compensation		1,816,000			1,412,000
Accrued expenses		1,418,000			3,995,000
Total current liabilities		11,149,000			12,317,000
Long term note payable, net of discount		1,594,000			—
Income tax liability		33,000			261,000
Deferred rent		133,000			190,000
Deferred compensation		—			226,000
Other liabilities		245,000			—
Total liabilities		13,154,000			12,994,000
Commitments and contingencies (Notes 8 and 9)
Stockholders’ equity:
Preferred stock, $0.01 par value, authorized 3,000,000 shares; issued and outstanding 0 shares at June 24, 2009 and June 25, 2008		—			—
Common stock, $0.01 par value; authorized 17,500,000 shares; issued and outstanding 5,727,000 shares at June 24, 2009 and 5,468,000 shares at June 25, 2008		57,000			55,000
Additional paid-in capital		63,289,000			60,281,000
Accumulated deficit		(49,572,000	)		(51,164,000	)
Total stockholders’ equity		13,774,000			9,172,000
Total liabilities and stockholders’ equity	$	26,928,000		$	22,166,000

See accompanying notes to consolidated financial statements.

F-3

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended June 24, 2009			Year Ended June 25, 2008
Net revenue:
Wholesale and other	$	61,427,000		$	39,103,000
Retail sales		803,000			793,000
Franchise revenue		80,000			83,000
Total revenue		62,310,000			39,979,000
Costs and expenses:
Cost of sales (exclusive of depreciation shown separately below)		47,918,000			32,968,000
Operating expenses		4,360,000			4,182,000
Depreciation and amortization		1,889,000			1,146,000
General and administrative expenses		7,197,000			7,016,000
Provision for goodwill and asset impairment		—			6,311,000
(Gain) loss on asset disposals		(14,000	)		77,000
Total costs and expenses		61,350,000			51,700,000
Operating income (loss) from continuing operations		960,000			(11,721,000	)
Interest expense		(1,511,000	)		(136,000	)
Interest and other income, net		277,000			438,000
Loss from continuing operations before income tax benefit		(274,000	)		(11,419,000	)
Income tax benefit		(95,000	)		(34,000	)
Loss from continuing operations		(179,000	)		(11,385,000	)
Discontinued operations:
Loss from discontinued operations		(838,000	)		(3,667,000	)
Gain on sale of discontinued operations, net of tax expense of $81,000 and $0, respectively		2,609,000			1,276,000
Net income (loss)	$	1,592,000		$	(13,776,000	)
Basic and diluted net income (loss) per share:
Loss from continuing operations	$	(0.03	)	$	(2.08	)
Income (loss) from discontinued operations, net	$	0.32		$	(0.44	)
Net income (loss)	$	0.29		$	(2.52	)
Weighted average and equivalent shares outstanding:
Basic and diluted		5,507,000			5,459,000

See accompanying notes to consolidated financial statements.

F-4

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit			Total Stockholders’ Equity
Balance, June 27, 2007	5,448,000	$	54,000	$	59,671,000	$	(36,573,000	)	$	23,152,000
Adjustment to fixed assets (Note 1)	—		—		—		(570,000	)		(570,000	)
Balance, June 27, 2007 (restated)	5,448,000		54,000		59,671,000		(37,143,000	)		22,582,000
Adjustment to adopt FIN 48	—		—		—		(245,000	)		(245,000	)
Exercise of stock options	20,000		1,000		56,000		—			57,000
Stock compensation expense	—		—		280,000		—			280,000
Common stock warrants	—		—		274,000		—			274,000
Net loss	—		—		—		(13,776,000	)		(13,776,000	)
Balance, June 25, 2008	5,468,000		55,000		60,281,000		(51,164,000	)		9,172,000
Exercise of stock options	9,000		—		20,000		—			20,000
Exercise of stock warrants	250,000		2,000		1,198,000		—			1,200,000
Stock compensation expense	—		—		295,000		—			295,000
Common stock warrants	—		—		1,495,000		—			1,495,000
Net income	—		—		—		1,592,000			1,592,000
Balance, June 24, 2009	5,727,000	$	57,000	$	63,289,000	$	(49,572,000	)	$	13,774,000

See accompanying notes to consolidated financial statements.

F-5

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended June 24, 2009			Year Ended June 25, 2008
Cash flows from operating activities:
Net income (loss)	$	1,592,000		$	(13,776,000	)
Loss from discontinued operations		838,000			3,667,000
Gain on disposal of discontinued operations, net		(2,609,000	)		(1,276,000	)
Loss from continuing operations:		(179,000	)		(11,385,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,889,000			1,146,000
Amortization and write off of loan fees		9,000			—
Amortization of note payable discount		1,034,000			15,000
Provision for bad debt		125,000			245,000
Income tax benefit		(95,000	)		(34,000	)
Provision for inventory obsolescence		69,000			(34,000	)
Provision for goodwill and asset impairment		—			6,311,000
Stock compensation expense		295,000			280,000
Notes receivable issued		(144,000	)		(214,000	)
(Gain) loss on disposal of assets		(14,000	)		77,000
Changes in operating assets and liabilities:
Accounts receivable		(1,802,000	)		(1,292,000	)
Inventories		(959,000	)		(308,000	)
Prepaid expenses		66,000			(116,000	)
Notes receivable		(271,000	)		(260,000	)
Income tax refund		(40,000	)		533,000
Other assets		(438,000	)		293,000
Accounts payable		59,000			1,355,000
Accrued and deferred compensation		574,000			(1,014,000	)
Accrued expenses		240,000			(35,000	)
Deferred franchise fee income and franchise deposits		—			(13,000	)
Deferred rent		(23,000	)		(22,000	)
Net cash provided by (used in) continuing operations		395,000			(4,472,000	)
Net cash used in discontinued operations		(3,405,000	)		(1,625,000	)
Net cash used in operating activities		(3,010,000	)		(6,097,000	)
Cash flows from investing activities:
Capital expenditures for property and equipment		(659,000	)		(4,304,000	)
Proceeds from disposal of property and equipment		56,000			21,000
Payments received on notes receivable		1,000,000			1,000,000
Change in restricted money market account		—			46,000
Net cash provided by (used in) investing activities of continuing operations		397,000			(3,237,000	)

See accompanying notes to consolidated financial statements.

F-6

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

	Year Ended June 24, 2009		Year Ended June 25, 2008
Payments received on notes receivable of discontinued operations		182,000		92,000
Capital expenditures for property and equipment of discontinued operations		—		(292,000	)
Proceeds from sale of discontinued operations, net of cash transferred		1,113,000		1,274,000
Net cash provided by (used in) investing activities		1,692,000		(2,163,000	)
Cash flows from financing activities:
Exercise of stock and warrant options		1,220,000		57,000
Borrowings under credit agreement		3,000,000		2,000,000
Net cash provided by financing activities		4,220,000		2,057,000
Net increase (decrease) in cash		2,902,000		(6,203,000	)
Cash at beginning of year		670,000		6,873,000
Cash at end of year	$	3,572,000	$	670,000
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	457,000	$	114,000
Income taxes	$	23,000	$	46,000
Non-cash transactions:
Issuance of notes receivable related to sale of Gloria Jean’s	$	1,600,000	$	—

See accompanying notes to consolidated financial statements.

F-7

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies and Practices

Business

Diedrich Coffee, Inc. (“Company”) is a specialty coffee roaster and wholesaler whose brands include Diedrich Coffee, Gloria Jean’s, and Coffee People. The Company has wholesale accounts with businesses and restaurant chains. In addition, the Company operates a coffee roasting facility and a distribution facility in central California that supplies roasted coffee in a variety of packaging formats to its wholesale customers.

Basis of Presentation and Fiscal Year End

The consolidated financial statements include the accounts of Diedrich Coffee, Inc. and its wholly owned subsidiaries. All significant intercompany transactions are eliminated. The Company’s fiscal year end is the Wednesday closest to June 30. In fiscal years 2009 and 2008, this resulted in a 52-week year.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events” (“SFAS No. 165”), the Company evaluated all subsequent events that occurred after the balance sheet date through the date the financial statements were issued on September 22, 2009.

Restatement of Financial Statements

During the 2009 fiscal year, a detailed review of the Company’s fixed asset subsidiary ledger was performed. The Company noted certain reconciling differences between the general ledger and the fixed asset subsystem for both cost and accumulated depreciation causing an out of balance with the general ledger by $570,000. These differences were caused by several assets which were acquired and impaired prior to fiscal year 2002 but had remaining net book value reflected in the Company’s consolidated financial statements.

In accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin No. 108, “Financial Statements—Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), in assessing the identified error, the Company should consider both the “rollover” approach, which quantifies misstatements originating in the current year statement of operations and the “iron curtain” approach, which quantifies misstatements based on the effects of correcting the misstatements existing in the balance sheet at the end of the reporting period. The principal difference between these two methods lies in how income statement errors are quantified. The “rollover” method quantifies income statement errors based on the amount by which the income statement is actually misstated – including the reversing effect of any prior errors. The “iron curtain” method quantifies income statement errors based on the amount by which the income statement would be misstated if the accumulated amount of the errors that remain in the balance sheet were corrected through the income statement of that period.

Based on the recent guidance from the SEC, if the errors are material when evaluated under the “rollover” method, the previously-issued financial statements are considered materially misstated. The “iron curtain” error analysis does not drive the decision regarding whether or not previously issued financial statements are materially misstated. However, if an error in previously issued financial statements is not material under the “rollover” method, but would be material under the “iron curtain” method, then the error must be corrected. The error can be corrected either as an “out-of-period” adjustment or by revising the previously-issued financial statements the next time they are filed.

Based on the Company’s review, this error did not impact the financial statements for the fiscal years 2002 through 2009 when evaluated under the “rollover” approach. But the error is material to its fiscal year 2009 results of operations under the “iron-curtain” method. Therefore the Company recorded an adjustment of $570,000 as a decrease to its opening retained earnings balance at the beginning of fiscal 2008 as a cumulative effect adjustment with the offset to fixed assets.

Discontinued Operations

The Company’s strategic direction is to focus on growing the wholesale business segment and the related distribution channels. In conjunction with the transaction with Praise International North America, Inc., which is described in more detail below, the Company sold the Gloria Jean’s U.S. franchise and retail operations. The Company’s results of the Gloria Jean’s franchise and retail operations are reported as discontinued operations for all periods presented.

F-8

As previously announced, on March 27, 2009, the Company and Praise International North America, Inc., a Delaware corporation (“Praise”), entered into an agreement (the “Agreement”) pursuant to which the Company agreed to sell all of the issued and outstanding shares (the “Shares”) of common stock, par value $0.01 per share, of Praise U.S. Holdings, Inc. (formerly known as Coffee People Worldwide, Inc.), a Delaware corporation and wholly-owned subsidiary of Diedrich Coffee Inc. that owned assets used in the Company’s U.S. franchise operations (such purchase, the “Transaction”). On June 12, 2009, the Company completed the Transaction, and pursuant to the Agreement Praise purchased the Shares for $3,100,000, of which $1,500,000 was paid in cash and the remainder paid in the form of a twelve-month promissory note with an aggregate principal amount of $1,600,000 and an interest rate equal to 7.0% per annum, issued by Praise to the Company. In addition, the Company entered into several ancillary agreements, including a roasting agreement whereby the Company agreed to provide coffee roasting services to Praise for a period of five years and a trademark license agreement whereby the Company granted to Praise a license to use the Company’s Gloria Jean’s Gourmet Coffees Corp. U.S. trademarks in the United States of America (including the Commonwealth of Puerto Rico) until these trademarks are transferred to Gloria Jean’s Coffees International Pty. Ltd.

Praise is an affiliate of Gloria Jean’s Coffees International Pty. Ltd., which was a party to the purchase of the Company’s international franchise operations in February 2005.

In a separate transaction, the one remaining Diedrich Coffee Inc. retail location closed during the current fiscal year due to lease expiration.

In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the financial results of the Gloria Jean’s franchise operations, retail operations and the one Diedrich Coffee retail location are reported as discontinued operations for all periods presented. Wholesale sales to former franchisees are included in continuing operations for all periods since the Company will continue to provide coffee roasting services to Praise.

The following accounts are reflected in Loss from Discontinued Operations in the consolidated statements of operations:

• Franchise revenues for Gloria Jean’s Gourmet Coffees Franchising Corp.

• Retail revenues for Gloria Jean’s Gourmet Coffees Corp. and Diedrich Coffee Inc.

• Cost of sales and related occupancy costs

• Operating expenses

• Depreciation and amortization

• General and administrative expenses

• Provision for taxes paid

• Impairment of assets

During the fiscal year ended June 25, 2008, the Company recorded income from discontinued operations of $1,276,000 in connection with cash received from escrow account related to the sale of certain assets to Starbucks Corporation.

The financial results included in discontinued operations were as follows:

	Year Ended June 24, 2009			Year Ended June 25, 2008
Net retail revenue	$	4,522,000		$	3,603,000
Net franchise revenue		2,048,000			2,760,000
Net revenue from discontinued operations	$	6,570,000		$	6,363,000
Loss from discontinued operations, net of $0 tax for 2009 and 2008	$	(838,000	)	$	(3,667,000	)
Gain on sale of discontinued operations, net of tax of $81,000 and $0, respectively		2,609,000			1,276,000
Total income (loss) discontinued operations, net of tax	$	1,771,000		$	(2,391,000	)

F-9

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company had $0 of invested cash at June 24, 2009 and June 25, 2008. The Company maintains cash balances at financial institutions that are in excess of FDIC insurance coverage limits.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is based on management’s best estimate of the amount of probable credit losses in existing accounts receivable. The Company evaluates its allowance for doubtful accounts based upon knowledge of its customers and their compliance with credit terms. The evaluation process includes a review of customers’ accounts on a regular basis. The review process evaluates all account balances with amounts outstanding 90 days and other specific amounts for which information obtained indicates that the balance may be uncollectible. The allowance for doubtful accounts is adjusted based on such evaluation, with a corresponding provision included in operating expenses. Account balances are charged off against the allowance when management believes it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its customers.

Inventories

Raw materials consist primarily of green bean coffee. Finished goods include roasted coffee, tea, accessory products, and packaged foods. All products are valued at the lower of cost or market using the first-in, first-out method.

Property and Depreciation

Property and equipment, including assets under capital leases, are recorded at cost. Depreciation for property and equipment is calculated using the straight-line method over estimated useful lives of three to seven years. Property and equipment held under capital leases and leasehold improvements are generally amortized using the straight-line method. Property and equipment held under capital leases are generally amortized over the shorter of their estimated useful lives or the term of the related leases. Leasehold improvements are generally amortized over the shorter of their estimated useful lives or 9 years or the term of the related leases.

Major remodels and improvements are capitalized. Maintenance and repairs that do not improve or extend the life of the respective assets are charged to expense as incurred.

Deferred Financing Costs

Costs related to the issuance of debt are deferred and amortized using a method that approximates the effective interest method as a component of interest expense over the terms of the respective debt issues.

Fair Value of Financial Instruments

The carrying amounts of cash, accounts receivable, inventories, other assets, notes receivable, accounts payable, accrued compensation, and accrued expenses, approximate fair value because of the short-term maturity of these financial instruments. The Company believes the carrying amounts of the Company’s long-term debt approximates fair value because the interest rate on these instrument are subject to change with market interest rates and other terms and conditions are consistent with terms currently available to the Company.

Cost of Sales

Cost of sales include cost of purchased products, royalty payments due to the licensor, equipment lease expenses, inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and all other costs of the distribution network.

