UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

Commission file number 0-32233

PEET’S COFFEE & TEA, INC.

(Exact Name of Registrant as Specified in Its Charter)

Washington	91-0863396
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1400 Park Avenue

Emeryville, California 94608-3520

(Address of Principal Executive Offices)(Zip Code)

(510) 594-2100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, no par value

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).

Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x

As of November 4, 2007, 13,881,652 shares of registrant’s Common Stock were outstanding.

	INDEX
		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	14
Item 4.	Controls and Procedures	15
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 6.	Exhibits	16
	Signatures	16

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PEET’S COFFEE & TEA, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share amounts)

	September 30,		December 31,
	2007		2006
ASSETS
Current assets
Cash and cash equivalents	$	2,061	$	7,692
Short-term marketable securities		10,809		19,511
Accounts receivable, net		7,488		6,838
Inventories		28,356		19,533
Deferred income taxes - current		2,078		1,888
Prepaid expenses and other		7,849		3,852
Total current assets		58,641		59,314
Long-term marketable securities		10,127		5,989
Property and equipment, net		97,792		82,447
Deferred income taxes - non current		1,311		1,315
Other assets, net		3,827		3,940
Total assets	$	171,698	$	153,005
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and other accrued liabilities	$	14,174	$	11,046
Accrued compensation and benefits		7,206		6,389
Deferred revenue		3,697		4,625
Total current liabilities		25,077		22,060
Deferred lease credits and other long-term liabilities		4,900		3,506
Total liabilities		29,977		25,566
Shareholders' equity
Common stock, no par value; authorized 50,000,000 shares; issued and outstanding:13,870,000 and 13,516,000 shares		102,413		93,246
Accumulated other comprehensive income (loss), net of tax		46		(15	)
Retained earnings		39,262		34,208
Total shareholders' equity		141,721		127,439
Total liabilities and shareholders' equity	$	171,698	$	153,005

See notes to consolidated financial statements.

3

PEET’S COFFEE & TEA, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)

	Thirteen weeks ended				Thirty-nine weeks ended
	September 30, 2007		October 1, 2006		September 30, 2007		October 1, 2006
Retail stores	$	41,450	$	34,350	$	121,436	$	101,331
Specialty sales		19,410		16,523		57,040		48,938
Net revenue		60,860		50,873		178,476		150,269
Cost of sales and related occupancy expenses		29,142		24,081		84,706		69,988
Operating expenses		21,593		18,142		62,772		52,829
General and administrative expenses		4,928		4,594		16,228		14,006
Depreciation and amortization expenses		2,619		2,215		7,935		6,292
Total costs and expenses from operations		58,282		49,032		171,641		143,115
Income from operations		2,578		1,841		6,835		7,154
Interest income		284		589		1,172		1,968
Income before income taxes		2,862		2,430		8,007		9,122
Income tax provision		1,026		951		2,953		3,483
Net income	$	1,836	$	1,479	$	5,054	$	5,639
Net income per share:
Basic	$	0.13	$	0.11	$	0.37	$	0.41
Diluted	$	0.13	$	0.10	$	0.36	$	0.39
Shares used in calculation of net income per share:
Basic		13,816		13,670		13,664		13,801
Diluted		14,168		14,316		14,057		14,484

See notes to consolidated financial statements.

4

PEET’S COFFEE & TEA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Thirty-nine weeks ended
	September 30, 2007			October 1, 2006
Cash flows from operating activities:
Net income	$	5,054		$	5,639
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,376			7,542
Amortization of interest purchased		177			334
Stock-based compensation		2,116			3,357
Excess tax benefit from exercise of stock options		(1,279	)		(709	)
Tax benefit from exercise of stock options		1,166			756
Loss on disposition of assets and asset impairment		122			273
Deferred income taxes		(186	)		(46	)
Changes in other assets and liabilities:
Accounts receivable, net		(650	)		(884	)
Inventories		(8,823	)		(7,038	)
Prepaid expenses and other current assets		(3,997	)		(3,036	)
Other assets		34			(312	)
Accounts payable, accrued liabilities and deferred revenue		4,027			2,622
Deferred lease credits and other long-term liabilities		1,394			534
Net cash provided by operating activities		8,531			9,032
Cash flows from investing activities:
Purchases of property and equipment		(25,804	)		(17,574	)
Proceeds from sales of property and equipment		22			28
Changes in restricted investments		-			(1,969	)
Proceeds from sales and maturities of marketable securities		26,144			36,553
Purchases of marketable securities		(21,688	)		(26,356	)
Net cash used in investing activities		(21,326	)		(9,318	)
Cash flows from financing activities:
Net proceeds from issuance of common stock		5,885			3,345
Purchase of common stock		-			(15,934	)
Excess tax benefit from exercise of stock options		1,279			709
Net cash provided by (used in) financing activities		7,164			(11,880	)
Decrease in cash and cash equivalents		(5,631	)		(12,166) ##
Cash and cash equivalents, beginning of period		7,692			20,623
Cash and cash equivalents, end of period	$	2,061		$	8,457

See notes to consolidated financial statements.

