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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended April 3, 2011

OR

For the transition period from              to             

Commission File Number 001-33646

TC GLOBAL, INC.

(Exact name of registrant as specified in its charter)

3100 Airport Way South,

Seattle, Washington 98134

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (206) 233-2070

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

Series A Convertible Preferred Stock, no par value

(Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrants’ most recently completed second fiscal quarter: Not Applicable (not traded on any market)

As of April 3, 2011, the number of shares of the registrant’s Common Stock outstanding was 3,565,606 (giving effect to the one-for-eight reverse split on June 28, 2007) and the number of shares of the registrant’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock outstanding was 12,790,874 and 3,590,349, respectively.

Documents incorporated by reference: Parts of the registrant’s definitive proxy statement, filed for its 2011 annual meeting of shareholders, are incorporated by reference in Part III of this Form 10-K annual report: Items 10, 11, 12, 13 and 14.

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A Warning About Forward-Looking Statements

In this report, we refer to TC Global, Inc. and its consolidated subsidiaries and joint ventures controlled by the Company as “we,” “us,” “our,” “the Company,” “Tully’s Coffee,” or “Tully’s.”

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor created by those sections. These statements include descriptions of our future financial condition, results of operations, objectives, strategies, plans, goals, targets or future performance and business for future periods, and generally may be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “initiatives,” “models,” “hope,” “goal,” “foresee” or other words of similar import.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those identified below, that could cause events, including our actual results, to differ materially from those expressed or implied by any forward-looking statements. These factors, among others, could cause our financial performance to differ materially from our goals, targets, objectives, intentions and expectations.

The following factors, among others, could cause our future results to differ materially from historical results or those anticipated:

These and other risk factors discussed in Part I, Item 1A (“Risk Factors”) of our Annual Report on Form 10-K are among important factors of which we are currently aware that could cause actual results, performance or achievements to differ materially from those expressed in our forward-looking statements. We operate in a continually changing business environment, and new risk factors emerge from time to time. Other unknown or unpredictable factors also could have material adverse effects on our future results, performance or achievements. We cannot assure you that projected results or events will be achieved or will occur. Consequently, you should not place undue reliance on our forward-looking information and statements.

We qualify all of our forward-looking statements by these cautionary statements. Except to the extent required by the federal securities laws, we do not intend to update or revise the forward-looking statements contained in this report.

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PART I.

TC Global, Inc. is a specialty retailer licensing the Tully’s Coffee business names and trademarks in the fast-casual categories of specialty coffee, snacks and non-alcoholic beverages, within the broader quick-service restaurant industry. Tully’s is known for gourmet coffees, wide selection of barista beverages, delicious assortment of breakfast and lunch offerings and anytime snacks, desserts and specialty beverages, and our genuine community coffeehouse experience.

We end our fiscal year on the Sunday closest to March 31. As a result, we record our revenue and expenses on a 52- or 53- week period, depending on the year. In this report, we refer to our fiscal periods as follows:

Retail Operations. We operate and franchise Tully’s Coffee branded retail stores, with 74 company-operated stores and 110 franchised stores in Washington, California, Arizona, Colorado, Idaho, Oregon, Montana, and Wyoming as of April 3, 2011. We also have four licensed locations in Singapore, which have been established under our joint venture, Tully’s Coffee Asia Pacific Partners, LP (“TCAPPLP”), as well as five licensed locations in South Korea opened by our master licensee in that region. We operate our stores in densely populated areas and commuting corridors, with locations in urban and suburban retail districts, lifestyle centers, shopping centers and other high-traffic areas. We also operate or franchise smaller footprint stores in special venues such as within the premises of manufacturing facilities, and kiosks and cafes located in grocery stores, hotels, hospitals, airports and university campuses. We manage our franchising and foreign business development activities through our specialty division.

Menu Offering. We are passionate about providing our customers with the best gourmet coffees. Our barista bars offer customers a broad selection of freshly prepared hot and cold beverages in various sizes, including our coffees, espressos, teas, Guayaki yerba mates, chai teas, Bellaccino blended beverages, fruit-based beverages (such as smoothies), ice cream shakes and hot cocoa. We complement our barista bar beverages with a diverse selection of premium foods, snacks and bottled beverages.

Customer Appeal. Our community coffeehouse concept and varied menu have broad customer appeal, and are relevant during multiple day-parts and in diverse geographic markets and climates. Our beverage and food offerings are built around core product families, enabling us to easily and cost-effectively introduce new menu items. Our comfortable, inviting stores are a great place to relax, take a break or gather with friends throughout the day.

Tully’s License. On March 27, 2009, we completed the sale of the assets associated with our wholesale business and supply chain (including Tully’s business names and trademarks) to Green Mountain Coffee Roasters, Inc. a Delaware corporation (“GMCR”), pursuant to the Asset Purchase Agreement dated September 15, 2008, as amended by Amendment No. 1 thereto dated November 12, 2008, and Amendment No. 2 thereto dated February 6, 2009, by and among TC Global, Inc., GMCR and Tully’s Bellaccino, LLC (the “Green Mountain Transaction”).

In connection with the closing of the Green Mountain Transaction, we entered into a Supply Agreement, a License Agreement, and a Noncompetition Agreement with GMCR. Tully’s secured an exclusive perpetual license to use the “Tully’s” brand and other trade names, trademarks and service marks in connection with certain (i) retail operations worldwide (excluding Japan) and (ii) wholesale operations outside of North America, utilizing an exclusive coffee supply arrangement.

Our History

Tully’s Coffee, a Washington corporation, was founded in 1992. Between 1992 and 2001, we expanded to 114 company-operated stores. During this period, we financed our retail expansion by raising over $60 million in equity securities and convertible debt, and over $17 million in licensing fees paid to us by foreign licensees. Between Fiscal 2001 and 2003, our financial performance was negatively impacted by the economic downturn that affected Seattle and San Francisco. During the same period, the market for new equity issues deteriorated significantly. To manage through this period and these challenges, rather than seek additional and potentially dilutive growth capital, we chose to reduce normal operating expenses by closing certain under-performing stores and slowing our new store development plans to preserve capital. From Fiscal 2006 through Fiscal 2007, we undertook a strategic business review and began implementing initiatives to improve our financial position and create a foundation for future growth. In Fiscal 2008 and Fiscal 2009, based on sustained losses and a continuing general economic downturn, we sold a large portion of our assets, in the sale of our wholesale division to GMCR, thereby reducing our core business to retail, franchised and licensed store locations. In Fiscal 2010 and Fiscal 2011, we have taken measures to “right size” our business through various initiatives and cost-cutting measures. These initiatives include:

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Our Products

We are passionate about providing our customers with the best gourmet coffees. All Tully’s stores offer a fresh assortment of Tully’s whole bean and ground varietal coffees and proprietary coffee blends. Our barista bar beverages include hot and cold beverages, highlighted by our coffees and espresso, teas, yerba mates, chai teas, Bellaccino blended beverages, fruit–based beverages (such as smoothies), ice cream shakes and hot cocoa. These drinks can be customized with dairy or soy milk and our customers’ favorite flavors, including fresh Tully’s espresso, Ghirardelli chocolate and premium flavor extracts. All barista bar beverages are made-to-order by our highly trained baristas.

We complement our great beverages with an array of premium foods, snacks, and bottled beverages—including fresh daily (never frozen) pastries, muffins, cookies and desserts that are baked by our artisan bakery vendors; fresh, pre-packaged, ready-to-go salads and sandwiches; healthy grab-and-go snacks such as nuts, trail mixes and dried fruits; chocolates and other confections; and juices, soda, and waters that make our stores a gathering place for refreshment and energy throughout the day.

We regularly introduce new products in our stores to attract new customers and to offer existing customers additional products during different parts of the day. Our beverage and food offerings are built around core product families that enable us to introduce new items that appeal to a broad range of customers, during different day-parts, to suit different geographic markets and climates.

Our Competitive Strengths

Our goal is to make our coffees and community coffeehouse experience the first choice for consumers in a highly competitive market. To achieve this objective, we intend to leverage the following strengths:

We sell world-class coffees. We are passionate about providing our customers with the best gourmet coffees. Currently, we sell dozens of different proprietary coffee blends and varietal coffees, including single origin, coffees from growers in Colombia, Guatemala and Sumatra. We also offer premium special lot (limited reserve) and estate coffees.

Our barista bars set us apart from our competitors. We offer a premium selection of hand-crafted beverages in the business. In addition to our hot and cold coffee and espresso-based drinks, our hand-crafted barista bar beverages include teas, yerba mates, chai teas, Bellaccino blended beverages, fruit–based beverages (such as smoothies), ice cream shakes and hot cocoa. Our customers can custom order their drinks using fresh Tully’s espresso, Ghirardelli chocolate, premium flavor extracts, and dairy and soy milk. We offer both everyday favorites like lattes, mochas and Americanos, and featured seasonal drinks such as pumpkin spice lattes and tea lattes, peppermint mochas and fruit Bellaccinos. All barista beverages are made-to-order by our baristas.