Operating Expenses

Operating expenses include compensation costs, utilities, advertising and marketing, free product supplied for inclusion in brewer sample packs and in-store demonstrations, business insurance, taxes, licenses, fees and bank charges.

General and Administrative Expenses

General and administrative expenses include compensation costs, consulting and outside services, auditing and accounting, legal, office rent, telephone, and Director’s and Officer’s insurance.

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Income Taxes

The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company’s assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Net Income (Loss) Per Common Share

“Basic” earnings per-share represents net earnings divided by the weighted average shares outstanding, excluding all potentially dilutive common shares. “Diluted” earnings per-share reflects the dilutive effect of all potentially dilutive common shares.

Goodwill

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” (“SFAS No. 141”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead are tested for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for the overall business, and significant negative industry or economic trends. The Company’s annual impairment measurement date is the fiscal year end. The Company has performed annual evaluations of its goodwill since June 30, 2001 in order to properly state its goodwill (see Note 12). The Company recorded impairment charges during fiscal year 2008 to fully impair goodwill with $6,311,000 included in continuing operations related to the wholesale operations and $521,000 included in discontinued operations related to the franchise operations.

Stock Option Plans

On June 30, 2005, the Company adopted the provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R sets accounting requirements for “share-based” compensation to employees and non-employee directors, including employee stock purchase plans, and requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of the price of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination rates within the valuation model. The expected term of options is derived from the output of the option valuation model and represents the period of time that options are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The fair values of the options were estimated using the Black-Scholes option-pricing model based on the following weighted average assumptions:

	Year Ended June 24, 2009	Year Ended June 25, 2008
Risk free interest rate	1.21% - 3.11%	1.91% - 4.91%
Expected life	3 years	2 - 3 years
Expected volatility	56% -119%	53% - 59%
Expected dividend yield	0%	0%
Forfeiture rate	5.58% - 7.48%	4.52% - 9.38%

Long-Lived Assets

The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144. This requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

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Revenue Recognition

The Company’s wholesale sales terms are FOB shipping point. Revenue from the sale of the wholesale products is recognized when ownership legally transfers to the customer, which is upon shipment. These sales are not subject to customer right of inspection or acceptance. Revenue from retail sales are recognized at shipping point. Initial franchise fees (“Front end fees”) are recognized when a franchised coffeehouse begins operations, at which time the Company has performed its obligations related to such fees. Initial franchise fees apply primarily in the case of domestic franchise development. Franchise royalties are recognized as earned, based upon a percentage of a franchise coffeehouse sales over time.

Shipping and Handling Costs

Shipping and handling costs are included as a component of cost of sales and related occupancy costs. A corresponding amount is billed to the Company’s wholesale customers, and is included as a component of wholesale and other revenue.

Concentrations

The Company generated 87.5% and 77.5% of its total revenues from the sale of K-Cups^® for fiscal 2009 and 2008, respectively. The manufacturing and distribution of K-Cups^® is licensed from a single licensor on a non-exclusive basis. During fiscal 2009 and 2008, the Company had sales to this licensor that represented approximately $24,441,000 or 39.8% of wholesale sales and $9,269,000 or 23.7% of wholesale sales, respectively.

The Company’s current agreement with the licensor expires in July 2013. The agreement provides for automatic five-year renewals if certain volume thresholds are met, which the Company is currently exceeding. In their Fiscal 2008 Form 10-K, Green Mountain Coffee Roasters, Inc. (NASDAQ: GMCR), which owns Keurig Incorporated, states that the two principal patents associated with the current generation K-Cup portion packs, will expire in 2012 pending patent applications associated with this technology which, if ultimately issued as patents, would have expiration dates in 2023. Any major disruptions in this relationship could cause a material adverse effect on the Company’s business and operations.

Accrued Expenses

Accrued expenses consist of the accrued legal settlements, legal fees, provision for store closures, deferred franchise fees, gift card liabilities and other liabilities.

Cash Surrender Value of Life Insurance

The change in the cash surrender value (“CSV”) of company owned life insurance (“COLI”) contracts excluding distributions, net of insurance premiums paid and gains realized, is reported in compensation and benefits expense (see Note 16).

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Recently Adopted Accounting Pronouncement

On June 24, 2009, the Company adopted SFAS No. 165, “Subsequent Events.” This statement establishes general standards of accounting and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of this standard required the Company to evaluate all subsequent events that occurred after the balance sheet date through the date and time the financial statements are issued. The Company has evaluated subsequent events through September 22, 2009, which is the date the financial statements were issued.

Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162.” The FASB Accounting Standards Codification (“Codification”) will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. This standard will become effective for the Company in the first quarter of the fiscal year ending on June 30, 2010. The Company does not expect that this standard will have a material impact on the consolidated financial statements upon adoption.

F-12

In December 2007, the FASB issued Statement on Financial Accounting Standards  No. 141R, “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R establishes the principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS No. 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141R is not permitted. Acquisitions, if any, after the effective date, will be accounted for in accordance with SFAS No. 141R.

In December 2007, the FASB issued Statement on Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 applies to all entities that prepare consolidated financial statements but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 establishes accounting and reporting standards that require noncontrolling interests to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. SFAS No. 160 is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008. Acquisitions, if any, after the effective date will be accounted for in accordance with SFAS No. 160.

In June, 2008, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus regarding EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 outlines a two-step approach to evaluate the instrument’s contingent exercise provisions, if any, and to evaluate the instrument’s settlement provisions when determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. EITF 07-5 is effective for fiscal years beginning after December 15, 2008 and must be applied to outstanding instruments as of the beginning of the fiscal year of adoption as a cumulative-effect adjustment to the opening balance of retained earnings. Early adoption is not permitted. The Company is currently evaluating the impact of adopting EITF 07-5 on its results of operations and financial position.

Reclassifications

Certain reclassifications have been made to prior periods to conform to the 2009 presentation.

2. Liquidity and Management Plans

For the fiscal year 2009, the Company reported net income of $1,592,000 which included a gain on sale of discontinued operations of $2,609,000 which was net of tax of $81,000. The Company had a cash balance of $3,572,000 and no ability to access credit under the current credit facility as of June 24, 2009.

The Contingent Convertible Note Purchase Agreement with Sequoia Enterprises, L.P. (“Sequoia”), a limited partnership whose sole general partner is a significant shareholder of the Company and also serves as the Chairman of the Company’s board of directors (the “Note Purchase Agreement”), expires on March 31, 2010 and the $2,000,000 balance on the outstanding note is due in full on that date. In addition, the Company obtained a $3,000,000 term loan on August 26, 2008. See Note 8. The Company is required to make regular monthly payments of interest on the $3,000,000 Term Loan with Sequoia, and to cause the principal amount to be reduced to $2 million no later than August 26, 2009. All outstanding principal and interest will be due on the maturity date of August 26, 2011, unless due earlier pursuant to the terms of the Loan Agreement upon a change of control of the Company or an event of default. Subsequently the Company paid $1 million due to Sequoia under the Term Loan on July 29, 2009.

The Company believes that cash flow from operations and payments from notes receivable due from Praise and Gloria Jean’s Coffees International Pty. Ltd will be sufficient to satisfy working capital needs at the anticipated operating levels and debt service requirements for at least the next twelve months.

The Company’s future capital requirements will depend on many factors, including the extent and timing of the rate at which the business grows, if at all, with corresponding demands for working capital. The Company may be required to seek additional funding through debt financing, equity financing or a combination of funding methods to meet capital requirements and sustain operations. However, additional funds may not be available on terms acceptable or at all.

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3. Accounts Receivable

During the current fiscal year, the Company provided for $64,000 of additional allowance for doubtful accounts related to wholesale accounts and charged off $172,000 of accounts receivable against the reserve for wholesale accounts.

The following table details the components of net accounts receivable:

	June 24, 2009			June 25, 2008
Wholesale receivables	$	6,496,000		$	4,814,000
Allowance for wholesale receivables		(180,000	)		(285,000	)
		6,316,000			4,529,000
Franchise and other receivables		105,000			709,000
Allowance for franchise and other receivables		(86,000	)		(223,000	)
		19,000			486,000
Total accounts receivable, net	$	6,335,000		$	5,015,000

4. Inventories

Inventories consist of the following:

	June 24, 2009		June 25, 2008
Unroasted coffee	$	422,000	$	1,608,000
Roasted coffee		2,404,000		1,163,000
Accessory and specialty items		49,000		104,000
Other food, beverage and supplies		2,635,000		1,777,000
	$	5,510,000	$	4,652,000

5. Notes Receivable

Notes receivable consist of the following:

	June 24, 2009			June 25, 2008
Notes receivable due on March 1, 2010. Notes are secured by the assets sold under the asset purchase and sale agreements or general security agreement. Fiscal 2009 amounts are net of a $75,000 allowance and fiscal 2008 amounts are net of a $247,000 allowance.	$	—		$	177,000
Notes receivable from a corporation discounted at an annual rate of 7.0% and 8.0%, payable annually in installments varying between $800,000 and $2,000,000, due between December 12, 2009 and January 31, 2011.		4,416,000			3,560,000
Less: current portion of notes receivable		(3,604,000	)		(1,074,000	)
Long-term portion of notes receivable	$	812,000		$	2,663,000

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6. Property and Equipment

Property and equipment is summarized as follows:

	June 24, 2009			June 25, 2008
Leasehold improvements	$	2,388,000		$	2,238,000
Equipment		16,092,000			16,888,000
Furniture and fixtures		396,000			427,000
Construction in progress		119,000			1,871,000
		18,995,000			21,424,000
Accumulated depreciation and amortization		(13,579,000	)		(14,667,000	)
	$	5,416,000		$	6,757,000

As described in Note 1, the Company recorded an adjustment of $570,000 to the carrying amount of fixed assets by restating the beginning balance as of the beginning of the fiscal year 2008.

7. Other Assets

Other assets are summarized as follows:

	June 24, 2009		June 25, 2008
Debenture certificate	$	489,000	$	—
Other		234,000		132,000
	$	723,000	$	132,000

The Company and its lessor, International Financial Services Corporation entered into a Pledge Agreement dated September 19, 2008 whereby the Company paid the lender $489,000 and obtained a Debenture Certificate to secure certain manufacturing equipment leases. The pledge agreement is for 36 months and will terminate on September 19, 2011 at which time, the funds and interest earned will be returned to the Company.

8. Note Payable

	June 24, 2009			June 25, 2008
Note payable amount bearing interest at a rate of three-month LIBOR plus 6.30% (7.48% as of June 24, 2009) is due and payable on March 31, 2010. Note is unsecured.	$	2,000,000		$	2,000,000
Note payable amount bearing interest at a rate of one-month LIBOR plus 6.30% (6.62% as of June 24, 2009). Note is unsecured.		3,000,000			—
Discount on note payable		(719,000	)		(259,000	)
		4,281,000			1,741,000
Less: current portion of notes payable, net of discount		(2,687,000	)		(1,741,000	)
	$	1,594,000		$	—

Note Purchase Agreement:

On May 10, 2004 the Company entered into a $5,000,000 Note Purchase Agreement with Sequoia Enterprises, L.P. (“Sequoia”), a limited partnership whose sole general partner is a significant shareholder of the Company and also serves as the Chairman of the board of directors of the Company (the “Note Purchase Agreement”), which provided, at the Company’s election, the ability to issue notes with up to an aggregate principal amount of $5,000,000. The Company has amended the Note Purchase Agreement from time to time and has agreed to refrain from further borrowings under the Note Purchase Agreement in connection with the entry into the Loan Agreement (as defined below) entered into on August 26, 2008. As amended, the notes issued under the Note Purchase Agreement are due in full on March 31, 2010, the Company is only required to make monthly payments of interest and the monthly commitment fee, but not principal, until such date. Interest is payable at three-month LIBOR plus 9.30% for any period during which the ratio of Indebtedness (as defined in the Note Purchase Agreement) on a consolidated basis to Effective Tangible Net Worth (as defined in the Note Purchase Agreement) is greater than 1.75:1.00 or the three-month LIBOR plus 6.30% for any other period, in each case reset on a periodic basis as provided in the Note Purchase Agreement. The Note Purchase Agreement contains covenants, among others, that

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limit the amount of indebtedness that the Company may have outstanding in relation to its tangible net worth. As of June 24, 2009, the Company had $2,000,000 of issued notes outstanding under the Note Purchase Agreement. As of June 24, 2009, the Company was in compliance with all covenants contained in the Note Purchase Agreement.

Loan Agreement:

On August 26, 2008, the Company entered into a loan agreement with Sequoia (the “Loan Agreement”). The Loan Agreement provides for a $3,000,000 term loan (the “Term Loan”). As amended, interest is payable at one-month LIBOR plus 9.30% for any period during which the ratio of Indebtedness (as defined in the Loan Agreement) on a consolidated basis to Effective Tangible Net Worth (as defined in the Loan Agreement) is greater than 1.75:1.00 or the one-month LIBOR plus 6.30% for any other period, in each case reset on a periodic basis as provided in the Loan Agreement. The Company is required to make regular monthly payments of interest, and to cause the principal amount to be reduced to $2 million no later than August 26, 2009. All outstanding principal and interest will be due on the maturity date of August 26, 2011, unless due earlier pursuant to the terms of the Loan Agreement upon a change of control of the Company or an event of default. As of June 24, 2009, the Company had $3,000,000 outstanding under the Loan Agreement. Subsequently the Company paid $1 million due to Sequoia under the Loan Agreement on July 29, 2009.

The Loan Agreement requires the Company to refrain from further borrowings under the Note Purchase Agreement and contains restrictions on incurring indebtedness on par with, or senior to, the Term Loan. The Loan Agreement also contains a covenant that limits the amount of indebtedness that the Company may have outstanding in relation to tangible net worth, in addition to other standard covenants and events of default.

The Term Loan is senior to all other indebtedness of the Company, except indebtedness pursuant to notes under the Note Purchase Agreement and certain permitted indebtedness identified in the Loan Agreement. Upon repayment of the notes under the Note Purchase Agreement, the Term Loan will be senior to all other indebtedness of the Company, except such permitted indebtedness.

Warrants:

2001 Sequoia Warrant

On May 8, 2001, in connection with the sale of 2,000,000 shares of Company common stock, the Company issued warrants to Sequoia Enterprises, L.P., of which the Company’s chairman and significant shareholder, Paul C. Heeschen, is the general partner, to purchase 250,000 shares of the Company’s common stock at a price of $4.80 per share (“2001 Sequoia Warrant”). Other investors also received warrants to purchase an additional 250,000 shares at a price of $4.80 per share. The warrants were exercisable immediately upon issuance.

The other investors exercised their warrants during the fourth fiscal quarter ending June 24, 2009 at an exercise price of $4.80 per share. The Company received cash proceeds of $1.2 million in connection with the warrant exercises.

On November 10, 2008 the exercise price of the 2001 Sequoia Warrant was decreased to $1.65 per share in connection with the Waiver Agreement (as defined below). The fair value of these amended warrants was approximately $53,000 which was recorded as a debt discount. At June 24, 2009, all 2001 Sequoia Warrants were outstanding with an expiration date of June 30, 2014.

2008 Sequoia Warrant

In connection with the Loan Agreement and an amendment to the Note Purchase Agreement, on August 26, 2008, the Company issued to Sequoia a warrant (the “2008 Sequoia Warrant”) to purchase 1,667,000 shares of common stock of the Company. On November 10, 2008 the exercise price was decreased to $1.65 per share in connection with the Waiver Agreement. The fair value of these amended warrants was approximately $300,000 which was recorded as a debt discount. At June 24, 2009, all 2008 Sequoia Warrants were outstanding with an expiration date of August 26, 2013. The 2008 Warrant is not eligible for cashless exercise, but the Company is obligated to cause the common stock issued upon exercise of the 2008 Warrant to be registered with the SEC and applicable state governmental authorities and to be listed on the stock exchange on which the Company’s stock is traded at the time of exercise, in each case at the Company’s expense.