5

Peet’s Coffee & Tea, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1. Basis of Presentation

The accompanying consolidated financial statements of Peet’s Coffee & Tea, Inc. and its subsidiaries (collectively, the “Company” or “Peet’s”) as of September 30, 2007 and for the thirteen and thirty-nine weeks ended September 30, 2007 and October 1, 2006 are unaudited and, in the opinion of management, contain all adjustments, consisting only of normal recurring items, except as discussed below, necessary to present fairly the financial position and results of operations for such periods. The information included in this Quarterly Report on Form 10-Q (this “Form 10-Q”) should be read in conjunction with the Company’s annual consolidated financial statements in Peet’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006 Form 10-K”).

The results of operations for the thirteen and thirty-nine weeks ended September 30, 2007 are not necessarily indicative of the results expected for the full year.

2. Summary of Significant Accounting Policies

Comprehensive Income

For the thirteen weeks ended September 30, 2007 and October 1, 2006, comprehensive income was $1,905,000 and $1,552,000, respectively. For the thirty-nine weeks ended September 30, 2007 and October 1, 2006, comprehensive income was $5,115,000 and $5,701,000, respectively. Comprehensive income consists of net income and net unrealized gains and losses on investments.

Net Income per Share

Basic net income per share is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur from common shares issued through stock options. Anti-dilutive shares of 1,070,226 and 693,741 have been excluded from diluted weighted average shares outstanding for the thirteen week periods ended September 30, 2007 and October 1, 2006, respectively, and 965,406 and 510,990 for the thirty-nine week periods ended September 30, 2007 and October 1, 2006, respectively.

The number of incremental shares from the assumed exercise of stock options was calculated by applying the treasury stock method. The following table summarizes the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute diluted net income per share (in thousands):

	13 weeks ended				39 weeks ended
	September 30, 2007		October 1, 2006		September 30, 2007		October 1, 2006
Basic weighted average shares outstanding		13,816		13,670		13,664		13,801
Incremental shares from assumed exercise of stock options		352		646		393		683
Diluted weighted average shares outstanding		14,168		14,316		14,057		14,484

Recently Issued Accounting Standards

In July 2006, the FASB issued Financial Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company’s federal income tax returns for the years 2002 through 2004 were effectively settled with the Internal Revenue Service. The Company’s federal income tax returns for 2005 and 2006 are open tax years. The Company’s state of California tax returns for 2004 through 2006 are open tax years. The state of California is the Company’s only significant tax jurisdiction and it also files in numerous state jurisdictions with varying statutes of limitations. The Company’s policy is to classify estimated interest and penalties in its provision for income taxes. Accrued interest and penalties are insignificant at September 30, 2007. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

6

The Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not impact the consolidated financial condition, results of operations or cash flows. At January 1, 2007 and September 30, 2007, the Company did not have any unrecognized tax benefits.

3. Inventories

The Company’s inventories consist of the following (in thousands):

	September 30,		December 31,
	2007		2006
Green coffee	$	18,927	$	11,535
Other inventory		9,429		7,998
Total	$	28,356	$	19,533

4. Stock Purchase Program

On September 6, 2006, the Board of Directors approved the purchase up to one million shares of the Company’s common stock, with no expiration. As of September 30, 2007, no shares have been purchased under this program.

5. Stock Option and Employee Stock Purchase Plans

Stock Option Plans

The Company maintains several equity incentive plans under which it may currently grant non-qualified stock options to employees and non-employee directors.

Changes in stock options were as follows:

	Options Outstanding			Weighted Average Exercise Price Per Share
Outstanding at December 31, 2006		2,732,711		$	20.33
Granted		258,132			26.38
Canceled		(59,516	)		25.85
Exercised		(328,450	)		16.32
Oustanding at September 30, 2007		2,602,877		$	21.28
Vested or expected to vest, September 30, 2007		2,339,499
Exercisable at September 30, 2007		1,812,494		$	18.48

7

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan (“ESPP”) where eligible employees can choose to have up to 15% of their annual earnings withheld to purchase the Company’s common stock. The purchase price of stock is 85% of the lower of the beginning of the offering period or end of the offering period market price. The Company authorized 200,000 shares of common stock available for issuance under the ESPP, which will be increased as of each annual meeting of the Company’s shareholders, beginning 2002 until 2020, by the lesser of 200,000 shares or 1.5% of the number of shares of common stock outstanding on that date. However, the Board of Directors has the authority to increase the ESPP reserve by a smaller number of shares of common stock on that date. During the thirteen week period ended September 30, 2007, there were no employee purchases of the Company’s common stock under the ESPP. At September 30, 2007, 972,162 shares remain available for future issuance under the ESPP.