We address all day-parts with our barista beverages, foods, snacks, desserts and bottled beverages. Our fresh, made-to-order hot and cold barista beverages and our fresh daily, never frozen, broad selection of ready-to-go foods, snacks and bottled beverages appeal to our customers throughout the day. We offer fresh, pre-packaged salads and sandwiches; healthy grab-and-go snacks such as nuts, trail mixes, and dried fruit; chocolates and other confections; and bottled beverages such as soda, waters, energy drinks and teas. These offerings make our coffeehouses an attractive destination during the day and into the evening. We feature best-in-class products, such as Ghirardelli chocolates, Dean & Deluca snacks, Guayaki yerba mates, and fresh daily baked goods, salads and sandwiches from local, artisan bakeries to reinforce our gourmet brand image.

We keep Tully’s exciting by regularly introducing new products in our existing categories. Our merchandising strategy allows us to leverage beverages and food items within our product families to efficiently offer new products that keep existing customers enthusiastic and attract new customers to our coffeehouses. This approach results in a shorter period from development to launch of new products. We are constantly creating and innovating new beverages to provide a change of pace and excite the senses. For example, in the autumn we introduced a family of pumpkin spice beverages in our barista bar product family at the same time that we introduced a special pumpkin spice cake and pastry in our food product family.

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We provide a community coffeehouse experience for our customers. We believe that the Tully’s community coffeehouse experience differentiates us from our competitors. The Tully’s experience is about friendly, personalized service in an upscale and relaxing environment, where customers enjoy comfortable seating, large community tables, soft music and free Wi-Fi Internet access while savoring Tully’s products. We strive to develop a genuine personal relationship with our customers and their communities by supporting community events, and local schools and charitable organizations, and by crafting our stores into neighborhood gathering places. Our “pay it forward” philosophy involves empowering our store managers to become part of their local communities by providing complimentary coffee for community activities, helping non-profit organizations raise money, and publicizing community events. Each store manager is provided a budget to develop these community building relationships. At the corporate level, we partner with charitable organizations and support their fundraising activities. For example, we help raise funds to support a number of children’s’ health organizations, breast cancer research, and university scholarship funds. We believe our commitment to the community strengthens our relationship with our employees and our customers.

Our Growth Strategy

We intend to pursue growth opportunities by implementing the following strategies. Implementation of these strategies is dependent upon sufficient capital resources and the ability to secure adequate financing. Further, growth will be limited in the event of a whole or partial disposition of the assets of any single segment.

Drive comparable store sales growth by executing on our fundamental retail strategies. We intend to drive comparable store sales and average unit volume growth by executing on our fundamental retail strategies to increase store traffic and average transaction size.

Expand our geographic footprint by leveraging international opportunities. Our international growth strategy emphasizes joint ventures and licensing relationships with companies situated in promising foreign markets, and sales of coffee and other products to those partners. We believe the success of our former licensee, Tully’s Coffee Japan (“TCJ”), demonstrates the broader opportunity available to us in foreign markets.

Execute our licensing/franchising strategy. Our licensing/franchising strategy focuses on adding licensed and franchised stores in market areas and venues that complement our company-operated stores. We have used these means to extend our presence in special venues, such as grocery stores, airports, hotels and university campuses.

Our Retail and Franchising Businesses

We operate and franchise Tully’s Coffee branded retail stores, with 74 company-operated stores and 110 franchised stores in Washington, California, Arizona, Colorado, Idaho, Oregon, Montana, and Wyoming as of April 3, 2011. Our stores are located in a variety of high-traffic urban and suburban neighborhoods, and in the Seattle and San Francisco central business districts. We also operate or franchise smaller footprint stores in special venues, such as within the premises of manufacturing facilities, and kiosks and cafes that are located in grocery stores, hotels, hospitals and airports and on university campuses.

Menu and Products

Our beverage and food offerings are built around core product families that enable us to introduce new items that appeal to a broad range of customers, at different day-parts, to suit different geographic markets and climates. Our product families are as follows:

Barista Bar Beverages—We believe that our barista bars offer the best selection of hand-crafted beverages in the business. These offerings include:

Daily Freshly Baked Goods and Foods—Our selection of food offerings changes based on the time of day. We offer freshly baked pastries and muffins during the morning, and pre-packaged sandwiches and salads from mid-morning through the remainder of the day. Cookies, cakes, ice cream and other desserts are featured during the afternoon and evening.

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“Grab-and-Go” Snacks and Chocolate—We offer conveniently sized packages of nuts, trail mixes, dried berries, and other snacks, and gourmet chocolates, from brands like Ghirardelli and Dean & Deluca, for snacking and impulse buys throughout the day.

Specialty Beverages—We stock a range of specialty beverages in our cold cases, including juices, waters, soda and energy drinks.

Coffee and Tea for Home Enjoyment—We sell our freshly roasted gourmet coffees, including special “limited edition” coffees, and a selection of leading gourmet teas, in each case for home consumption.

Brewing equipment and accessories—We sell brewing equipment and accessories from leading manufacturers, including French presses, Keurig K-Cup brewing systems and Tully’s K-Cups, espresso machines, mugs and coffee grinders.

Our Coffeehouses

Coffeehouse Design and Appearance

Our coffeehouses are characterized by our warm color scheme, high quality finishes, easy-to-read menu board and enticing product images. Our coffeehouses typically feature soft music and lighting; a “children’s corner” with kid-sized furniture, books and toys; comfortable sofas and chairs; and space dedicated to larger tables. Many of our coffeehouses have a fireplace that adds to the warm and relaxed atmosphere. We seek to make each location comfortable and inviting for individuals and larger groups. We believe that our coffeehouse design reinforces our upscale brand image.

In addition, most of our company-operated stores and some franchised stores, offer free Wi-Fi Internet to our customers. Wi-Fi provides our customers a convenient way to check e-mail and “surf the web” while enjoying our beverages and food offerings in the comfort of a Tully’s coffeehouse.

Franchising Development

Our franchising strategy focuses on adding franchised stores in market areas and venues that complement our company-operated stores. We have used franchising to extend our presence through smaller footprint stores in special venues, such as within the premises of manufacturing facilities, and kiosks and cafes that are located in grocery stores, hotels, hospitals and airports and on university campuses. Franchising stores in the domestic market offers the potential for accelerated growth with minimal capital investment by Tully’s. The franchisee is responsible for all of the capital expenditures associated with the store, although we usually support the construction, training and start-up of new franchised stores to ensure consistency with company-operated stores.

Grocery Cafes—Albertsons, Fred Meyer, Safeway, Fry’s Food and Drug and King Soopers operate franchised Tully’s cafes in select stores. We believe that grocery cafes complement our retail business by introducing grocery store customers to our brand and great barista bar beverages.

Other Special Venues—We have franchised stores in a variety of special venues, such as universities, airports, and hotels, that have high volume captive audiences and where the location is owned, licensed or managed by a third party. These stores include quick grab-and-go kiosks, coffee bars and full service stores. Our franchisees currently operate stores in Hilton and Red Lion hotels in Washington and California, and at universities in California and Washington, among other locations.

To promote operational and cultural consistency with company-operated stores, we require our franchisees to undergo training before opening their first coffeehouse. We also evaluate our partners’ store operations on a periodic basis to ensure brand consistency across the entire Tully’s system.

Retail Marketing

We believe that our loyal customers are our most important marketing assets. Our focus on providing our customers with a genuine community coffeehouse experience is designed to establish loyal customers. These customers are our brand advocates and, through word-of-mouth, promote our products and share the Tully’s genuine community coffeehouse experience with their friends and colleagues.

We employ marketing strategies to increase brand awareness, encourage trial and repeat purchases by educating potential customers about our hand-craft roasted coffees and other beverage and food offerings, and promote our genuine community coffeehouse experience. We employ a variety of marketing tools that are tailored to the specific needs of particular markets or coffeehouses, including:

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We periodically supplement these marketing initiatives with selective print and radio advertising through local radio, newspapers and other publications to attract new customers within a particular market and to promote special and seasonal product offerings.

We offer our customers the Tully’s Coffee Card, a stored-value payment card that serves as a convenient way to purchase our products and as an easy gift item, which is supplemented with extra value during select promotional periods during the year. It is available at all company-operated Tully’s stores and select franchised stores. Our Tully’s Coffee Card includes a loyalty program that provides customer rewards for use of the card, and we enable online purchase, registration and reloading of cards for customers at www.mytullyscard.com. Business and nonprofit enterprises may purchase Tully’s Coffee Cards in bulk and co-label them for use as incentives or rewards for customers, employees and supporters.

Tully’s actively uses social and interactive media to communicate with customers. Through Facebook, Twitter, Text Club, Tell Tully’s™ and other social media platforms, we are able to solicit feedback on our beverage offerings, engage customers with topical pop culture banter, promote current marketing initiatives and receive feedback regarding retail store experiences.

Employees

As of April 3, 2011, we employed approximately 670 people, with approximately 633 employed in retail stores and regional retail operations. Approximately 37 work in our administrative, retail and licensee/franchisee support staff. We have decreased our staff overall by nearly 8% since the end of Fiscal 2010; this includes a 33% decrease in corporate administrative staff in the same time period. We have instituted these reductions to bring our general and administrative costs in line with the operations of the business, in an attempt to minimize the costs and optimize the efficiencies of running our business.

We offer a competitive benefits program to employees who work at least 28 hours per week. Eligible employees receive vacation, holidays, medical and dental insurance and other benefits. Store managers, and district managers participate in incentive pay programs tied to various performance criteria. None of our employees are represented by a labor union and management anticipates this will continue to be the case. Tully’s believes that its current relations with employees are satisfactory.