2009 Sequoia Warrant

In connection with the extension of the Note Purchase Agreement, after the close of the Nasdaq Stock Market on April 29, 2009, the Company issued to Sequoia a warrant to purchase 70,000 shares of common stock of the Company at an exercise price of $7.40 per share (the “2009 Sequoia Warrant”), which was the closing price of the Company’s common stock on such date. The fair value of these warrants was approximately $440,000 which was immediately recorded as interest expense. The 2009 Sequoia Warrant is exercisable by Sequoia, in whole or in part, at any time or from time to time, prior to April 29, 2014. The 2009 Sequoia Warrant is not eligible for cashless exercise, but the Company is obligated to cause the common stock issued upon exercise of the 2009 Sequoia Warrant to be registered with the SEC and applicable state governmental authorities and to be listed on the stock exchange on which the Company’s stock is traded at the time of exercise, in each case at the Company’s expense.

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Waiver Agreement:

On September 17, 2008, the Company was not in compliance with covenants under the Note Purchase Agreement and the Loan Agreement. On November 10, 2008, the Company entered into a Waiver Agreement, Amendment No. 1 to 2008 Warrant and Amendment No. 2 to 2001 Warrant (the “Waiver Agreement”) with Sequoia. Pursuant to the Waiver Agreement, Sequoia waived the requirement set forth in the Note Purchase Agreement and the Loan Agreement with Sequoia (collectively, the “Loan Agreements”) that the Company shall not permit, as of the end of any fiscal quarter, the ratio of the Indebtedness on a consolidated basis to Effective Tangible Net Worth to be more than 1.75:1.00 (as such terms are defined in the Loan Agreements). Such waiver is effective until the earlier of (a) October 31, 2009 and (b) the end of any fiscal quarter at which the foregoing ratio is greater than 2.10:1.00. As part of the waiver and amendment, the exercise price of the 2008 Sequoia Warrant and the 2001 Sequoia Warrants for 250,000 shares of common stock was reduced to $1.65 from $2.00 per share. In consideration of the foregoing waiver, (a) the interest rates under the Note Purchase Agreement and the Term Loan were set at LIBOR plus 9.3% for any period during which the ratio of indebtedness of the Company on a consolidated basis to effective tangible net worth is greater than 1.75:1.00 and (b) the interest rates under the Note Purchase Agreement and the Term Loan were set at LIBOR plus 6.30% for any other period. The Company is in compliance with all debt covenants as of June 24, 2009.

Letter of Credit:

In addition, the Company entered into a Credit Agreement with Bank of the West on November 4, 2005. The agreement provides for a $750,000 letter of credit facility that expires on October 15, 2009. The letter of credit facility is secured by a deposit account at Bank of the West. As of June 24, 2009, this deposit account had a balance of $623,000, which is shown as restricted cash on the consolidated balance sheets. As of June 24, 2009, $472,000 of letters of credit was outstanding under the letter of credit facility. The agreement contains covenants that, among other matters, require the Company to submit financial statements to the bank within specified time periods. As of June 24, 2009, the Company was in compliance with all Bank of the West agreement covenants.

9. Commitments and Contingencies

Lease Commitments

As of June 24, 2009, the Company leases warehouse and office space in Irvine, Castroville and Salinas, California. The leases expire at various dates through December 2015. Contingent rent expense was insignificant for all periods presented. In addition, the Company leases equipment with various expiration dates through January 2014.

Future minimum lease payments under non-cancelable operating leases and minimum future sublease rentals expected to be received as of June 24, 2009, are as follows:

Year Ending June	Non-Cancelable Operating Leases
	Total		Building and equipment leases (A)		Other locations (B)
2010	$	2,853,000	$	2,612,000	$	241,000
2011		1,706,000		1,558,000		148,000
2012		675,000		534,000		141,000
2013		539,000		396,000		143,000
2014		529,000		385,000		144,000
Thereafter		723,000		554,000		169,000
	$	7,025,000	$	6,039,000	$	986,000

(A) Includes Irvine and Castroville office and warehouse space and company-operated equipment leases.

(B) The Company has leased and subleased land and buildings to others. Many of these leases provide for fixed payments with contingent rents when sales exceed certain levels, while others provide for monthly rentals based on a percentage of sales. The Company directly pays the rents on these master leases, and collects associated rent amounts directly from its sublessees. The total sublease rentals receivable by the Company under non-cancelable subleases is approximately $403,000 as of June 24, 2009.

Continuing operations, rent expense under operating leases approximated $877,000 and $742,000, for the years ended June 24, 2009 and June 25, 2008, respectively. These amounts are net of sublease rental income of $211,000 and $266,000, for the years ended June 24, 2009 and June 25, 2008, respectively.

Rent expense under equipment leases approximated $1,658,000 and $866,000, for the years ended June 24, 2009 and June 25, 2008, respectively.

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Purchase Commitments

At June 24, 2009 the Company had commitments to purchase coffee through fiscal year 2010, totaling $3,578,000 for 2,457,000 pounds of green coffee, the majority of which were fixed as to price. Such contracts are generally short-term in nature, and the Company believes that their cost approximates fair market value.

Capital Commitments

At June 24, 2009, the Company had capital expenditure commitments of $460,000 for its roasting facility.

Indemnifications

The Company agrees to provide for the indemnification of and the advancement of certain costs, judgments, penalties, fines, liabilities, expenses incurred and amounts paid in settlement to the fullest extent permitted by the Company’s charter, bylaws and applicable law to each of the Company’s directors and executive officers that become a party to the Indemnification Agreement.

Contingencies

In the ordinary course of business, the Company may become involved in legal proceedings from time to time. Material pending legal proceedings to the business, to which the Company became or were a party during the current fiscal year or subsequent thereto, but before the filing of this report, are summarized below:

On September 21, 2006, a purported class action complaint entitled Jason Reid; Kimberly Cornia, et al. v. Diedrich Coffee., et al. was filed against the Company in United States District Court Central District of California by two former employees, who worked in the positions of team member and shift manager. During the fiscal year 2009, the Company paid approximately $700,000 to fully settle this lawsuit.

On February 2, 2007, a second similar purported class action complaint entitled Deborah Willems, et al. v. Diedrich Coffee., et al. was filed in Orange County, California Superior Court on behalf of another former employee who worked in the position of general manager. This case currently involves the issue of whether employees and former employees who worked in California stores during specified time periods were deprived of overtime pay, missed meal and rest breaks. In addition to unpaid overtime, this case seeks to recover waiting time penalties, interest, attorneys’ fees and other types of relief on behalf of the current and former employees in the purported class.

The Company has entered into a settlement with the plaintiffs in the Willems v. Diedrich lawsuit. On September 14, 2009, the Company received a judgment based on Order of Final Approval. As of June 24, 2009, the Company estimated that the required amount to settle this claim is $376,000 and has recorded an accrual for this amount included in discontinued operations in the accompanying consolidated statement of operations.

Based on the Company’s examination of this matter and its experience to date, the Company has recorded its best estimate of liability with respect to this matter. However, the ultimate liability cannot be determined with certainty.

A lawsuit entitled Leader Bank v. Ajay Misra, et al v. Diedrich Coffee et al, is currently pending in the Middlesex Superior Court, Middlesex, Massachusetts. In that case the Plaintiff, Leader Bank, filed a complaint to collect on a defaulted promissory note it had with the franchisee, Defendant Amtek Group, LLC, on February 23, 2009. Ajay and Priya Misra were named defendants as well. On June 16, 2009, Defendants filed a third-party complaint against Diedrich Coffee alleging breach of contract, aiding and abetting Leader Bank in its takeover of the store and breach of privacy. In their complaint, third-party plaintiffs claim that they are entitled to $2,477,500. The Company is contesting the third-party complaint vigorously and has filed a motion to dismiss that will be heard on October 9, 2009. The Company believes that liability is not probable and the potential settlement is not estimable under this lawsuit and has therefore not accrued any amounts related to the damages claimed under this lawsuit in the accompanying consolidated financial statements.

F-18

10. Stockholders’ Equity

Stock Options

On October 20, 2000, the Company’s board of directors authorized the adoption of the Diedrich Coffee, Inc. 2000 Equity Incentive Plan (the “2000 Equity Incentive Plan”) and the concurrent discontinuation of the option grants under the Diedrich Coffee, Inc. Amended and Restated 1996 Stock Incentive Plan and the Diedrich Coffee, Inc. 1996 Non-Employee Directors Stock Option Plan. The Company’s stockholders approved the 2000 Equity Incentive Plan on October 16, 2000. A total of 1,087,500 shares of the Company’s common stock may be issued under the 2000 Equity Incentive Plan, as amended. The board of directors determines the number of shares, terms and exercise periods for awards under the 2000 Equity Incentive Plan on a case by case basis, except for automatic annual grants of options to non-employee directors. Employee options generally vest ratably over three years and expire ten years from the date of grant. The exercise price of options is generally equivalent to the fair market value of the Company’s common stock on the date of grant.

The Company entered into the Phillips Option Agreement on February 7, 2008. Under the Phillips Option Agreement, Mr. Phillips, was granted, subject to stockholder approval, options to purchase up to 275,000 shares of the Company’s common stock. On January 22, 2009, the stockholders approved the Phillips Option Agreement. Options granted to Mr. Phillips will be exercisable at an exercise price of $3.23 per share and will vest in three equal installments on each of the first three anniversary dates of February 7, 2008. The options granted to Mr. Phillips will become immediately vested and fully exercisable upon a change in control and the options will terminate and become unexercisable on the earlier of February 7, 2018 or the first anniversary of the change of control.

Information regarding the Company’s stock options is summarized below:

	Options			Weighted Average Exercise Price		Aggregate Intrinsic Value
Number of options available for future grant at June 24, 2009		303,917
Outstanding at June 27, 2007		554,675		$	4.76	$	209,000
Granted		342,500		$	3.30	$	—
Exercised		(20,000	)	$	2.84	$	13,000
Forfeited		(258,875	)	$	5.27	$	—
Outstanding at June 25, 2008		618,300		$	3.80	$	—
Granted		245,000		$	2.53	$	3,528,000
Exercised		(8,500	)	$	2.35	$	125,000
Forfeited		(104,500	)	$	3.65	$	863,000
Outstanding at June 24, 2009		750,300		$	3.36	$	10,198,000
Weighted-average fair value of options granted:
Year ended June 25, 2008	$	1.60
Year ended June 24, 2009	$	1.16
Options exercisable:
At June 25, 2008		239,966
At June 24, 2009		334,466

F-19

The following table summarizes information about nonvested stock option transactions from June 27, 2007 through June 24, 2009:

	Number of Shares		Weighted Average Grant Date Fair Value per Share		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value
Nonvested, June 27, 2007	121,667		$	—
Granted	342,500		$	1.60
Vested	(93,333	)	$	1.49
Forfeited/cancelled	—		$	—
Nonvested, June 25, 2008	370,834		$	1.63	9.49	$	—
Granted	245,000		$	1.16
Vested	(151,666	)	$	1.54
Forfeited/cancelled	(48,334	)	$	1.63
Nonvested, June 24, 2009	415,834		$	1.38	9.19	$	5,838,800

Stock option-based compensation expense included in the statement of operations for the fiscal years ended June 24, 2009 and June 25, 2008 was $295,000 and $280,000, respectively. As of June 24, 2009, there was approximately $354,000 of total unrecognized stock option-based compensation cost related to options granted under the Company’s plans that will be recognized over a weighted average period of 1.9 years. The total intrinsic value of options exercised during the years ended June 24, 2009 and June 25, 2008 was approximately $125,000 and $375,000, respectively.

Stock Purchase Warrants

2001 Sequoia Warrant

On May 8, 2001, in connection with the sale of 2,000,000 shares of Company common stock, the Company issued warrants to Sequoia Enterprises, L.P., of which the Company’s chairman and significant shareholder, Paul C. Heeschen, is the general partner, to purchase 250,000 shares of the Company’s common stock at a price of $4.80 per share (“2001 Sequoia Warrant”). Other investors also received warrants to purchase an additional 250,000 shares at a price of $4.80 per share. The warrants were exercisable immediately upon issuance.

The other investors exercised their warrants during the fourth fiscal quarter ending June 24, 2009 at an exercise price of $4.80 per share. The Company received cash proceeds of $1.2 million in connection with the warrant exercises.

On November 10, 2008 the exercise price of the 2001 Sequoia Warrant was decreased to $1.65 per share in connection with the Waiver Agreement (see Note 8). The fair value of these amended warrants was approximately $53,000 which was recorded as a debt discount. At June 24, 2009, all 2001 Sequoia Warrants were outstanding with an expiration date of June 30, 2014.

2008 Sequoia Warrant

On August 26, 2008, the Company issued to Sequoia a warrant (the “2008 Sequoia Warrant”) for the right to purchase 1,667,000 shares of common stock of the Company at an exercise price of $2.00 per share. The 2008 Sequoia Warrant is exercisable by Sequoia, in whole or in part, at any time or from time to time, prior to August 26, 2013. The 2008 Sequoia Warrant is not eligible for cashless exercise, but the Company is obligated to cause the common stock issued upon exercise of the 2008 Sequoia Warrant to be registered with the SEC and applicable state governmental authorities and to be listed on the stock exchange on which the Company’s stock is traded at the time of exercise, in each case at the Company’s expense.

On November 10, 2008 the exercise price of the 2008 Sequoia Warrant was decreased to $1.65 per share in connection with the Waiver Agreement (see Note 8). The fair value of these amended warrants was approximately $300,000 which was recorded as a debt discount. At June 24, 2009, all 2008 Sequoia Warrants were outstanding with an expiration date of August 26, 2013.

F-20

2009 Sequoia Warrant

On April 29, 2009, the Company issued to Sequoia a warrant to purchase 70,000 shares of common stock of the Company at an exercise price of $7.40 per share (the “2009 Sequoia Warrant”). The fair value of these warrants was approximately $440,000 which was immediately recorded as interest expense. The 2009 Sequoia Warrant is exercisable by Sequoia, in whole or in part, at any time or from time to time, prior to April 29, 2014. The 2009 Sequoia Warrant is not eligible for cashless exercise, but the Company is obligated to cause the common stock issued upon exercise of the 2009 Sequoia Warrant to be registered with the SEC and applicable state governmental authorities and to be listed on the stock exchange on which the Company’s stock is traded at the time of exercise, in each case at the Company’s expense.

The following table summarizes information about warrant transactions from June 27, 2007 through June 24, 2009:

	Number of Shares		Weighted Average Exercise Price (A)
Warrants outstanding, June 27, 2007	504,219		$	3.23
Granted	—			—
Exercised	—			—
Forfeited/cancelled	—			—
Warrants outstanding, June 25, 2008	504,219		$	3.23
Granted	1,737,000		$	1.88
Exercised	(250,000	)	$	4.80
Forfeited/cancelled	(4,219	)	$	3.95
Warrants outstanding, June 24, 2009	1,987,000		$	1.85

(A) The weighted average exercise price of the 2001 and 2008 amended Sequoia Warrants outstanding at June 24, 2009 reflect the decrease in the exercise price from $4.80 to $1.65 in connection with the Waiver Agreement.

