Forward-Looking Statements

Certain statements contained in this quarterly report on Form 10-Q regarding the risks, circumstances and financial trends that may affect our future operating results, financial position and cash flows are not based on historical fact and are forward-looking statements within the meaning of federal securities laws and regulations. These statements are based on management's current expectations, assumptions, estimates and observations of future events and include any statements that do not directly relate to any historical or current fact. These forward-looking statements can be identified by the use of words like "anticipates," "feels," "estimates," "projects," "expects," "plans," "believes," "intends," "will," "assumes" and other words of similar meaning. Owing to the uncertainties inherent in forward-looking statements, actual results could differ materially from those set forth in forward-looking statements. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Users should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the federal securities laws. Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, fluctuations in availability and cost of green coffee, competition, organizational changes, the impact of a weaker economy, business conditions in the coffee industry and food industry in general, the Company's continued success in attracting new customers, variances from budgeted sales mix and growth rates, and weather and special or unusual events, as well as other risks described in this report and other factors described from time to time in the Company's filings with the SEC.

Pending Acquisition

As described in the Company's current report on Form 8-K filed with the SEC on December 8, 2008, Farmer Bros. Co. has entered into an Asset Purchase Agreement (the "Purchase Agreement") with Sara Lee Corporation and its affiliate (collectively, the "Seller").

Pursuant to the Purchase Agreement, the Company will purchase certain assets used in connection with the Seller's DSD Coffee Business, which generally consists of manufacturing and selling coffee, tea and related products through a network of facilities and vehicles. This business also includes the distribution, sale and service of brewed and liquid coffee equipment.

The assets to be purchased include manufacturing plants in Houston, Texas and Oklahoma City Oklahoma, approximately 61 leased warehouses and one owned warehouse, approximately 445 vehicles, and all DSD Coffee Business inventory, trademarks and trade names; the most well known being SUPERIOR®, MCGARVEY®, CAIN'S®, IRELAND®, JUSTIN LLOYD®, METROPOLITAN® and PREBICA®. The Company anticipates hiring approximately 800 employees associated with Seller's DSD business.

At closing, the Company will assume certain liabilities, including obligations under contracts, environmental liabilities with respect to the transferred facilities, pension liabilities, advertising and trade promotion accruals, and accrued vacation as of the closing for hired personnel.

The purchase price is $45.4 million, subject to certain adjustments, including the amount of inventory and prepaid expenses at closing, as well as additional amounts associated with (i) certain accounting costs and costs to provide the Company with information technology to operate the purchased assets, which costs will be shared by the parties; and (ii) reimbursement by the Company of certain accrued vacation associated with the hired personnel. The transaction is expected to close by February 28, 2009. We have capitalized approximately $1.1 million of expenses associated with the pending acquisition of the DSD assets of Sara Lee Corporation.

In connection with the closing, the Seller and the Company will enter into certain operational agreements, including trademark and formula license agreements, co-pack agreements, a liquid coffee distribution agreement, a transition services agreement, and a green coffee and tea purchase agreement.

The transaction is subject to customary closing conditions, as well as completion of the information technology carve-out and delivery of historical financial statements of the DSD Business. The Purchase Agreement also includes customary indemnification obligations of the parties.

The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the Purchase Agreement, a copy of which is filed as an exhibit to this Company's quarterly report on Form 10-Q.

Liquidity and Capital Resources

The Company expects to fund the purchase price for the assets described above with cash and debt. The Company expects to make an additional investment (above the purchase price) of approximately $15 million to finance working capital in fiscal 2009, and not more than $20 million to finance integration expenses, transaction costs and capital expenditures from operations, cash and debt in future years.

The continued weakness in the economy during fiscal 2009 and the sustained decline in the U.S. housing market kept pressure on the financial markets and have reduced the value and liquidity of the preferred stock we hold. As a result, we are negotiating with a commercial bank for a line of credit to provide sufficient liquidity to enable the Company to achieve its goals and provide time for the financial markets to recover. In the event we have not secured acceptable financing with a bank or other commercial lender prior to closing the acquisition, a portion of the purchase price may include a $20 million secured promissory note in favor of the Seller.

During the fiscal quarter ended December 31, 2008 we incurred approximately $4 million to substantially complete CBI's new plant. Planned spending in fiscal 2009 includes $10 million investment in our Torrance plant, most of which will occur in the second half of fiscal 2009, to provide more roasting and packaging flexibility and to further reduce material handling. We have over 60% of our branches operating on the new mobile sales software and hardware installation and the remaining branch sales locations are expected to be installed by the end of the fourth quarter of fiscal 2009 at an estimated cost of approximately $1.6 million.

Our working capital is composed of the following (unaudited, in thousands):

                        December 31,     December 31,
                            2008             2007

Current assets         $      192,607   $      231,031
Current liabilities            25,919           27,019
Working capital        $      166,688   $      204,012

Capital expenditures   $       22,522   $        6,166
Dividends paid         $        3,551   $        3,216

At December 31, 2008 we had no material commitments for capital expenditures other than those described above.