We believe that training and developing our coffeehouse employees and retail managers is essential to fulfilling our mission of creating the Tully’s genuine community coffeehouse experience for our customers. Delivering superior, personalized customer service reflects the soul of who we are as a company. We have specific in-store and classroom training requirements for all new retail store employees. Our training program provides our more experienced employees with advanced training in coffee history, beverage preparation, cash handling, cash register and paperwork procedures, sales techniques, and customer service. We also provide advanced training programs for our store and district managers and “train the trainers” programs for our training staff.

To promote operational and cultural consistency with company-operated stores, we require our franchisees to undergo similar training before opening their first coffeehouse and to provide ongoing classroom and in-store training to their coffeehouse employees. Employees at franchised locations generally complete a certification process that is comparable to the program that we offer to our coffeehouse employees.

Competition

With the exception of Starbucks, which leads the retail specialty coffee segment, the industry is highly fragmented and contains no other company with a strong national brand. In addition to Starbucks, we compete with regional coffeehouses, such as Coffee Bean & Tea Leaf, and Peet’s Coffee & Tea, as well as numerous local coffee shops, convenience stores, restaurants, street vendors and, to a certain degree, quick service restaurants such as McDonalds and Krispy Kreme. In addition, consumers may choose non-coffee food and beverages offered by these and other competitors as alternatives to our offerings.

We believe that our customers choose among coffeehouses based upon the quality and variety of the coffee and other products, store atmosphere and convenience, customer service and price.

We expect the gourmet coffee market to become even more competitive, both within our primary geographic markets and in other regions of the United States, as regional companies expand and attempt to build brand awareness in new markets and as smaller participants are consolidated into larger competitors. We believe that there is an opportunity for many companies to compete in the gourmet coffee segment, and that the preferences and needs of consumers, owners of retail store buildings, coffee growers, coffee store employees, wholesale distributors and other constituents of the specialty coffee industry will support continued competition in this segment.

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This Annual Report on Form 10-K contains forward-looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties. You should carefully consider the risks described below, as well as the other information contained in this report, including our consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Any of the risks described below could materially and adversely affect our business, prospects, financial condition and results of operations.

If we are unsuccessful in executing our Fiscal 2012 business plan, we will need to raise additional capital to fund our business and continue as a going concern.

In their report dated July 1, 2011, our registered public accounting firm stated that our financial statements for the fiscal year ended April 3, 2011 were prepared assuming we would continue as a going concern; however our recurring losses and limited working capital raise substantial doubt about our ability to continue as a going concern. As of April 3, 2011 we had cash and cash equivalents of $2.8 million, of which $540,000 was held in TCAPPLP and limited in use, and a working capital deficit of $8.3 million. Our ability to continue as a going concern is in doubt as a result of our historical recurring losses from operations and is subject to our ability to restructure the Company in a manner that will return it to profitability or raise additional capital from debt, equity or the sale of assets. If sources of capital are unavailable, or are available only on a limited basis or under unacceptable terms, then the Company could be required to substantially reduce or discontinue its investments in store improvements, new customers and new products; reduce operating, marketing, general and administrative costs related to its continuing operations; or limit the scope of its continuing operations. Due to various contractual obligations of the Company, including store operating leases, supply agreements and franchise agreements, the Company may not have the discretion to reduce operations in an orderly manner to a more sustainable level. The potential sale of stores or other income-producing assets could adversely affect future operating results and cash flows.

We have a history of losses and expect to incur losses in the future.

We have incurred net losses in every year since inception except for Fiscal 2006 and Fiscal 2009, when we reported net income as a result of a $17.0 million and a $28.7 million gain on the sale of intellectual property assets, respectively. We expect to report a net loss for Fiscal 2012 and likely will incur losses in future periods.

We incurred a net loss of $5.4 million in Fiscal 2011. We continue to use significant amounts of our cash resources to fund our net losses, working capital and capital expenditure requirements. As of April 3, 2011, we had cash and cash-equivalents of approximately $2.8 million, including $540,000 that was held in our Asian joint venture, called Tully’s Coffee Asia Pacific Partners, LP (“TCAPPLP”) and limited in its use for corporate spending, compared to approximately $7.1 million in cash, cash equivalents and escrow receivable as of March 28, 2010, of which $1.0 million was held in TCAPPLP and limited in its use for general corporate spending.

We will need to raise additional capital to fund our business if sales volumes do not meet our expectations of sustained increases during Fiscal 2012.

Our retail and specialty businesses have incurred significant operating expenses and losses. As we continue to operate our business, we expect these losses to continue. Based on our current projections, if sales volumes do not meet our expectations of sustained increases through Fiscal 2012 we may not have sufficient resources to cover our working capital and capital expenditure requirements and, without additional sources of capital, there will be substantial doubt that the Company will be able to continue as a going concern.

In order to maintain an appropriate level of liquidity, the Company believes it will need to either effectively implement its operational plans and objectives or obtain additional capital in the next six to nine months in order to fund its working capital requirements for the remainder for Fiscal 2012.

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Financing alternatives available to us would likely involve significant interest and other costs or could be highly dilutive to our existing shareholders. There can be no assurance any debt or equity financing arrangement will be available to us when needed on acceptable terms, if at all. In addition, there can be no assurance that these financing alternatives would provide us with sufficient funds to meet our long term capital requirements. If we are unable to secure additional financing or generate sufficient cash flow from operations to fund our working capital and capital expenditure requirements, we could be required to sell stores or other significant assets to provide capital to fund our business. The sale of stores or other income-producing assets could adversely affect our future operating results and cash flows.

We require a significant amount of cash, which may not be available to us, to fund our capital and liquidity needs.

For most of our history, we have not generated sufficient cash to fully fund operations. We historically have financed this cash shortfall through borrowings, assets sales and through cash provided under our international licensing relationships. We need to obtain additional financing, complete another strategic transaction or sell significant assets to provide future capital to fund our business. We may not be able to obtain additional financing in amounts or on terms acceptable to us, if at all.

If we are not able to successfully execute on our Fiscal 2012 operating plan, and if we are unable to obtain financing or consummate a strategic transaction, our financial condition and results of operation will be materially adversely affected.

Our ability to execute on our Fiscal 2012 operating plan and to manage our costs in light of persisting adverse economic conditions continues to be critical to the success and the performance of our business. During Fiscal 2010 and into Fiscal 2011, these economic conditions continued to negatively affect our business. We continually monitor our results against our operating plan, while also working to reduce costs in every area possible, including additional cuts to our administrative staff as recently as April 26, 2011. Despite the continued refinements and cost cutting measures implemented, we no longer have sufficient margin in our plan to absorb further declines against our expectations.

Because we do not believe that we are able to achieve additional material cost reductions, if our sales volumes decline during Fiscal 2012 we may be unable to generate enough cash flow from operations to cover our working capital and capital expenditure requirements into Fiscal 2013.

GMCR acquired all of our intellectual property, including all worldwide rights to the Tully’s and Bellaccino names and brands. Our rights to use our names and brands after are subject to our license agreement with GMCR.

Our rights to use the Tully’s names and brands in our retail and specialty businesses, including with respect to our franchise business and in foreign markets, are subject to the terms and conditions set forth in our license agreement with GMCR. We could lose our exclusive rights to operate retail stores using the Tully’s brand and to engage in the wholesale sale of licensed products outside of North America in certain circumstances. In addition, the license agreement may be terminated by GMCR in the event of any uncured breach by us of a material obligation under the license agreement, and in certain other circumstances. Termination of the license agreement would have a material adverse effect on our business.

If our brand image is tarnished and our product quality diminished, our business may suffer.

The Tully’s brand may be harmed by factors that are outside of our control.

Our success depends on GMCR’s ability to maintain brand image for our existing products and effectively build up brand image for new products and brand extensions. There can be no assurance, however, that GMCR will maintain existing advertising and marketing campaigns or that such efforts will have a positive effect on the Tully’s brand. GMCR’s failure to maintain product quality, or allegations of product contamination, even when false or unfounded, could tarnish the image of the Tully’s brand and may cause consumers to choose other products.

Our franchisees or TCJ, the owner of our brand in Japan, may fail to operate Tully’s coffeehouses in a manner consistent with our standards and requirements. We have no control over TCJ’s use of the Tully’s brand within Japan. Although our franchise agreements regulate franchisee behavior to some extent, enforcing remedies under franchise agreements typically requires litigation, and our image and reputation may suffer even if such litigation is successfully concluded. If any of our franchisees acts in a manner inconsistent with our beliefs or preference, it could damage the value of the Tully’s brand in that franchisee’s territory, and such damage could spread to other territories.

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Our success also depends in part on our continued ability to use our licensed Tully’s trademarks and trade dress in order to increase brand awareness and further develop the Tully’s brand in both domestic and foreign markets. If our efforts to protect our licensed intellectual property rights are not adequate, or if any third party misappropriates or infringes them, the value of the Tully’s brand may be harmed. We may become engaged in litigation to protect our rights, which could result in substantial costs to us as well as the diversion of management’s attention.

Finally, customers who purchase our whole bean or ground coffees may improperly store the coffees or prepare beverages from our coffee incorrectly, in either case potentially affecting the quality of the coffee prepared from our products. If customers do not perceive our products to be of high quality, then the value of the Tully’s brand may be diminished and our ability to implement our business strategy may be adversely affected.