11. Income Taxes

The components of income tax benefit from continuing and discontinued operations are as follows:

	Year Ended June 24, 2009			Year Ended June 25, 2008
Continuing Operations:
Current:
Federal	$	(40,000	)	$	(71,000	)
State		26,000			37,000
Current tax (benefit) provision		(14,000	)		(34,000	)
Deferred:
Federal		(66,000	)		—
State		(15,000	)		—
Deferred tax benefit		(81,000	)		—
Total tax benefit from continuing operations		(95,000	)		(34,000	)
Discontinued Operations:
Deferred:
Federal		66,000			—
State		15,000			—
Total tax provision discontinued operations		81,000			—
Total consolidated tax benefit	$	(14,000	)	$	(34,000	)

F-21

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The significant components of deferred tax assets and liabilities are as follows:

Deferred tax assets:
Net operating loss carryforwards	$	4,289,000		$	5,867,000
Capital loss carryforwards		9,966,000			—
Intangible assets		549,000			8,000
Property and equipment		396,000			573,000
Accrued expenses		451,000			742,000
Other, net		1,212,000			1,358,000
Total gross deferred tax assets		16,863,000			8,548,000
Less: valuation allowance		(16,863,000	)		(7,215,000	)
Deferred tax liabilities:
Installment gain and other		—			(1,333,000	)
Net deferred tax assets	$	—		$	—

A reconciliation of the statutory federal income tax rate with the Company’s effective income tax provision (benefit) rate for continuing operations is as follows:

	Year Ended June 24, 2009		Year Ended June 25, 2008
Federal statutory rate	(34.0	)%	(34.0	)%
State income taxes, net of Federal benefit	6.2		(2.0	)
Goodwill and other non-deductible costs	9.1		20.3
Valuation allowance	(21.8	)	5.9
Other	—		9.5
	(40.5	)%	(0.3	)%

As of June 24, 2009, net operating loss carryforwards of $11,170,000 and $11,451,000 for federal and state income tax purposes, respectively, are available to be utilized against future taxable income for years through fiscal 2027, and capital loss carryforwards of $25,018,000 which are available to offset future capital gains and will expire in fiscal 2014 if unutilized subject to possible annual limitation pertaining to change in ownership rules under the Internal Revenue Code.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is not more likely than not that the Company will not realize the benefits of these deductible differences, and thus has recorded a valuation allowance against the entire deferred tax asset balance. As of June 24, 2009 and June 25, 2008, the valuation allowance was $16,863,000 and $7,215,000, respectively. The change in the valuation allowance during 2009 was an increase of $9,648,000.

Included in the net operating loss carryforwards is $247,000 related to excess stock compensation, the benefit of which will be recorded as additional paid-in-capital if and when realized.

On June 28, 2007, the Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). The Company recorded a cumulative effect adjustment of $245,000 including interest and penalties, which was accounted for as an increase to the June 28, 2007 balance of accumulated deficit on the consolidated balance sheet. A tabular reconciliation of the total amounts (in absolute values) of unrecognized tax benefits at the beginning and end of the periods is as follows:

	Year Ended June 24, 2009			Year Ended June 25, 2008
Unrecognized tax benefits beginning of year	$	261,000		$	245,000
Increase in tax positions for prior year		17,000			16,000
Decrease in tax positions for prior year		(245,000	)		—
Unrecognized tax benefits at end of year	$	33,000		$	261,000

F-22

The unrecognized tax liabilities of $33,000 at June 24, 2009, if recognized, would affect the effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The fiscal 2009 decrease in unrecognized tax position relates to the discontinued operations. These liabilities are included in other liabilities in the accompanying consolidated balance sheets.

The Company files income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. The Company is no longer subject to U.S. income tax examinations for the fiscal years prior to 2005 and is no longer subject to state income tax examinations for years prior to 2001. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. There was $8,000 interest and penalties associated with uncertain tax positions as of June 24, 2009.

12. Impairment and Restructuring Charges

The Company recorded impairment charges of $6,311,000 for fiscal 2008 to fully impair goodwill associated with the wholesale operations.

13. Earnings Per Share

The following table sets forth the computation of basic and diluted net income per share from continuing operations:

	Year Ended June 24, 2009			Year Ended June 25, 2008
Numerator:
Net loss from continuing operations	$	(179,000	)	$	(11,385,000	)
Denominator:
Basic weighted average shares outstanding		5,507,000			5,459,000
Effect of dilutive securities		—			—
Diluted adjusted weighted average shares		5,507,000			5,459,000
Basic and diluted net loss per share from continuing operations	$	(0.03	)	$	(2.08	)

For the years ended June 24, 2009, and June 25, 2008, employee stock options of approximately 750,000, and 618,000, respectively, and warrants of approximately 1,987,000 and 504,000 respectively, (as described in Note 10), were excluded from the computation of diluted earnings per share as their impact would have been anti-dilutive.

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

	Year Ended June 24, 2009		Year Ended June 25, 2008
Numerator:
Net Income (loss)	$	1,592,000	$	(13,776,000	)
Denominator:
Basic and diluted weighted average shares outstanding		5,507,000		5,459,000
Basic and diluted net income (loss) per share	$	0.29	$	(2.52	)

14. Segment Information

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

Reported revenues for the wholesale segment include sales to third parties and franchisees. Wholesale segment income before tax includes a manufacturing profit on all sales. Wholesale segment income before tax also is net of specifically identified selling, general and administrative expenses and costs of the Company’s coffee roasting facility and a goodwill impairment charge in the fiscal year 2008.

The franchise operations segment revenues include franchise royalty fees. Franchise segment income before tax is net of specifically identified operating, general and administrative expenses.

F-23

The retail operations segment includes ecommerce revenue. Revenues are derived from sales of products through the websites www.diedrich.com, www.coffeepeople.com and www.coffeeteastore.com. Retail segment income before tax is net of cost of goods sold and related occupancy costs, operating, general and administrative expenses.

Summarized financial information of continuing operations of the Company’s reportable segments is shown in the following table. The other total assets consist of corporate cash, corporate notes receivable, corporate prepaid expenses, corporate property, plant and equipment, and cash surrender value of life insurance policy. The other component of segment loss before tax includes corporate general and administrative expenses, depreciation and amortization expense, and interest expense.

	Wholesale Operations			Franchise Operations		Retail Operations		Other			Total
	(in thousands)
Year ended June 24, 2009
Total revenue	$	61,427		$	80	$	803	$	—		$	62,310
Interest expense		—			—		—		1,511			1,511
Depreciation and amortization		1,549			—		29		311			1,889
Segment income (loss) before tax		8,233			39		182		(8,728	)		(274	)
Total assets as of June 24, 2009	$	15,995		$	22	$	204	$	10,707		$	26,928
Year ended June 25, 2008
Total revenue	$	39,103		$	83	$	793	$	—		$	39,979
Interest expense		—			—		—		136			136
Depreciation and amortization		805			—		32		309			1,146
Segment income (loss) before tax		(4,692	)		70		218		(7,015	)		(11,419	)
Total assets as of June 25, 2008	$	14,594		$	1,084	$	170	$	6,318		$	22,166

Intercompany sales from wholesale operations to retail operations of $460,000 for fiscal year 2009, and $404,000 for fiscal year 2008 have been eliminated.

15. Selected Quarterly Financial Data (Unaudited)

The quarterly results of operations for the years ended June 24, 2009 and June 25, 2008 were as follows:

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(in thousands, except per share data)
Fiscal 2009
Total revenue	$	10,408		$	13,870		$	17,884		$	20,148
Operating income (loss) from continuing operations		(1,224	)		(717	)		1,632			1,269
Income (loss) from continuing operations before tax		(1,467	)		(908	)		1,468			633
Income (loss) from discontinued operations before tax		(316	)		(83	)		(102	)		2,353
Net Income (loss)		(1,783	)		(995	)		1,358			3,012
Basic income (loss) per share		(0.33	)		(0.18	)		0.25			0.54
Diluted income per share		—			—			0.25			0.40
Fiscal 2008
Total revenue	$	6,625		$	10,600		$	9,904		$	12,850
Operating loss from continuing operations		(1,243	)		(709	)		(1,091	)		(8,678	)
Loss from continuing operations before tax		(1,073	)		(642	)		(1,014	)		(8,690	)
Income (loss) from discontinued operations before tax		770			(517	)		(1,070	)		(1,574	)
Net loss		(270	)		(1,159	)		(2,153	)		(10,194	)
Basic and diluted loss per share		(0.05	)		(0.21	)		(0.39	)		(1.86	)

Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including the seasonal nature of the Company’s business, which may affect sales volume and food costs. All quarters have 12-week accounting periods, except the fourth quarter, which has a 16-week accounting period.

During the fourth fiscal quarter of 2008, the Company recorded net loss of $10,194,000 which reflects a charge to goodwill and asset impairment of $6,311,000 relating to the wholesale operations.

F-24

During the first fiscal quarter of 2008, the Company recorded a gain from sale of discontinued operations of $1,276,000 in connection with the Starbucks transaction.

During the fourth fiscal quarter of 2009, the Company recorded a gain from sale of discontinued operations of $2,690,000 before income taxes of $81,000 in connection with the Praise transaction.

During the fourth fiscal quarter of 2009, the Company recorded interest expense of approximately $440,000 in connection with the issuance of 2009 Sequoia Warrant (see Note 10).

16. Employee Benefit Plans

401(k) Plan

The Company has a 401(k) Plan that covers eligible employees. The Company contributions to this plan were $36,000 and $42,000 for the fiscal years 2009 and 2008, respectively.

Deferred Compensation Plan

The Company terminated the deferred compensation plan effective December 31, 2008 and provided 60-day notice of the termination of the trust agreement effective February 28, 2009. All remaining amounts were fully distributed as of March 4, 2009.

F-25

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

	Balance at Beginning of Period		Provisions		Accounts Written Off			Balance at End of Period
Allowance for Bad Debt:
Year ended June 25, 2008	$	163,000	$	978,000	$	(633,000	)	$	508,000
Year ended June 24, 2009	$	508,000	$	577,000	$	(819,000	)	$	266,000

F-26

EX-99.3

Exhibit 99.3

TABLE OF CONTENTS

	Page Number
PART I—FINANCIAL INFORMATION	1
Item 1. Financial Statements	1
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)	1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)	2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)	3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	4

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

DIEDRICH COFFEE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	March 3, 2010			June 24, 2009
Assets
Current assets:
Cash	$	5,438,000		$	3,572,000
Restricted cash and short term investments		623,000			623,000
Accounts receivable, less allowance for doubtful accounts of $87,000 at March 3, 2010 and $266,000 at June 24, 2009		12,056,000			6,335,000
Inventories		4,115,000			5,510,000
Income tax refund receivable		—			40,000
Current portion of notes receivable, less allowance of $103,000 at March 3, 2010 and $75,000 at June 24, 2009		1,764,000			3,604,000
Prepaid expenses		932,000			293,000
Total current assets		24,928,000			19,977,000
Property and equipment, net		6,435,000			5,416,000
Notes receivable, less allowance of $0 at June 24, 2009		—			812,000
Other assets		812,000			723,000
Total assets	$	32,175,000		$	26,928,000
Liabilities and Stockholders’ Equity
Current liabilities:
Note payable, net of discount	$	2,000,000		$	2,687,000
Accounts payable		9,148,000			5,228,000
Accrued compensation		1,610,000			1,816,000
Accrued expenses		1,321,000			1,418,000
Total current liabilities		14,079,000			11,149,000
Long term note payable, net of discount		1,501,000			1,594,000
Income tax liability		33,000			33,000
Deferred rent		107,000			133,000
Other liabilities		245,000			245,000
Total liabilities		15,965,000			13,154,000
Commitments and contingencies (Notes 9 and 10)
Stockholders’ equity:
Preferred stock, $0.01 par value, authorized 3,000,000 shares; issued and outstanding 0 shares at March 3, 2010 and June 24, 2009		—			—
Common stock, $0.01 par value; authorized 17,500,000 shares; issued and outstanding 5,727,000 shares at March 3, 2010 and June 24, 2009		57,000			57,000
Additional paid-in capital		65,964,000			63,289,000
Accumulated deficit		(49,811,000	)		(49,572,000	)
Total stockholders’ equity		16,210,000			13,774,000
Total liabilities and stockholders’ equity	$	32,175,000		$	26,928,000

See accompanying notes to unaudited condensed consolidated financial statements.

1

DIEDRICH COFFEE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Twelve Weeks Ended March 3, 2010			Twelve Weeks Ended March 4, 2009			Thirty-Six Weeks Ended March 3, 2010			Thirty-Six Weeks Ended March 4, 2009
Net revenue:
Wholesale	$	25,661,000		$	17,568,000		$	65,758,000		$	41,601,000
Retail and other		224,000			316,000			550,000			561,000
Total revenue		25,885,000			17,884,000			66,308,000			42,162,000
Costs and expenses:
Cost of sales (exclusive of depreciation shown separately below)		18,954,000			13,314,000			48,783,000			33,167,000
Operating expenses		1,437,000			1,034,000			4,058,000			3,292,000
Depreciation and amortization		356,000			417,000			1,070,000			1,151,000
General and administrative expenses		4,228,000			1,487,000			8,038,000			4,878,000
Gain on asset disposals		—			—			(3,000	)		(7,000	)
Total costs and expenses		24,975,000			16,252,000			61,946,000			42,481,000
Operating income (loss) from continuing operations		910,000			1,632,000			4,362,000			(319,000	)
Interest expense		129,000			227,000			436,000			794,000
Interest and other income, net		(42,000	)		(63,000	)		(200,000	)		(206,000	)
Merger related costs		1,636,000			—			4,137,000			—
Income (loss) from continuing operations before income tax provision (provision)		(813,000	)		1,468,000			(11,000	)		(907,000	)
Income tax provision (benefit)		(35,000	)		8,000			228,000			12,000
Income (loss) from continuing operations		(778,000	)		1,460,000			(239,000	)		(919,000	)
Discontinued operations:
Loss from discontinued operations, net of tax expense of $0		—			(102,000	)		—			(501,000	)
Net income (loss)	$	(778,000	)	$	1,358,000		$	(239,000	)	$	(1,420,000	)
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations	$	(0.14	)	$	0.27		$	(0.04	)	$	(0.17	)
Loss from discontinued operations, net		—			(0.02	)		—			(0.09	)
Net income (loss)	$	(0.14	)	$	0.25		$	(0.04	)	$	(0.26	)
Weighted average and equivalent shares outstanding:
Basic and diluted		5,727,000			5,468,000			5,727,000			5,468,000

See accompanying notes to unaudited condensed consolidated financial statements.

