The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

          Inventories consisted of the following:

3. Earnings Per Share

The following table illustrates the reconciliation of the numerator and denominator of basic and diluted earnings per share computations as required by SFAS No. 128 (dollars in thousands, except per share data):

For the twelve weeks ended April 12, 2003 and April 13, 2002 options to purchase 287,810 and 92,000 respectively, were outstanding but were not included in the computation of diluted income per share because the options' exercise price was greater than the market price of the common shares.

The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees". Accordingly, except for a grant to outside consultants in the first fiscal quarter of 2003, no compensation expense has been recognized for its stock option awards and its stock purchase plan because the exercise price of the Company's stock options equals or exceeds the market price of the underlying stock on the date of the grant. The Company has adopted the disclosure-only provision of Statement of Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"). Had compensation cost for the Company's stock option awards and the stock purchase plan been determined based on the fair value at the grant dates for the awards under those plans, consistent with the provisions of SFAS 123, the Company's net income and net income per share for the twelve and twenty-eight weeks ended April 12, 2003, and Apri l 13, 2002 would have decreased to the pro forma amounts indicated below:

The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions: an expected life averaging 5 years and 3 years; an average volatility of 61% and 56%; no dividend yield; and a risk-free interest rate averaging 2.97% and 3.13%, for the grants issued during the twenty-eight weeks ended April 12, 2003 and April 13, 2002, respectively. The weighted-average fair values of options granted during the twenty-eight weeks ended April 12, 2003 and April 13, 2002 are $8.20 and $9.82, respectively.

The fair value of the employees' purchase rights under the Company's Employee Stock Purchase Plan was estimated using the Black-Scholes model with the following assumptions for the twenty eight weeks ended April 12, 2003 and April 13, 2002: an expected life of six months; expected volatility of 63% and 56% respectively; and an average risk-free interest rate of 1.00%, and 1.96%, respectively. The weighted average fair value of those purchase rights granted were $9.16 and $7.30 for the twenty-eight weeks ended April 12, 2003 and April 13, 2002, respectively

The Company maintains an Employee Stock Ownership Plan (the "ESOP"). The ESOP is qualified under sections 401(a) and 4975(e)(7) of the Internal Revenue Code. For the twenty-eight weeks ended April 12, 2003 and April 13, 2002, the Company recorded compensation costs of $114,000 and $113,000, respectively, to accrue for anticipated stock distributions under the ESOP. On April 12, 2003, the ESOP held 41,121 unearned shares at an average cost of $27.10.

8. Income Taxes

The Company benefits from a manufacturer's investment tax credit from the State of Vermont expiring in 2004. At April 12, 2003, the deferred tax asset of $332,000 is reported net of a valuation allowance amounting to $1,556,000. During the twenty-eight weeks ended April 12, 2003 and April 13, 2002, the Company reduced the valuation allowance on the deferred tax asset arising from its Vermont tax credit by $46,000 and $30,000, respectively, based primarily upon estimates of future taxable income; the percentage of income that is allocable to the State of Vermont and; the number of disqualifying dispositions of stock options.

9. Related party transactions

The Company uses travel services provided by Heritage Flight, a company which provides charter air services. On September 25, 2002, Mr. Stiller, the CEO of Green Mountain Coffee Roasters, Inc, purchased 100% of the ownership of Heritage Flight, now known as ElanAir, Inc., dba Heritage Flight. During the twelve and twenty-eight weeks ended April 12, 2003, Heritage Flight billed the Company the amount of $191,000 and $258,000, respectively, for various travel services. During the twelve and twenty-eight weeks ended April 13, 2002, Heritage Flight billed the Company the amount of $31,000 and $121,000, respectively, for various travel services.

The Company recorded in cost of sales royalties in the amount of $1,244,000 and $1,203,000 for the fiscal quarters ended April 12, 2003 and April 13, 2002, respectively, to a related party.

During the twelve weeks ended April 12, 2003, the Company paid certain expenses amounting to $152,000 on behalf of the Green Mountain Coffee Roasters Foundation which will be reimbursed to the Company during the Company's third fiscal quarter. Green Mountain Coffee Roasters Foundation, a Delaware corporation, was formed in 1993. It is a non-profit tax-exempt organization under Section 501 (c)(3) of the Internal Revenue Code. It engages in charitable activities as determined by its Board of Directors, which consists of Paul Comey, Robert P. Stiller and John Winter. Messrs. Comey and Stiller are executive officers of Green Mountain Coffee Roasters, Inc. Mr. Winter is also an employee of the Company.