We are dependent on GMCR for supplies of coffee and related products.

GMCR will use commercially reasonable efforts to supply to us, and we will purchase all of our requirements of whole bean and ground coffee and other coffee products for an initial term through March 27, 2014. If GMCR is unable to supply all of our requirements for coffee and related products, the pricing under our supply agreement with GMCR is not competitive with market prices or we are unable to maintain specified purchase volumes, our business would suffer.

Moreover, if the supply agreement were terminated, our coffee supplies would be disrupted and we would need to source our coffee from new vendors, who may be unable or unwilling to match the quality and pricing under the supply agreement. Economic conditions and growth trends in the green coffee industry could materially and adversely affect our ability to obtain an adequate supply of coffee to supply our license and franchise partners and retail customers.

Our supply agreement with GMCR may not allow us to obtain market rate coffee pricing in future periods and may hinder our ability to obtain market level prices for any potential asset sales.

Because of our supply agreement with GMCR, we are limited to offsetting the cost exposure of the main commodity used in our business, as we are unable to enter into fixed-price purchase commitments with other roasters. An increase in the market price of coffee beans could significantly reduce our operating income and we may be unable to adjust our retail prices to offset the increased coffee price. In addition, the Supply Agreement may decrease the value of our assets in a potential sale because it limits our ability to purchase coffee beans from other roasters.

Our failure to compete successfully against current or future competitors could have a material adverse effect on our business, including loss of customers, declining sales and loss of market share.

The gourmet coffee market is highly competitive. A number of our competitors, Starbucks in particular, have much greater financial and marketing resources, brand recognition and customer bases than we do. In the retail specialty coffee segment, we compete with industry leader Starbucks as well as regional coffeehouses, such as Coffee Bean & Tea Leaf and Peet’s Coffee & Tea, and local coffee shops, convenience stores, restaurants, street vendors and, to a certain degree, quick service restaurants such as McDonalds and Krispy Kreme.

We expect the gourmet coffee market to become even more competitive, both within our primary geographic markets and in other regions of the United States, as regional companies expand and attempt to build brand awareness in new markets and as smaller participants are consolidated into larger competitors.

New products may not be accepted in current or future markets. Failure to achieve market acceptance of new products will adversely affect our revenues.

Our beverage and food offerings are built around core product families that enable us to introduce new items that we hope will appeal to a broad range of customers, at different day-parts, to suit different geographic markets and climates. We believe that the introduction of these new products is important to the growth of our revenues for existing stores and future markets. Acceptance of new products may vary in different geographic markets, and may be not be embraced by customers in our current or future markets. If our new products are not accepted, our operating results would be adversely affected.

If we lose key personnel upon whom we are dependent, we may not be able to manage our operations and meet our strategic objectives.

Many key responsibilities of our business have been assigned to a relatively small number of individuals. Our future success depends to a considerable degree on the vision, skill, experience and effort of our senior management team. The loss of any of our key management employees could have a significant impact on our ability to effectively manage our operations and implement our business strategy.

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Our current level of administrative staffing may be insufficient to support our ongoing operations.

Between March 28, 2010 and April 4, 2011, we have decreased our corporate administrative staff by 33%, as well as implementing other cost saving initiatives. This level of staffing may require us to outsource certain tasks to third-party providers or reduce our ability to implement our business strategy. Our current level of administrative staff may not be sufficient to support sustained growth or our operations.

Our franchisees, and the laws that govern the franchise relationship, could hinder our ability to grow.

We rely on our franchisees to develop territories in which we choose not to open company-operated stores. We rely on their local knowledge to successfully address the needs of their territories. If a franchisee is unable to address these needs, we may be unable to sustain our presence in new regions.

Many of our franchise agreements grant exclusive rights to certain territories that last for multiple years. These rights not only prevent other franchisees from operating in the franchised territory, but also could prevent us from opening company-operated stores in the territory. If a franchisee is slow or fails to open new stores in its territory, we or another franchisee could be prevented or delayed from opening stores in that same territory. If such an event occurs, our ability to implement our business strategy may be adversely affected.

We are subject to federal regulation and state laws that govern the offer and sale of franchises and the franchisor-franchisee relationship. The failure to obtain or retain required licenses or registration approvals to sell franchises could delay or preclude franchise sales and otherwise adversely affect our business, financial condition and results of operations. Additionally, any franchise law violations may give existing and future franchisees a basis to bring claims against us, which could result in rescission of the franchise agreement, damages or other relief. Assertion of such claims against us could adversely affect our business, financial condition, and results of operations.

Our current financial position and liquidity issues make it difficult to attract new and qualified franchisee candidates.

We may not be able to attract new and qualified franchisees because of our current financial position and liquidity issues, which could inhibit our ability to grow. Our business is heavily dependent on our ability to maintain and develop our brand, which depends, in part, on our ability to retain or expand our geographic footprint. If any of our franchisees acts in a manner inconsistent with our beliefs or preference, it could damage the value of the Tully’s brand in that franchisee’s territory, and such damage could spread to other geographical regions.

The current economic crisis could adversely impact our business and financial results and have a material adverse impact on our liquidity and capital resources.

As a retailer that is dependent upon consumer discretionary spending, we will continue to face achallenging operating environment in Fiscal 2012 if customers have less money for discretionary purchases as a result of continuing job losses, foreclosures, bankruptcies, reduced access to credit and a stagnant housing market. The sustained economic downturn could potentially have a material adverse effect on our liquidity and capital resources.

We occupy our company-owned stores under long-term leases, and we may be unable to renew leases at the end of the lease periods or obtain new leases on acceptable terms.

All of our retail stores are located on leased premises or locations otherwise controlled by third parties. Many of our current leases are non-cancelable and typically have terms of several years. Therefore, we could be required to continue lease payments for a store that we would otherwise wish to terminate. We also may not have the right or option to renew some of our existing leases. We face intense competition from both restaurants and other specialty retailers for suitable sites for new stores, and if we are unable to renew an existing lease, we would be obligated either to find a new location or close the coffeehouse. If we negotiate a new lease or lease extension at an existing location, the rent may increase substantially. In either case, our existing operations and operating results could be adversely affected. Additionally, because we compete with other retailers and restaurants for store sites and some landlords may grant exclusive locations to our competitors, we may not be able to obtain new leases or renew existing leases on acceptable terms.

We have limited supplier choices for many of our products, and the inability of certain of these suppliers to meet our needs could disrupt our operations.

We are dependent on GMCR for coffee roasting, packaging and distribution. For certain of our other products, we either have limited or no replacements readily available. Additionally, a significant interruption in supply from GMCR or our other key vendors would significantly impair our ability to operate our business on a day-to-day basis and would adversely affect our operating results.

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In addition, we use local bakeries to supply our stores with bakery items. These bakeries typically have limited capital resources to fund growth, and therefore may be unable to meet our needs as we grow. Small bakeries are generally more sensitive to increases in prices for raw ingredients for their products as compared to larger, commercial operations. Furthermore, as we enter new markets, we may be unable to find quality, local bakeries that meet our needs. If this occurs we may not be able to offer bakery products in coffeehouses in that area, or we could be forced to purchase bakery products at higher costs or of lower quality elsewhere, either of which could adversely affect our operating results.

Our business is dependent on a healthy economic climate in our principal geographic markets.

Our product offerings are discretionary items in our customers’ budgets. Adverse economic trends may cause consumers to reduce their discretionary spending, which could have an adverse impact on our revenues. Because our retail stores are concentrated in the Seattle and San Francisco markets, an economic downturn in those regions could have a material adverse effect on our business and operations.

We face the risk of adverse publicity and litigation, actual or threatened, in connection with our products and operations.

We may from time to time be subject to complaints or actual or threatened claims from consumers alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from these allegations may materially adversely affect us, regardless of whether the allegations are valid or whether we are liable. In particular, instances of food-borne illness whether or not traced to our stores or products, could reduce demand for our menu offerings, hurt our brand image or lead to litigation and liability. If any of our customers become ill from consuming our products, the affected stores may be forced to close or a product recall may be required. In addition, employee claims against us based on, among other things, discrimination, harassment or wrongful termination may divert financial and management resources that would otherwise be used to benefit our future performance. There is also a risk of litigation from our franchisees with regard to the terms of our franchise arrangements. We have been subject to a variety of claims from time to time, and future claims could materially adversely affect our business, prospects, financial condition, operating results or cash flows.

We are subject to numerous and changing government regulations. Changes in, or failure to comply with, these regulations could negatively affect our sales, increase our costs, result in fines or other penalties against us or harm our growth strategy.

Each retail location is subject to licensing and reporting requirements by a number of governmental authorities. These governmental authorities include federal, state and local health, environmental, labor relations, sanitation, building, zoning, fire, safety and other authorities that have jurisdiction over the development and operation of our retail locations. Our activities are also subject to the Americans with Disabilities Act and related regulations, which prohibit discrimination on the basis of disability in public accommodations and employment. Changes in any of these laws or regulations could have a material adverse effect on our business, financial condition and results of operations. A failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of facilities for an indeterminate period of time, or third party litigation, any of which could have a material adverse effect on us and our results of operations.

Our ability to use our net operating loss carryforwards may be subject to limitation.