Stock-Based Compensation

Total stock-based compensation expense recognized in the consolidated statement of income for the thirteen weeks ended September 30, 2007 was $671,000 and consisted of stock option and ESPP expense of $603,000 and $68,000, respectively. Total stock-based compensation expense recognized in the consolidated statement of income for the thirty-nine weeks ended September 30, 2007 was $2,116,000 and consisted of stock option and ESPP expense of $1,906,000 and $210,000, respectively. The related total tax benefit was $273,000 and $862,000 for the thirteen and thirty-nine weeks ended September 30, 2007, respectively. Stock-based compensation expense recognized in the consolidated statement of income for the thirteen weeks ended October 1, 2006 was $1,106,000 and consisted of stock option and ESPP expense of $1,030,000 and $76,000, respectively. Stock-based compensation expense recognized in the consolidated statement of income for the thirty-nine weeks ended October 1, 2006 was $3,357,000 and consisted of stock option and ESPP expense of $3,134,000 and $223,000, respectively. The related total tax benefit was $451,000 and $1,370,000 for the thirteen and thirty-nine weeks ended October 1, 2006, respectively. Stock-based compensation expense was recognized as follows in the statements of income (in thousands):

	13 weeks ended				39 weeks ended
	September 30, 2007		October 1, 2006		September 30, 2007		October 1, 2006
Cost of sales and related occupancy expenses	$	60	$	122	$	174	$	419
Operating expenses		246		381		725		1,130
General and administrative expenses		365		603		1,217		1,808
Total	$	671	$	1,106	$	2,116	$	3,357

The fair value of each option grant and ESPP award is estimated on the date of grant using the Black-Scholes-Merton (“Black-Scholes”) option-pricing model with the following assumptions for the thirty-nine week periods ended September 30, 2007 and October 1, 2006:

	Stock Options						ESPP
	September 30, 2007			October 1, 2006			September 30, 2007			October 1, 2006
Expected term (in years)		5.4			5.3			0.5			0.5
Expected stock price volatility		30.0	%		34.1	%		25.1	%		27.8	%
Risk-free interest rate		5.0	%		5.0	%		4.9	%		5.0	%
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Estimated fair value per option granted	$	9.79		$	11.89		$	5.86		$	7.18

The expected term of the options represents the estimated period of time from date of option grant until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on a combination of historical volatility and the implied volatility of the Company’s traded options. For grants prior to July 3, 2006, expected stock price volatility was estimated using only the historical volatility of the Company’s stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent term. The Company has not paid dividends in the past and does not plan to pay dividends in the near future.

6. Legal Proceedings

In November 2006, a complaint styled as a shareholder derivative action was filed, purportedly on behalf of Peet’s, against certain of the Company’s present and former directors and officers. The complaint alleges that the defendants caused or allowed improprieties in connection with certain stock option grants since at least 2001 and thereby breached their fiduciary duties to Peet’s and violated specified provisions of the California Corporations Code. The complaint also alleges that certain of the Company’s present and former directors and officers were unjustly enriched as a result. Purportedly on behalf of Peet’s, the complaint seeks, among other things, damages, restitution and corporate governance reforms. This complaint and a similar one have been filed in the Superior Court for Alameda County, California and a third was filed in February 2007 in the United States District Court for the Northern District of California.

8

These actions could result in substantial costs and divert management’s attention and resources. These actions are at a preliminary stage, and the Company is not in a position to determine whether a loss is probable or estimate a range of amount of loss.

The Company may from time to time become involved in certain legal proceedings in the ordinary course of business. Currently, the Company is not a party to any other legal proceedings that management believes would have a material adverse effect on the financial position or results of operations of the Company.

7. Segment Information

The Company operates in two reportable segments: retail and specialty sales. Retail store operations consist of sales of whole bean coffee, beverages, tea and related products through Company-operated retail stores. Specialty sales consist of whole bean coffee sales through grocery, home delivery, foodservice and office coffee accounts. Management evaluates segment performance primarily based on revenue and segment operating income. The following table presents certain financial information for each segment. Segment operating income before taxes excludes unallocated marketing expenses and general and administrative expenses. Unallocated assets include cash, coffee inventory in the warehouse, corporate headquarter assets and intangible and other assets.