Overview

Green Mountain Coffee Roasters, Inc. ( "Green Mountain") sells coffee to retailers including supermarkets, convenience stores, specialty food stores; food service enterprises including restaurants, hotels, universities and business offices; and directly to individual consumers.

Cost of sales consists of the cost of raw materials including coffee beans, flavorings and packaging materials, a portion of our rental expense, the salaries and related expenses of production and distribution personnel, depreciation on production equipment and freight and delivery expenses. Selling and operating expenses consist of expenses that directly support the sales for Green Mountain's wholesale or consumer direct channels, including media and advertising expenses, a portion of our rental expense, and the salaries and related expenses of employees directly supporting sales. General and administrative expenses consist of expenses incurred for corporate support and administration, including a portion of our rental expense and the salaries and related expenses of personnel not elsewhere categorized.

Green Mountain's fiscal year ends on the last Saturday in September. Our fiscal year normally consists of 13 four-week periods with the first, second and third "quarters" ending 16 weeks, 28 weeks and 40 weeks, respectively, after the commencement of the fiscal year.

On January 1, 2003, Green Mountain Coffee Roasters, Inc., a Vermont company, merged into its parent company, Green Mountain Coffee, Inc., a Delaware company. At the same time, the parent company changed its name to Green Mountain Coffee Roasters, Inc., which is the name under which Green Mountain has always operated. The parent company owned 100% of the issued and outstanding capital stock of the merged subsidiary and the purpose of this merger was primarily to simplify tax reporting.

 

Coffee Prices and Availability, and General Risk Factors

Green coffee commodity prices are subject to substantial price fluctuations, generally caused by multiple factors including weather, political and economic conditions in certain coffee-producing countries and other supply-related concerns. In recent years, green coffee prices have been under considerable downward pressures due to oversupply, and this situation is likely to persist. We believe that the "C" price of coffee (the price per pound quoted by the Coffee, Sugar and Cocoa Exchange) will remain highly volatile in future fiscal years. In addition to the "C" price, coffee of the quality sought by Green Mountain tends to trade on a negotiated basis at a substantial premium or "differential" above the "C" price. These differentials also are subject to significant variations. In recent years, while the "C" price has been at or near historic lows, differentials have generally been on the rise.

In the past, we generally have been able to pass increases in green coffee costs to our customers. However, there can be no assurance that we will be successful in passing such fluctuations on to the customers without losses in sales volume or gross margin in the future. Similarly, rapid sharp decreases in the cost of green coffee could also force us to lower sales prices before realizing cost reductions in our green coffee inventory. Because Green Mountain roasts over 30 different types of green coffee beans to produce its more than 100 coffee selections, if one type of green coffee bean were to become unavailable or prohibitively expensive, management believes Green Mountain could substitute another type of coffee of equal or better quality, meeting a similar taste profile. However, frequent substitutions could lead to cost increases and fluctuations in gross margins. Furthermore, a worldwide supply shortage of the high-quality arabica coffees the Company purchases could have an adverse impact on Gre en Mountain and its profitability.

We enter into fixed coffee purchase commitments in an attempt to secure an adequate supply of quality coffees. To further reduce our exposure to rising coffee costs, we enter into futures contracts to hedge price-to-be-established coffee purchase commitments.

We expect to face increasing competition in all our markets, as competitors improve the quality of their coffees to make them more comparable to Green Mountain's. In addition, specialty coffee is now more widely available, and a number of competitors benefit from substantially larger promotional budgets following, among other factors, the acquisition of specialty coffee companies by large, consumer goods multinationals. We expect that the continued high quality and wide availability of our coffee across a large array of distribution channels, combined with the added-value of our customer service processes will enable us to successfully compete in this environment, although there can be no assurance that we will be able to do so.

Certain statements contained herein are not based on historical fact and are "forward-looking statements" within the meaning of the applicable securities laws and regulations. In addition, the Company's representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statements that do not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "will," "feels," "estimates," "intends," "plans," "projects," and similar expressions, may identify such forward-looking statements. Owing to the uncertainties inherent in forward-looking statements, actual results could differ materially from those set forth in forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, fluctuations in availability and cost of high-quality green co ffee, competition, organizational changes, the impact of a weaker economy, business conditions in the coffee industry and food industry in general, the impact of the loss of one or more major customers, delays in the timing of adding new locations with existing customers, Green Mountain's level of success in continuing to attract new customers, variances from budgeted sales mix and growth rate, and weather and special or unusual events, as well as other risks described in this report and other factors described from time to time in the Company's filings with the Securities and Exchange Commission. In addition, the Company has an equity investment in Keurig, Incorporated, a small private company. Keurig, Incorporated can have significant quarterly operating income fluctuations and its results can differ materially from expectations set forth in forward-looking statements. Keurig is currently operating at a loss. Further, there is a high degree of uncertainty around investment spending for the launch of the K eurig Single-Cup Brewer for the home and results could materially vary depending on Keurig, Incorporated's success in entering the home brewer market. Forward-looking statements reflect management's analysis as of the date of this document. The Company does not undertake to revise these statements to reflect subsequent developments

Note: Certain prior year customer channel classifications were reclassified to conform to current year classifications.