2

DIEDRICH COFFEE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Thirty-Six Weeks Ended March 3, 2010			Thirty-Six Weeks Ended March 4, 2009
Cash flows from operating activities:
Net loss	$	(239,000	)	$	(1,420,000	)
Loss on discontinued operations, net		—			501,000
Loss from continuing operations:		(239,000	)		(919,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,070,000			1,151,000
Amortization and write off of loan fees		7,000			6,000
Amortization of note payable discount		220,000			463,000
Provision for (recovery of) bad debt		(32,000	)		250,000
Income tax provision		—			12,000
Provision for inventory obsolescence		14,000			17,000
Stock compensation expense		2,675,000			225,000
Gain on disposal of assets		(3,000	)		(7,000	)
Notes receivable issued		—			(93,000	)
Changes in operating assets and liabilities:
Accounts receivable		(5,689,000	)		(5,093,000	)
Inventories		1,381,000			(143,000	)
Prepaid expenses		(599,000	)		(349,000	)
Notes receivable		(148,000	)		(260,000	)
Other assets		(96,000	)		(432,000	)
Accounts payable		3,920,000			3,163,000
Accrued compensation		(206,000	)		(297,000	)
Accrued expenses		(97,000	)		(127,000	)
Deferred rent		(26,000	)		(8,000	)
Net cash provided by (used in) continuing operations		2,152,000			(2,441,000	)
Net cash used in discontinued operations		—			(732,000	)
Net cash provided by (used in) operating activities		2,152,000			(3,173,000	)
Cash flows from investing activities:
Capital expenditures for property and equipment		(2,094,000	)		(544,000	)
Proceeds from disposal of property and equipment		8,000			8,000
Payments received on notes receivable		2,800,000			1,168,000
Change in restricted cash and short term investments		—			1,000
Net cash provided by investing activities of continuing operations		714,000			633,000
Net cash provided by investing activities of discontinuing operations		—			3,000
Net cash provided by investing activities		714,000			636,000
Cash flows from financing activities:
Borrowings under credit agreement		—			3,000,000
Payments made on long term debt		(1,000,000	)		—
Net cash (used in) provided by financing activities		(1,000,000	)		3,000,000
Net increase in cash		1,866,000			463,000
Cash at beginning of year		3,572,000			670,000
Cash at end of period	$	5,438,000		$	1,133,000
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	230,000		$	332,000
Income taxes	$	163,000		$	11,000
Non-cash transactions:
Issuance of notes receivable	$	29,000		$	93,000

See accompanying notes to unaudited condensed consolidated financial statements.

3

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 3, 2010

(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Diedrich Coffee, Inc. (the “Company” or “Diedrich”) is a specialty coffee roaster and wholesaler whose brands include Diedrich Coffee, Gloria Jean’s, and Coffee People. The Company has wholesale accounts with businesses and restaurant chains. In addition, the Company operates a coffee roasting facility and a distribution facility in central California that supplies roasted coffee in a variety of packaging formats to its wholesale customers.

Basis of Presentation

The unaudited condensed consolidated financial statements of Diedrich and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America, as well as the instructions to Form 10-Q and Article 8 of Regulation S-X. These statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended June 24, 2009.

The Company evaluated all subsequent events that occurred after the balance sheet date. In the opinion of management, all adjustments (consisting of normal, recurring adjustments and accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results expected for a full year.

Discontinued Operations

During the year ended June 24, 2009, the Company sold the Gloria Jean’s U.S. franchise and retail operations (the “Transaction”) to Praise International North America, Inc. (“Praise”).

Praise is an affiliate of Gloria Jean’s Coffees International Pty. Ltd., which was a party to the purchase of the Company’s international franchise operations in February 2005.

Also during the fiscal year ended June 24, 2009, the Company closed the one remaining Diedrich retail location due to expiration of the lease relating to that retail location.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) topic 360, Property, Plant & Equipment (“ASC 360”) the financial results of the Gloria Jean’s franchise operations, retail operations and the one Diedrich retail location are reported as discontinued operations for all periods presented. Wholesale sales to former franchisees are included in continuing operations for all periods since the Company will continue to provide coffee roasting services to Praise.

The following accounts are reflected in Loss from discontinued operations in the consolidated statements of operations:

• Franchise revenues for Gloria Jean’s Gourmet Coffees Franchising Corp.

• Retail revenues for Gloria Jean’s Gourmet Coffees Corp. and Diedrich

• Cost of sales and related occupancy costs

• Operating expenses

• Depreciation and amortization

• General and administrative expenses

• Provision for taxes

• Impairment of assets

Recently Adopted Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FAS No. 162, as codified in FASB ASC topic 105, Generally Accepted Accounting Principles (“ASC 105”). ASC 105 establishes that the FASB Accounting Standards Codification (“Codification”) will become the authoritative source of U.S. GAAP and that rules and interpretive releases of the SEC will also be sources of authoritative GAAP for SEC registrants. Following ASC 105, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The Company adopted ASC 105 effective for our first quarter of fiscal year 2010.

4

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MARCH 3, 2010

(UNAUDITED)

In June 2008, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus regarding EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5), as codified in FASB ASC topic 815, Derivatives & Hedging (“ASC 815”). ASC 815 outlines a two-step approach to evaluate the instrument’s contingent exercise provisions, if any, and to evaluate the instrument’s settlement provisions when determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. ASC 815 is effective for fiscal years beginning after December 15, 2008 and must be applied to outstanding instruments as of the beginning of the fiscal year of adoption as a cumulative-effect adjustment to the opening balance of retained earnings. Early adoption is not permitted. The cumulative effect of applying ASC 815 will be reported as an adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted ASC 815 on June 25, 2009 and there was no impact on the Company’s unaudited condensed consolidated financial statements.

Significant Accounting Policies

There have been no significant changes to the Company’s significant accounting policies during the twelve weeks ended March 3, 2010. See Footnote 1 of the Company’s consolidated financial statements included in the Company’s 2009 Annual Report on Form 10-K for a comprehensive description of the Company’s significant accounting policies.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Stock-Based Compensation

The Company applies the provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), as codified in FASB ASC topic 718—Compensation — Stock Compensation (“ASC 718”), which sets accounting requirements for “share-based” compensation to employees and non-employee directors, including employee stock purchase plans, and requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of the price of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination rates within the valuation model. The expected term of options is derived from the output of the option valuation model and represents the period of time that options are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The fair values of the options were estimated using the Black-Scholes option-pricing model based on the following weighted average assumptions:

	TWELVE WEEKS ENDED				THIRTY-SIX WEEKS ENDED
	March 3, 2010		March 4, 2009		March 3, 2010		March 4, 2009
Risk free interest rate	1.18	%	1.21	%	1.18	% – 1.39%	1.21	% – 3.11%
Expected life	3 years		3 years		3 years		3 years
Expected volatility	149	%	100	%	149	% – 161%	56	% – 100%
Expected dividend yield	0	%	0	%	0	%	0	%
Forfeiture rate	42.6	%	7.48	%	6.9	% – 42.6%	5.58	% – 7.48%

A summary of option activity under our stock option plans for the Thirty-Six weeks ended March 3, 2010 is as follows:

	Number of options		Weighted average exercise price ($)		Weighted average remaining contractual term (years)	Aggregate intrinsic Value ($)
Options outstanding at June 24, 2009	750,300		$	3.36
Plus options granted	87,500			30.48
Less:
Options canceled or expired	(139,050	)		3.49
Options outstanding at March 3, 2010	698,750		$	6.73	6.35	$	19,650,000
Options exercisable at March 3, 2010	470,414		$	3.59	4.99	$	14,705,000

5

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MARCH 3, 2010

(UNAUDITED)

Stock-based compensation expense included under general and administration expenses in the statements of operations was $2,190,000 for the twelve weeks ended March 3, 2010 and $2,675,000 for the thirty-six weeks ended March 3, 2010. Stock-based compensation expense included in the statement of operations was $68,000 for the twelve weeks ended March 4, 2009 and $225,000 for the thirty-six weeks ended March 4, 2009. As of March 3, 2010, there was approximately $3,602,000 of total unrecognized stock-based compensation cost related to options granted under the Company’s plans that will be recognized over a weighted average period of 1.8 years. No options vested during the twelve weeks ended March 3, 2010. Aggregate intrinsic value at March 3, 2010 was based on a closing price of $34.85 per share.

Concentrations

The Company generated 93.5% and 85.9% of total revenues from the sale of K-Cups^® for the thirty-six weeks ended March 3, 2010 and March 4, 2009, respectively. The manufacturing and distribution of K-Cups^® is licensed from a single licensor, Keurig, Incorporated (“Keurig”), on a non-exclusive basis. During the thirty-six weeks ended March 3, 2010 and March 4, 2009, the Company had sales to the licensor that represented approximately $32,179,000 or 48.9% and $15,768,000 or 37.9% of wholesale sales, respectively.

The current agreement with the licensor expires in July 2013. The agreement provides for automatic five-year renewals if certain volume thresholds are met, which thresholds the Company is currently exceeding. In its fiscal year 2009 Form 10-K, Green Mountain Coffee Roasters, Inc. (NASDAQ: GMCR) (“GMCR”), which owns Keurig states that the two principal patents associated with the current generation K-Cup portion packs, will expire in 2012, and pending patent applications associated with this technology which, if ultimately issued as patents, would have expiration dates in 2023. Any major disruptions in this relationship could cause a material adverse effect on the Company’s business and operations.

Accounts receivable from Keurig and one other customer were 38.4% and 12.4%, respectively and 30.4% and 13.0%, respectively of total accounts receivable as of March 3, 2010 and June 24, 2009, respectively.

Accounts payable to Keurig was 39.7% and 38.1% of total accounts payable as of March 3, 2010 and June 24, 2009, respectively.

Reclassifications

Certain reclassifications have been made to the March 4, 2009 unaudited condensed consolidated financial statements to conform to the March 3, 2010 presentation.

2. LIQUIDITY AND MANAGEMENT PLANS

For the thirty-six weeks ended March 3, 2010, the Company reported a net loss of $239,000 which was net of income tax of $228,000. The Company had a cash balance of $5,438,000 and no access to additional borrowings under the current credit facility as of March 3, 2010.

The Contingent Convertible Note Purchase Agreement with Sequoia Enterprises, L.P. (“Sequoia”), a limited partnership whose sole general partner is a significant shareholder of the Company and also serves as the Executive Chairman of the Company’s board of directors (the “Note Purchase Agreement”), expired on March 31, 2010 and the $2,000,000 balance on the outstanding note was due in full on that date. As per the terms of the Note Purchase Agreement, the Company paid $2,000,000 due to Sequoia on March 31, 2010. In addition, the Company obtained a $3,000,000 Term Loan (as defined below) from Sequoia on August 26, 2008. See Note 10. The Company is required to make regular monthly payments of interest on the Term Loan. As per the terms of the Term Loan Agreement (as defined below), the Company paid $1,000,000 due to Sequoia on July 29, 2009. All outstanding principal and interest will be due on the maturity date of August 26, 2011, unless due earlier pursuant to the terms of the Term Loan Agreement upon a change of control of the Company or an event of default. As of March 3, 2010, the Company had $2,000,000 outstanding under the Term Loan Agreement.

The Company believes that cash flow from operations and payments from notes receivable due from Praise and Gloria Jean’s Coffees International Pty. Ltd issued in connection with the sale of the Gloria Jean’s U.S. and international franchise operations will be sufficient to satisfy working capital needs at the anticipated operating levels and debt service requirements for at least the next twelve months.

The Company’s future capital requirements will depend on many factors, including the extent and timing of the rate at which the business grows, if at all, with corresponding demands for working capital. The Company may be required to seek additional funding through debt financing, equity financing or a combination of funding methods to meet capital requirements and sustain operations. However, additional funds may not be available on terms acceptable or at all.

6

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MARCH 3, 2010

(UNAUDITED)

3. ACCOUNTS RECEIVABLE

During the thirty-six weeks ended March 3, 2010, the Company recorded a net of $32,000 in recoveries of previously reserved accounts receivable balances.

The following table details the components of net accounts receivable:

	March 3, 2010			June 24, 2009
Wholesale receivables	$	12,065,000		$	6,496,000
Allowance for wholesale receivables		(17,000	)		(180,000	)
		12,048,000			6,316,000
Franchise and other receivables		78,000			105,000
Allowance for franchise and other receivables		(70,000	)		(86,000	)
		8,000			19,000
Total accounts receivable, net	$	12,056,000		$	6,335,000

4. INVENTORIES

Inventories consist of the following:

	March 3, 2010		June 24, 2009
Unroasted coffee	$	722,000	$	422,000
Roasted coffee		1,336,000		2,404,000
Accessory and specialty items		76,000		49,000
Other food, beverage and supplies		1,981,000		2,635,000
Total inventory	$	4,115,000	$	5,510,000

5. NOTES RECEIVABLE

Notes receivable consist of the following:

	March 3, 2010			June 24, 2009
Notes receivable from a corporation discounted at an annual rate of 8.0%, payable annually in installments, due January 31, 2011	$	951,000		$	2,816,000
Notes receivable from a corporation, interest due at an annual rate of 7.0%, payable in two equal installments on December 12, 2009 and June 12, 2010		813,000			1,600,000
		1,764,000			4,416,000
Less: current portion of notes receivable		(1,764,000	)		(3,604,000	)
Long-term portion of notes receivable	$	—		$	812,000

6. NOTE PAYABLE

	March 3, 2010			June 24, 2009
Note payable amount bearing interest at a rate of three-month LIBOR plus 6.30% (6.55% as of March 3, 2010) is due and payable on March 31, 2010. Note is unsecured	$	2,000,000		$	2,000,000
Note payable amount bearing interest at a rate of one-month LIBOR plus 6.30% (6.53% as of March 3, 2010) is due and payable on August 26, 2011. Note is unsecured		2,000,000			3,000,000
Discount on note payable		(499,000	)		(719,000	)
		3,501,000			4,281,000
Less: current portion of notes payable, net of discount		(2,000,000	)		(2,687,000	)
Long-term portion of notes payable, net of discount	$	1,501,000		$	1,594,000

7

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MARCH 3, 2010

(UNAUDITED)

On March 31, 2010, the Company paid $2,000,000 due under the Note Purchase Agreement. The remaining balance of $2,000,000 under the Term Loan Agreement is immediately due and payable upon consummation of the pending merger (see Notes 10 and 15).

7. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per share from continuing operations:

	Twelve Weeks Ended March 3, 2010			Twelve Weeks Ended March 4, 2009		Thirty-Six Weeks Ended March 3, 2010			Thirty-Six Weeks Ended March 4, 2009
Numerator:
Net income (loss) from continuing operations	$	(778,000	)	$	1,460,000	$	(239,000	)	$	(919,000	)
Denominator:
Basic weighted average shares outstanding		5,727,000			5,468,000		5,727,000			5,468,000
Effect of dilutive securities		—			—		—			—
Diluted adjusted weighted average shares		5,727,000			5,468,000		5,727,000			5,468,000
Basic and diluted net income (loss) per share from continuing operations	$	(0.14	)	$	0.27	$	(0.04	)	$	(0.17	)

For the twelve and thirty-six weeks ended March 3, 2010, employee stock options of approximately 699,000 and warrants of 1,987,000 were excluded from the computation of dilutive earnings per share as their impact would have been anti-dilutive. For the twelve and thirty-six weeks ended March 4, 2009, employee stock options of approximately 663,000 shares and 2,167,000 of stock purchase warrants were excluded from the computation of diluted earnings per share as their impact would have been anti-dilutive.

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

	Twelve Weeks Ended March 3, 2010			Twelve Weeks Ended March 4, 2009		Thirty-Six Weeks Ended March 3, 2010			Thirty-Six Weeks Ended March 4, 2009
Numerator:
Net income (loss)	$	(778,000	)	$	1,358,000	$	(239,000	)	$	(1,420,000	)
Denominator:
Basic weighted average shares outstanding		5,727,000			5,468,000		5,727,000			5,468,000
Effect of dilutive securities		—			—		—			—
Diluted weighted average shares outstanding		5,727,000			5,468,000		5,727,000			5,468,000
Basic and diluted net income (loss) per share	$	(0.14	)	$	0.25	$	(0.04	)	$	(0.26	)

8. SEGMENT AND RELATED INFORMATION

Subsequent to the sale of Gloria Jean’s U.S. franchise and retail operations (see Note 1), the Company has two reportable segments, wholesale operations and retail and other. Retail and other includes ecommerce retail operations and franchise operations. Ecommerce revenues are derived from sales of products through the Company’s three websites, www.diedrich.com, www.coffeepeople.com and www.coffeeteastore.com. The Company evaluates performance of its operating segments based on income before provision for asset impairment and restructuring costs, income taxes, interest expense, depreciation and amortization, and general and administrative expenses.