An ownership change, which may occur if there is a transfer of ownership exceeding 50% of our outstanding shares of common stock in any three-year period, may lead to a limitation on the usability of, or a potential loss of some or all of, our net operating loss carryforwards or NOLs.

Because the regulations governing NOLs are highly complex and may be changed from time to time, and because our attempts to prevent an ownership change from occurring may not be successful, the NOLs could be limited or lost. To the extent the NOL’s become unavailable to us; our future taxable income and that of any consolidated affiliate will be subject to federal income taxation, thus reducing funds otherwise available for corporate purposes.

We have been unable to secure a partner to buy out one-half of our joint venture partner’s interest in TCAPPLP, and currently have $4.0 million overdue as a TCAPLLP obligation. This obligation could have an adverse impact on our international operations.

In 2008 TCAP, our wholly-owned subsidiary, and Asia Food Culture Management Pte. Ltd. (“AFCM”), a Singapore company and the limited partner in TCAPPLP, established a joint venture to develop the Tully’s brand in Asia (excluding Japan), Australia and New Zealand through franchising and licensing activities, retail store operations, coffee roasting, wholesale distribution and other business activities. In 2009 TCAP agreed to purchase, or cause a third party to purchase, one-half of AFCM’s partnership interest in TCAPPLP. As of April 3, 2011, TCAP had not met its obligation. TCAP and AFCM continue to work on a settlement and to seek a buyer for AFCM’s partnership interest. If TCAP is unsuccessful in either finding a buyer for AFCM’s interest or in its settlement negotiations, we could face adverse economic consequences surrounding our wholly owned subsidiary TCAP.

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Risks Relating to Our Industry

Fluctuations in the availability and cost of the products used by our stores may affect our results of operations.

Our future success depends to a large extent upon the availability of high-quality green Arabica coffee beans at reasonable prices. The cost of our coffee beans is subject to a range of factors, many of which are beyond our control. Coffee prices generally increased for Tully’s since Fiscal 2009. There has been increasing demand for Arabica coffee beans that could put additional upward pressure on prices or limit the quantities available to us. Natural events, civil unrest and labor issues or shipping disruptions could interrupt the supply of these premium beans or affect the cost. Green coffee bean prices have been affected in the past, and could be affected in the future, by the actions of organizations that have attempted to influence commodity prices of green coffee beans.

In addition, increases in the cost of other raw materials (such as paper and dairy), natural resources (such as energy and gasoline) or the price we pay for our baked goods, could result in an increase in the costs of the products served in our stores. Our ability to raise prices in response to rising costs of coffee beans or other raw ingredients may be limited, and our profitability could be adversely affected if the costs of our inputs were to rise substantially. Moreover, passing price increases on to our customers could result in losses in sales volume or margins in the future. Rapid, sharp decreases in the cost of our raw ingredients could also force us to lower sales prices before we have realized cost reductions in our inventory. Such cost fluctuations could adversely affect our gross margins, or force us to increase the retail and wholesale prices for our products.

Increasing labor costs could adversely affect our results of operations and cash flows.

Many of our employees are hourly employees whose wages may be affected by increases in the federal, state or municipal “living wage” rates. Numerous proposals have been made on federal, state and local levels to increase minimum wage levels. An increase in the minimum wage may create pressure to increase the pay scale for our employees, which would increase our labor costs and those of our franchisees.

We face significant competition in recruiting qualified employees and managers for our retail stores. A shortage in the labor pool, an increase in the costs of employee benefits or other general inflationary pressures could also increase labor costs. In addition, changes in labor laws or reclassifications of our employees from management to hourly employees could affect our labor cost. An increase in labor costs could have a material adverse effect on our results of operations and cash flows if we are unable to recover these increases by raising the prices we charge our customers.

Many companies in our industry face various lawsuits filed by hourly, nonexempt employees alleging various violations of wage and hour employment laws, including without limitation, overtime pay, missed meal and rest periods, and tip sharing. We are currently defending a lawsuit in California filed by a former store employee alleging that Tully’s failed to provide adequate meal and rest periods for its employees. The plaintiff is seeking class action certification on behalf of all hourly employees in Tully’s California stores. The details of this particular lawsuit are more fully described in “Legal Proceedings.”

Moreover, our costs could be negatively affected by an unpredictable workers’ compensation environment. For example, many of our employees are located in California, which has experienced higher workers compensation costs and rates than other states. Increases in insurance premiums could impair our profitability.

The products we serve contain certain ingredients, the health effects of which are not fully understood.

Our gourmet coffees and many of our other beverages contain caffeine and other ingredients, the health effects of which are not fully understood. A number of research studies conclude or suggest that excessive consumption of caffeine may lead to increased heart rate, nausea and vomiting, restlessness and anxiety, depression, headaches, tremors, sleeplessness and other adverse health effects. Harmful effects of caffeine consumed by pregnant women are also the subject of several research studies.

We also serve products that contain ingredients other than caffeine, such as sugars, fats, and carbohydrates. Public interest groups have focused attention on the marketing of high-fat and high-sodium foods to children in a stated effort to combat childhood obesity.

An unfavorable report or public opinion on the health effects of the ingredients used in our products, particularly caffeine, could significantly reduce the demand for our products, which could harm our business and reduce our sales and profitability.

Consumer preferences related to coffee, dairy and bakery products could adversely affect our revenues or our costs.

Because our business is predominantly dependent on a single product, gourmet coffee, we are vulnerable to changes in consumer preferences and economic conditions that could harm our financial results. Consumer preferences can change rapidly and without warning, moving from one trend to another among many product or retail concepts. Shifts in consumer preferences away from the gourmet coffee segment would have a material adverse effect on our results of operations. Our continued success will depend in part on our ability to anticipate, identify and respond quickly to changing consumer preferences and economic conditions.

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We rely heavily on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our ability to effectively operate our business.

We rely heavily on information technology systems across our operations, including for management of our supply chain, point-of-sale processing in our stores, gift cards, online business and various other processes and transactions. Our ability to effectively manage our business and coordinate the production, distribution and sale of our products depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could cause delays in product sales and reduced efficiency of our operations, and significant capital investments could be required to remediate the problem.

Risks Related to Our Capital Stock

There is no trading market for our stock, and no assurance such a market will develop in the future.

There is no public market for our common stock or our preferred stock. Consequently, the liquidity of an investment in our capital stock is limited. We cannot offer any assurance that an active trading market for our common stock will develop or how liquid that market may become.

Our two largest shareholders have significant influence over matters subject to shareholder vote and may support corporate actions that conflict with other shareholders’ interests.

As of April 3, 2011, we had approximately 5,000 owners of record of our common stock. Notwithstanding this large number of shareholders, as of April 3, 2011, Mr. Tom T. O’Keefe, our founder and chairman, beneficially owned approximately 14.7% of our common stock, and the estate of Mr. Keith McCaw beneficially owned approximately 4.9% of our common stock as well as 15.6% of the outstanding Series A Preferred stock. The shareholdings of Mr. O’Keefe and the estate of Mr. McCaw gives each of these shareholders individually, and on a combined basis if acting in unison, the ability to significantly influence the election of our directors and other matters brought before the shareholders for a vote, including any potential sale of Tully’s. The voting power held by Mr. O’Keefe and by the estate of Mr. McCaw could prevent or significantly delay another company from acquiring or merging with us, even if the acquisition or merger was in the best interests of our shareholders.

Payment of liquidation preferences to holders of our Series A Preferred Stock could result in little or no proceeds remaining available for other shareholders.

Our articles of incorporation provide that our Series A Preferred stock is senior to the shares of common stock for a stated dollar amount of liquidation preferences, and the Series B Preferred stock is junior to a stated dollar amount of liquidation preference of both the Series A Preferred stock and the common stock. If we were acquired or sold all or a substantial portion of our assets at a time when our preferred stock is outstanding, the amounts remaining for distribution to shareholders might be less than the aggregate liquidation preferences of the more senior shareholders, and no amounts might be available for distribution to the more junior shareholders.

Not Applicable.

As of April 3, 2011, Tully’s operated 74 retail stores in the United States, all of which are located on property leased by, or otherwise provided to, us. Our retail stores vary in size, with an average of 1,700 feet per location. These retail space leases provide for minimum annual payments, and (in certain cases) contingent rentals based upon gross sales, escalation clauses and/or options to renew. We lease approximately 17,800 feet of office, storage, and training space in Seattle, Washington, to house our headquarters pursuant to a ten-year lease expiring May 2020 and subject to two five-year options to renew and early termination provisions at five years.

In December 2007, a lawsuit was filed against Tully’s in California state court by a former store employee alleging that Tully’s failed to provide meal and rest periods for its employees. The plaintiff sought class action certification on behalf of all hourly employees in Tully’s California stores. Similar lawsuits alleging missed meal and rest periods have been filed in California against many other companies. We believe that Tully’s complied with all laws that require providing meal and rest periods for its employees, but agreed to settle this lawsuit through binding arbitration. This matter was settled in September 2010 in the amount of $375,000, all of which was disbursed to the class.