Results of Operations

The Company's net sales in the second quarter of fiscal 2009 increased 7%, or $5,170,000, to $76,530,000 as compared to $71,359,000 in the second quarter of fiscal 2008; units sold increased 4% in this period as compared to the same period in the prior year. Net sales for the first half of fiscal 2009 increased 8%, or $10,751,000, to $143,053,000 from $132,302,000 in the same period of fiscal 2008, primarily due to higher selling prices, reflecting increased product costs, offset by a 2% decrease in units sold. We expect weakness in the general economy and reduced consumer spending will have a continued impact on our sales through the remainder of fiscal 2009.

Cost of goods sold in the second quarter of fiscal 2009 increased 5% to $39,212,000 or 51% of sales as compared to $37,183,000, or 52% of sales, in the second quarter of fiscal 2008. Gross profit in the second quarter of fiscal 2009 increased $3,142,000 to $37,318,000, or 49% of sales, as compared to $34,176,000, or 48% of sales, in the second quarter of fiscal 2008. Cost of goods sold for the first six months of fiscal 2009 increased $5,386,000 to $74,785,000 as compared to $69,399,000 in the same period of fiscal 2008. Gross profit in the first half of 2009 increased $5,366,000 to $68,269,000, or 48% of sales, as compared to $62,903,000, or 48% of sales, in the same

period of fiscal 2008. Higher commodity prices and higher fuel costs have kept pressure on our profit margins in the first half of fiscal 2009 as compared to the same period of fiscal 2008. While we make every effort to pass these higher costs through to our customers, competition restricts our ability to do so. We cannot predict whether the current profit margins can be maintained.

Operating expenses in the second quarter of fiscal 2009 increased $3,719,000 to $37,105,000 from $33,386,000 in the second quarter of fiscal 2008, largely because of increased selling expenses. Selling expenses for the three months ended December 31, 2008 increased $4,708,000, or 39% of sales, to $30,193,000 from 36% of sales or $25,485,000 in the same period of fiscal 2008. Selling expenses for the first half of fiscal 2009 increased to $58,197,000, or 41% of sales, from $48,840,000, or 37% of sales, in the same period of fiscal 2008. This increase is primarily the result of higher sales and a $1.8 million (19%) increase in freight costs in the first two quarters of fiscal 2009.

Our income from operations in the second quarter of fiscal 2009 was $213,000 as compared to income from operations of $790,000 in the same quarter of fiscal 2008. Loss from operations in the first half of fiscal 2009 was ($4,042,000) as compared to ($1,739,000) in the same period of fiscal 2008.

Total other income (expense) in the second quarter of fiscal 2009 was $551,000 as compared to an expense of ($3,153,000) in the second quarter of fiscal 2008. Total other (expense) in the first half of fiscal 2009 was ($7,775,000) as compared to ($3,761,000) in the first half of fiscal 2008. These changes are primarily the result of changes in Other, net (expense) income, which reflects realized and unrealized losses (gains) in our preferred stock portfolio. Financial market conditions described in our Form 10-K for the year ended June 30, 2008 have continued into the first half of fiscal 2009. The downturn in the housing market combined with real estate financing and liquidity issues have put pressure on the valuations of the preferred stocks we hold. The Company has no direct exposure to sub-prime mortgages, but financial companies compose approximately 85% of the universe of preferred stocks. Selling pressure from leveraged investors who need liquidity and a new supply of preferred issues taking advantage of lower dividend rates have resulted in a downward pressure on values.

Investor demand for the safety of U.S. Treasury instruments has flattened the U.S. Treasury yield curve and widened spreads between preferred stocks and U.S. Treasury instruments. We believe that preferred stocks are currently priced cheaper to U.S. Treasury bond yields than they have ever traded. Although aggressive easing of interest rates by the world's central banks and other economic stimulus actions by governments may eventually have positive effects on this situation, we expect little improvement until the housing market stabilizes.

As a result of the forgoing factors, net loss for the second quarter of fiscal 2009 was ($106,000), or ($0.01) per share, as compared to a net loss of ($228,000), or ($0.02) per share, in the second quarter of fiscal 2008. Net loss for the first two quarters of fiscal 2009 was ($6,190,000), or ($0.42) per share as compared to ($1,180,000), or ($0.08) per share, in the same period of fiscal 2008.

Quarterly Financial Data (Unaudited)



                                          March 31,      June 30,      September 30,      December 31,
                                            2008           2008            2008               2008
                                                       (In thousands, except share data)
Net sales                                $    67,276    $   66,907    $        66,524    $       76,530
Gross profit                             $    30,657    $   25,851    $        30,951    $       37,318
(Loss) income from operations            $    (1,004 )  $   (7,901 )  $        (4,255 )  $          213
Net loss                                 $    (2,710 )  $   (4,034 )  $        (6,085 )  $         (106 )
Net (loss) income per common share       $     (0.19 )  $    (0.27 )  $         (0.42 )  $         0.01




                                          March 31,      June 30,      September 30,      December 31,
                                            2007           2007            2007               2007
                                                       (In thousands, except share data)
Net sales                                $    54,382    $   58,137    $        60,943    $       71,359
Gross profit                             $    26,993    $   29,452    $        28,727    $       34,177
(Loss) income from operations            $    (2,247 )  $     (232 )  $        (2,528 )  $          789
Net income (loss)                        $     1,512    $    1,337    $          (953 )  $         (227 )
Net income (loss) per common share       $      0.11    $     0.09    $         (0.07 )  $        (0.02 )