Note : The allocation by region of coffee pounds shipped to certain McLane Company, Inc. warehouses for distribution to ExxonMobil convenience stores has been estimated.

Gross profit increased by $1,374,000, or 13.8%, to $11,313,000 for the 2003 period. As a percentage of net sales, gross profit decreased 0.2 percentage points to 43.0% for the 2003 period. The decrease was primarily attributable to a change in sales mix and increased distribution costs, following a rate increase charged by third-party shipping companies as well as increased pounds shipped via those carriers to West Coast customers.

Selling and operating expenses increased by $743,000, or 12.8%, to $6,563,000 for the 2003 period. This increase was primarily due to market tests of the Keurig® Single-Cup Brewer for the home as well as seasonal billable equipment service expenses. General and administrative expenses increased by $269,000, or 14.7%, to $2,105,000 for the 2003 period. As a percentage of sales, operating expenses decreased 0.4 percentage points to 32.9% for the 2003 period. Severance costs related to the departure of the prior chief financial officer accounted for $217,000 of this dollar increase.

As a result of the foregoing, operating income increased by $362,000, or 15.8%, to $2,645,000 for the 2003 period.

Interest expense increased by $108,000 to $126,000 for the 2003 period. This increase is due to higher debt balances associated with the Keurig investment in fiscal 2002. In the 2003 period and the 2002 period, we capitalized $30,000 and $49,000, respectively, of interest expense associated with investments in production equipment currently classified as construction in progress (primarily the installation of the bowl roasters and related conveyance and storage equipment).

Income tax expense increased $112,000, or 11.9%, to $1,055,000 for the 2003 period. The effective tax rate for the 2003 period was 41.5%.

We adopted the equity method of accounting for our investment in Keurig, Incorporated ("Keurig") in the third fiscal quarter of 2002 as our Common Stock ownership percentage grew from under 10% to 49.93% in the course of that period. Our percentage ownership of the total common stock equivalent shares of Keurig was 41.8% at April 12, 2003. Keurig is effectively controlled by MD Co. (controlled by MDT Advisors, a division of Harris Bretall Sullivan and Smith, an institutional investment company), which owns approximately 23% of Keurig's capital stock, as a result of contractual limitations and restrictions agreed to by Green Mountain.

The equity in the net earnings of Keurig in the 2003 period was a loss of $289,000 or $0.04 per diluted share. This Keurig loss is primarily due to the ramp-up of sales and marketing expenditures related to the Keurig Single-Cup Brewer for the home.

Net income decreased by $128,000, or 9.7%, to $1,198,000 in the 2003 period. Earnings per diluted share were $0.17 in the 2003 period as compared to $0.18 in the 2002 period.

Net sales increased by $7,508,000, or 13.6%, to $62,878,000 for the twenty-eight weeks ended April 12, 2003 (the "2003 YTD period"), as compared to the twenty-eight weeks ended April 13, 2002 (the "2002 YTD period"). Coffee pounds shipped increased by approximately 948,000 pounds, or 12.8%, to approximately 8,369,000 pounds in the 2003 YTD period. The pounds increase was strongest in the supermarket channel (+19.5%) due to the addition of new customers. The convenience store channel grew 14.6% largely due to the strong seasonal sales to McLane Company, Inc. ("McLane") in the first quarter of 2003. As explained above, the Office Coffee Service ("OCS") regained momentum and grew 12.0%.

Interest expense increased by $226,000 to $321,000 for the 2003 YTD period. This increase is due to higher debt balances associated with the Keurig investment which took place in fiscal 2002. In the 2003 YTD and the 2002 YTD periods, we capitalized $67,000 and $49,000 of interest expense, respectively.

Income tax expense increased $285,000, or 11.5%, to $2,756,000 for the 2003 YTD period. The effective tax rate in 2003 was 41.5%, up from 40.9% in 2002. We reduced our valuation allowance on our Vermont Manufacturer's tax credit by $45,000 and $30,000 during the 2003 and the 2002 YTD period, respectively. The ultimate amount of this credit that we will be able to use is dependent on many factors, including: the amount of taxable income being generated, the percentage of income that is allocable to the State of Vermont and, the number of disqualifying dispositions of stock options.