	Retail					Specialty					Unallocated			Total
	Dollars		Percent of			Dollars		Percent of						Dollars		Percent of
	(in thousands)		Net Revenue			(in thousands)		Net Revenue						(in thousands)		Net Revenue
Thirteen weeks ended September 30, 2007
Net revenue	$	41,450		100.0	%	$	19,410		100.0	%				$	60,860		100.0	%
Cost of sales and occupancy		19,510		47.1	%		9,632		49.6	%					29,142		47.9	%
Operating expenses		18,109		43.7	%		3,484		17.9	%					21,593		35.5	%
Depreciation and amortization		2,075		5.0	%		314		1.6	%	$	231			2,619		4.3	%
Segment operating income		1,756		4.2	%		5,980		30.8	%		(5,159	)		2,578		4.2	%
Interest income												284			284
Income before income taxes															2,862
Total assets		55,641					13,162					102,895			171,698
Capital expenditures		5,874					328					1,442			7,644
Thirteen weeks ended October 1, 2006
Net revenue	$	34,350		100.0	%	$	16,523		100.0	%				$	50,873		100.0	%
Cost of sales and occupancy		16,008		46.6	%		8,073		48.9	%					24,081		47.3	%
Operating expenses		14,960		43.6	%		3,182		19.3	%					18,142		35.7	%
Depreciation and amortization		1,602		4.7	%		364		2.2	%	$	249			2,215		4.4	%
Segment operating income		1,780		5.2	%		4,904		29.7	%		(4,843	)		1,841		3.6	%
Interest income												589			589
Income before income taxes															2,430
Total assets		40,829					12,740					97,003			150,572
Capital expenditures		3,452					381					2,836			6,669
Thirty-nine weeks ended September 30, 2007
Net revenue	$	121,436		100.0	%	$	57,040		100.0	%				$	178,476		100.0	%
Cost of sales and occupancy		56,684		46.7	%		28,022		49.1	%					84,706		47.5	%
Operating expenses		52,517		43.2	%		10,255		18.0	%					62,772		35.2	%
Depreciation and amortization		6,218		5.1	%		985		1.7	%	$	732			7,935		4.4	%
Segment operating income		6,017		5.0	%		17,778		31.2	%		(16,960	)		6,835		3.8	%
Interest income												1,172			1,172
Income before income taxes															8,007
Total assets		55,641					13,162					102,895			171,698
Capital expenditures		17,669					794					7,341			25,804
Thirty-nine weeks ended October 1, 2006
Net revenue	$	101,331		100.0	%	$	48,938		100.0	%				$	150,269		100.0	%
Cost of sales and occupancy		46,514		45.9	%		23,474		48.0	%					69,988		46.6	%
Operating expenses		43,877		43.3	%		8,952		18.3	%					52,829		35.2	%
Depreciation and amortization		4,550		4.5	%		1,068		2.2	%	$	675			6,292		4.2	%
Segment operating income		6,390		6.3	%		15,444		31.6	%		(14,681	)		7,154		4.8	%
Interest income												1,968			1,968
Income before income taxes															9,122
Total assets		40,829					12,740					97,003			150,572
Capital expenditures		10,591					692					6,291			17,574

9

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

You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. Except for historical information, the discussion in this report contains certain forward-looking statements that involve risks and uncertainties. We have based these forward-looking statements on our current expectations and assumptions about future events. In some cases, you can identify forward-looking statements by terminology, such as “may,” “should,” “could,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “forecast” and similar expressions (or the negative of such expressions.) Forward-looking statements include statements concerning projected new store openings, 2007 revenue growth rates and capital expenditures. Forward-looking statements are based on our beliefs as well as assumptions based on information currently available to us, including financial and operational information, the volatility of our stock price, and current competitive conditions. As a result, these statements are subject to various risks and uncertainties. For a discussion of material risks and uncertainties that the Company faces, see the discussion in the 2006 Form 10-K titled “Risk Factors”. Important factors that could cause actual results to differ materially include, but are not limited to, the following:

· Increases in the cost and decreases in availability of high quality arabica coffee beans: Although we do not purchase coffee on the commodity markets, price movements in the commodity trading of coffee impact the prices we pay. Coffee is a trade commodity and, in general, its price can fluctuate depending on: weather patterns in coffee-producing countries; economic and political conditions affecting coffee-producing countries; foreign currency fluctuations; the ability of coffee-producing countries to agree to export quotas; and general economic conditions that make commodities more or less attractive investment options. Over the past eighteen months, the commodity prices for coffee have risen above their historical range for the prior three to four years. If we are unable to pass along increased coffee costs, our margin will decrease and our profitability will decrease accordingly. In addition, if we are not able to purchase sufficient quantities of high quality arabica beans due to any of the above factors, we may not be able to fulfill the demand for our coffee, our revenue may decrease and our ability to expand our business may be negatively impacted.

· A significant interruption in the operation of our roasting and distribution facility could potentially disrupt our operations. We have completed the transition of our roasting and distribution operations to a new facility and are in the process of converting our previous roasting and distribution facility to office space. A significant interruption in the new facility, whether as a result of a natural disaster or other causes, could significantly impair our ability to operate our business. Since we only roast our coffee to order, we do not carry inventory of roasted coffee in our roasting plant. Therefore, a disruption in service in our roasting facility would impact our sales in our retail and specialty channels almost immediately. Moreover, our roasting and distribution facilities and most of our stores are located near several major earthquake faults. The impact of a major earthquake on our facilities, infrastructure and overall operations is difficult to predict and an earthquake could seriously disrupt our entire business.