8

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MARCH 3, 2010

(UNAUDITED)

Summarized financial information of continuing operations of the Company’s reportable segments is shown in the following table. The other total assets consist of corporate cash, corporate notes receivable, corporate prepaid expenses, and corporate property, plant and equipment. The other component of segment income (loss) before tax includes corporate general and administrative expenses, depreciation and amortization expense, and interest expense.

	TWELVE WEEKS ENDED						THIRTY-SIX WEEKS ENDED
	March 3, 2010			March 4, 2009			March 3, 2010			March 4, 2009
Net revenue:
Wholesale	$	25,661,000		$	17,568,000		$	65,758,000		$	41,601,000
Retail and other		224,000			316,000			550,000			561,000
Total net revenue	$	25,885,000		$	17,884,000		$	66,308,000		$	42,162,000
Interest expense:
Corporate	$	129,000		$	227,000		$	436,000		$	794,000
Total interest expense	$	129,000		$	227,000		$	436,000		$	794,000
Depreciation and amortization:
Wholesale	$	291,000		$	346,000		$	869,000		$	940,000
Retail and other		12,000			9,000			39,000			18,000
Corporate		53,000			62,000			162,000			193,000
Total depreciation and amortization	$	356,000		$	417,000		$	1,070,000		$	1,151,000
Segment income (loss) from continuing operations before income tax benefit:
Wholesale	$	5,161,000		$	3,049,000		$	12,527,000		$	4,676,000
Retail and other		30,000			133,000			32,000			70,000
Corporate		(6,004,000	)		(1,714,000	)		(12,570,000	)		(5,653,000	)
Total segment income (loss) from continuing operations before income tax provision	$	(813,000	)	$	1,468,000		$	(11,000	)	$	(907,000	)

	March 3, 2010		June 24, 2009
Identifiable assets:
Wholesale	$	22,082,000	$	15,995,000
Retail and other		253,000		226,000
Corporate		9,840,000		10,707,000
Total assets	$	32,175,000	$	26,928,000

9. COMMITMENTS AND CONTINGENCIES

There have been no material changes to the Company’s significant commitments and contingencies during the thirty-six weeks ended March 3, 2010, except on December 30, 2009, the Company entered into a lease agreement with Castroville Industrial Partners, LLC for approximately 62,000 square feet of warehouse space which is used primarily as a distribution facility. This lease expires March 2015. See Footnote 9 of the Company’s consolidated financial statements included in the Company’s 2009 Annual Report on Form 10-K for a comprehensive description of the Company’s significant commitments and contingencies.

9

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MARCH 3, 2010

(UNAUDITED)

10. OUTSTANDING DEBT, FINANCING ARRANGEMENTS AND RESTRICTED CASH

Note Purchase Agreement:

On May 10, 2004 the Company entered into a $5,000,000 Note Purchase Agreement (the “Note Purchase Agreement”) with Sequoia, a limited partnership whose sole general partner is a significant shareholder of the Company and also serves as the Executive Chairman of the board of directors of the Company (the “Board”). The Note Purchase Agreement provided, at the Company’s election, the ability to issue notes with up to an aggregate principal amount of $5,000,000. The Company has amended the Note Purchase Agreement from time to time and has agreed to refrain from further borrowings under the Note Purchase Agreement in connection with the entry into the Term Loan Agreement (as defined below) entered into on August 26, 2008. As amended, the notes issued under the Note Purchase Agreement were due in full on March 31, 2010, and the Company was only required to make monthly payments of interest and the monthly commitment fee, but not principal, until such date. The Note Purchase Agreement contains covenants, among others, that limit the amount of indebtedness that the Company may have outstanding in relation to its tangible net worth. As of March 3, 2010, the Company had $2,000,000 of issued notes outstanding under the Note Purchase Agreement and was in compliance with all covenants contained in the Note Purchase Agreement. Subsequently, on March 31, 2010, the Company paid in full the $2,000,000 due to Sequoia under the Note Purchase Agreement.

Loan Agreement:

On August 26, 2008, the Company entered into a loan agreement with Sequoia (the “Term Loan Agreement”). The Term Loan Agreement provides for a $3,000,000 term loan (the “Term Loan”). As amended, interest is payable at one-month LIBOR plus 9.30% for any period during which the ratio of Indebtedness (as defined in the Term Loan Agreement) on a consolidated basis to Effective Tangible Net Worth (as defined in the Term Loan Agreement) is greater than 1.75:1.00 or the one-month LIBOR plus 6.30% for any other period, in each case reset on a periodic basis as provided in the Term Loan Agreement. The Company is required to make regular monthly payments of interest on the Term Loan with Sequoia. In addition, as per the terms of the Term Loan Agreement, the Company paid $1,000,000 due to Sequoia on July 29, 2009. All outstanding principal and interest will be due on the maturity date of August 26, 2011, unless due earlier pursuant to the terms of the Term Loan Agreement upon a change of control of the Company or an event of default. As of March 3, 2010, the Company had $2,000,000 outstanding under the Term Loan Agreement.

The Term Loan Agreement requires the Company to refrain from further borrowings under the Note Purchase Agreement and contains restrictions on incurring indebtedness on par with, or senior to, the Term Loan Agreement. The Term Loan Agreement also contains a covenant that limits the amount of indebtedness that the Company may have outstanding in relation to tangible net worth, in addition to other standard covenants and events of default. As of March 3, 2010, the Company was in compliance with all covenants contained in the Term Loan Agreement.

The Term Loan is senior to all other indebtedness of the Company, except indebtedness pursuant to notes under the Note Purchase Agreement and certain permitted indebtedness identified in the Term Loan Agreement. Upon repayment of the notes under the Note Purchase Agreement, the Term Loan will be senior to all other indebtedness of the Company, except such permitted indebtedness.

Letter of Credit:

In addition, the Company entered into a Credit Agreement with Bank of the West on November 4, 2005. The current agreement provides for a $500,000 letter of credit facility that expires on October 31, 2010. The letter of credit facility is secured by a deposit account at Bank of the West. As of March 3, 2010, this deposit account had a balance of $623,000, which is shown as restricted cash on the consolidated balance sheets. As of March 3, 2010, $472,000 of letters of credit were outstanding under the letter of credit facility. The agreement contains covenants that, among other matters, require the Company to submit financial statements to the bank within specified time periods. As of March 3, 2010, the Company was in compliance with all Bank of the West agreement covenants.

11. WARRANTS

2001 Sequoia Warrant:

On May 8, 2001, in connection with the sale of 2,000,000 shares of Company common stock, the Company issued warrants to Sequoia to purchase 250,000 shares of the Company’s common stock at a price of $4.80 per share (“2001 Sequoia Warrant”). Other investors also received warrants to purchase an additional 250,000 shares at a price of $4.80 per share. The warrants were exercisable immediately upon issuance.

During the fiscal year ending June 24, 2009, the other investors exercised their warrants at an exercise price of $4.80 per share. The Company received cash proceeds of $1.2 million in connection with the warrant exercises.

10

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MARCH 3, 2010

(UNAUDITED)

On November 10, 2008, the Company entered into a waiver agreement whereby the exercise price of the 2001 Sequoia Warrant was decreased to $1.65 per share. The fair value of these amended warrants was approximately $53,000 which was recorded as a debt discount. At March 3, 2010, all 2001 Sequoia Warrants were outstanding with an expiration date of June 30, 2014.

2008 Sequoia Warrant:

In connection with the Term Loan Agreement and an amendment to the Note Purchase Agreement, on August 26, 2008, the Company issued to Sequoia a warrant (the “2008 Sequoia Warrant”) to purchase 1,667,000 shares of common stock of the Company. On November 10, 2008, the Company entered into a waiver agreement whereby the exercise price was decreased to $1.65 per share. The fair value of these amended warrants was approximately $300,000 which was recorded as a debt discount. At March 3, 2010, all 2008 Sequoia Warrants were outstanding with an expiration date of August 26, 2013. The 2008 Warrant is not eligible for cashless exercise, but the Company is obligated to cause the common stock issued upon exercise of the 2008 Warrant to be registered with the SEC and applicable state governmental authorities and to be listed on the stock exchange on which the Company’s stock is traded at the time of exercise, in each case at the Company’s expense.

2009 Sequoia Warrant:

In connection with the extension of the Note Purchase Agreement, after the close of the Nasdaq Stock Market on April 29, 2009, the Company issued to Sequoia a warrant to purchase 70,000 shares of common stock of the Company at an exercise price of $7.40 per share (the “2009 Sequoia Warrant”), which was the closing price of the Company’s common stock on such date. The fair value of these warrants was approximately $440,000 which was immediately recorded as interest expense. The 2009 Sequoia Warrant is exercisable by Sequoia, in whole or in part, at any time or from time to time, prior to April 29, 2014. The 2009 Sequoia Warrant is not eligible for cashless exercise, but the Company is obligated to cause the common stock issued upon exercise of the 2009 Sequoia Warrant to be registered with the SEC and applicable state governmental authorities and to be listed on the stock exchange on which the Company’s stock is traded at the time of exercise, in each case at the Company’s expense.

The following table summarizes information about warrant transactions from June 24, 2009 through March 3, 2010:

	Number of Shares	Weighted Average Exercise Price
Warrants outstanding, June 24, 2009	1,987,000	$	1.85
Granted	—		—
Exercised	—		—
Forfeited/cancelled	—		—
Warrants outstanding, March 3, 2010	1,987,000	$	1.85

12. LEGAL PROCEEDINGS

A lawsuit entitled Leader Bank v. Ajay Misra, et al v. Diedrich Coffee et al, was pending on March 3, 2010 in the Middlesex Superior Court, Middlesex, Massachusetts. In that case the Plaintiff, Leader Bank, filed a complaint to collect on a defaulted promissory note it had with the franchisee, Defendant Amtek Group, LLC, on February 23, 2009. Ajay and Priya Misra were named defendants as well. On June 16, 2009, Defendants filed a third-party complaint against Diedrich alleging breach of contract, aiding and abetting Leader Bank in its takeover of the store and breach of privacy. In their complaint, third-party plaintiffs claimed that they were entitled to $2,477,500. The Company contested the third-party complaint vigorously. The Company filed a motion to dismiss the complaint, and all of Amtek’s claims, along with Misras’ claims of breach of contract and privacy were dismissed. Misra amended the complaint to bring additional claims of misrepresentation, promissory estoppel and breach of good faith. The Company believed that liability was not probable and the potential settlement not estimable under the lawsuit. Given the relative expenses of litigation, however, the Company agreed to mediate this matter in an attempt to resolve the suit without further expense. As a result of this mediation, the parties have agreed in principle to settlement terms. As of March 3, 2010, the Company estimated that the required amount to settle this claim is $45,000 and recorded an accrual for this amount included in general and administrative expense in the accompanying consolidated statements of operations. Subsequently, on April 13, 2009, the Company paid $45,000 to Misra to fully settle this claim.

11

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MARCH 3, 2010

(UNAUDITED)

On November 10, 2009, an action entitled George Mendenhall, individually and on behalf of all others similarly situated v. J. Russell Phillips, et al., (the “Complaint”) was filed in the Superior Court of the State of California for the County of Orange (the “Court”). In this action, the plaintiff named as defendants Diedrich, the members of the Board, Peet’s and Peet’s wholly owned subsidiary, Marty Acquisition Sub, Inc. Among other things, the Complaint alleged that the members of the Board breached their fiduciary duties to Diedrich’s stockholders in connection with the transactions previously contemplated by the terminated Peet’s Agreement, allegedly resulting in an unfair process and unfair price to such stockholders. The Complaint sought class certification and certain forms of equitable relief, including enjoining the completion of the transactions previously contemplated by the terminated Peet’s Agreement.

On December 23, 2009, an amended Complaint (the “Amended Complaint”) was filed in the Court. The Amended Complaint names as defendants Diedrich, the members of the Board, Green Mountain Coffee Roasters, Inc., a Delaware corporation (“GMCR”), and Pebbles Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of GMCR (“Acquisition Sub”). Among other things, the Amended Complaint allegedly that the members of the Board breached their fiduciary duties to Diedrich stockholders by failing to provide adequate disclosures of allegedly material information concerning the transaction and also seeks an equitable assessment of attorneys’ fees and costs from Diedrich, the members of the Board, GMCR and Acquisition Sub for the benefit allegedly conferred by plaintiff’s counsel on Diedrich stockholders through plaintiff’s alleged involvement in the auction process. The Amended Complaint seeks class certification, certain forms of equitable relief, including enjoining the completion of the transaction contemplated by the Merger Agreement with GMCR until additional disclosures are provided, and an equitable assessment of attorneys’ fees and costs. On December 30, 2009, plaintiff filed an ex parte application with the Court for a temporary restraining order, a schedule for a motion for preliminary injunction and expedited discovery (the “Application”). On December 31, 2009, the Court denied the Application in its entirety. On January 22, 2010, Diedrich and the members of the Board filed with the Court a demurrer seeking the dismissal of the causes of action alleged against Diedrich and the members of the Board in the Amended Complaint. On January 27, 2010, GMCR and Acquisition Sub filed with the Court a demurrer seeking the dismissal of the cause of action alleged against GMCR and Acquisition Sub in the Amended Complaint. On March 12, 2010, the Court sustained the demurrer of Diedrich and the members of the Board to plaintiff’s claim for equitable assessment of attorneys’ fees and costs, with thirty days leave to amend, and overruled the demurrer to the disclosure claims against the members of the Board. The Court also sustained the demurrer of GMCR and Acquisition Sub to plaintiff’s claim for equitable assessment of attorneys’ fees and costs, with thirty days leave to amend. Diedrich believes that the allegations of the Amended Complaint are without merit and intends to vigorously contest the action.

The Company believes that liability is not probable under this lawsuit and has therefore not accrued any amounts related to the potential claims under this lawsuit in the accompanying consolidated financial statements as of March 3, 2010. The Company maintains insurance coverage that it believes is adequate for its business, including, but not limited to, professional and general liability insurance. There is no assurance that the insurance maintained will be adequate in the event of a claim, or that such insurance will continue to be available in the future.

13. DISCONTINUED OPERATIONS

During the fiscal year ended June 24, 2009, the Company sold the Gloria Jean’s U.S. franchise and retail operations to Praise.

In addition, the Company entered into several ancillary agreements, including a roasting agreement whereby the Company agreed to provide coffee roasting services to Praise for a period of five years and a trademark license agreement whereby the Company granted to Praise a license to use the Company’s Gloria Jean’s Gourmet Coffees Corp. U.S. trademarks in the United States of America (including the Commonwealth of Puerto Rico) until these trademarks are transferred to Gloria Jean’s Coffees International Pty. Ltd.

Praise is an affiliate of Gloria Jean’s Coffees International Pty. Ltd., which was a party to the purchase of the Company’s international franchise operations in February 2005.

Also during the fiscal year ended June 24, 2009, the Company closed the one remaining Diedrich retail location due to expiration of the lease relating to that retail location.

In accordance with ASC 360, the financial results of the Gloria Jean’s franchise operations, retail operations and the one Diedrich retail location are reported as discontinued operations for all periods presented. Wholesale sales to former franchisees are included in continuing operations for all periods since the Company will continue to provide coffee roasting services to Praise.

12

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MARCH 3, 2010

(UNAUDITED)

The financial results included in discontinued operations were as follows:

	Twelve Weeks Ended March 4, 2009			Thirty-Six Weeks Ended March 4, 2009
Net retail revenue	$	1,246,000		$	3,330,000
Net franchise revenue		562,000			1,590,000
Net revenue from discontinued operations		1,808,000			4,920,000
Loss from discontinued operations, net of $0 tax	$	(102,000	)	$	(501,000	)

14. INCOME TAXES

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical losses and limited earnings history, management cannot conclude that it is more likely than not that the Company will realize the benefits of these deductible differences, and thus has recorded a valuation allowance against the entire deferred tax asset balance.