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On May 17, 2011, a lawsuit was filed against the Company in California state court by JH Development, LLC, a franchise area developer, alleging that (i) at the time the Company entered into agreements with the plaintiff, the Company concealed its financial strength and the fact that it was contemplating a sale of its wholesale division and rights to the “Tully’s” trademark; (ii) the Company breached the franchise agreements with the plaintiff; (iii) the Company made false promises to the plaintiff; and (iv) the Company violated certain provisions of the California Corporations Code governing the sale of franchises. The plaintiff is seeking damages, rescission, and attorneys’ fees and costs. We are investigating the claims, have retained California counsel, have removed the case to federal court in the Central District of California, and intend to vigorously defend this litigation, but cannot predict the outcome or financial impact to the Company at this time. We are a party to various other legal proceedings arising in the ordinary course of our business, but are not currently a party to any other legal proceeding that we believe could have a material adverse effect on our financial position or results of operations.

From time to time we are involved in legal proceedings that arise in the ordinary course of our business. Any such proceedings, whether meritorious or not, could be time consuming, costly, and result in the diversion of significant operational resources or management time.

Although the outcomes of legal proceedings are inherently difficult to predict, we are not currently involved in any legal proceeding in which the outcome, in our judgment based on information currently available, is likely to have a material adverse effect on our business or financial position.

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PART II

Market Information, Holders and Dividends

Currently there is no public market for Tully’s common stock. As of April 3, 2011 there were approximately 5,000 holders of record of Tully’s common stock.

A special distribution was paid on May 20, 2009, to shareholders of record on the close of business on April 30, 2009. We presently do not have a plan to pay further distributions or dividends to shareholders. We intend to retain and use earnings, if any, to finance the growth of our business for an indefinite period. Any determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, results of operations, capital requirements, restrictions under our borrowing agreements, and such other factors as the board of directors deems relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information

(As of April 3, 2011)

In 1994, Tully’s shareholders approved the 1994 Stock Option Plan, pursuant to which we issued incentive or nonqualified stock options to our employees and directors. In August 1999 our shareholders approved an amended plan (the “1994 Option Plan”), which established the maximum number of shares issuable under the 1994 Option Plan and the Employee Stock Purchase Plan at 525,000 shares. The 1994 Option Plan expired on October 19, 2004 (this did not terminate outstanding options). As of April 3, 2011, options for 11,368 shares were outstanding under the 1994 Option Plan and options for 121,890 shares had been exercised under the 1994 Option Plan, and no shares had been issued under the Employee Stock Purchase Plan.

In December 2004, Tully’s shareholders approved the 2004 Stock Option Plan. The 2004 Stock Option Plan authorizes the issuance of up to 312,500 shares of common stock under the 2004 Stock Option Plan and Tully’s Employee Stock Purchase Plan. As of April 3, 2011, options to purchase 220,119 common shares were outstanding under the 2004 Stock Option Plan, options for 136,717 shares had been exercised under the 2004 Stock Option Plan and no shares had been issued under the Employee Stock Option Plan.

In March 2010, Tully’s shareholders approved the 2010 Stock Option Plan. The 2010 Stock Option Plan authorizes the issuance of up to 312,500 shares of common stock under the 2010 Stock Option Plan and Tully’s Employee Stock Purchase Plan. As of April 3, 2011, no options had been granted under the 2010 Stock Option Plan and no shares had been issued under the Employee Stock Option Plan.

Stock options are granted solely at the discretion of our board of directors and are issued at a price determined by our board of directors. The term of each option granted is for such period as determined by our board of directors, but not more than ten years from date of grant. Options are nontransferable and may generally be exercised based on a vesting schedule determined by our board of

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directors. Options may be either incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, or nonqualified stock options. Our shareholders also previously approved the Employee Stock Purchase Plan, under which employees would be permitted to purchase common stock from the Company. No offerings have been made to employees under the Employee Stock Purchase Plan.

Recent Sales of Unregistered Securities

None.

Recent Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

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The following table sets forth selected historical consolidated financial data for our company. The selected financial information set forth below under the captions “Results of Operations Data” for Fiscal 2009 - 2011, and the selected “Consolidated Balance Sheet Data” as of March 28, 2010 and April 3, 2011, have been derived from our audited consolidated financial statements included elsewhere in this report. The selected historical consolidated financial information set forth below under the captions “Results of Operations Data” for Fiscal 2007 - 2008 and the selected “Consolidated Balance Sheet Data” as of April 1, 2007, March 30, 2008 and March 29, 2009, have been derived from our audited financial statements that are not included in this report.

The data presented below should be read in conjunction with, and is qualified in its entirety by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and the notes thereto appearing elsewhere in this report.

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Notes for Selected Financial Data

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The following discussion and analysis of our financial condition and results of operations for Fiscal 2009, Fiscal 2010, and Fiscal 2011, should be read together with our consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this report.

Business Overview

Since our founding in 1992, our objective has been to make our gourmet coffees and genuine community coffeehouse experience the first choice for consumers in our markets. To achieve this goal, we have made significant investments in marketing and building our brand and have concentrated on opening company-operated retail stores and developing our wholesale and specialty business. We have filed reports under the Securities Exchange Act of 1934 since 1999.

Between 1992 and 2001, we expanded to 114 company-operated stores. During this period, we financed our retail expansion by raising over $60 million in equity securities and convertible debt, and over $17 million in licensing fees paid to us by foreign licensees. Between Fiscal 2001 and 2003, our financial performance was negatively impacted by the economic downturn that affected Seattle and San Francisco. During the same period, the market for new equity issues deteriorated significantly. To manage through this period and these challenges, rather than to seek additional and potentially dilutive growth capital, we chose to reduce normal operating expenses by closing certain under-performing stores and slowing our new store development plans to preserve capital. From Fiscal 2006 through Fiscal 2007, we undertook a strategic business review and began implementing initiatives to improve our financial position and create a foundation for future growth. In Fiscal 2008 and Fiscal 2009, based on sustained losses and a continuing general economic downturn, we sold a large portion of our assets, in the sale of our wholesale division to GMCR, thereby reducing our core business to retail, franchised and licensed store locations. In Fiscal 2010 and Fiscal 2011, we have taken measures to “right size” our business through various initiatives and cost-cutting measures, including the closure of underperforming company-owned locations which may continue in future periods as we evaluate our ongoing operations.

We are a specialty gourmet coffee retailer. We generate revenues through two operating divisions:

For most of the fiscal years since our founding, we have not generated sufficient cash to fully fund operations. We historically have financed this cash shortfall through the issuance of debt and equity securities, borrowings, asset sales, and cash provided under our international licensing relationships.

On March 27, 2009, we completed the sale of the assets associated with our wholesale business and supply chain (including Tully’s business names and trademarks) to Green Mountain Coffee Roasters, Inc. (“GMCR”), a Delaware corporation, pursuant to the Asset Purchase Agreement dated September 15, 2008, as amended by Amendment No. 1 thereto dated November 12, 2008, and Amendment No. 2 thereto dated February 6, 2009, by and among the TC Global, Inc., GMCR and Tully’s Bellaccino, LLC (the “Green Mountain Transaction”).

In connection with the closing of the Green Mountain Transaction, we entered into a Supply Agreement, a License Agreement, and a Noncompetition Agreement with GMCR. We also secured a perpetual license to use the “Tully’s” brand and other trade names, trademarks and service marks in connection with certain (i) retail operations worldwide (excluding Japan) and (ii) wholesale business outside of North America, utilizing an exclusive coffee supply arrangement. Our current shareholders and executive management team continue to own and operate the Company’s domestic retail business (company owned, franchised and licensed retail store locations) and international retail and wholesale businesses.

The Company has classified the results of operations for the wholesale business in discontinued operations. The discontinued operations represent only those pertaining to the Green Mountain Transaction, and do not include any results relating to those activities which are expected to continue under the License Agreement due to this continuing involvement.

In connection with the Green Mountain Transaction, we changed our corporate name to “TC Global, Inc.”

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Trends in Our Business

Retail Division.

As of April 3, 2011, Tully’s had 74 company-operated retail stores and 110 franchised stores in Washington, California, Arizona, Colorado, Idaho, Oregon, Montana, and Wyoming. Our stores are located in a variety of urban and suburban neighborhoods, and in the Seattle and San Francisco central business districts. We also operate or franchise smaller footprint stores in special venues, such as within the premises of manufacturing facilities, and kiosks and cafes that are located in grocery stores, hotels, hospitals and airports and on university campuses.

We have recently undertaken a strategic review of our retail business. As a result, we are implementing initiatives to improve our retail operations, retail distribution, store facilities and merchandising strategies. The ongoing goal of our retail division initiatives is to increase retail store average unit volume, increase comparable store sales and improve new store unit economics. We are simultaneously targeting operational improvements to enhance our retail margins and profitability. All of these initiatives are designed to collectively improve our sales and profitability.

Further, we continue to review of our retail locations and leasing arrangements. Since Fiscal 2009 we have closed fourteen locations. Some of these store closures were a result of natural closures on lease arrangements, store refranchising, and lease terminations.

Specialty Division.

Our specialty division oversees the franchising of Tully’s Coffee retail stores. Franchising complements our company-operated retail business by making Tully’s genuine community coffeehouse experience more widely available and convenient for customers. Franchising also extends the Tully’s brand and promotes consumer familiarity with Tully’s products. At April 3, 2011 there were 110 U.S. franchisee-operated stores, primarily in special venues such as grocery stores, airports, hotels and university campuses.