Company Overview and Industry Outlook

Peet’s is a specialty coffee roaster and marketer of fresh, deep-roasted whole bean coffee sold through multiple channels of distribution for home and away-from-home enjoyment.  Founded in Berkeley, California in 1966, Peet’s has established a loyal customer base with strong brand awareness in California.  Our growth strategy is based on the sale of whole bean coffee and high-quality beverages in multiple channels of distribution including our own retail stores, grocery, home delivery, and office and restaurant accounts throughout the United States.  Our current retail expansion strategy is focused in the western United States, where we have strong customer awareness, loyalty and brand affinity.

We expect the specialty coffee industry to continue to grow.  We believe that this growth will be fueled by continued consumer interest in high-quality coffee and related products.  We believe that by offering high-quality products to consumers throughout the country, we will attract the same loyal customer base that we have attracted in California.

As we grow, our operations will continue to be vertically integrated, allowing us to control the quality of our product at all stages.  We purchase high quality arabica coffee beans from countries around the world, and we utilize our artisan-roasting technique to bring out the distinctive flavor of our coffees. Because roasted coffee is perishable, we are committed to delivering our coffee under the strictest freshness standards. As a result, we do not stock or inventory roasted coffee. We roast to order and ship fresh coffee daily to our stores and customers.  We believe control of purchasing, roasting, packaging and distribution of our coffee allows us to maintain our commitment to freshness, is cost effective, and enhances our margins and profit potential.

10

Results of Operations

The following discussion on results of operations should be read in conjunction with the consolidated financial statements and accompanying notes and the other financial data included elsewhere in this report.

	Thirteen weeks ended						Thirty-nine weeks ended
	September 30, 2007			October 1, 2006			September 30, 2007			October 1, 2006
Statement of income as a percent of net revenue:
Net revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales and related occupancy expenses		47.9			47.3			47.5			46.6
Operating expenses		35.5			35.7			35.2			35.1
General and administrative expenses		8.1			9.0			9.1			9.3
Depreciation and amortization expenses		4.3			4.4			4.4			4.2
Income from operations		4.2			3.6			3.8			4.8
Interest income		0.5			1.2			0.7			1.3
Income before income taxes		4.7			4.8			4.5			6.1
Income tax provision		1.7			1.9			1.7			2.3
Net income		3.0	%		2.9	%		2.8	%		3.8	%
Percent of net revenue by business segment:
Retail stores		68.1	%		67.5	%		68.0	%		67.4	%
Specialty sales		31.9			32.5			32.0			32.6
Percent of net revenue by business category:
Whole bean coffee and related products		51.8	%		54.2	%		52.7	%		55.0	%
Beverages and pastries		48.2			45.8			47.3			45.0
Cost of sales and related occupancy expenses as a percent of segment revenue:
Retail stores		47.1	%		46.6	%		46.7	%		45.9	%
Specialty sales		49.6			48.9			49.1			48.0
Operating expenses as a percent of segment revenue:
Retail stores		43.7	%		43.6	%		43.2	%		43.3	%
Specialty sales		17.9			19.3			18.0			18.3
Percent increase from prior year:
Net revenue		19.6	%		18.7	%		18.8	%		20.6	%
Retail stores		20.7			19.6			19.8			19.8
Specialty sales		17.5			16.9			16.6			22.4
Cost of sales and related occupancy expenses		21.0			22.4			21.0			23.3
Operating expenses		19.0			24.6			18.8			25.9
General and administrative expenses		7.3			35.9			15.9			47.7
Depreciation and amortization expenses		18.2			18.9			26.1			17.3
Selected operating data:
Number of retail stores in operation
Beginning of period		152			120			136			111
Store openings		7			6			23			15
Store closures		-			-			-			-
End of period		159			126			159			126

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Thirteen Weeks Ended September 30, 2007 Compared to Thirteen Weeks Ended October 1, 2006

Net revenue

Net revenue for the thirteen weeks ended September 30, 2007 increased 19.6% versus the same period in 2006 as a result of continued expansion of our retail and specialty sales segments. Sales of whole bean and related products increased 14.3% to $31.5 million. Net revenue from beverages and pastries increased 25.9% to $29.3 million.

In the retail segment, net revenue increased 20.7% compared to the same period in 2006 primarily as a result of increased sales from the 33 new stores we opened in the last 12 months and growth in the existing stores. During the third quarter of 2007, we opened seven new stores compared to six during the same period in 2006. Sales of whole bean coffee and related products in the retail segment increased by 8.2% to $12.1 million, while sales of beverages and pastries increased by 26.7% to $29.3 million. The increase in beverage and pastry sales was primarily related to sales at the stores we opened in 2006 and 2007 and increased traffic in our existing stores. The slower growth in whole bean and related products was primarily due to continuing cannibalization of bean sales in retail stores as we increased the availability of Peet’s coffee in grocery stores.

In the specialty sales segment, net revenue increased 17.5% compared to the thirteen weeks ended October 1, 2006. The $2.9 million increase consisted of a $1.9 million increase in grocery sales, a $0.2 million increase in home delivery sales, and a $0.8 million increase in sales to foodservice and office accounts. The increase in grocery was primarily due to continued strong growth in our existing accounts and new accounts we added in the last 12 months. We added approximately 800 new grocery store accounts over the past 12 months, bringing the number of grocery stores selling Peet’s coffee to approximately 5,100. Net revenue to the home delivery channel grew 5.0% compared to the same period in 2006 primarily due to special offerings that drove new customer acquisition. In addition, foodservice and office coffee sales increased 17.6% primarily due to new foodservice accounts and efforts in expanding our office distributorships, offset by the closure of six Company operated Peet’s kiosks located within six Larry’s Markets in the Seattle area due to the bankruptcy and closure of Larry’s Markets in September 2006.

Cost of sales and related occupancy expenses

Cost of sales and related occupancy expenses consist of product costs, including manufacturing costs, rent and other occupancy costs. As a percent of net revenue, cost of sales increased from 47.3% in the third quarter of 2006 to 47.9% in the third quarter of 2007. This increase was caused by higher green coffee and milk costs and increased manufacturing costs from our new roasting facility, partially offset by the retail price increase in November 2006. We anticipate milk prices and manufacturing costs, in particular, to continue to negatively impact gross margin for the rest of 2007.

Operating expenses

Operating expenses consist of both retail and specialty operating costs, such as employee labor and benefits, repairs and maintenance, supplies, training, travel and banking and card processing fees. Operating expenses as a percent of net revenue for the current quarter decreased from 35.7% in 2006 to 35.5% in 2007.

In the retail segment, operating expenses as a percent of net revenue increased from 43.6% in 2006 to 43.7% in 2007. The impact from new stores opened in the last two years was largely offset by the price increase in November 2006 and improved operating leverage.

As a percent of net revenue, specialty operating expenses decreased 1.4% to 17.9% in 2007. The decrease was primarily due to the closure of Larry’s Markets, which had a negative impact on last year due to closure costs and writing off our remaining assets’ book value, partially offset by grocery promotions and other start up costs for our expansion in the east.

General and administrative expenses

General and administrative expenses in the current quarter were $4.9 million, or 8.1% of net revenue, compared to $4.6 million, or 9.0% for the same period last year. The increase in absolute dollars was driven by increases in headcount and other investments to support our growth, partially offset by lower incentive based compensation expense.

Depreciation and amortization expenses

Depreciation and amortization expenses increased in the third quarter of 2007 from $2.2 million to $2.6 million primarily due to the 48 stores we opened in 2006 and 2007.

Interest income

We currently invest in U.S. government, agency, municipal and guaranteed student loan obligations. Interest income includes interest income and gains or losses from the sale of these instruments. We earned $0.3 million in interest income in the third quarter of 2007, compared to $0.6 million last year. The difference was due to lower investment balances during the third quarter of 2007 as compared to the same period in 2006.

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Income tax provision

The effective income tax rate for the period is 35.8% compared to 39.1% during the third quarter of 2006. The lower effective tax rate is primarily due to the increase in the anticipated deduction from 3% to 6% for qualified domestic production activities as part of the American Job Creations Act of 2004.

Thirty-nine Weeks Ended September 30, 2007 Compared to Thirty-nine Weeks Ended October 1, 2006

Net revenue

Net revenue for the thirty-nine weeks ended September 30, 2007 increased 18.8% versus the same period in 2006 as a result of continued expansion of our retail and specialty sales segments. Sales of whole bean and related products increased 13.9% to $94.0 million. Net revenue from beverages and pastries increased 24.7% to $67.8 million.

In the retail segment, net revenue increased 19.8% compared to the same period in 2006 primarily as a result of increased sales from the 33 new stores we opened in the last 12 months and growth in the existing stores. During the thirty-nine weeks ended September 30, 2007, we opened 23 new stores compared to 15 during the same period in 2006. Sales of whole bean coffee and related products in the retail segment increased by 7.9% to $37.0 million, while sales of beverages and pastries increased by 25.9% to $84.4 million. The increase in beverage and pastry sales was primarily related to sales at the stores we opened in 2006 and 2007 and increased traffic in our existing stores. The slower growth in whole bean and related products was primarily due to continuing cannibalization of bean sales in retail stores as we increased the availability of Peet’s coffee in grocery stores.

In the specialty sales segment, net revenue increased 16.6% compared to the thirty-nine weeks ended October 1, 2006. The $8.1 million increase consisted of a $5.0 million increase in grocery sales, a $0.9 million increase in home delivery sales, and a $2.2 million increase in sales to foodservice and office accounts. The increase in grocery was primarily due to continued strong growth in our existing accounts and new accounts we added in the last 12 months. We added approximately 800 new grocery store accounts over the past 12 months, bringing the number of grocery stores selling Peet’s coffee to approximately 5,100. Net revenue to the home delivery channel grew 7.5% compared to the same period in 2006 primarily due to special offerings to our existing customers. In addition, foodservice and office coffee sales increased 17.9% primarily due to new foodservice accounts and efforts in expanding our office distributorships, offset by the closure of six Company operated Peet’s kiosks located within six Larry’s Markets in the Seattle area due to the bankruptcy and closure of Larry’s Markets in September 2006.

Cost of sales and related occupancy expenses

Cost of sales and related occupancy expenses consist of product costs, including manufacturing costs, rent and other occupancy costs. As a percent of net revenue, cost of sales increased from 46.6% in 2006 to 47.5% in 2007. This increase was caused by higher green coffee and milk costs, increased manufacturing costs from our new roasting facility, an increase in grocery promotions and an increased number of new stores, which have higher occupancy expenses on a lower sales base, partially offset by the retail price increase in November 2006.

Operating expenses

Operating expenses consist of both retail and specialty operating costs, such as employee labor and benefits, repairs and maintenance, supplies, training, travel and banking and card processing fees. Operating expenses as a percent of net revenue increased from 35.1% in 2006 to 35.2% in 2007. The favorable impact of a retail price increase in November 2006 was offset by higher retail operating expenses due to new stores and grocery promotions as we expanded in the east.

In the retail segment, operating expenses as a percent of net revenue decreased by 0.1% to 43.2%. The decrease was primarily due to the impact from the price increase in November 2006 and from improved operating leverage and reduced store expenses, including repair and maintenance and supplies, partially offset by the impact from new stores opened in the last two years.

As a percent of net revenue, specialty operating expenses decreased 0.3% to 18.0% in the third quarter of 2007. The decrease was primarily due to the closure of Larry’s Markets, which had a negative impact on last year due to closure costs and writing off our remaining assets’ book value, partially offset by grocery promotions and other start up costs for our expansion in the east.

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General and administrative expenses

General and administrative expenses in the current period were $16.2 million, or 9.1% of net revenue, compared to $14.0 million, or 9.3% for the same period last year. There were significant offsetting differences in costs in the comparable periods. 2007 costs included $1.2 million of costs related to legal and other professional fees incurred for the stock option review and restatement of financial statements and legal fees for the related lawsuits. In addition, we incurred increased costs in headcount and other investments to support our growth in 2007. However, as a percent of sales, marketing expenses were significantly lower in 2007 compared to the prior year when spending was higher on promotions such as our 40^th Anniversary Celebration.

Depreciation and amortization expenses

Depreciation and amortization expenses increased in 2007 from $6.3 million to $7.9 million primarily due to the 48 stores we opened in 2006 and 2007.

Interest income

We currently invest in U.S. government, agency, municipal and guaranteed student loan obligations. Interest income includes interest income and gains or losses from the sale of these instruments. We earned $1.2 million in interest income in the current period, compared to $2.0 million last year. The difference was primarily due to lower investment balances slightly offset by higher interest rates.

Income tax provision

The effective income tax rate for the thirty-nine week period ended September 30, 2007 and as projected for the full-year is 36.9% compared to 38.2% for the thirty-nine weeks ended October 1, 2006. The lower effective tax rate is primarily due to the increase in the anticipated deduction from 3% to 6% for qualified domestic production activities as part of the American Job Creations Act of 2004.

Liquidity and Capital Resources

At September 30, 2007, we had $2.1 million in cash and cash equivalents and $20.9 million in short-term and long-term marketable securities for a total of $23.0 million. Working capital was $33.6 million as of September 30, 2007.

Net cash provided by operations was $8.5 million for the thirty-nine weeks ended September 30, 2007 compared to $9.0 million for the same prior year period. Operating cash flows were lower than the prior year period primarily due to increased seasonal coffee purchases, partially offset by increased deferred lease credits due to new stores and timing differences in working capital.

Net cash used in investing activities was $21.3 million for the thirty-nine weeks ended September 30, 2007. Investing activities primarily relate to purchases of property and equipment and maturities and purchases of marketable securities. During the thirty-nine week period ended September 30, 2007, we purchased property and equipment totaling $25.8 million primarily related to new stores and for our new roasting facility. Proceeds from maturities net of purchases of marketable securities totaled $4.5 million.

Net cash provided by financing activities for the thirty-nine weeks ended September 30, 2007 was $7.2 million, consisting of $5.9 million in net proceeds from issuance of common stock and $1.3 million of excess tax benefit from exercise of stock options and employee stock purchase plan shares.