The equity in the net earnings of Keurig in the 2003 YTD period was a loss of $373,000 or $0.05 per diluted share. The Keurig loss is primarily due to the ramp-up of sales and marketing expenditures related to the Keurig Single-Cup Brewer for the home.

Liquidity and Capital Resources

Working capital increased $1,279,000 to $7,184,000 at April 12, 2003 from $5,905,000 at September 28, 2002. This increase is primarily due to increased accounts receivable and inventories. Accounts receivable were high due to the sales volume increase in the last weeks of the 2003 period. Green coffee inventory was unusually high at April 12, 2003 (+$683,000 over the 2002 year-end level), as Green Mountain decided to build up green coffee inventory before the outset of the war in Iraq.

Net cash provided by operating activities decreased by $2,128,000, or 30.3%, to $4,899,000 in the 2003 YTD period. Cash flows from operations were used to fund capital expenditures in both periods.

In the 2002 YTD period, the Company purchased 586,350 preferred shares and 317,969 common shares of Keurig, Incorporated ("Keurig") for approximately $5,921,000. During the 2002 YTD period, besides the investment in Keurig, Green Mountain had capital expenditures of $5,194,000, including $3,268,000 for production and distribution equipment, $510,000 for leasehold improvements, $739,000 for equipment on loan to wholesale customers, $405,000 for computer equipment and software, and $272,000 in fixtures.

In the 2003 YTD period, cash flow from financing activities included $895,000 generated from the exercise of employee stock options, up from $519,000 in the 2002 YTD period. In addition, cash flow from operating activities included a $392,000 tax benefit from the exercise of non-qualified options and disqualifying dispositions of incentive stock options, up from $302,000 in the 2002 YTD period. As options granted under the Company's stock option plans are exercised, the Company will continue to receive proceeds and a tax deduction for disqualifying dispositions; however, neither the amounts nor the timing thereof can be predicted.

In the first fiscal quarter of 2003, Green Mountain repurchased 19,281 of its own common shares at a cost of $286,000.

On August 30, 2002, Green Mountain entered into a new syndicated credit facility with Fleet Bank and BankNorth N.A. This facility includes an equipment line of credit of up $5,000,000 and a revolving line of credit of up to $12,500,000, which is subject to a borrowing base formula, and matures in 2005. On April 12, 2003, $2,140,000 was outstanding under the revolving line of credit, and, based on the borrowing base formula, the remaining amount available was $14,071,000 (including the $5,000,000 specific equipment line). The credit facility is subject to quarterly covenants and Green Mountain was in compliance with these covenants at April 12, 2003. Also part of this credit facility is a $15,000,000 term loan that is being paid back in quarterly installments of $750,000 and expires in 2007. The outstanding balance on the term loan at April 12, 2003 was $12,750,000.

The interest paid on the credit facility varies with prime, LIBOR and Banker's Acceptance rates, plus a margin based on a performance price structure. We have also entered into a $5 million amortizing interest rate swap agreement effective January 1, 2003, in order to fix the interest rate on a portion of the term loan. The effect of the swap is to limit the interest rate exposure to a fixed rate of 3.495% versus the 30-day LIBOR rate.

We believe that cash flow from operating activities, existing cash, the currently available credit facility and additional borrowings will provide sufficient liquidity to pay all liabilities in the normal course of business, fund capital expenditures and service debt requirements through fiscal 2003.

A summary of the Company's cash requirements related to its outstanding long-term debt, future minimum lease payments and green coffee purchase commitments is as follows:

In the third quarter of 2003 and for the full 2003 year, we expect to achieve operating income of  9 to 11 percent of sales.

We anticipate our tax rate to remain at 41.5% for the remainder of the fiscal year.

We currently expect the negative impact of Keurig earnings to range from $0.03 to $0.05 per diluted share for the third fiscal quarter and from $0.12 to $0.16 per diluted shares for fiscal 2003 as a whole. Results from Keurig could be materially different from this estimate. Keurig is a small private company which can have significant quarterly operating income fluctuations. Further, there will be a high degree of uncertainty around investment spending given Keurig's strategic launch of the Keurig Single-Cup Brewer for the home.

Diluted earnings per share is expected to be in the range of $0.18 to $0.22 for the third quarter of fiscal 2003 and $0.84 to $0.88 for the full fiscal year.