The income tax provision of $228,000 for the thirty-six weeks ended March 3, 2010 primarily represents California state income taxes since the utilization of net operating loss carryforwards has been suspended by the state for the Company’s 2010 fiscal year end. Until the Company completes a tax study, the merger related expenses are being treated as a non-deductible expenditure for income tax purposes. Subsequent to the merger (see Note 15 below), net operating loss carryforwards of the Company could be subject to possible annual limitation pertaining to change in ownership rules under the Internal Revenue Code. The Company’s accrual for uncertain tax positions was $33,000 as of March 3, 2010 and June 24, 2009. There was $8,000 of interest and penalties associated with uncertain tax positions as of March 3, 2010 and June 24, 2009.

15. PROPOSED MERGER WITH GREEN MOUNTAIN COFFEE ROASTERS, INC.

On December 7, 2009, Diedrich, GMCR, and Acquisition Sub, entered into an Agreement and Plan of Merger (the “Merger Agreement”), whereby GMCR agreed to acquire all issued and outstanding shares of Diedrich’s common stock, par value $0.01 per share (the “Shares”), in exchange for, with respect to each share, the right to receive $35.00 in cash, without interest (the “Offer Consideration”). Under the terms of the Merger Agreement, after the satisfaction or waiver of the conditions to the Merger (as defined below), Acquisition Sub will merge with and into Diedrich, with Diedrich surviving as a wholly owned subsidiary of GMCR (the “Merger”). In the Merger, each outstanding Share that is not tendered and accepted pursuant to the Offer (as defined below) (other than Shares held by Diedrich or any of its wholly owned subsidiaries or held in its treasury, or owned by GMCR or Acquisition Sub or any other wholly owned subsidiary of GMCR, and other than Shares as to which appraisal rights have been perfected in accordance with applicable law) will be converted into the right to receive the Offer Consideration.

As required under the Merger Agreement, on December 11, 2009, GMCR, through Acquisition Sub, commenced a tender offer (the “Offer”) whereby Acquisition Sub is offering to acquire the Shares in exchange for, with respect to each share, the right to receive the Offer Consideration, subject to the conditions set forth in GMCR’s Offer to Purchase, dated December 11, 2009 and related Letter of Transmittal. The Offer was initially scheduled to expire at 12:00 midnight Eastern Time on January 11, 2010 (one minute after 11:59 p.m., Eastern Time, on January 11, 2010). However, Acquisition Sub extended the Offer on January 8, 2010, and then subsequently on each of February 8, 2010, March 9, 2010 and April 6, 2010, for the maximum duration permitted under the Merger Agreement. Accordingly, the Offer will expire at 12:00 midnight Eastern Time on May 3, 2010 (one minute after 11:59 p.m. Eastern Time on May 3, 2010), unless further extended.

Consummation of the Offer is subject to customary conditions, including, but not limited to, (i) a number of Shares validly tendered and not withdrawn pursuant to the Offer that, together with any Shares owned by GMCR, Acquisition Sub or any other subsidiary of GMCR immediately prior to the acceptance pursuant to the Offer, represents more than 50% of the Adjusted Outstanding Share Number (as defined in the Merger Agreement), (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (iii) the absence of any Company Material Adverse Effect (as defined in the Merger Agreement) since the date of the Merger Agreement. The Offer is not subject to a financing condition.

13

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MARCH 3, 2010

(UNAUDITED)

The Merger Agreement and the Offer may be terminated under certain customary circumstances by GMCR or Diedrich, including if the Acceptance Time does not occur by February 15, 2010, provided, however, that such date will automatically be extended until June 15, 2010 if, on February 15, 2010, all of the conditions to the Offer have been satisfied or fulfilled or capable of being satisfied or fulfilled, except certain conditions regarding regulatory approvals. The Merger Agreement provides for a termination fee of $8,517,000 payable by Diedrich to GMCR if the Merger Agreement is terminated under certain circumstances. If Diedrich fails to pay when due any amounts payable under such termination fee provisions, then Diedrich shall (i) reimburse GMCR for all reasonable costs and expenses (including fees and disbursements of legal counsel) actually incurred in connection with the collection of such overdue amount and the enforcement by GMCR of its rights under the Merger Agreement, and (ii) pay to GMCR interest on any amount that is overdue. In addition, the Merger Agreement includes a graduated reverse termination fee such that, if the Merger Agreement were terminated by GMCR under certain circumstances involving regulatory approvals, a reverse termination fee would be payable by GMCR to Diedrich based on the following: (a) if the Merger Agreement is terminated before February 15, 2010 under such circumstances, GMCR would be obligated to pay $8,517,000; (b) if the Merger Agreement were terminated on or after February 15, 2010 but before April 15, 2010, GMCR would be obligated to pay $9,517,000; (c) if the Merger Agreement were terminated on or after April 15, 2010 but before June 15, 2010, GMCR would be obligated to pay $10,517,000; and (d) if the Merger Agreement were terminated on or after June 15, 2010, GMCR would be obligated to pay $11,517,000.

In connection with the transactions contemplated by the Merger Agreement, on December 7, 2009, certain directors and executive officers of Diedrich entered into stockholder agreements with GMCR (the “Stockholder Agreements”) whereby such directors and executive officers agreed to tender Shares in the Offer, subject to certain terms and conditions. Pursuant to his Stockholder Agreement, Paul C. Heeschen, Executive Chairman of Diedrich’s board of directors (the “Board”), has agreed to tender 1,832,580 Shares in the Offer.

Termination of a Material Definitive Agreement. Prior to entering into the Merger Agreement with GMCR, Diedrich: (a) terminated the Agreement and Plan of Merger, dated as of November 2, 2009 (as amended by an Amendment No. 1 dated November 17, 2009, the “Peet’s Merger Agreement”), by and among Peet’s Coffee & Tea, Inc., a Washington corporation (“Peet’s”), Marty Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Peet’s, and Diedrich, in accordance with its terms; and (b) paid to Peet’s a termination fee of $8,517,000 pursuant to the Peet’s Merger Agreement, which fee was paid to Peet’s on behalf of Diedrich by GMCR. Concurrently with the termination of the Peet’s Merger Agreement, the Stockholder Agreements, dated November 2, 2009, between Peet’s and each of Paul C. Heeschen and certain other directors and executive officers of Diedrich, were automatically terminated.

Litigation. On November 10, 2009, the Complaint was filed in the Court. In this action, the plaintiff named as defendants Diedrich, the members of the Board, Peet’s and Peet’s wholly owned subsidiary, Marty Acquisition Sub, Inc. Among other things, the Complaint alleged that the members of the Board breached their fiduciary duties to Diedrich’s stockholders in connection with the transactions previously contemplated by the terminated Peet’s Merger Agreement, allegedly resulting in an unfair process and unfair price to such stockholders. The Complaint sought class certification and certain forms of equitable relief, including enjoining the completion of the transactions previously contemplated by the terminated Peet’s Merger Agreement.

14

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MARCH 3, 2010

(UNAUDITED)

On December 23, 2009, the Amended Complaint was filed in the Court. The Amended Complaint names as defendants Diedrich, the members of the Board, GMCR and Acquisition Sub. Among other things, the Amended Complaint alleges that the members of the Board breached their fiduciary duties to Diedrich stockholders by failing to provide adequate disclosures of allegedly material information concerning the transaction and also seeks an equitable assessment of attorneys’ fees and costs from Diedrich, the members of the Board, GMCR and Acquisition Sub for the benefit allegedly conferred by plaintiff’s counsel on Diedrich stockholders through plaintiff’s alleged involvement in the auction process. The Amended Complaint seeks class certification, certain forms of equitable relief, including enjoining the completion of the transaction contemplated by the Merger Agreement with GMCR until additional disclosures are provided, and an equitable assessment of attorneys’ fees and costs. On December 30, 2009, plaintiff filed the Application. On December 31, 2009, the Court denied the Application in its entirety. On January 22, 2010, Diedrich and the members of the Board filed with the Court a demurrer seeking the dismissal of the causes of action alleged against Diedrich and the members of the Board in the Amended Complaint. On January 27, 2010, GMCR and Acquisition Sub filed with the Court a demurrer seeking the dismissal of the cause of action alleged against GMCR and Acquisition Sub in the Amended Complaint. On March 12, 2010, the Court sustained the demurrer of Diedrich and the members of the Board to plaintiff’s claim for equitable assessment of attorneys’ fees and costs, with thirty days leave to amend, and overruled the demurrer to the disclosure claims against the members of the Board. The Court also sustained the demurrer of GMCR and Acquisition Sub to plaintiff’s claim for equitable assessment of attorneys’ fees and costs, with thirty days leave to amend. Diedrich believes that the allegations of the Amended Complaint are without merit and intends to vigorously contest the action.

Change in Control and Termination Provisions Applicable to Mr. Sean McCarthy. Mr. Sean McCarthy is entitled to a severance payment equal to nine months of annual base salary if he is terminated by Diedrich without cause, provided that he executes a customary release of Diedrich. As discussed in more detail below, Mr. McCarthy, who was formerly Vice President and Chief Financial Officer was appointed President and Chief Financial Officer of Diedrich, effective as of February 1, 2010, and entered into a Letter Agreement dated January 22, 2010 (the “Letter Agreement”) related to such appointment. Under the Letter Agreement, Mr. McCarthy will receive a lump sum severance payment equal to his annual base salary if he is terminated for any reason other than a “Just Cause Dismissal” (as defined in Article IX of Diedrich’s 2000 Equity Incentive Plan) instead of the nine months of annual base salary severance payment described above, provided that Mr. McCarthy executes a complete release of Diedrich in connection with or related to his employment with Diedrich. Mr. McCarthy is also entitled to a stock appreciation payment upon the consummation of a change in control transaction, provided that he executes a general release of Diedrich. For this purpose, a change in control transaction is defined as a transaction that results in a non-affiliate of Diedrich acquiring 90% of the outstanding shares of common stock. The stock appreciation payment payable to Mr. McCarthy upon the consummation of a change in control transaction is equal to the product of (i) the difference determined by subtracting $5.00 from the per share price at which at least 90% of the outstanding shares of common stock is acquired, multiplied by (ii) 100,000.

In connection with the Offer and the Merger, Mr. McCarthy will receive an aggregate payment of $3,626,200, which is comprised of (i) a payment of $3,000,000 (constituting the stock appreciation payment) and (ii) a payment of $626,200 in connection with Diedrich options owned by him. Under the prior employment letter agreement, if Mr. McCarthy were to be terminated without cause following the Merger, Mr. McCarthy would also receive a lump sum payment of $168,750, provided that he executes a customary release of Diedrich. However, pursuant to the Letter Agreement entered into in connection with his appointment as President and Chief Financial Officer, effective as of February 1, 2010, if Mr. McCarthy is terminated for any reason other than a “Just Cause Dismissal” (as defined in Article IX of Diedrich’s 2000 Equity Incentive Plan) following the Merger, Mr. McCarthy will receive a lump sum payment of $275,000 (instead of the lump sum payment of $168,750 described above), provided that Mr. McCarthy executes a complete release of Diedrich in connection with or related to his employment with Diedrich.

15

EX-99.4

Exhibit 99.4

Green Mountain Coffee Roasters, Inc.

Index to Pro Forma Condensed Combined Financial Information (Unaudited)

	Pages
Pro Forma Condensed Combined Financial Statements:
Introduction to Pro Forma Condensed Combined Financial Statements (Unaudited)	1
Pro Forma Condensed Combined Balance Sheet as of March 27, 2010 (Unaudited)	3
Pro Forma Condensed Combined Statement of Operations (Unaudited) For the Twenty-Six Weeks ended March 27, 2010	4
Pro Forma Condensed Combined Statement of Operations (Unaudited) For the Fifty-Two Weeks ended September 26, 2009	5
Notes to Pro Forma Condensed Combined Financial Statements (Unaudited)	6-9

Green Mountain Coffee Roasters, Inc.

Introduction to Pro Forma Condensed Combined Financial Information (Unaudited)

On May 11, 2010, Green Mountain Coffee Roasters, Inc. (“GMCR”) acquired Diedrich Coffee, Inc. (“Diedrich”) for $35 per share of common stock in cash, pursuant to a cash tender offer, for a total purchase price of approximately $313,143,000. The transaction was financed using existing cash and GMCR’s existing credit facility, as increased by an amendment on the acquisition date. Diedrich will be maintained as a wholly-owned subsidiary, with operations integrated into GMCR’s Specialty Coffee Business Unit segment. In addition, on November 13, 2009, GMCR entered into a Share Purchase Agreement to acquire all of Timothy’s Coffees of the World Inc. (“Timothy’s”) issued and outstanding stock for a purchase price of $156,274,000. The accompanying unaudited pro forma condensed combined financial information is based on the historical financial statements of GMCR, Diedrich and Timothy’s. The information attempts to illustrate the effect that GMCR’s acquisition of Diedrich and Timothy’s would have had on GMCR’s financial statements if the transaction had been consummated at earlier dates as described below. This information is hypothetical and does not necessarily reflect the financial performance that would have actually resulted if the acquisition of Diedrich and Timothy’s had been completed on the dates assumed.

The Unaudited Pro Forma Condensed Combined Balance Sheet presents the historical financial position of GMCR as though the Diedrich acquisition was consummated on March 27, 2010, the end of GMCR’s second fiscal quarter. Because the Timothy’s acquisition occurred prior to the balance sheet date there are no pro forma adjustments for this acquisition. The Unaudited Pro Forma Condensed Combined Statements of Operations present the historical results of operations of GMCR for the twenty-six weeks ended March 27, 2010 and the fifty-two weeks ended September 26, 2009. The accompanying Unaudited Pro Forma Condensed Combined Statements of Operations reflect pro forma adjustments for both Diedrich and Timothy’s as though the acquisitions were consummated on September 28, 2008, the beginning of GMCR’s 2009 fiscal year.

GMCR’s historical results as of and for the twenty–six weeks ended March 27, 2010 are derived from GMCR’s unaudited consolidated financial statements included in its Quarterly Report on Form 10-Q for the quarter ended March 27, 2010. GMCR’s historical results for the fifty-two weeks ended September 26, 2009 are derived from GMCR’s audited consolidated financial statements included in its Annual Report on Form 10-K for the fifty-two weeks ended September 26, 2009. The Unaudited Pro Forma Condensed Combined Balance Sheet was prepared using Diedrich’s historical balance sheet as of March 3, 2010. The Unaudited Pro Forma Condensed Combined Statement of Operations for the twenty-six weeks ended March 27, 2010 was prepared using Diedrich’s historical results of operations for the twenty-four weeks ended March 3, 2010 and Timothy’s historical results of operations for the six weeks ended November 12, 2009, the period prior to the acquisition. For the period of November 12, 2009 through March 27, 2010, Timothy’s results of operations are included in GMCR’s historical results. The Unaudited Pro Forma Condensed Combined Statement of Operations for the fifty-two weeks ending September 26, 2009 was prepared using Diedrich historical results of operations for the fifty-two weeks ending September 16, 2009 and Timothy’s historical results of operations for the fifty-two weeks ending July 26, 2009.

The unaudited pro forma condensed combined financial statements have been prepared using the acquisition method of accounting. The allocation of the purchase price to the fair values of the identified tangible and intangible assets acquired and liabilities assumed was based upon an independent valuation and management estimates. The historical financial information has been adjusted to give effect to matters that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the operating results of the combined company.

