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.

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 purchase an increasing amount of green coffee from specifically identified farms, estates, cooperatives and cooperative groups. So far in fiscal 2003, close to 39% of green coffee purchases were "farm-identified," up from 34% in fiscal 2002. The timing of these purchases is dictated by when the coffee becomes available (after the annual crop), which does not always coincide with the period the Company needs this green coffee to fulfill customer demand. This can lead to higher and more variable inventory levels.

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.

Gross profit increased by $1,636,000, or 16.7%, to $11,404,000 for the 2003 period. As a percentage of net sales, gross profit increased 0.8 percentage points to 43.3% for the 2003 period. Slightly higher green coffee costs were more than offset by favorable changes in sales mix.

Selling and operating expenses increased by $983,000, or 18.1%, to $6,421,000 for the 2003 period. This increase was primarily due to market tests of the Keurig® Single-Cup Brewer for the home as well as higher variable compensation costs of the sales force as compared to the same period last year. General and administrative expenses increased by $176,000, or 9.5%, to $2,028,000 for the 2003 period.

As a result of the foregoing, operating income increased by $477,000, or 19.2%, to $2,955,000 for the 2003 period. As a percentage of sales, operating income improved 0.4% to 11.2%.

Interest expense increased by $33,000 to $125,000 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 $35,000 and $44,000, respectively, of interest expense associated with investments in production equipment currently classified as construction in progress.

Income tax expense increased $312,000, or 35.6%, to $1,189,000 for the 2003 period. The effective tax rate for the 2003 period was 41.5%. The tax rate in the 2002 period was only 37.5% because of a large reduction in the valuation allowance related to the Vermont manufacturer's tax credit.

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 July 5, 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 $317,000 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. In the 2002 period, the equity in Keurig's net earnings was a loss of $21,000.

Despite an improvement in gross margin and expenses growing at a lower rate than sales, net income decreased by $83,000, or 5.8%, to $1,358,000 in the 2003 period due to the effect of Keurig's loss and a higher tax rate. Earnings per diluted share were $0.19 in the 2003 period as compared to $0.20 in the 2002 period.

Net sales increased by $10,863,000, or 13.9%, to $89,222,000 for the forty weeks ended July 5, 2003 (the "2003 YTD period"), as compared to forty weeks ended July 6, 2002 (the "2002 YTD period"). Coffee pounds shipped increased by approximately 1,321,000 pounds, or 12.5%, to approximately 11,847,000 pounds in the 2003 YTD period. The pounds increase was strongest in the supermarket channel (+21.9%) due to the addition of new customers. The convenience store channel grew 10.8% 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 11.8%.

Interest expense increased by $259,000 to $446,000 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 $102,000 and $93,000 of interest expense, respectively.

Income tax expense increased $597,000, or 17.8%, to $3,945,000 for the 2003 YTD period. The effective tax rate in 2003 was 41.5%, up from 39.9% in 2002. We reduced our valuation allowance on our Vermont Manufacturer's tax credit by $116,000 and $155,000 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 $690,000 or $0.10 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 $1,883,000 to $7,788,000 at July 5, 2003 from $5,905,000 at September 28, 2002. This increase is primarily due to increased accounts receivable and inventories. Accounts receivable were higher compared to fiscal 2002 year-end due to the sales volume increase in the last weeks of the 2003 period and because of an increase in terms given to certain customers. Green coffee inventory has increased over the course of 2003 (+$648,000 at July 5, 2003 over the 2002 year-end level), because Green Mountain is buying more farm-identified green coffee as it becomes available (after the annual crop), which does not necessarily coincide with the period the Company needs this green coffee to fulfill customer demand. Inventories are likely to increase further as we approach the holiday season and prepare to launch the new Keurig brewer for the home.

Net cash provided by operating activities decreased by $1,226,000, or 13.4%, to $7,923,000 in the 2003 YTD period. Cash flows from operations were used to fund capital expenditures in both periods.

During the 2003 YTD period, Green Mountain had capital expenditures of $5,057,000, including $2,526,000 for production equipment, $1,271,000 for loaner equipment, $926,000 for computer equipment and software, $124,000 for vehicles and $210,000 for leasehold improvements and fixtures.

At July 5, 2003, the balance of fixed assets classified as construction in progress (primarily the installation of the bowl roasters and related conveyance and storage equipment) and therefore not being depreciated in the current period amounted to $5,046,000. The majority of the assets covered in this amount will be ready for production use by the end of fiscal 2003.

In the 2002 YTD period, the Company purchased 628,450 shares of Preferred Stock and 1,642,854 shares of Common Stock of Keurig, Incorporated ("Keurig") from third parties for approximately $14,604,000. During the 2002 YTD period, besides the investment in Keurig, Green Mountain had capital expenditures of $6,780,000, including $4,341,000 for production and distribution equipment, $998,000 for equipment on loan to wholesale customers, $608,000 for computer equipment and software, $475,000 for leasehold improvements, and $358,000 in fixtures.

In the 2003 YTD period, cash flow from financing activities included $949,000 generated from the exercise of employee stock options, up from $603,000 in the 2002 YTD period. In addition, cash flow from operating activities included a $477,000 tax benefit from the exercise of non-qualified options and disqualifying dispositions of incentive stock options, up from $457,000 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 July 5, 2003, $1,640,000 was outstanding under the revolving line of credit, and, based on the borrowing base formula, the remaining amount available was $14,008,000 (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 July 5, 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 July 5, 2003 was $12,000,000.

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 and the currently available credit facility will provide sufficient liquidity to pay all liabilities in the normal course of business, fund capital expenditures and service debt requirements through calendar 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:

For the fourth quarter of fiscal 2003, we anticipate growth in dollar sales to be in the range of 14% to 19%. We expect that gross margin will be in the range of 42 to 43 percent. Selling, general and administrative expenses will most likely increase to 32 to 33 percent of sales as we continue to test and start rolling-out our single cup program for the home market. We anticipate our tax rate to remain at 41.5%.

Our equity in the net earnings of Keurig in the fourth quarter should range from a loss of $0.04 to $0.06 per Green Mountain share. Therefore, the fully diluted earnings per share range for the fourth quarter is expected to be $0.15 to $0.18 per share. 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.

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. In fiscal 2004, depreciation expense is expected to increase up to $1 million over fiscal 2003 levels.

In fiscal 2004, sales and earnings before our equity in the net earnings of Keurig are expected to grow in the range of 10 to 15 percent.

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.

Hedge accounting:
We use coffee futures to hedge price increases in price-to-be-fixed coffee purchase commitments and anticipated coffee purchases. These derivative instruments qualify for hedge accounting under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Hedge accounting is permitted if the hedging relationship is expected to be highly effective. Effectiveness is determined by how closely the changes in the fair value of the derivative instrument offset the changes in the fair value of the hedged item. If the derivative is determined to qualify for hedge accounting, the effective portion of the change in the fair value of the derivative instrument is recorded in other comprehensive income and recognized in earnings when the related hedged item is sold. The ineffective portion of the change in the fair value of the derivative instrument is recorded directly to earnings. If these derivative instruments do not qualify for hedge accounting, we would have to record the changes in the fair value of the derivative instruments directly to earnings. See "Item 3. Quantitative and Qualitative Disclosures about Market Risk" and Note 4 in the "Notes to Condensed Consolidated Financial Statements," included elsewhere in this report.

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.

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 July 5, 2003, the Company had $8,640,000 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 $86,000 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 forty week periods ended July 5, 2003, the Company paid $26,000 and $56,000, 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 and Interim Chief Financial Officer 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 and our Interim Chief Financial Officer 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.