Additionally, our specialty division oversees Tully’s Coffee Asia, which seeks to develop the Tully’s brand in Asia (excluding Japan) and Australia, foreign licensing, wholesale distribution and other business activities. As of April 3, 2011 we had franchised four stores in Singapore and five stores in South Korea through our master licensees Kitchen Language PTE LTD (“Kitchen Language”) and DK Retail Co., Ltd., (“DK Retail”), respectively. Kitchen Language is obligated to develop 15 locations in Singapore, while DK Retail is obligated for 100 locations in South Korea.

Revenue Trends

Our quarterly sales from our retail and specialty operations are summarized as follows:

Our revenue levels are expected to increase during the third quarter due to holiday season sales on recent trends in comparable stores sales.

Operating Cost Trends

Retail Cost Trends. We experience both variable and fixed cost trends in our retail division cost structure. Cost of products (cost of goods sold), labor cost, occupancy costs other than rent, supplies, and other operating expenses typically increase or decrease according to broader pricing trends for our products. During Fiscal 2010 and Fiscal 2011, we experienced increasing pricing associated with costs for dairy, raw coffee beans, paper and baked goods, as well as minimal increases in energy-related costs. In some cases, store-level retail operating expenses may increase or decrease depending on the sales volume at a particular location. Generally, our leases provide for periodic rent increases (which are generally leveled for financial reporting purposes by “straight-line rent” accounting).

We continue to undertake certain retail business initiatives with the objective of reducing costs as a percentage of sales through increased efficiencies and operating leverage. However, initiatives intended to produce a future benefit may cause a short-term increase in costs, both in absolute dollars and as a percentage of sales. We analyze retail division operating costs as a percentage of store sales.

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Specialty Cost Trends. Most of our specialty division costs consist of labor, travel and legal expenses. Labor and travel costs have increased to support our growing U.S. franchise store base as well as the development of stores associated with the TCAPPLP joint venture. We also incur legal and compliance costs in connection with our franchising operations. U.S. franchising costs continue to decrease as a percentage of franchise royalty and license revenues as we leverage our investment in franchising infrastructure and labor, travel and legal expenses while realizing the leverage from a larger franchised store base.

Marketing, General and Administrative Cost Trends. Most of our marketing expenditures are discretionary in nature and depend on the type, intensity and frequency of the marketing programs we employ. Examples of marketing expenses include point-of-sale materials, community initiatives, sponsorships and advertising. We expect marketing expenses to remain neutral as we initiate a limited number of retail programs in Fiscal 2012, comparable to the limited programs we implemented in Fiscal 2011.

Our general and administrative costs are less discretionary than our marketing costs. We have continued to scale back expenses related to our administrative staff. During Fiscal 2010, at the beginning of Fiscal 2011 and into Fiscal 2012, we reduced our administrative staff. Over the past year, we have decreased our corporate administrative staff by 33%, as well as implementing other cost savings initiatives.

Retail Performance Measures

Our U.S. retail stores are summarized as follows:

International franchised and licensed stores at the end of each respective fiscal year are set forth in the table below:

Our quarterly comparable store sales increases (decreases) over prior year’s comparable quarter are summarized as follows:

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Results of Operations

As a result of the Green Mountain Transaction, the results of operations for the wholesale operations are reported in discontinued operations, in accordance with the guidance provided in FASB ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets (“FASB ASC 360”).

For additional information about our operating divisions, see Note 21 of the Notes to the Consolidated Financial Statements.

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Fiscal 2011 Compared To Fiscal 2010

Net Sales

Our overall net sales decreased by $1.3 million, or 3.3%. This decrease was primarily the result of a $2.2 decrease in specialty net sales, as a result of the Company’s outsourcing of its warehousing and distribution of product to DPI, and the resulting decline in product sales to our franchisees and licensees from the specialty division.

The divisional breakout in total net sales decrease)was comprised as follows:

Sales of products from company-operated retail stores increased $871,000 to $36.3 million, principally due to an increase in comparable retail stores sales of 4.8%, or $1.5 million, in addition to a $1.3 million increase from the opening of new stores, all partially offset by a decrease of $2.0 million for store closures of negatively operating locations during Fiscal 2011.

The factors comprising the retail sales increase are summarized as follows:

Cost of Goods Sold and Operating Expenses

Cost of goods sold and related occupancy costs increased $181,000, or 1%, to $17.3 million for Fiscal 2011 as compared to Fiscal 2010. Retail cost of goods sold as a percent of retail store sales remained steady at 36.2% in Fiscal 2011 as compared to 35.9% in Fiscal 2010 reflecting continued initiatives to decrease product costs and optimize product mix. Retail occupancy expenses as a percent of retail store sales decreased to 10.8% in Fiscal 2011 from 12.4% in Fiscal 2010, reflecting our closures of retail locations where occupancy costs as a percent of retail sales were too high.

Store operating expenses decreased to 43.3% as a percent of retail store sales in Fiscal 2011 and as compared to 44.1% in Fiscal 2010 as a result of continued initiatives to focus on costs associated with programs to improve retail store service levels, including store staffing and improved training programs.

Other operating expenses (expenses associated with all operations other than company-operated retail stores) decreased $330,000, or 14.1%, to $2.0 million during Fiscal 2011 from $2.3 million in Fiscal 2010. The decrease reflects our continued focus on minimizing expenses while at the same time increasing U.S. and International franchise and license businesses.

Marketing, general and administrative costs increased slightly by $319,000 or 4.9%, to $6.8 million during Fiscal 2011 from $6.5 million in Fiscal 2010. This increase was primarily due to an increase in legal costs during the year, and the payouts we made to settle two cases against the Company. (See Note 17 of the “Notes to the Consolidated Financial Statements” for further details).

Depreciation and amortization expense decreased $276,000, or 23.2%, to $915,000 for Fiscal 2011 from $1.2 million for Fiscal 2010, reflecting a lower level of depreciable assets as we reduce corporate office space and lower our depreciable store base, as well as the age of our existing asset base.

Other Income (Expense)

Miscellaneous expense decreased $13,000 or 11.3% to $102,000 for Fiscal 2011 as compared to $115,000 for Fiscal 2010, primarily due to foreign exchange losses.

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Noncontrolling Interest

A loss of $151,000 was attributable to Asia Food Culture Management Pte. Ltd. (“AFCM”), a Singapore company and the limited partner in TCAPPLP, compared to a loss of $188,000 in Fiscal 2010, as the overall net loss attributable to TCAPPLP decreased in Fiscal 2011.

Income Taxes

In Fiscal 2011 we experienced a $66,000 income tax benefit reflecting the California Empowerment Zone credits that were claimed in the March 28, 2010 California State Income Tax Return. In Fiscal 2010 we experienced a $764,000 income tax benefit reflecting the five year Alternative Minimum Tax, or AMT, carryback changes enacted as part of the stimulus package for our fiscal years beginning Fiscal 2005.

At April 3, 2011, we had federal and state net operating loss carryforwards of approximately $34.2 million and $12.5 million, respectively. The federal net operating loss carryforwards expire between 2027 and 2031 and the state net operating losses expire between 2012 and 2032. Our net operating loss carryforwards are one of our deferred income tax assets; however, the ultimate realization of these deferred income tax assets is dependent upon generation of future taxable income. Due to the uncertainty of future taxable income, deferred tax assets resulting from these net operating losses have been fully reserved. In accordance with SFAS 109, Accounting for Income Taxes, we will assess the continuing need for a valuation allowance that results from uncertainty regarding our ability to realize the benefits of our deferred tax assets.

Net Income (Loss)

As a result of the factors described above, we had a net loss of $5.4 million for Fiscal 2011 as compared to net loss of $5.4 million for Fiscal 2010.

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Fiscal 2010 Compared To Fiscal 2009

Net Sales

Sales of products from company-operated retail stores decreased $3.2 million, to $35.4 million, principally due to the effects of closing or selling company-owned retail locations and a decrease in comparable retail stores sales of 2.8%, or $1.0 million.

The divisional breakout in total net sales increase was comprised as follows:

The retail sales decrease represented an 8.3% decrease compared to Fiscal 2009. For Fiscal 2010 comparable retail store sales declined 2.8% as a result of the economic downturn that negatively impacted our business. The factors comprising the retail sales decrease are summarized as follows:

Net sales for the specialty division increased by $3.7 million for Fiscal 2010 as compared to Fiscal 2009. The increase reflects the Company’s significant ramp in business on product sales throughout the franchise units and international expansion. Further, in prior periods the Company allocated product sales to licensed and franchise stores in the wholesale business. The Company did not reclassify these revenues out of discontinued operations as immaterial in previous periods.

Cost of Goods Sold and Operating Expenses

Cost of goods sold and related occupancy costs decreased $1.4 million, or 7.5%, to $17.1 million for Fiscal 2010 as compared to Fiscal 2009. Retail cost of goods sold as a percent of retail store sales remained steady at 35.9% in Fiscal 2010 as compared to 36.2% in Fiscal 2009 reflecting continued initiatives on product costs, product mix, and discounts reflected in sales for the stored value card loyalty programs. Retail occupancy expenses as a percent of retail store sales increased from 11.7% in Fiscal 2009 to 12.4% in Fiscal 2010, reflecting increased occupancy levels as a percent of sales with the decreased revenue levels as described above.

Store operating expenses decreased to 44.1% as a percent of retail store sales in Fiscal 2010 and as compared to 45.4% in Fiscal 2009 as a result of continued initiatives to focus on costs associated with programs to improve retail store service levels, including store staffing and new training programs.