For the next twelve months, we expect our cash flows from operations and cash and marketable securities to be sufficient for our operating and capital requirements, our share purchase program and our contractual obligations as they come due.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We invest excess cash in interest-bearing, U.S. government, agency, municipal and guaranteed student loan obligations. These financial instruments are all subject to fluctuations of daily interest rates. Therefore our investment portfolio is exposed to market risk from these changes.

The supply and price of coffee are subject to significant volatility and can be affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee bean prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee beans through agreements establishing export quotas or restricting coffee supplies worldwide.

We currently use fixed-price purchase commitments, but in the past have used and may potentially in the future use coffee futures and coffee futures options to manage coffee supply and price risk.

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Fixed-Price and Not-Yet-Priced Purchase Commitments

We enter into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee beans and fix our cost of green coffee beans. These commitments are made with established coffee brokers and are denominated in U.S. dollars. We also enter into “not-yet-priced” commitments based on a fixed premium over the New York “C” market with the option to fix the price at any time. As of September 30, 2007, we had approximately $25.7 million in open fixed-priced purchase commitments and approximately $1.9 million in not-yet-priced commitments for a total of approximately $27.6 million with delivery dates ranging from October 2007 through July 2012. We believe, based on relationships established with our suppliers, that the risk of non-delivery on such purchase commitments is low.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Definition and limitations of disclosure controls. Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluates these controls and procedures on an ongoing basis to determine if improvements or modifications are necessary.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. These limitations include the possibility of human error, the circumvention or overriding of the controls and procedures and reasonable resource constraints. In addition, because we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, our system of controls may not achieve its desired purpose under all possible future conditions. Accordingly, our disclosure controls and procedures provide reasonable assurance, but not absolute assurance, of achieving their objectives.

Evaluation of disclosure controls and procedures. We have evaluated the effectiveness of our disclosure controls and procedures and our internal control over financial reporting as of September 30, 2007 and determined that we have the following material weakness based on the control criteria established in a report entitled Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission related to stock option grants:

· We did not design and implement controls necessary to provide reasonable assurance that the measurement date for stock option grants was appropriately determined. In particular, the procedures used to approve and process stock option grants were insufficient to ensure that all option grants complied with our stock option plans and the selection of measurement dates conformed to the requirements of applicable accounting rules. As a result, the measurement date used for certain option grants was not appropriate and such grants were not accounted for in accordance with GAAP.

For this reason, we have concluded that our disclosure controls and procedures and our internal control over financial reporting were not effective as of September 30, 2007. We have disclosed this conclusion to the Audit Committee and to our independent registered public accountants.

There have been no changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Management’s Remediation Plans

The Company has developed more formal procedures and is in the process of testing controls to provide reasonable assurance that the measurement date for stock option grants is appropriately determined. Effective March 26, 2007, the Compensation Committee of the Board of Directors adopted a stock option granting policy and specified Company procedures. The policy set forth policies and procedures relating to stock option granting practices, including (a) the review of stock option grant documentation prior to a grant to ensure proper support for the measurement date including the appropriate Board of Directors, Compensation Committee or Chief Executive Officer approval, (b) eliminating the use of unanimous written consents by all Board of Directors and its Compensation Committee, and (c) the use of predetermined effective dates for all grants.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In November 2006, a complaint styled as a shareholder derivative action was filed, purportedly on behalf of Peet’s, against certain of our present and former directors and officers. The complaint alleges that the defendants caused or allowed improprieties in connection with certain stock option grants since at least 2001 and thereby breached their fiduciary duties to Peet’s and violated specified provisions of the California Corporations Code. The complaint also alleges that certain of our present and former directors and officers were unjustly enriched as a result. Purportedly on behalf of Peet’s, the complaint seeks, among other things, damages, restitution and corporate governance reforms. This complaint and a similar one have been filed in the Superior Court for Alameda County, California and a third was filed in February 2007 in the United States District Court for the Northern District of California.

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These actions could result in substantial costs and divert management’s attention and resources. These actions are at a preliminary stage, and we are not in a position to determine whether a loss is probable or estimate a range of amount of loss.

We may from time to time become involved in certain legal proceedings in the ordinary course of business. Currently, the Company is not a party to any other legal proceedings that management believes would have a material adverse effect on the financial position or results of operations of the Company.

Item 6. Exhibits

Exhibit	Description
3.1	Amended and Restated Articles of Incorporation.*
3.2	Amended and Restated Bylaws.*
31.1	Certification of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2	Certification of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1	Certification of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
32.2	Certification of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

* Incorporated by reference to the Registrant’s Information Statement on Form S-1 (File No. 333-47957) filed on October 13, 2000, as subsequently amended.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PEET’S COFFEE & TEA, INC.
Date: November 8, 2007	By:	/s/ Thomas P. Cawley
		Thomas P. Cawley
		Vice President, Chief Financial Officer and Secretary

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