1

The accompanying unaudited pro forma condensed combined financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included on GMCR’s 2009 Annual Report on Form 10-K, Quarterly Report on Form 10-Q for the twenty-six weeks ended March 27, 2010, Current Report on Form 8-K for the Timothy’s acquisition filed on November 13, 2009, as amended and; Diedrich’s 2009 Annual Report on Form 10-K, Quarterly Report on Form 10-Q for the twelve-weeks ended December 9, 2009 and Quarterly Report on Form 10-Q for the twelve weeks ended March 3, 2010. GMCR’s management believes that the assumptions used in preparing these unaudited pro forma condensed combined financial statements provide a reasonable basis for presenting all of the significant effects of the acquisitions. These unaudited pro forma condensed combined financial statements presented are for informational purposes only and do not purport to be indicative of the results that would have actually occurred if the acquisitions had been consummated on the dates indicated or of those results that may be achieved in the future. In addition, the allocation of the Diedrich purchase price is preliminary and, accordingly, the purchase accounting adjustments made in the preparation of the unaudited pro forma condensed combined financial statements may be subject to adjustment which could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.

2

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Pro Forma Condensed Combined Balance Sheet

(Dollars in thousands)

(Unaudited)

	March 27, 2010
	GMCR Historical			(B) Diedrich Historical			Pro Forma Adjustments					Pro Forma
Assets
Current assets:
Cash and cash equivalents	$	144,135		$	5,438		$	(143,643	)	(C	)	$	5,930
Restricted cash and cash equivalents		70			623			—					693
Short-term investments		—			—			—					—
Receivables, less uncollectible accounts and return allowances of $8,555		128,198			13,820			(8,265	)	(D	)		133,753
Income tax receivable		6,243			—			—					6,243
Inventories		109,929			4,115			379		(E	)		114,423
Other current assets		23,779			932			—					24,711
Deferred income taxes, net		11,932			—			1,733		(F	)		13,665
Total current assets		424,286			24,928			(149,796	)				299,418
Fixed assets, net		180,043			6,435			4,515		(G	)		190,993
Intangibles, net		129,575			—			100,200		(H	)		229,775
Goodwill		168,897			—			219,470		(I	)		388,367
Other long-term assets		8,999			812			—					9,811
Total assets	$	911,800		$	32,175		$	174,389				$	1,118,364
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	5,062		$	2,000		$	8,500		(J	)	$	15,562
Accounts payable		89,532			9,148			(8,265	)	(D	)		90,415
Accrued compensation costs		16,245			1,610			2,504		(K	)		20,359
Accrued expenses		32,568			1,321			1,147		(L	)		35,036
Other short-term liabilities		2,525			—			—					2,525
Total current liabilities		145,932			14,079			3,886					163,897
Long-term debt		67,642			1,501			157,499		(J	)		226,642
Deferred income taxes, net		53,376			33			30,361		(F	)		83,770
Other long-term liabilities		5,123			352			—					5,475
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.10 par value: Authorized—1,000,000 shares; No shares issued or outstanding		—			—			—					—
Common stock, $0.10 par value: Authorized—200,000,000 shares; Issued—43,846,000 shares		4,384			57			(57	)	(M	)		4,384
Additional paid-in capital		462,565			65,964			(65,964	)	(M	)		462,565
Retained earnings (Accumulated deficit)		174,358			(49,811	)		48,664		(M	)		173,211
Accumulated other comprehensive loss		(1,506	)		—			—					(1,506	)
ESOP unallocated shares, at cost—12,687 shares		(74	)		—			—					(74	)
Total stockholders' equity		639,727			16,210			(17,357	)				638,580
Total liabilities and stockholders' equity	$	911,800		$	32,175		$	174,389				$	1,118,364

3

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Pro Forma Condensed Combined Statement of Operations

(Dollars in thousands except per share data)

(Unaudited)

	Twenty-six weeks ended March 27, 2010
	GMCR Historical					(A) Timothy's Historical			(B) Diedrich Historical			Pro Forma Adjustments					Pro Forma
Net sales	$	674,278				$	13,004		$	50,535		$	(43,353	)	(N	)	$	694,464
Cost of sales		463,801					9,576			37,071			(43,460	)	(O	)		466,988
Gross profit		210,477					3,428			13,464			107					227,476
Selling and operating expenses		98,558					234			2,871			—					101,663
General and administrative expenses		47,636					1,260			6,953			(4,570	)	(P	)		51,279
Operating income		64,283					1,934			3,640			4,677					74,534
Other income (expense)		(244	)				—			113			—					(131	)
Interest expense		(1,881	)				(395	)		(260	)		(1,296	)	(R	)		(3,832	)
Merger related expenses		—					—			(4,137	)		4,137		(S	)		—
Income (loss) before income taxes		62,158					1,539			(644	)		7,518					70,571
Income tax benefit (expense)		(24,962	)				(477	)		(166	)		(2,985	)	(T	)		(28,590	)
Net income (loss)	$	37,196				$	1,062		$	(810	)	$	4,533				$	41,981
Basic income per share:
Weighted average shares outstanding		43,705,417		(U	)													43,705,417
Net income	$	0.85															$	0.96
Diluted income per share:
Weighted average shares outstanding		45,876,132		(U	)													45,876,132
Net income	$	0.81															$	0.92

4

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Pro Forma Condensed Combined Statement of Operations

(Dollars in thousands except per share data)

(Unaudited)

	Fifty-two weeks ended September 26, 2009
	GMCR Historical					(A) Timothy's Historical			(B) Diedrich Historical			Pro Forma Adjustments					Pro Forma
Net sales	$	803,045				$	59,819		$	71,032		$	(73,161	)	(N	)	$	860,735
Cost of sales		553,281					44,178			52,925			(73,546	)	(O	)		576,838
Gross profit		249,764					15,641			18,107			385					283,897
Selling and operating expenses		123,948					2,425			6,246			—					132,619
General and administrative expenses		47,103					5,462			9,140			15,941		(P	)		77,646
Patent Litigation (settlement) expense		(17,000	)				—			—			—					(17,000	)
Operating income (loss)		95,713					7,754			2,721			(15,556	)				90,632
Other income (expense)		(662	)				83			215			(634	)	(Q	)		(998	)
Interest expense		(4,693	)				(3,368	)		(1,295	)		602		(R	)		(8,754	)
Income (loss) before income taxes		90,358					4,469			1,641			(15,588	)				80,880
Income tax benefit (expense)		(34,476	)				(1,459	)		33			6,188		(T	)		(29,714	)
Net income (loss)	$	55,882				$	3,010		$	1,674		$	(9,400	)			$	51,166
Basic income per share:
Weighted average shares outstanding		37,993,196		(U	)													37,993,196
Net income	$	1.47															$	1.35
Diluted income per share:
Weighted average shares outstanding		40,123,533		(U	)													40,123,533
Net income	$	1.39															$	1.28

5

Green Mountain Coffee Roasters, Inc.

Notes to Pro Forma Condensed Combined Financial Information (Unaudited)

(A) “Timothy’s” represents the operations of Timothy’s World Coffee brand and wholesale business acquired on November 13, 2009. The Unaudited Pro Forma Condensed Combined Balance Sheet as of March 27, 2010 includes Timothy’s balances within GMCR’s consolidated historical results. The Unaudited Pro Forma Condensed Combined Statement of Operations for the twenty-six weeks ended March 27, 2010 includes six weeks of Timothy’s operations prior to the acquisition on November 13, 2009. Subsequent to the acquisition date, Timothy’s operations are included in GMCR’s historical consolidated statement of operations. The Unaudited Pro Forma Condensed Combined Statement of Operations for the fifty-two weeks ended September 26, 2009 includes Timothy’s operations for the fifty-two weeks ended July 26, 2009.

(B) “Diedrich” represents the balance sheet and operations of Diedrich Coffee, Inc. acquired on May 11, 2010. The Unaudited Pro Forma Condensed Combined Balance Sheet and Statement of Operations as of and for the twenty-six weeks ending March 27, 2010 were prepared using Diedrich’s historical balance sheet and statement of operations as of and for the twenty-four weeks ending March 3, 2010. The Unaudited Pro Forma Condensed Combined Statement of Operations for the fifty-two weeks ending September 26, 2009 was prepared using Diedrich historical statements of operations for the fifty-two weeks ending September 16, 2009.

(C) The total purchase price associated with the Diedrich acquisition was $313,143,000 of which approximately $143,643,000 was financed with cash on hand, $29,500,000 from the existing credit facility and $140,000,000 from the Amendment to the Credit Agreement in the form of a term loan.

(D) Represents the elimination of trade accounts receivable and accounts payable for the sale of coffee, brewers and related royalties between GMCR and Diedrich.

(E) Represents the estimated fair value adjustment to Diedrich’s acquired inventory. The Unaudited Pro Forma Condensed Combined Statements of Operations exclude any adjustment to cost of sales for the estimated fair value adjustment due to the non-recurring nature of the adjustment.

(F) Represents a current net tax asset of $1,733,000 and a long-term net tax liability of $30,361,000 calculated as of the date of the Diedrich acquisition. The current net tax asset is primarily related to accrued compensation expenses. The net long-term tax liability is related to the amortization on the intangible assets, which are deductible for book purposes but not for tax, offset by a long-term tax benefit for net operating loss carryforwards.

(G) Represents the estimated fair value adjustment to Diedrich’s acquired fixed assets for a decrease of approximately $1,994,000. In addition, this adjustment reflects the acquisition of certain leased equipment as required by the Agreement and Plan of Merger for approximately $6,509,000.

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(H) Reflects estimated fair value of identified intangible assets based upon an independent valuation and management’s estimates as of the date of acquisition, as follows:

	Amortization Period	Estimated Fair Value
Customer relationships	10 years	$	83,300,000
Product family names	10 years		16,900,000
Total		$	100,200,000

(I) Reflects residual of the acquisition price for Diedrich of $313,143,000 over the fair value of the assets acquired and liabilities assumed as of March 27, 2010 as follows:

Purchase Price	$	313,143,000
Less Fair Value of:
Tangible Assets Acquired		(38,802,000	)
Intangible Assets		(100,200,000	)
Plus Fair Value of:
Liabilities Assumed		45,329,000
Goodwill	$	219,470,000

The final allocation will be based on the fair value of assets acquired and liabilities assumed as of the acquisition date of May 11, 2010.

(J) Reflects the additional borrowing GMCR incurred to finance the acquisition. GMCR incurred $29,500,000 from its existing credit facility and $140,000,000 from the Amendment to the Credit Agreement in the form of a term loan. In addition, this adjustment reflects the elimination of Diedrich’s debt of $3,501,000 that was not assumed in the acquisition.

(K) Reflects the adjustment for acquisition-related liabilities accounted for as part of the business combination.

(L) Reflects accrual for expenses, net of income taxes, related to the Diedrich acquisition.

(M) Reflects the elimination of Diedrich’s stockholders’ equity accounted for in the allocation of the purchase price and the accrual for expenses related to the Diedrich acquisition as noted in (L) above.

(N) Represents the elimination of coffee and brewer sales amongst GMCR, Diedrich and Timothy’s, as well as the elimination of royalties earned by GMCR from Diedrich and Timothy’s, as follows:

	Twenty-six weeks ended March 27, 2010		Fifty-two weeks ended September 26, 2009
GMCR Sales	$	13,636,000	$	26,755,000
Diedrich Sales		24,942,000		28,741,000
Timothy’s Sales		4,775,000		17,665,000
Total Sales	$	43,353,000	$	73,161,000

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(O) Reflects the elimination of coffee and brewer cost of sales amongst GMCR, Diedrich and Timothy’s, as well as the elimination of royalties paid to GMCR from Diedrich and Timothy’s, as follows:

	Twenty-six weeks ended March 27, 2010		Fifty-two weeks ended September 26, 2009
GMCR COS	$	29,717,000	$	46,406,000
Diedrich COS		10,721,000		13,528,000
Timothy’s COS		2,915,000		13,227,000
Total COS	$	43,353,000	$	73,161,000

In addition, reflects an adjustment to reduce depreciation related to the valuation of fixed assets used in production of $107,000 for the twenty-six weeks ended March 27, 2010 and $385,000 for the fifty-two weeks ended September 26, 2009.

(P) Reflects the elimination of expenses related to the Diedrich and Timothy’s acquisitions incurred by all parties and the adjustment for depreciation and amortization expense related to valuation of fixed assets and intangibles as follows:

Twenty-six weeks ended March 27, 2010
	Diedrich			Timothy’s			Total
Acquisition related expenses	$	(7,971,000	)	$	(1,898,000	)	$	(9,869,000	)
Depreciation		(21,000	)		(4,000	)		(25,000	)
Amortization		5,010,000			314,000			5,324,000
Total	$	(2,982,000	)	$	(1,588,000	)	$	4,570,000

Fifty-two weeks ended September 26, 2009
	Diedrich			Timothy’s			Total
Acquisition related expenses	$	—		$	(426,000	)	$	(426,000	)
Depreciation		(56,000	)		(32,000	)		(88,000	)
Amortization		10,020,000			6,435,000			16,455,000
Total	$	9,964,000		$	5,977,000		$	15,941,000

(Q) Conforms Timothy’s presentation of coffee derivatives to GMCR’s accounting policy. GMCR determined these coffee derivatives to be consistent with accounting for ordinary purchase commitments.

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(R) Reflects the interest that would have been incurred on debt used to finance the acquisition using the rate in effect at the time of acquisition. The rate on the existing credit facility was 1.09% (one-month LIBOR plus 75 basis points) and the rate on the term loan was 2.84% (one-month LIBOR plus 250 basis points). In addition, this adjustment reflects the elimination of interest expense on Diedrich and Timothy’s long-term debt that was not assumed in the acquisitions.

	Twenty-six weeks ended March 27, 2010			Fifty-two weeks ended September 26, 2009
GMCR	$	(1,951,000	)	$	(4,061,000	)
Diedrich		260,000			1,295,000
Timothy’s		395,000			3,368,000
Total	$	(1,296,000	)	$	602,000

Debt incurred to finance the acquisition that was subject to variable interest rates was $159,000,000 for the twenty-six weeks ended March 27, 2010 and $169,500,000 for the fifty-two weeks ended September 26, 2009. Had interest rates increased by 125 basis points, the effect on net income would have been additional interest expense of $994,000 during the twenty-six weeks ended March 27, 2010 and $2,119,000 during the fifty-two weeks ended September 26, 2009.

(S) Reflects elimination of acquisition related expenses incurred by Diedrich.

(T) Reflects the benefit from (provision for) income taxes associated with the pro forma adjustments computed based upon an estimated combined federal and state statutory rate of 39.7%.

(U) Unrelated to the acquisitions, on April 28, 2010, the Company announced a three-for-one stock split in the form of a stock dividend of two additional shares of the Company’s common stock for every one issued share. The stock dividend was distributed on May 17, 2010 to holders of record as of May 10, 2010.

The following reflects historical and pro forma earnings per share on a post-split basis:

	Twenty-six weeks ended March 27, 2010				Fifty-two weeks ended September 26, 2009
	GMCR Historical		Pro Forma		GMCR Historical		Pro Forma
Net income (in thousands)	$	37,196	$	41,981	$	55,882	$	51,166
Basic income per share:
Weighted average shares outstanding		131,116,251		131,116,251		113,979,588		113,979,558
Net income	$	0.28	$	0.32	$	0.49	$	0.45
Diluted income per share:
Weighted average shares outstanding		137,628,396		137,628,396		120,370,599		120,370,599
Net income	$	0.27	$	0.31	$	0.46	$	0.43

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