We currently anticipate making total capital expenditures in the range of $7.0 to $7.5 million in fiscal 2003. We continuously review capital expenditure needs and actual amounts expended may differ from these estimates.

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period (see Note 2 to the Company's Consolidated Financial Statements included in the Annual Report on Form 10-K). Actual results could differ from those estimates.

In December 2001, the Securities and Exchange Commission ("SEC") requested that all registrants list their critical accounting policies in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of their Form 10-K. The SEC defined a critical accounting policy as one which is important to the portrayal of the company's financial condition and results of operations and requires management's subjective or complex judgments. In accordance with this request, we have described our critical accounting policies below.

Provision for Doubtful Accounts:
Periodically, we review the adequacy of our provision for doubtful accounts based on historical bad debt expense results and current economic conditions using factors based on the aging of our accounts receivable. In addition, from time-to-time we estimate specific additional allowances based on indications that a specific customer may be experiencing financial difficulties. Actual bad debt results could differ materially from our estimates.

Deferred Tax Valuation Allowance:
Periodically, we review the adequacy of its deferred tax valuation allowance that is primarily related to a Vermont manufacturer's investment tax credit. This review entails estimating: Green Mountain's future taxable income through fiscal 2004; how much of that taxable income will be allocable to Vermont; and, the levels of disqualifying dispositions of stock options, among other factors. A reduction in the valuation allowance can result in a decrease in our income tax expense. Conversely, an increase in the valuation allowance can lead us to report our income tax at a higher rate. Since future results may differ materially from those estimates, our estimate of the amount of deferred tax assets that will be ultimately realized could differ materially.

Impairment of Long-Lived Assets:
When facts and circumstances indicate that the carrying values of long-lived assets, including fixed assets, investments in other companies and intangibles, may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the assets to projected future cash flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying value of such assets may not be recoverable, we recognize an impairment loss as a charge against current operations. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value, less estimated costs to sell. Judgments we make related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, these factors could cause us to realize a material impairment charge.

Historically, the Company has experienced variations in sales and earnings from quarter to quarter due to the holiday season and a variety of other factors, including, but not limited to, general economic trends, the cost of green coffee, competition, marketing programs, weather and special or unusual events. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

The table below provides information about Green Mountain's debt obligations that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates.

There have been no material changes in information relating to commodity price risks since the Company's disclosure included in Item 7A of Form 10-K as filed with the Securities and Exchange Commission on December 24, 2002.

At April 12, 2003, the Company had $9,890,000 of debt subject to variable interest rates (the lower of Fleet Bank's prime rate, LIBOR rates for maturities up to one year or Bankers' Acceptance rates). A hypothetical 100 basis point increase in the Bankers' Acceptance, LIBOR and prime rates would result in additional interest expense of $99,000 on an annualized basis.

The Company entered into an interest swap agreement with Fleet Bank ("Fleet") effective January 1, 2003, in order to fix the interest rate on a portion of its term loan. The swap has a notional amount of $5,000,000 and matures on July 1, 2007. The effect of the swap is to convert underlying variable-rate debt based on LIBOR to fixed rate debt with an interest rate of 3.495% plus a margin based on a performance price structure. For the twelve and twenty-eight week periods ended April 12, 2003, the Company paid $25,000 and $30,000, respectively, in additional interest expense pursuant to the swap agreement.

Within 90 days of the filing of this report, the Company's Chief Executive Officer, Interim Chief Financial Officer and Controller have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based on that evaluation, our Chief Executive Officer, Interim Chief Financial Officer and Controller concluded that our disclosure controls and procedures are effective to make known to them in a timely fashion material information related to the Company required to be filed in this report. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.

While we believe the present design of our disclosure controls and procedures is effective to make known to our senior management in a timely fashion all material information concerning our business, we will continue to improve the design and effectiveness of our disclosure controls and procedures to the extent necessary in the future to provide our senior management with timely access to such material information, and to correct any deficiencies that we may discover in the future.

(a) The Registrant held its 2003 Annual Meeting of Stockholders on March 20, 2003 at the Company's offices located at 81 Demeritt Place in Waterbury, Vermont. The Board of Directors of the Registrant solicited proxies for this meeting pursuant to a proxy statement filed under regulation 14A.

(b-c) At the Annual Meeting the stockholders voted as follows on the following matter:

VOTES

For                    Against              Abstain             

6,423,151          119,558 22,348       

(a) Exhibits:

(b) A report on Form 8-K was filed on April 3, 2003 to announce the appointment of Frances G. Rathke as Interim Chief Financial Officer.