Other operating expenses (expenses associated with all operations other than company-operated retail stores) increased $1.1 million to $2.3 million during Fiscal 2010 from $1.1 million in Fiscal 2009. The increase reflects our continued focus to increase U.S. and International franchise and license businesses.

Marketing, general and administrative costs decreased significantly by $1.2 million, or 15.8%, to $6.5 million during Fiscal 2010 from $7.7 million in Fiscal 2009. This decrease was primarily due to a $566,000 reduction in labor related expenses coupled with the $236,000 reduction in legal fees and $243,000 in occupancy expenses.

Depreciation and amortization expense decreased $514,000, or 30.1%, to $1.2 million for Fiscal 2010 from $1.7 million for Fiscal 2009, reflecting a lower level of depreciable assets as we reduce corporate office space and lower our depreciable store base.

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Other Income (Expense)

Interest expense decreased $3.2 million or 99.7% to $10,000 for Fiscal 2010 as compared to $3.3 million for Fiscal 2009, primarily due to the repayment of outstanding indebtedness under the Benaroya Credit Facility and Northrim Credit Facility in the prior year.

Noncontrolling Interest

A gain of $188,000 was attributable to AFCM, the limited partner in Tully’s Coffee Asia, for Fiscal 2010, compared to $214,000 as the net loss attributable to Tully’s Coffee Asia decreased slightly.

Income Taxes

In Fiscal 2010 we experienced a $764,000 income tax benefit reflecting the five year Alternative Minimum Tax, or AMT, carryback changes enacted as part of the stimulus package for our fiscal years beginning Fiscal 2005. In Fiscal 2009 we experienced an income tax benefit of $11.5 million reflecting the estimated income tax and AMT consequences from the Green Mountain Transaction in Fiscal 2009.

At March 28, 2010, we had federal and state net operating loss carryforwards of approximately $30.5 million and $11.9 million, respectively. The federal net operating loss carryforwards expire between 2027 and 2030 and the state net operating losses expire between 2011 and 2030. Our net operating loss carryforwards are one of our deferred income tax assets; however, the ultimate realization of these deferred income tax assets is dependent upon generation of future taxable income. Due to the uncertainty of future taxable income, deferred tax assets resulting from these net operating losses have been fully reserved. In accordance with SFAS 109, Accounting for Income Taxes, we will assess the continuing need for a valuation allowance that results from uncertainty regarding our ability to realize the benefits of our deferred tax assets.

Net Income (Loss)

As a result of the factors described above, we had a net loss of $5.4 million for Fiscal 2010 as compared to net income of $22.6 million for Fiscal 2009.

Liquidity and Financial Condition

Sources and Uses of Cash in our Business

The following table sets forth, for the periods indicated, selected statements of cash flows data:

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Overall, our operating activities, investing activities, and financing activities used $749,000 of cash during Fiscal 2011 as compared to a use of $8.4 million during Fiscal 2010. This decrease in the use of cash is primarily due to the use of nearly $6.0 million in cash for shareholder distribution in Fiscal 2010, along with the receipt of $3.5 million in escrow receivable in Fiscal 2011.

Cash used by operating activities for Fiscal 2011 was $2.7 million, an increase of $810,000 compared to Fiscal 2010 when operating activities used cash of $1.9 million.

Investing activities provided cash of $2.4 million in Fiscal 2011, which was primarily the result of $3.5 million released from escrow created as part of the Green Mountain Transaction, offset by $1.3 million spent on the purchase of property and equipment.

Financing activities used cash of $426,000 in Fiscal 2011, a decrease of 93.5% from Fiscal 2010, which is the result of the $6.0 million shareholder distribution made during Fiscal 2010.

Contractual Commitments

We did not have any off-balance sheet arrangements as of April 3, 2011. The following table summarizes our principal financial commitments (other than ordinary trade obligations such as accounts payable and accrued liabilities) as of April 3, 2011:

Liquidity and Capital Resources

As of April 3, 2011 we had cash and cash equivalents of $2.8 million, of which $540,000 was held in TCAPPLP and limited in use, and a working capital deficit of $8.3 million, which also includes TCAP’s $4.0 million obligation to AFCM; such obligation is not expected to be satisfied by funds held by TC Global, Inc. See Note 12 of “Notes to Consolidated Financial Statements”

The Company has realized some improvements during its most recent periods in sales volumes as compared to previous periods and has made certain reductions in staffing and other expenses. Despite improved revenues during the current quarter and reductions to staffing and other expenses, and with the exception of the Third Quarter Fiscal 2011 and Fourth Quarter Fiscal 2011, the Company continues to incur negative cash flows from operations. If sales volumes do not meet expectations during Fiscal 2012 or if increased costs result from pending litigation or contingent obligations, the Company does not believe it will be able to offset such negative trends through additional overhead cost reductions. As a result, if operating results do not meet expectations, the Company may not have sufficient resources to cover its working capital and capital expenditure requirements and, without additional sources of capital made available to the Company during Fiscal 2012, there will be substantial doubt that the Company will be able to continue as a going concern. In order to maintain an appropriate level of liquidity, the Company believes it will need to either effectively implement its operational plans and objectives or obtain additional capital in the next six to nine months in order to fund its working capital requirements for the remainder for Fiscal 2012 and is evaluating a variety of alternatives, reorganization of existing operations and/or sale of some of its stores or other selected assets. Certain financing alternatives could result in significant interest and other costs, be highly dilutive to existing shareholders or require the divestiture or sale of some or all of the Company’s assets. There can be no assurance that any debt or equity financing arrangement will be available to the Company on acceptable terms, if at all. In addition, there can be no assurance that these financing alternatives would provide the Company with sufficient funds to meet its current or long term capital requirements.

If sources of capital are unavailable, or are available only on a limited basis or under unacceptable terms, then the Company could be required to substantially reduce or discontinue its investments in store improvements, new customers and new products; reduce operating, marketing, general and administrative costs related to its continuing operations; or limit the scope of its continuing operations. Due to various contractual obligations of the Company, including store operating leases, supply agreements and franchise agreements, the Company may not have the discretion to reduce operations in an orderly manner to a more sustainable level. The potential sale of stores or other income-producing assets could adversely affect future operating results and cash flows.

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Seasonality

Our business is subject to moderate seasonal fluctuations. Greater portions of Tully’s net sales are generally realized during the third quarter of Tully’s fiscal year, which includes the December holiday season. Seasonal patterns are generally applicable to both of our operating divisions. In addition, quarterly results are affected by the timing of the opening of new stores (by Tully’s and our franchisees) or the closure of stores not meeting our expectations. Because of these factors, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. The sale of the wholesale business may have an unexpected impact on the historical seasonality trends of our business.

Application of Critical Accounting Policies

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements. Note that our preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We believe the following critical accounting policies affect our more significant judgments and estimates used in our consolidated financial statements, and should be read in conjunction with the Consolidated Financial Statements. Our critical accounting policies relate particularly to (1) revenue recognition, (2) evaluation of long-lived assets for impairment, and (3) share based payments.

Revenue recognition

Sales are generally recognized at the time of the sale at retail store locations. Customer payments received on the issuance and replenishment of our Tully’s coffee cards (stored value payment cards) are deferred and recognized as revenues when the cards are redeemed, net of the estimated amounts of customer incentives and discounts associated with the cards. Management’s judgment is involved in determining the applicable timing for recognition of these incentives and discounts in revenues. Sales of product for specialty divisions are recognized upon shipment of the products.

Revenues from advance license fees and similar agreements are recognized on the straight-line basis over the expected life of the agreements. Management’s judgment is involved in determining the applicable amortization periods for these advance license fees. Royalty revenues for specialty licensees are recognized in accordance with the license agreements based upon sales at specific licensee store locations. Initial franchise fees for new stores franchised by Tully’s are recognized when Tully’s has completed the services required to earn these fees and make them non-refundable, which is generally upon opening of a store. Royalty revenues from franchisee operated stores are recognized according to the relevant franchise agreements.

Evaluation of long-lived assets for impairment and assets held for sale

We periodically review the carrying value of our long-lived assets for continued appropriateness. This review is based upon our projections of anticipated future cash flows. We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations. The net carrying value of assets not recoverable are reduced to their fair value. Our estimates of fair value represent our best estimate, based primarily on discounted cash flows. We recognized non-cash impairment losses of $82,000 and $135,000 in the fourth quarters of Fiscal 2010 and Fiscal 2011, respectively, in accordance with the provisions of FASB ASC 360. This relates to impairment of leasehold improvements and equipment.

Assets and liabilities to be disposed of by sale are, among other factors, classified as “Held for Sale” at which point management has committed to a plan for the disposition, the sale is probable and expected to occur within 12 months and the assets are in sellable condition. No impairment was recorded in Fiscal 2011 as expected closure asset sales are expected to exceed costs.

Share Based Payments

We grant stock options to purchase our common stock to certain employees under the 2004 Stock Option Plan and 2010 Stock Option Plan. Additionally, we have outstanding options that were granted under an earlier stock option plan. The determination of fair value of stock option awards on the date of grant using the Black-Scholes model is affected by our stock price and subjective assumptions. These assumptions include, but are not limited to, the expected term of stock options and expected stock price volatility over the term of the awards. Our stock options have characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimates.