Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )

On Tuesday, December 2, 2003, Diedrich Coffee, Inc. will hold its annual meeting of stockholders at the Hyatt Regency Irvine, 17900 Jamboree Boulevard, Irvine, California 92614. The meeting will begin at 10:00 a.m. local time. We will serve our premium coffee.

Only stockholders of record at the close of business on October 23, 2003 can vote at this meeting or any adjournments that may take place. At the meeting we will:

We will also attend to business properly presented at the meeting and any adjournments or postponements of the meeting. The foregoing items of business, including the nominees for directors, are more fully described in the proxy statement that is attached and a part of this notice.

Whether or not you plan to attend the annual meeting in person, you are requested to complete, date, sign and return the enclosed proxy card as promptly as possible in order to ensure your representation at the meeting. If you attend the annual meeting, you may revoke your proxy at any time before it is voted and vote in person if you wish, even if you have previously returned your proxy card. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must obtain from the record holder a proxy issued in your name.

This proxy statement is furnished in connection with the solicitation on behalf of the board of directors of Diedrich Coffee, Inc., a Delaware corporation, of proxies for use at the annual meeting of stockholders to be held on December 2, 2003 at 10:00 a.m. local time, or at any adjournment or postponement of the meeting. At the meeting, we will vote on the matters described in this proxy statement and in the accompanying notice. The annual meeting will be held at the Hyatt Regency Irvine, 17900 Jamboree Boulevard, Irvine, California 92614. We intend to mail this proxy statement and accompanying proxy card on or about October 30, 2003 to all stockholders entitled to vote at the annual meeting.

You should complete and return the accompanying form of proxy regardless of whether you attend the annual meeting in person. You may revoke your proxy at any time before it is exercised by: giving our Corporate Secretary written notice of revocation; giving our Corporate Secretary a properly executed proxy of a later date; or attending our annual meeting and voting in person; provided that, if your shares are held of record by a broker, bank or other nominee, you must obtain from the record holder a proxy issued in your name. Written notices of revocation and other communications with respect to the revocation of proxies should be addressed to Diedrich Coffee, Inc., 28 Executive Park, Suite 200, Irvine, California, 92614, Attention: Corporate Secretary.

All shares represented by valid proxies received and not revoked before they are exercised will be voted in the manner specified in the proxies. If nothing is specified, the proxies will be voted in favor of each of the proposals. Our board of directors is unaware of any other matters that may be presented for action at our annual meeting. If other matters do properly come before our annual meeting, however, it is intended that shares represented by proxies will be voted in the discretion of the proxy holders.

We will pay the entire cost of soliciting proxies. In addition to soliciting the proxies by mail, we will request banks, brokers and other record holders to send proxies and proxy materials to the beneficial owners of our common stock and secure their voting instructions, if necessary. We will reimburse record holders for their reasonable expenses in performing these tasks. If necessary, we may use our regular employees, who will not be specially compensated, to solicit proxies from stockholders, either personally or by telephone, letter, or other means.

Our board of directors has fixed October 23, 2003 as the record date for determining the Diedrich Coffee stockholders entitled to notice of, and to vote at, our annual meeting. Therefore, only

stockholders of record at the close of business on the record date will receive notice of, and be able to vote at, our annual meeting. As of October 23, 2003, there were 5,161,264 shares of our common stock outstanding held by 707 record holders in addition to approximately 3,150 holders who do not hold shares in their own names. A majority of these shares must be present at our annual meeting, either in person or by proxy, in order for there to be a quorum at the meeting. Each share of our outstanding common stock entitles its holder to one vote. Shares of our common stock with respect to which the holders are present in person at our annual meeting but not voting, and shares for which we have received proxies but with respect to which holders of the shares have abstained, will be counted as present at our annual meeting for purpose of determining whether or not a quorum exists. Broker non-votes will also be counted as present for purposes of determining whether a quorum exists.

The nominees for election as directors will be elected by a plurality of the votes of the shares of our common stock present in person or represented by proxy at the meeting. Proposals 2, 3, 4, and 6 will require the affirmative vote of a majority of our outstanding shares of common stock present in person or represented by proxy at the meeting. With respect to these proposals, abstentions will be counted in tabulations of the votes cast and will have the same effect as a vote against the proposal, whereas broker non-votes will not be counted for purposes of determining whether a proposal has been approved. With respect to Proposal 5, the affirmative vote of the holders of a majority of the shares casting votes will be required to approve the proposal. Abstentions and broker non-votes will not be counted as votes cast, and will not be counted for purposes of determining whether Proposal 5 has been approved. Votes will be tabulated by the inspector of election appointed for the meeting, who will separately tabulate affirmative and negative votes, abstentions, and broker non-votes. Our board of directors urges you to complete, date, and sign the accompanying proxy and return it promptly.

Our directors are elected once a year at our annual meeting of stockholders. Our bylaws provide that our board of directors shall consist of between three and seven directors with the precise number to be determined by resolution of our board of directors. The authorized number of members of our board of directors is presently set at seven persons. If a quorum is present at our annual meeting, the seven nominees receiving the greatest number of votes will be elected. The seven directors will serve until the next annual meeting of stockholders and until their respective successors are elected and qualified.

Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the seven nominees named below. All of the nominees for election as directors at the annual meeting set forth in the table below are incumbent directors. Each of the nominees has consented to serve as a director if elected, and management has no reason to believe that any nominee will be unable to serve. In the event that any nominee is unavailable for re-election as a result of an

unexpected occurrence, shares will be voted for the election of such substitute nominee as management may propose.

Name	Age	Title	Director Since
Paul C. Heeschen (2)	46	Chairman of the Board of Directors	1996
Martin R. Diedrich	45	Vice Chairman of the Board of Directors, Chief Coffee Officer, and Secretary	1985
Peter Churm (1)(2)	77	Director	1996
Lawrence Goelman (1)(2)	62	Director	1996
Randy Powell (1)	42	Director	2001
Richard Spencer	50	Director	2001
Roger M. Laverty	56	President, Chief Executive Officer, and Director	2003

There are no family relationships among any of the directors or executive officers of Diedrich Coffee. The principal occupation for the last five years of each nominee for director, as well as other information, is set forth below.

Paul C. Heeschen joined our board of directors in January 1996. In February 2001, the board of directors elected him as Chairman. For the past 11 years, Mr. Heeschen has been a Principal of Heeschen & Associates, a private investment firm. He is also the sole general partner of Sequoia Enterprises, LP, D.C.H., LP, and Redwood Enterprises VII, LP, and a trustee of the Palm Trust, each of which are stockholders of Diedrich Coffee.

Martin R. Diedrich joined us as an officer and director in 1985. In April 1997, he became Vice Chairman of the board of directors and Chief Coffee Officer, and continued to serve as our Corporate Secretary. Before that time, Mr. Diedrich served as our Director of Coffee. In addition, he served as the Chairman of the board of directors from January 1996 to April 1997. Mr. Diedrich is an internationally recognized specialty coffee expert who is a frequent speaker at industry and trade association functions.

Peter Churm joined our board of directors in October 1996. He retired from his position as Chairman Emeritus of Furon Company, a designer, developer and manufacturer of products made primarily from specially formulated high performance polymer materials, in November 1999 in connection with the acquisition of Furon Company. He had held this position since 1992. He served as Chairman of the board of directors of Furon Company from May 1980 through February 1992 and was President for more than 16 years prior to that time. He also serves on the board of directors of CKE Restaurants, Inc., a publicly traded food service company.

Lawrence Goelman joined our board of directors in October 1996 and was the Chairman of our board of directors and interim Chief Executive Officer from March 1997 to November 1997. Mr. Goelman has served as the Managing Partner of Tremont Partners, Inc., a privately held consulting company, since 1995. Until March 2001, Mr. Goelman was also the Managing Partner of GazelleLab LLC, a private venture development firm. From May 1996 to December 1996, Mr. Goelman was the interim President and Chief Executive Officer of Pinnacle Micro, Inc., a publicly owned company that manufactures compact disc recording devices. Before that, he served for 14 years as Chairman, President and Chief Executive Officer of CostCare, Inc., which was acquired by John Hancock Life Insurance Company.

Randy Powell joined our board of directors in December 2001. Mr. Powell previously served on our board of directors from July 1999 to October 2000. Currently, Mr. Powell is President of Maple Leaf Pork, a division of Maple Leaf Foods, Inc., a Canadian company traded on the Toronto Stock Exchange. From August 1996 until November 2000, Mr. Powell served as President and Chief Executive Officer of Second Cup Ltd., a publicly traded Canadian coffee company and the former parent company of Gloria Jean's coffees.

Richard Spencer joined our board of directors in December 2001. Since May 1993, Mr. Spencer has been manager or president of Westcliff Capital Management, LLC or its predecessor company. Westcliff Capital Management, LLC is an investment advisor for certain investment funds and institutional investors, some of which are stockholders of Diedrich Coffee.

Roger M. Laverty joined our board of directors and became our President and Chief Executive Officer in April 2003. From 1999 to 2002, Mr. Laverty was Chief Executive Officer and a director of Prime Advantage, Inc., a privately held company that provides demand aggregation services to mid-market manufacturers. From 1993 to 1997, Mr. Laverty was the Chief Executive Officer of Smart & Final Inc., a publicly traded company that operates non-membership warehouse grocery stores and a foodservice distribution business. Before that, he served for 14 years in a variety of positions with Smart & Final Inc., including Chief Operating Officer from 1988 until 1993.

Our board of directors has standing compensation and audit committees. We do not have a standing nominating committee. The entire board of directors acts as a committee with respect to nominations for membership on our board of directors.

Audit Committee. Our audit committee is responsible for, among other matters, making recommendations to our board of directors regarding the engagement of our independent auditor, reviewing with our independent auditor the fees, scope, timing, plans and results of the audit engagement and reviewing any significant changes in our accounting policies and the adequacy of our internal accounting controls. It also analyzes and discusses with our independent auditor any difficulties or disagreements with our management as well as legal proceedings or contingent liabilities involving us that may be material to our financial statements or the auditor's report. Our audit committee is composed of outside directors who are not officers or employees. The audit committee consists of three directors: Mr. Churm, Mr. Goelman, and Mr. Powell. Mr. Churm and Mr. Goelman have been members of our audit committee since its formation, and Mr. Powell has served on the committee since 2001. Our board of directors and audit committee have adopted an audit committee charter. The report of the audit committee is set forth below under the caption "Report of the Audit Committee of the Board of Directors." Our board of directors has determined that we have at least one audit committee financial expert, as defined under Item 401(h) of Regulation S-K, serving on the audit committee. Our board of directors has further determined that each of Mr. Churm and Mr. Goelman are our audit committee financial experts, and that all of the members of our audit committee are independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended.

Compensation Committee. Our compensation committee determines salaries and incentive compensation for our executive officers and administers our equity incentive plans. The compensation committee consists of Mr. Churm, Mr. Goelman, and Mr. Heeschen. The report of the compensation committee is set forth below under the caption "Report of the Compensation Committee of the Board of Directors on Executive Compensation."

During our fiscal year ended July 2, 2003, there were five meetings of the board of directors, four meetings of the audit committee, and one meeting of the compensation committee. Each of the current

directors attended at least 75% of the meetings of the board of directors and meetings of the committees on which they served during the fiscal year ended July 2, 2003.

Directors who are also our employees receive no extra compensation for their service on the board of directors. Non-employee directors earned fees of $1,000 per board meeting attended in person, $500 per board meeting attended telephonically, and $500 per committee meeting attended in person or telephonically. Non-employee directors also received reimbursement for out-of-pocket expenses incurred in connection with attending board meetings. In the fiscal year ended July 2, 2003, Mr. Goelman earned $6,500, Mr. Churm earned $6,000, Mr. Powell earned $5,000, Mr. Heeschen earned $4,500, and Mr. Spencer earned $4,000. In addition, the non-employee directors are eligible to receive stock option grants under the Diedrich Coffee, Inc. 2000 Equity Incentive Plan. In the fiscal year ended July 2, 2003, each of our non-employee directors was granted 1,250 stock options under the 2000 Equity Incentive Plan.

Under our 2000 Equity Incentive Plan, each non-employee director automatically receives, upon first becoming a director, a one-time grant of an option to purchase up to 2,500 shares of our common stock. The initial options vest and become exercisable with respect to 50% of the underlying shares upon the earlier of the first anniversary of the grant date or immediately before the first annual meeting of stockholders following the grant date, provided that the recipient has remained a non-employee director for the entire period from the grant date to such earlier date. The remaining 50% of the underlying shares vest upon the earlier of the second anniversary of the grant date or immediately before the second annual meeting of stockholders following the grant date, provided that the recipient has remained a non-employee director for the entire period from the grant date to such date. In addition to the initial grant, under the 2000 Equity Incentive Plan, each non-employee director also receives, upon re-election to our board of directors, an automatic grant of an option to purchase up to 1,250 additional shares of our common stock. These additional options vest and become exercisable upon the earlier of the first anniversary of the grant date or immediately before the annual meeting of stockholders following the grant date, provided that the recipient has remained a non-employee director for the entire period from the grant date to such date. In addition to the initial and additional options, under the 2000 Equity Incentive Plan, each director, including each non-employee director, is eligible to receive other awards under the 2000 Equity Incentive Plan at the discretion of the administrator of the plan. If Proposal 3 is approved, each non-employee director will automatically receive an option to purchase up to 15,000 shares of our common stock upon being re-elected as a director, and new non-employee directors will, in the future, automatically receive an option to purchase up to 15,000 shares of our common stock upon first becoming a director.

All non-employee director options granted under the 2000 Equity Incentive Plan have a term of ten years and an exercise price equal to the fair market value of our common stock on the date of grant. Vesting of non-employee director options granted under the 2000 Equity Incentive Plan accelerates in certain circumstances in connection with a change in control. During the fiscal year ended July 2, 2003, an aggregate of 6,250 options to purchase shares of our common stock were issued to non-employee directors under the 2000 Equity Incentive Plan. As of October 20, 2003, no options to purchase shares had been exercised by any director.

The nominees for election as directors will be elected by a plurality of the votes of the shares present in person or represented by proxy and entitled to vote at the annual meeting.

The board of directors recommends that you vote in favor of each nominee named in Proposal 1.

PROPOSAL 2
INCREASE IN THE NUMBER OF SHARES AVAILABLE UNDER THE
DIEDRICH COFFEE, INC. 2000 EQUITY INCENTIVE PLAN

The maximum number of shares of our common stock that may be issued pursuant to awards under the Diedrich Coffee, Inc. 2000 Equity Incentive Plan is currently 437,500, and as of October 17, 2003, options covering a total of 410,750 shares were outstanding or have been exercised under the 2000 Equity Incentive Plan. Accordingly, only 26,750 shares remain available for new grants. We rely heavily upon the 2000 Equity Incentive Plan to recruit, retain, and reward qualified employees and directors, and our board of directors has unanimously approved, subject to approval by our stockholders, an amendment of the 2000 Equity Incentive Plan to make available an additional 650,000 shares of our common stock for awards under the 2000 Equity Incentive Plan.

The following is a summary of the principal features of the 2000 Equity Incentive Plan as in effect and as proposed to be amended by Proposal 2. The summary is qualified in its entirety by the terms of the Diedrich Coffee, Inc. 2000 Equity Incentive Plan, a copy of which, as proposed to be amended, is attached as Appendix A.

Purpose. The purpose of the 2000 Equity Incentive Plan is to promote our interests and those of our stockholders by using investment interests in our company to attract, retain and motivate our management and other persons, to encourage and reward their contributions to our performance, and to align their interests with the interests of our stockholders.

Administration, Amendment and Termination. As long as we have a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, the administrator of the 2000 Equity Incentive Plan will be the compensation committee, composed solely of two or more "non-employee directors" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 and two or more "Outside Directors" as defined in the regulations adopted under Section 162(m) of the Internal Revenue Code of 1986, as amended. The administrator has the power to:

The 2000 Equity Incentive Plan, as amended from time to time, shall, in the discretion of the administrator, apply to and govern awards granted under the 2000 Equity Incentive Plan prior to the date of such amendment, provided that the consent of an award holder is required if such amendment would alter, terminate, impair or adversely affect an award or cause the award to cease to qualify as an

incentive stock option. Awards may be granted under the 2000 Equity Incentive Plan until the tenth anniversary of the adoption of the 2000 Equity Incentive Plan by our board of directors.

Securities Subject to the 2000 Equity Incentive Plan. Currently, a total of 437,500 shares of our common stock may be issued under the 2000 Equity Incentive Plan. If Proposal 2 is approved by the stockholders, a total of 1,087,500 shares of our common stock may be issued under the 2000 Equity Incentive Plan. We may issue common stock under the plan from:

The administrator may appropriately adjust the maximum number and kind of shares subject to the 2000 Equity Incentive Plan, the number and kind of shares or other securities subject to the then outstanding awards, the price for each share or other unit of any other securities subject to the then outstanding awards, and/or the number and kind of shares or other securities to be issued as non-employee director options if our common stock is affected through any of the following: merger; combination; consolidation; stock dividend; sale or exchange of assets; stock split; recapitalization; reverse stock split; reclassification; or spin-off.

For purposes of calculating the aggregate number of shares issued under the plan, we will count only the number of shares actually issued upon exercise, purchase or settlement of an award and not returned to us upon expiration, termination or cancellation of any awards. However, if an award holder pays the exercise or purchase price, or withholding taxes relating to an award with shares of our common stock, or if we withhold shares in satisfaction of the exercise or purchase price, or withholding taxes payment, then we will reduce the number of shares of common stock available for issuance under the 2000 Equity Incentive Plan by the gross number of shares for which the award is exercised or purchased, or for which it vests, as applicable.

On October 28, 2003, the closing price of our common stock on the Nasdaq National Market was $3.58 per share.

Awards Under the 2000 Equity Incentive Plan. We may grant the following types of awards under the 2000 Equity Incentive Plan: stock options; stock bonuses; performance awards; stock sales; restricted stock; phantom stock; stock appreciation rights; dividend equivalents; stock payments; and other stock-based benefits.

Stock options granted under the 2000 Equity Incentive Plan may be incentive stock options intended to qualify under the provisions of Section 422 of the Internal Revenue Code or non-qualified stock options that do not so qualify. However, the aggregate fair market value of stock with respect to which any recipient's incentive stock options first become exercisable during any calendar year under all of our plans and any plans of any parent or subsidiary of ours may not exceed $100,000, and may be further limited by other requirements in the Internal Revenue Code. If this limitation is exceeded, the excess incentive stock options will be treated as non-qualified stock options.

Eligibility. Our directors, officers, employees, consultants, advisors and our affiliated entities are eligible to receive awards under the 2000 Equity Incentive Plan, except that only non-employee directors may receive "non-employee director options," as described below. In addition to our 5 non-employee directors, as of the end of our fiscal year ended July 2, 2003, 840 employees were eligible to receive awards under the 2000 Equity Incentive Plan.

Terms and Conditions of Non-Employee Director Options Under the 2000 Equity Incentive Plan. The 2000 Equity Incentive Plan provides that non-employee directors receive initial and annual grants of "non-employee director options." Upon first becoming a non-employee director, a non-employee director currently receives a one-time grant of an option to purchase up to 2,500 shares of our common stock. If Proposal 3 is approved, a non-employee director will, upon first becoming a director, receive a one-time grant of an option to purchase up to 15,000 shares of our common stock. These initial options vest and become exercisable with respect to 50% of the underlying shares upon the earlier of the following dates, if the recipient has remained a non-employee director for the entire period from the grant date to such date:

The remaining 50% of the shares underlying the initial options vest upon the earlier of the following dates, if the recipient has remained a non-employee director for the entire period from the grant date to such date:

In addition to the initial grant, each non-employee director also currently receives, upon re-election to our board of directors, an automatic grant of an option to purchase up to 1,250 additional shares of our common stock. If Proposal 3 is approved, each non-employee director will, upon re-election, receive an automatic grant of an option to purchase up to 15,000 additional shares of our common stock. These additional options vest and become exercisable upon the earlier of the following dates, if the recipient has remained a non-employee director for the entire period from the grant date to such date:

All non-employee director options have a term of ten years and an exercise price equal to the fair market value of our common stock on the date of grant. If a recipient of a non-employee director option ceases to be a director of Diedrich Coffee, all initial options granted to the recipient are exercisable, to the extent already exercisable at the date the director ceases to be a director, for a period of 365 days after that date (or sooner if the option expires according to its terms). All additional options are exercisable, to the extent already exercisable at the date the director ceases to be a director, for a period of 365 days after that date (or sooner if the option expires according to its terms) if the director ceases to be a director because of death or permanent disability, or a period of 90 days after that date (or sooner if the option expires according to its terms) if the director ceases to be a director for any other reason. In addition to these non-employee director options, non-employee directors are eligible to receive general grants of awards under the plan, including stock options other than non-employee director options, at the discretion of the administrator. To the extent not inconsistent with the terms of the plan governing non-employee director options, the terms of general awards under the 2000 Equity Incentive Plan apply to non-employee director options.

Terms and Conditions of General Awards Under the 2000 Equity Incentive Plan. The administrator selects the recipients of awards granted under the 2000 Equity Incentive Plan and determines the dates, amounts, exercise prices, vesting periods and other relevant terms of the awards. However, only non-employee directors are eligible to receive non-employee director options. In addition, the 2000 Equity Incentive Plan specifies the dates, amounts, exercise prices, vesting periods and other relevant terms of non-employee director options, as summarized above.

Award Pricing. The administrator determines the exercise or purchase price of awards granted under the 2000 Equity Incentive Plan except that the provisions of the plan govern the exercise price of non-employee director options. In addition, the exercise price for an incentive stock option must comply with the provisions of Section 422 of the Internal Revenue Code. Section 422 currently provides that the exercise price must not be less than the fair market value of our common stock on the date of grant, and not less than 110% of the fair market value of our common stock as of the date of grant in the case of a grant to a person owning more than ten percent of the total combined voting power of all classes of our stock.

Award Vesting and Term. The administrator determines the date or dates on which awards granted under the 2000 Equity Incentive Plan vest and become exercisable except that the provisions of the plan govern the vesting and term of non-employee director options. In addition, the term for an incentive stock option must comply with the provisions of Section 422 of the Internal Revenue Code. Section 422 currently provides that the incentive stock option may not be exercisable after the expiration of ten years from the date of grant, or five years in the case of an incentive stock option granted to a person owning more than ten percent of the total combined voting power of all classes of our stock.

Awards granted under the 2000 Equity Incentive Plan may be exercised at any time after they vest and before the expiration date determined by the administrator, provided that an award is generally exercisable following an award holder's termination of employment only to the extent that the award had become exercisable on or before the date of termination and to the extent that the award is not forfeited under the terms of the plan. Furthermore, in the absence of a specific agreement to the contrary, stock options will generally expire and become unexercisable immediately upon termination of the recipient's employment with us for just cause; 30 days after termination of the recipient's employment with us for any reason other than just cause, death, permanent disability or normal retirement; or 180 days after termination of the recipient's employment with us due to death, permanent disability or normal retirement, unless the term of the options provides for an earlier expiration. The administrator may accelerate the vesting of any options and may also extend the period following termination of employment with us during which options may vest and/or be exercised.

Other Award Provisions. The administrator determines any applicable performance criteria, restrictions or conditions of any award.

Award Payments. A holder of an award may pay cash or any other consideration deemed acceptable by the administrator to pay the exercise or purchase price for the award. Subject to restrictions under applicable laws and regulations, we may extend or arrange for the extension of credit to any award holder to finance the award holder's purchase of shares upon exercise of the holder's award on terms approved by the administrator, or allow exercise in a broker's transaction in which the exercise or purchase price will not be received by us until after exercise and subsequent sale of the underlying common stock. The administrator may, in its discretion, allow an award holder to pay the exercise or purchase price for an award by delivering shares of our common stock.

Limited Transferability of Awards. Awards are generally not transferable by the recipient during the life of the recipient.

Awards Documentation. An agreement duly executed on behalf of us and by the recipient or, a confirming memorandum issued by us to the recipient, setting forth such terms and conditions applicable to the award, evidence awards granted under the 2000 Equity Incentive Plan.

Rights With Respect to Common Stock. No recipient of an award under the 2000 Equity Incentive Plan or other person will have any right, title or interest in or to any shares of common stock subject to any award or any rights as a stockholder unless the award is duly exercised pursuant to the terms of the 2000 Equity Incentive Plan and the shares of common stock are issued to the recipient upon exercise of the award.

Plan Provisions Regarding Changes in Control. As of the effective time and date of any change in our control (as defined in the 2000 Equity Incentive Plan), the 2000 Equity Incentive Plan and any of the then outstanding awards (whether or not vested) will automatically terminate unless:

If, pursuant to these plan provisions, the 2000 Equity Incentive Plan and the awards terminate by reason of the occurrence of a change in control without provision for any of the actions described in the paragraph above, then any recipient holding outstanding awards shall have the right, at such time immediately prior to the consummation of the change in control as our board of directors shall designate, to exercise the recipient's awards to the full extent not theretofore exercised, including any installments which have not yet become vested.

Plan Provisions Regarding Section 162(m) the Internal Revenue Code. In general, Section 162(m) of the Internal Revenue Code imposes a $1,000,000 limit on the amount of compensation that may be deducted by us in any tax year with respect to each of our Chief Executive Officer and our other four most highly compensated officers, including any compensation relating to an award under the 2000 Equity Incentive Plan. To prevent compensation relating to an award under the 2000 Equity Incentive Plan from being subject to the $1,000,000 limit of Internal Revenue Code Section 162(m), the 2000 Equity Incentive Plan provides that no eligible person shall be granted any awards with respect to more than 200,000 shares of common stock in any one calendar year if such grant would otherwise be subject to Section 162(m).

Furthermore, if Internal Revenue Code Section 162(m) would otherwise apply and if the amount of compensation an eligible person would receive under an award is not based solely on an increase in the value of our underlying common stock after the date of grant or award, the administrator can condition the grant, vesting, or exercisability of such an award on the attainment of a preestablished objective performance goal. For this purpose, a preestablished objective performance goal may include one or more of the following performance criteria: cash flow; return on assets or net assets; earnings per share, including earnings before interest, taxes and amortization; income or net income; operating

margin; return on equity; return on operating revenue; total stockholder return; any similar performance criteria; and/or return on capital.

The following summary of certain federal income tax consequences of the receipt and exercise of awards granted by us is based on the laws and regulations in effect as of the date of this proxy statement and does not purport to be a complete statement of the law in this area. Furthermore, the discussion below does not address the tax consequences of the receipt and exercise of awards under foreign, state and/or local tax laws, and such tax laws may not correspond to the federal tax treatment described herein. The exact federal income tax treatment of transactions under the 2000 Equity Incentive Plan will vary depending upon the specific facts and circumstances involved.

Incentive Stock Options. Except as discussed below, a recipient of an incentive stock option generally will not pay tax on the grant or the exercise of the option if the recipient exercises the option while the recipient is our employee or within three months following termination of the recipient's employment (or one year, if termination was due to a permanent and total disability).

If the recipient of the incentive stock option sells the shares acquired upon the exercise of the option at any time within one year after the date we transfer those shares to the recipient or two years after the date we grant the incentive stock option to the recipient, then:

If the recipient sells shares acquired upon exercise of an incentive stock option at any time after the recipient has held the shares for at least one year after the date we transfer the shares to the recipient pursuant to the recipient's exercise of the incentive stock option and at least two years after the date we grant the recipient the incentive stock option, then the recipient will recognize capital gain or loss equal to the difference between the sales price and the purchase price paid for the shares upon exercise of the incentive stock option.

The amount by which the fair market value of shares the recipient acquires upon exercise of an incentive stock option (determined as of the date of exercise) exceeds the purchase price paid for the shares upon exercise of the incentive stock option will be included as a positive adjustment in the calculation of the recipient's "alternative minimum taxable income" in the year of exercise. The "alternative minimum tax" will generally equal the amount by which 26% or 28% (depending upon the amount of the recipient's alternative minimum taxable income) of the recipient's alternative minimum taxable income (reduced by certain exemption amounts) exceeds the recipient's regular income tax liability for the year. Before exercising an incentive stock option, a recipient should determine whether and to what extent exercise of an incentive stock option will result in alternative minimum tax in the year of exercise.

In the case of an early disposition of shares by a recipient that results in the recognition of ordinary income, we will be entitled to a deduction equal to the amount of such ordinary income. If

the recipient holds the shares for the requisite period described above and therefore solely recognizes capital gain upon the sale of such shares, we will not be entitled to any deduction.

Non-qualified Stock Options. Our grant of a non-qualified stock option to a recipient is generally not a taxable event for the recipient. Upon the exercise of a non-qualified stock option, the recipient will generally recognize ordinary income equal to the excess of the fair market value of the shares the recipient acquires upon exercise (determined as of the date of exercise) over the purchase price paid for the shares upon exercise of the non-qualified stock option. We generally will be entitled to deduct as a compensation expense the amount of such ordinary income. The recipient's subsequent sale of the shares generally will give rise to capital gain or loss equal to the difference between the sale price and the sum of the purchase price paid for the shares plus the ordinary income recognized with respect to the shares, and such capital gain or loss will be taxable as long term or short term capital gain or loss depending upon the recipient's holding period after exercise. If the recipient is an "insider" (as defined below), the recipient is advised to consult a tax advisor about the possibility of making an election under Section 83(b) of the Internal Revenue Code upon exercise of a non-qualified stock option.

Stock Appreciation Rights and Phantom Stock. Generally, the holder of a stock appreciation right or phantom stock award will recognize ordinary income equal to the amount paid by us under either arrangement on the date the holder receives payment from us. If we place a limit on the amount that will be payable under a stock appreciation right, the holder may recognize ordinary income equal to the value of the holder's right under the stock appreciation right at the time the value of such right equals such limit and the stock appreciation right is exercisable. We will generally be entitled to a deduction in an amount equal to the ordinary income recognized by the holder.

Stock Purchase Rights—Restricted Stock. Under the 2000 Equity Incentive Plan, we are authorized to grant rights to purchase our restricted common stock subject to our right to repurchase such stock at the price paid by the participant if the participant's employment relationship with us terminates prior to the lapse of such repurchase right. In general, there will be no tax consequences to a participant upon the grant of a right to purchase such restricted stock. Instead, the participant will be taxed at ordinary income rates at the time our repurchase rights expire or are removed on an amount equal to the excess of the fair market value of the stock at that time over the amount the participant paid to acquire such stock. A participant who acquires restricted stock, however, may make an election under Section 83(b) of the Internal Revenue Code with respect to such stock. If such an election is timely made, the participant is taxed at ordinary income rates in the year in which the participant acquires the restricted stock. The ordinary income the participant must recognize is equal to the excess of the fair market value of the stock at the time of the participant's acquisition of the stock (determined without regard to the restrictions) over the amount that the participant paid to acquire such stock. If a participant makes a timely election under Section 83(b) of the Internal Revenue Code with respect to restricted stock, the participant generally will not be required to report any additional income with respect to such restricted stock until he disposes of such stock, at which time he will generally recognize capital gain or loss equal to the difference between the sales price and the sum of the purchase price paid, if any, for the shares plus the ordinary income recognized pursuant to the election under Section 83(b) of the Internal Revenue Code. In the event that a participant forfeits restricted stock with respect to which an election under Section 83(b) of the Internal Revenue Code has been made, the participant ordinarily will not be entitled to recognize any loss for federal income tax purposes (except to the extent the amount realized by the participant at the time of such forfeiture is less than the participant's purchase price for such stock). We generally will be entitled to a deduction equal to the amount of ordinary income (if any) recognized by a participant with respect to restricted stock for our taxable year in which, or with which, ends the taxable year of the participant in which such ordinary income is recognized.

Other Awards. In addition to the types of awards described above, the 2000 Equity Incentive Plan authorizes certain other awards that may include payments in cash, our common stock, or a

combination of cash and common stock. The tax consequences of such awards will depend upon the specific terms of such awards. Generally, however, a participant who receives an award payable in cash will recognize ordinary income, and we will be entitled to a deduction, with respect to such award at the earliest time at which the participant has an unrestricted right to receive the amount of the cash payment. In general, the sale or grant of stock to a participant under the 2000 Equity Incentive Plan will be a taxable event at the time of the sale or grant if such stock at that time is not subject to a substantial risk of forfeiture or is transferable within the meaning of Section 83 of the Internal Revenue Code in the hands of the participant. For such purposes, stock is ordinarily considered to be transferable if it can be transferred to another person who takes the stock free of any substantial risk of forfeiture. In such case, the participant will recognize ordinary income, and we will be entitled to a deduction, equal to the excess of the fair market value of such stock on the date of the sale or grant over the amount, if any, that the participant paid for such stock. Stock that at the time of receipt by a participant is subject to restrictions that constitute a substantial risk of forfeiture and that is not transferable within the meaning of Internal Revenue Code Section 83, generally will be taxed under the rules applicable to restricted stock as described above.

Withholding. In the event that an optionee or other recipient of an award under the 2000 Equity Incentive Plan is our employee, we ordinarily will be required to withhold applicable federal income taxes with respect to any ordinary income recognized by such optionee or other award recipient in connection with stock options or other awards under the 2000 Equity Incentive Plan.

Special Rules Applicable to "Insiders." If a recipient of an award is an "insider" (a director, officer or other individual subject to Section 16 of the Exchange Act), the recipient may be required to defer determination of the amount of income and the timing of income recognition in connection with an award under the plan, and the beginning of the holding period for any shares the recipient receives, until the expiration of any period during which the recipient would be restricted from disposing of any shares the recipient received. The recipient will not be required to defer these determinations if the recipient makes a valid election under Section 83(b) of the Internal Revenue Code. If a recipient is an insider, the recipient is advised to consult a tax advisor to determine the tax consequences of exercising options granted to the recipient under the plan.

Certain Additional Rules Applicable to Awards. The terms of awards granted under the 2000 Equity Incentive Plan may provide for accelerated vesting in connection with a change in control of Diedrich Coffee. In that event and depending upon the individual circumstances of the recipient, certain amounts with respect to such awards may constitute "excess parachute payments" under the "golden parachute" provisions of the Internal Revenue Code. Under these provisions, a participant will be subject to a 20% excise tax on any "excess parachute payments" and Diedrich Coffee will be denied any deduction with respect to such payment. Participants are advised to consult their tax advisors as to whether accelerated vesting or payment of an award in connection with a change in our control would give rise to an excess parachute payment.

We generally are entitled to a deduction equal to the ordinary income recognized by a recipient in connection with an award. However, our deduction (including the deduction related to ordinary income recognized by a recipient) for compensation paid to the Chief Executive Officer and the other four most highly compensated officers may be limited to $1 million per person annually. Depending on the nature of the award, all or a portion of the ordinary income attributable to certain awards granted under the 2000 Equity Incentive Plan may be included in the compensation subject to such deduction limitation.

Special rules will apply in cases where a recipient pays the exercise price of the award or applicable withholding tax obligations under the 2000 Equity Incentive Plan by delivering any of our previously owned common stock or by reducing the number of shares of common stock otherwise

issuable pursuant to the award. Participants who contemplate taking any such action are advised to consult with their personal tax advisors regarding the tax consequences of such action.

Participation in the 2000 Equity Incentive Plan by Executive Officers, Directors and Other Employees; Interest of Certain Persons in Matters to be Acted Upon

Participation in the 2000 Equity Incentive Plan is in the discretion of the administrator, except that non-employee directors automatically receive non-employee director options in accordance with the 2000 Equity Incentive Plan. Each of the five current non-employee directors standing for re-election will, upon re-election to our board of directors, receive an automatic grant of an option to purchase up to 1,250 shares of our common stock. Each non-employee director will also receive an automatic grant of an option to purchase up to 1,250 additional shares of our common stock immediately following each future annual meeting of stockholders if the non-employee director has served as a director since his or her election or appointment and has been re-elected at any such future annual meeting.

If both Proposals 2 and 3 are approved, each of the five current non-employee directors standing for re-election will instead receive, upon re-election to our board of directors, an automatic grant of an option to purchase up to 15,000 shares of our common stock. Each non-employee director will also receive an automatic grant of an option to purchase up to 15,000 additional shares of our common stock immediately following each future annual meeting of stockholders if the non-employee director has served as a director since his or her election or appointment and has been re-elected at any such future annual meeting. Finally, under the 2000 Equity Incentive Plan, each non-employee director will be eligible to receive future awards of additional stock options or other types of awards as determined by the compensation committee in its discretion. These awards, if granted, would be in addition to the non-employee director options that non-employee directors automatically receive under the 2000 Equity Incentive Plan.

The following table summarizes certain information with respect to benefits that will be received by the directors standing for re-election as non-employee directors and by our officers and employees:

Name		Dollar Value		Number Of Shares
Roger Laverty Director, President, and Chief Executive Officer		(1	)	(1	)
Matthew McGuinness (2) Executive Vice President of Development		(1	)	(1	)
Pamela Britton Vice President and Chief Operating Officer		(1	)	(1	)
Carl Mount Vice President—Manufacturing and Distribution		(1	)	(1	)
Michael Zorehkey Vice President—Real Estate		(1	)	(1	)
All current executive officers as a group (12 persons)		(1	)	(1	)
All employees, including current officers who are not executive officers,
	as a group (828 persons)		(1	)	(1	)
All current directors who are not executive officers as a group (5 persons) (3)		(1	)(4)	6,250(5	)(6)

The affirmative vote of a majority of our shares present in person or represented by proxy and entitled to vote at the annual meeting will be required to approve the increase in the number of shares of common stock available for issuance under the Diedrich Coffee, Inc. 2000 Equity Incentive Plan.

PROPOSAL 3
INCREASE IN THE NUMBER OF OPTIONS GRANTED TO
NON-EMPLOYEE DIRECTORS UNDER THE
DIEDRICH COFFEE, INC. 2000 EQUITY INCENTIVE PLAN

Upon first becoming a non-employee director, a non-employee director currently receives a one-time grant of an option to purchase 2,500 shares of our common stock. In addition to the initial grant, each non-employee director also currently receives, upon re-election to our board of directors, an automatic grant of an option to purchase 1,250 additional shares of our common stock. A summary of the material terms of the Diedrich Coffee, Inc. 2000 Equity Incentive Plan, including vesting and other terms applicable to non-employee director options, is provided above in Proposal 2 under the heading "Summary of the Diedrich Coffee, Inc. 2000 Equity Incentive Plan—Terms and Conditions of Non-Employee Director Options Under the 2000 Equity Incentive Plan."

Our board of directors has adopted, subject to stockholder approval, amendments to the 2000 Equity Incentive Plan to provide for an initial grant of an option to purchase up to 15,000 shares of our common stock upon first becoming a non-employee director and for an additional grant of an option to purchase up to 15,000 shares of our common stock upon being re-elected to our board of directors. The remainder of the terms of the 2000 Equity Incentive Plan as they pertain to non-employee director options will remain unchanged.

We believe that recent regulatory developments in the areas of corporate governance and financial reporting have resulted in increased demand for qualified and capable public company directors. As a result of increased competition for qualified directors and the increase in statutory responsibilities of directors, we believe that the proposed amendment to increase the number of options granted to non-employee directors is necessary for us to remain competitive with respect to director compensation and to continue to attract and retain the best available persons for service as non-employee members of our board of directors and its committees.

If Proposal 3 is approved by the stockholders, the proposed amendments will become effective immediately, and we will grant each non-employee director who is re-elected at the 2003 annual meeting, and at each annual meeting thereafter, an option to purchase up to 15,000 shares of our common stock.

The affirmative vote of a majority of our shares present in person or represented by proxy and entitled to vote at the annual meeting will be required to approve the proposed amendments to the Diedrich Coffee, Inc. 2000 Equity Incentive Plan to increase the number of options automatically granted to non-employee directors upon initial election and re-election to the board of directors.

PROPOSAL 4
APPROVAL OF THE STOCK OPTION PLAN AND AGREEMENT
WITH ROGER M. LAVERTY

Proposal 4 seeks your approval of the Stock Option Plan and Agreement with our Chief Executive Officer, Roger M. Laverty (the "Laverty Option Plan"). In April 2003, the board of directors appointed Mr. Laverty to the positions of director, President, and Chief Executive Officer. The following is a summary of the principal features of the Laverty Option Plan. The summary is qualified in its entirety by the terms of the Stock Option Plan and Agreement with Roger M. Laverty, a copy of which is attached as Appendix B.

We entered into the Laverty Option Plan on April 24, 2003. Under the plan, Mr. Laverty was granted options to purchase up to 200,000 shares of our common stock for the purpose of encouraging and rewarding his contributions to our performance and aligning his interests with the interests of our stockholders. Subject to stockholder approval, the options granted to Mr. Laverty will be exercisable at an exercise price of $3.44 per share and will vest in four equal installments on each of the first four anniversary dates of April 24, 2003. If we terminate Mr. Laverty's employment for cause or if Mr. Laverty terminates his employment with us for any reason (other than as a result of a constructive termination), then all options that have not otherwise become exercisable as of the termination date will immediately terminate and become unexercisable, and all options that have become exercisable as of the termination date will terminate and become unexercisable on the earlier of April 24, 2013 or the date that is 60 days after the date of the termination. If Mr. Laverty's employment is terminated for any other reason, including by us without cause or by Mr. Laverty as a result of a constructive termination, then all options that have not otherwise become exercisable as of the termination date will continue to become exercisable, except that such options will terminate and become unexercisable on the earlier of April 24, 2013 or the first anniversary of the date of Mr. Laverty's termination, and all options that have become exercisable as of the termination date will terminate and become unexercisable on the earlier of the April 24, 2013 or the first anniversary of the date of Mr. Laverty's termination. In any event, the options granted to Mr. Laverty will vest and become immediately exercisable if Mr. Laverty is terminated by us other than for cause within 60 days prior to or within one year following a change in control, and all of his options will terminate and become unexercisable on the earlier of April 24, 2013 or the first anniversary of the change in control. Otherwise, all of Mr. Laverty's unexercised options will terminate on April 24, 2013.

The table below summarizes certain information with respect to the options granted to Mr. Laverty on April 24, 2003, which are contingent upon stockholder approval of Proposal 4.

Name		Dollar Value		Number Of Shares
Roger M. Laverty President and Chief Executive Officer		(1	)	200,000(2	)

We have agreed to file a registration statement on Form S-8 with the Securities and Exchange Commission to register the issuance of shares of our common stock upon the exercise of options under the Laverty Option Plan. The exercise of options by Mr. Laverty will be contingent upon the receipt of all necessary governmental approvals and consents as well as compliance with all applicable federal, state and/or local tax withholding requirements. Only Mr. Laverty is eligible to receive options under the Laverty Option Plan and the options are non-transferable and non-assignable, other than by will or the laws of descent. The Laverty Option Plan provides that the exercise price of the options may be paid in cash or, subject to the discretion of our compensation committee, by delivery of shares of our common stock or a combination of cash and shares of our common stock.

In April 2003, Mr. Laverty also entered into an employment agreement with us to serve as our President and Chief Executive Officer. The agreement provides for an annual base salary of $300,000 and an annual incentive bonus of up to 50% of base salary based on our and Mr. Laverty's performance against objectives approved by our board of directors. Mr. Laverty also received, subject to stockholder approval, options to purchase up to 200,000 shares of our common stock at an exercise price of $3.44 per share. The options vest over four years at a rate of 25% per year. If we terminate Mr. Laverty without cause or if Mr. Laverty terminates his employment with us as a result of a constructive termination, Mr. Laverty will be entitled to receive a severance payment equal to 50% of his base salary if such termination occurs prior to April 29, 2004 and 100% of his base salary if such termination occurs after April 29, 2004. Mr. Laverty receives employee benefits consistent with our policies for other senior executives.

Our board of directors authorized the Laverty Option Plan and entered into the related employment agreement with Mr. Laverty as two elements of an organized effort to attract and motivate an individual whom our board of directors has determined possesses the characteristics necessary to substantially improve our performance. The employment agreement appoints Mr. Laverty as our President and Chief Executive Officer, giving him the necessary authority to make the changes he determines are in our best interests. The Laverty Option Plan rewards Mr. Laverty as the value of our common stock increases. Taken as a whole, we believe these two agreements give Mr. Laverty the authority and the motivation to direct his efforts to improve our performance.

The following is a brief, general description of federal income tax consequences of the receipt and exercise of options granted by Diedrich Coffee under the Laverty Option Plan. This description is based on the laws and regulations in effect as of the date of this proxy statement and does not purport to be a complete statement of the law in this area. Furthermore, the discussion below does not address the tax consequences of the receipt and exercise of options under foreign, state and/or local tax laws, and such tax laws may not correspond to the federal tax treatment described herein. The exact federal income tax treatment of transactions under the Laverty Option Plan will vary depending upon the specific facts and circumstances involved.

Non-qualified Stock Options. Our grant of a non-qualified stock option to Mr. Laverty is generally not a taxable event for him. Upon the exercise of a non-qualified stock option, Mr. Laverty will generally recognize ordinary income equal to the excess of the fair market value of the shares he acquires upon exercise (determined as of the date of exercise) over the exercise price of the non-qualified stock option. We will generally be able to deduct as compensation expense the amount of ordinary income recognized by Mr. Laverty. Mr. Laverty's subsequent sale of the shares generally will give rise to capital gain or loss equal to the difference between the sale price and the sum of the exercise price paid for the shares plus the ordinary income recognized with respect to the shares.

Withholding. Because Mr. Laverty is our employee, we ordinarily will be required to withhold applicable federal income taxes with respect to any ordinary income recognized by him in connection with stock options granted under the Laverty Option Plan.

Special Rules Applicable to "Insiders." Because Mr. Laverty is an "insider," he may be required to defer determination of the amount of income and the timing of income recognition in connection with his options under the plan, and the beginning of the holding period for any shares he receives, until the expiration of any period during which he would be restricted from disposing of any shares he received. Mr. Laverty will not be required to defer these determinations if he makes a valid election under Section 83(b) of the Internal Revenue Code.

The affirmative vote of a majority of our shares present in person or represented by proxy and entitled to vote at the annual meeting will be required to approve the Stock Option Plan and Agreement with Roger M. Laverty.

We propose to enter into a transaction pursuant to which we will borrow up to $5 million from Sequoia Enterprises, LP (the "Lender"). Our Chairman, Paul Heeschen, is the sole general partner of the Lender. Through the Lender and several other entities, Mr. Heeschen beneficially owns 1,742,236 shares, or approximately 32.1%, of our common stock. In connection with the proposed transaction, we will issue one or more notes which are convertible into our common stock contingent upon the occurrence of specified events. In addition, upon repayment of the amount of indebtedness evidenced by the convertible notes, we will be obligated to issue the Lender warrants to purchase shares of our common stock, which warrants will be exercisable upon the occurrence of the same events. We are seeking stockholder approval of the proposed transaction in order to comply with several Nadsdaq Marketplace Rules which may apply to the proposed transaction. The terms of the proposed transaction and the Nadsaq rules which may apply are more fully discussed below.

Contingent Convertible Note Purchase Agreement. The parties propose to enter into a Contingent Convertible Note Purchase Agreement (the "Agreement") which will provide for the issuance of one or more unsecured contingent convertible promissory notes (the "Notes") with an aggregate principal amount not to exceed $5 million. We will make customary representations and warranties for a related party transaction of this type. The Lender will make customary investor representations and warranties.

Issuance of Notes. At our election, for a period of three years, we may issue to the Lender on the effective date of the Agreement, or on the first day of any fiscal quarter of Diedrich Coffee, one or more Notes having a minimum principal amount of $300,000 up to an aggregate amount of $5 million, provided that the proceeds from the sale of the first Note that we issue to the Lender must be in an amount that is sufficient to repay amounts that we owe to Bank of the West and any other senior debt. We will be required to provide the Lender at least 10 business days notice prior to requesting any funds. During the three-year period, we will be required to pay a commitment fee (as described below) for any portion of the $5 million that we do not borrow.

Maturity Dates. The principal amount of the Notes plus any accrued and unpaid interest will be due on the earlier of a Change in Control (as defined below) or the third anniversary of the effective date of the Agreement. A "Change in Control" will be defined in the Agreement as (a) a transaction in which a nonaffiliated third party acquires equity representing 15% or more of the voting equity of Diedrich Coffee; (b) a transaction in which an affiliate of Diedrich Coffee (other than an affiliate controlled by Mr. Heeschen) acquires equity representing 25% or more of the voting equity of Diedrich Coffee; (c) a merger, consolidation or other business combination transaction involving Diedrich Coffee, the result of which is that a third party who does not then own, directly or indirectly, more than 25% of the voting equity of Diedrich Coffee, acquires more than 25% of the voting equity of Diedrich Coffee or the successor entity; or (d) a sale of all or substantially all of our assets.

Covenants. The Agreement will contain customary covenants including that we may not permit any other indebtedness to be senior to the Notes, and the Notes will be of equal seniority with trade debt and all other permissible indebtedness that we may incur. The Agreement will also include the following additional covenants: we will use the loan proceeds first to repay amounts that we owe to Bank of the West under our current credit facility; we will not incur more than a specified amount of indebtedness (in addition to the indebtedness under the Notes) which is of equal seniority with the Notes; we will not incur any indebtedness that is senior to the Notes; we will maintain a specified ratio of indebtedness to tangible net worth; and we will maintain a minimum EBITDA amount.

Interest; Required Payments. Interest on the Notes will accrue at a rate equal to LIBOR plus 3.30% per annum calculated on the basis of a 360 day year and actual days elapsed. We will be required to make payments to the Lender monthly on the first day of each month. Each monthly payment will be equal to the sum of (a) all accrued interest on each of the outstanding Notes for the prior month, plus (b) 1.67% of the outstanding aggregate principal amount of the Notes, plus (c) a commitment fee equal to 0.0833% of the difference between $5 million and the principal amount of all issued Notes.

Prepayment of the Notes. We may prepay the Notes in whole or in part at any time. We will be required to give 10 days notice of our intent to prepay. The Lender will apply partial prepayments first to interest and then to principal.

Issuance of Warrants. Upon the repayment of the principal on any outstanding Notes (at maturity or upon prepayment), we will be required to issue the Lender a warrant (the "Warrant") to purchase the number of shares of common stock which the Lender would have been entitled to receive upon conversion of the Note prior to the payment. The per share purchase price for the shares to be purchased pursuant to the Warrant will be equal to the conversion price per share (as described below) applicable at the time of exercise. Any Warrant issued by us pursuant to this provision will only be exercisable immediately prior to a Change of Control and will expire and no longer be exercisable on the fourth anniversary of the effective date of the Agreement.

Conversion Contingent Upon a Change in Control. If there is a Change of Control at any time prior to payment in full of the principal balance of the Notes, the Lender will have the right, immediately prior to such Change of Control, to convert the amounts outstanding under the Notes (including accrued interest) into our common stock at the then applicable conversion price per share.

Conversion Price. The number of shares of our common stock into which the Notes may be converted will be determined by dividing the principal amount, together with all accrued interest to the date of conversion, for each Note by the then applicable conversion price. The conversion price for each Note will be the greater of (a) the closing price of our common stock on the date that the Notes were issued or (b) an amount equal to 85% of the average equivalent price paid by any party who engages in a transaction or series of transactions resulting in a Change of Control.

Defaults. The occurrence of any of the following events will be deemed to be a default under the Agreement: our failure to make monthly payments on the Notes when due; our breach of any of the covenants in the Agreement or the Notes; the acceleration of any of our indebtedness to other creditors; our breach of any agreements with equity holders; our filing of a petition in bankruptcy; our making an assignment for the benefit of creditors; or our failure to have an involuntary petition in bankruptcy dismissed. Except with respect to bankruptcy and payment defaults, we will have 30 days in order to cure any default. We will have seven days to cure any payment default, provided that we will be required to pay a late fee equal to 1% of the aggregate amount of the late payment.

Non-Assignablity of Notes. The Notes may not be assigned by the Lender without our prior written consent. Our common stock issuable upon conversion of the Notes will be freely tradable, subject to compliance with applicable securities laws.

Fees. We will pay the Lender's legal expenses, up to a specified amount, incurred in connection with reviewing the Agreement and related documents.

The proposed financing transaction is subject to a number of conditions. First, the board of directors is completing an assessment of the current financial markets to confirm that the terms of the Agreement are fair to Diedrich Coffee and its stockholders. The board of directors will only proceed with the proposed transaction upon receiving confirmation that the terms are fair compared to terms otherwise available in the financial markets. Second, we will be required to obtain the necessary regulatory approvals for the proposed transaction, including, if necessary, the receipt of a permit for the issuance of the Notes to comply with any applicable California usury laws. Third, the stockholders must approve Proposal 5. Finally, we have not yet entered into a binding agreement with the Lender. Thus, either party may elect to terminate the proposed transaction after the date of this proxy statement for any reason without liability. Accordingly, even if our stockholders approve Proposal 5, we may not proceed with the proposed financing transaction.

Our board of directors has determined that it is in the best interests of Diedrich Coffee and its stockholders to repay amounts outstanding under our Credit Agreement with Bank of the West, which, at October 17, 2003, was approximately $2,624,000. Accordingly, we expect to use the proceeds from the issuance of the Notes to repay amounts outstanding under our Credit Agreement with Bank of the West and to fund potential expansion of our operations.

As more fully described in our Annual Report on Form 10-K for the fiscal year ended July 2, 2003, on September 3, 2002, we entered into a Credit Agreement with United California Bank, doing business as Bank of the West (the "Credit Agreement"). We immediately borrowed $3,000,000 under the Credit Agreement in order to pay the balance of all amounts owed to Fleet National Bank. We are required to make monthly principal payments of $100,000 over 30 months and all amounts we owe under the term loan must be repaid by March 31, 2005. Under the amended terms of the Credit Agreement, we are required to make monthly interest payments on amounts outstanding under the replacement term loan, computed at either Bank of the West's prime rate plus 1.0% or a LIBOR rate plus 3.25%.

On April 10, 2003, we borrowed an additional $950,000 under the Credit Agreement in order to purchase coffee packaging equipment. The equipment loan calls for monthly principal payments of $26,000 plus interest through the maturity date of the loan, August 28, 2006. The interest rate of the equipment loan is fixed at 5.77% until the loan is repaid.

Our obligations under the Credit Agreement are secured by all of our assets, including the stock of each of our subsidiaries (each of which guarantees our obligations under the Credit Agreement), as well as all intangible assets we own, including the intellectual property and trademark assets that we and our subsidiaries own. We are subject to a number of additional restrictions under our Credit Agreement. These include limitations on our ability to sell assets, make capital expenditures, incur additional indebtedness, permit new liens upon our assets, and pay dividends on or repurchase our common stock. We must also maintain compliance with agreed-upon financial covenants that limit the amount of indebtedness that we may have outstanding in relation to our tangible net worth, require us to maintain a specified minimum dollar value level of tangible net worth, require us to maintain a specified minimum dollar value level of EBITDA and certain minimum ratios of cash flow to debt service obligations, require us to maintain a specified minimum level of profitability, and require us to maintain a minimum cash balance on deposit with Bank of the West.

Our common stock is listed on the Nasdaq National Market and we are subject to the Nasdaq Marketplace Rules. Nasdaq Marketplace Rule 4350(i)(1)(A) requires us to obtain stockholder approval

if we enter into an arrangement pursuant to which an officer or director may acquire common stock in excess of the lesser of one percent of the number of shares of our common stock outstanding on the date that we issue the Notes or 25,000 shares. Although, at this time, we cannot determine the exact number of shares that will be issued upon conversion of the Notes, if any, or the number of shares that will be issued upon exercise of the Warrants, if any, it is possible that, if the stockholders approve Proposal 5 and we consummate the proposed financing transaction, the Lender, and for purposes of determining the beneficial ownership of the shares, Mr. Heeschen, may acquire more than 25,000 shares of our common stock. Accordingly, we are seeking stockholder approval in order to comply with Nasdaq Marketplace Rule 4350(i)(1)(A).

Nasdaq Marketplace Rule 4350(i)(1)(D)(ii) also requires us to obtain stockholder approval in connection with a transaction, other than a public offering, involving the potential issuance of common stock (or securities convertible into or exercisable for common stock) equal to 20 percent or more of our common stock or 20 percent or more of our voting power outstanding before the issuance for less than the greater of book or market value of the stock as of the date of the transaction. The Notes will be contingently convertible into shares of our common stock and the Warrants will be contingently exercisable to purchase shares of our common stock. The conversion price, and for purposes of the Warrants, the exercise price, will be subject to adjustment in specified circumstances. Although, at this time, we cannot determine the exact number of shares that will be issued upon conversion of the Notes, if any, or the number of shares that will be issued upon exercise of the Warrants, if any, it is possible that, if the stockholders approve Proposal 5 and we consummate the proposed financing transaction, the Lender could acquire securities that are convertible into or exercisable for 20 percent or more of our common stock for less than the greater of book or market value of the stock as of the date of the transaction. Accordingly, we are seeking stockholder approval in order to comply with Marketplace Rule 4350(i)(1)(D)(ii).

Finally, Nasdaq Marketplace Rule 4350(i)(1)(B) provides that shareholder approval is required if a transaction results in a change in control of the issuer. The Nasdaq Marketplace Rules do not specifically define what constitutes a change in control. Because Mr. Heeschen currently beneficially owns approximately 32.1% of our common stock, he is likely deemed to be in a control position with respect to the common stock of Diedrich Coffee. Although, at this time, we cannot determine the exact number of shares that will be issued upon conversion of the Notes, if any, or the number of shares that will be issued upon exercise of the Warrants, if any, it is possible that, if the stockholders approve Proposal 5 and we consummate the proposed financing transaction, Mr. Heeschen could become the beneficial owner of more than 50% of our common stock. The increase in beneficial ownership over 50% could be deemed by Nasdaq to constitute a change in control. Accordingly, we are seeking stockholder approval in order to comply with Nasdaq Marketplace Rule 4350(i)(1)(B).

If Proposal 5 is approved, and we consummate the proposed financing transaction, we may be required to issue shares of our common stock, either upon conversion of the Notes or upon exercise of the Warrants. Depending on the amount that we may elect to borrow and on the applicable conversion price, the transaction may be dilutive to our current stockholders.

Mr. Heeschen currently beneficially owns approximately 32.1% of our outstanding common stock (including shares issuable upon the conversion of outstanding options and warrants held by an affiliate of Mr. Heeschen that are exercisable within 60 days). If the stockholders approve Proposal 5 and the proposed transaction is consummated, there is a possibility that Mr. Heeschen would beneficially own, or have the ability to acquire, more than 50% of our outstanding stock. Mr. Heeschen has abstained, and will abstain, from participating in the board of director's deliberations regarding the advisability of

the proposed financing. In addition, Mr. Heeschen will not vote any shares beneficially owned by him on Proposal 5.

Under Delaware law, stockholders are not entitled to appraisal rights with respect to the proposed issuance of the Notes.

The affirmative vote of the holders of a majority of the shares casting votes on Proposal 5 is required to approve the proposed financing transaction.

The board of directors, with the exception of Mr. Heeschen who has recused himself on this matter, recommends that you vote in favor of Proposal 5.

Our board of directors has again selected KPMG LLP to serve as our independent auditor for the fiscal year ending June 30, 2004. KPMG LLP has served as our auditor since January 17, 1997. Representatives of KPMG LLP are expected to be at the meeting, will have an opportunity to make a statement if they so desire, and will be available to respond to appropriate questions.

Selection of our independent auditor is not required to be submitted for stockholder approval, but our board of directors is seeking ratification of its selection of KPMG LLP from our stockholders as a matter of good corporate practice. If the stockholders do not ratify this selection, the board of directors will reconsider its selection of KPMG LLP and will either continue to retain this firm or appoint new auditors upon recommendation of the audit committee. Even if the selection is ratified, the audit committee and our board of directors, in their discretion, may direct the appointment of different independent auditors at any time during the year if they determine that such a change would be in our best interests and those of our stockholders.

The affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the annual meeting will be required to ratify the selection of KPMG LLP as our independent auditor for the current fiscal year.

The executive officers of Diedrich Coffee, and their ages as of October 20, 2003, are as follows:

Name	Age	Position(s) Held
Roger Laverty	56	President, Chief Executive Officer, and Director
Martin Diedrich	45	Vice Chairman of the Board of Directors, Chief Coffee Officer, and Secretary
Martin Lynch	66	Executive Vice President and Chief Financial Officer
Matthew McGuinness	43	Executive Vice President of Development
Pamela Britton	50	Vice President and Chief Operating Officer
Carl Mount	40	Vice President—Manufacturing and Distribution
Michael Zorehkey	42	Vice President—Real Estate
Matthew Kimble	51	Vice President—Human Resources
Edward Apffel	46	Vice President—Sales
Diane Hays-Hoag	55	Vice President—Gloria Jean's Marketing
Paul Marshall	51	Vice President—Information Systems
David Jenkins	44	Vice President—Gloria Jean's International Operations

The following is information regarding those persons currently serving as executive officers of Diedrich Coffee:

Roger Laverty. Mr. Laverty's biographical information is included above under Proposal 1.

Martin Diedrich. Mr. Diedrich's biographical information is included above under Proposal 1.

Martin Lynch joined Diedrich Coffee in October 2003 as Executive Vice President and Chief Financial Officer. Since 2001, Mr. Lynch has been President and Managing Partner of Claremorris, Inc., a privately owned consulting company. From 1989 to 2001, Mr. Lynch was Executive Vice President and Chief Financial Officer of Smart and Final Inc., a publicly traded company engaged in grocery store retailing and foodservice distribution. From 1984 to 1989, Mr. Lynch was Executive Vice President and Chief Financial Officer of Duty Free Shoppers Group, Ltd., a privately owned retailer of luxury goods to the traveling public. From 1976 to 1984, he served as Senior Vice-President and Chief Financial Officer of Tiger International, a publicly traded company engaged in transportation and financial services.

Matthew McGuinness joined Diedrich Coffee in March 2000 as Senior Vice President and Chief Financial Officer. In October 2000, he was promoted to Executive Vice President and Chief Financial Officer. In October 2003, he was appointed Executive Vice President of Development. From May 1998 to February 2000, Mr. McGuinness was Senior Vice President—Finance and Chief Financial Officer at Denny's, Inc., a subsidiary of Advantica Restaurant Group, Inc., a publicly traded food service company. From 1991 until May 1998, Mr. McGuinness was Vice President—Finance and Chief Financial Officer at El Pollo Loco, Inc., also a subsidiary of Advantica Restaurant Group, Inc. Mr. McGuinness received a B.A. degree in business administration from the University of Michigan and is a certified public accountant.

Pamela Britton joined Diedrich Coffee in February 2001 as Vice President of Operations of our Gloria Jean's subsidiary. She was subsequently appointed Chief Operating Officer of Gloria Jean's, and then Vice President and Chief Operating Officer of Diedrich Coffee. From July 1999 to February 2001, Ms. Britton was Vice President of Operations for Johnny Rockets Group, Inc., a privately owned food service company. From June 1992 until June 1999, Ms. Britton served as Vice President of Operations of Cinnabon World Famous Cinnamon Rolls, a division of the publicly traded food service company AFC Enterprises, Inc.

Carl Mount joined Diedrich Coffee in November 1999 as Vice President—Manufacturing and Purchasing. From January 1999 to November 1999, Mr. Mount was a plant manager for the Pepsi Bottling Group in Hayward, California. He served as a Senior Consultant, Manufacturing Services for the Coca-Cola Company in Atlanta, Georgia from July 1998 to January 1999. Prior to this, he served as Group Operations Manager from November 1996 to July 1998, and as Operations Manager from August 1995 to November 1996, for the Coca-Cola Company in Istanbul, Turkey and Bursa, Turkey, respectively. Mr. Mount received a B.S. degree in business administration from the University of Southern California, and a masters degree in business administration from Santa Clara University.

Michael Zorehkey joined Diedrich Coffee in March 2000 as Director of Mall Development. In April 2001, he was appointed Vice President—Real Estate. From June 1999 until March 2000, Mr. Zorehkey served as the Senior Vice President of Zorehkey & Associates, a privately owned real estate consulting firm. From July 1997 until June 1999, Mr. Zorehkey was Vice President—Real Estate for Edison Brothers Stores, a publicly owned company. From April 1996 until July 1997, Mr. Zorehkey was Vice President Real Estate and Construction for Cinnabon World Famous Cinnamon Rolls, a division of the publicly traded food service company AFC Enterprises, Inc. From April 1992 until April 1996, Mr. Zorehkey was Director of Real Estate for Sweet Factory, Inc., a publicly owned company.

Matthew Kimble joined Diedrich Coffee in connection with our acquisition of Coffee People, Inc. in July 1999 and has served as our Vice President—Human Resources since then. From January 1997 until the acquisition, Mr. Kimble served as the Vice President, Human Resources of Coffee People. From 1991 to January 1997, he served as Employment Manager for Thrifty Payless Drug Stores, Inc. Mr. Kimble received a B.A. degree in business administration from Olympic College.

Edward Apffel joined Diedrich Coffee in June 1997 as Director of Wholesale Sales. Since April 2000, he has served as Vice President—Sales. From January 1996 to June 1997, Mr. Apffel was Director National Wholesale Sales at F. Gavina & Sons, Inc., a privately owned company that roasts and markets coffee to the grocery and food service industry on a national basis. From October 1992 to December 1995, Mr. Apffel was the owner of Red Apple Coffee Co., a privately owned company coffee consulting firm.

Diane Hays-Hoag joined Diedrich Coffee in November 2001 as Vice President of Marketing of our Gloria Jean's subsidiary, and was subsequently appointed Vice President—Gloria Jean's Marketing. From February 1994 to November 2001, Ms. Hays-Hoag served in various capacities for Carl's Jr. Restaurant, a division of the publicly traded CKE Restaurants, Inc., first as Brand Manager, then as Director, and finally as Vice President, Marketing. Ms. Hays-Hoag received a B.S. degree in education from California State College.

Paul Marshall joined Diedrich Coffee in October 1998 as Vice President—Management Information Services. From January 1997 to January 1998, Mr. Marshall served as Vice President—Management Information Services of Pic n' Save Wharehouse Foods, Inc., a publicly owned discount retail company. From September 1995 to December 1996, Mr. Marshall was Vice President—Management Information Services of KidsMart, a privately held children's retail clothing company. Mr. Marshall received a B.A. in business administration from the University of Michigan.

David Jenkins joined Diedrich Coffee in April 2000 as Director of International Franchise Operations for our Gloria Jean's subsidiary. In January 2001, he was appointed Vice President, International Operations and Sales, and currently serves as Vice President—Gloria Jean's International Operations. From January 1989 to March 2000, Mr. Jenkins worked in international operations and development for the Baskin-Robbins and Dunkin'Donuts brands of Allied Domecq PLC, holding several management positions including Director of International Operations. Mr. Jenkins received a B.S. in natural resources from Ohio State University, and a masters degree in business administration from the American Graduate School of International Management.

The following table sets forth compensation earned during the last three fiscal years by those individuals who served as our Chief Executive Officer during the fiscal year ended July 2, 2003, and for the four most highly compensated executive officers other than the CEO who were serving as our executive officers at the end of the last completed fiscal year. The table includes Philip Hirsch, who resigned from his position as President and Chief Executive Officer on January 3, 2003.

Name and Principal Position	Fiscal Year	Salary($)			Long-Term Compensation; Awards; Securities; Underlying Options(#)
Roger Laverty (1) President and Chief Executive Officer	2003 2002 2001	$	49,059 — —	$	— — —	200,000 — —
Philip Hirsch (2) Former President and Chief Executive Officer	2003 2002 2001	$	175,344 88,433 —	$	— 62,500 —	125,000 20,000 —
Matthew McGuinness (3) Executive Vice President of Development	2003 2002 2001	$	248,467 254,808 238,649	$	18,000 30,000 98,091	— 10,000 50,000	(5)
Pamela Britton (4) Vice President and Chief Operating Officer	2003 2002 2001	$	194,785 206,472 68,007	$	18,000 50,000 52,500	— 20,000 35,000	(5)
Carl Mount Vice President—Manufacturing and Distribution	2003 2002 2001	$	174,952 178,365 165,980	$	5,000 25,000 34,332	— 10,000 15,000	(5)
Michael Zorehkey Vice President—Real Estate	2003 2002 2001	$	148,847 152,865 125,387	$	48,324 38,700 44,800	— 17,000 3,000	(5)

The following table sets forth information regarding stock options granted to the following executive officers during the fiscal year ended July 2, 2003.

The following table sets forth information concerning the number and value of unexercised options held by the following executive officers on July 2, 2003. None of these executive officers exercised options to purchase common stock during the fiscal year ended July 2, 2003.

		Number of Securities Underlying Unexercised Options at Fiscal Year End(#)		Value of Unexercised In-The-Money Options at Fiscal Year End($)(1)
Name
	Exercisable		Unexercisable(2)		Exercisable		Unexercisable(2)
Roger Laverty		—		200,000		$	—	$	—
Philip Hirsch (3)		60,000		—		$	24,500	$	—
Matthew McGuinness		52,083		26,667		$	—	$	—
Pamela Britton		23,333		31,667		$	4,667	$	2,333
Carl Mount		15,000		15,000		$	—	$	—
Michael Zorehkey		3,875		18,000		$	—	$	—

The following table summarizes the equity compensation plans under which our common stock may be issued as of July 2, 2003.

We have granted, subject to stockholder approval of Proposal 4, Roger M. Laverty, our President and Chief Executive Officer, non-qualified options to purchase 200,000 shares of our common stock pursuant to the terms and subject to the conditions of the Stock Option Plan and Agreement with Roger M. Laverty (the "Laverty Option Plan"). None of the options granted under the Laverty Option Plan will become exercisable until stockholders approve the terms of the Laverty Option Plan and the grant of the options thereunder. If approved, the options will become exercisable in four equal installments on each of the first four anniversary dates of the Laverty Option Plan, April 24, 2003, at an option exercise price of $3.44 per share.

The following section describes certain employment agreements and compensatory arrangements between us or our affiliated entities and those who currently serve as our executive officers or as executive officers of our affiliated entities. In addition, it describes certain employment agreements and compensatory arrangements between us or our affiliates and those who served as our executive officers or as executive officers of our affiliates in fiscal year ended July 3, 2002, but are no longer employed with us or our affiliates.

Employment Agreements and Compensatory Arrangements with Current Executive Officers

Roger Laverty. In April 2003, Mr. Laverty entered into an employment agreement with us to serve as our President and Chief Executive Officer. The agreement provides for an annual base salary of $300,000 and an annual incentive bonus of up to 50% of base salary based on our and Mr. Laverty's performance against objectives approved by our board of directors. Mr. Laverty also received, subject to stockholder approval, options to purchase up to 200,000 shares of our common stock at an exercise price of $3.44 per share. The options vest over four years at a rate of 25% per year. If we terminate Mr. Laverty without cause or if Mr. Laverty terminates his employment with us as a result of a constructive termination, Mr. Laverty will be entitled to receive a severance payment equal to 50% of his base salary if such termination occurs prior to April 29, 2004 and 100% of his base salary if such termination occurs after April 29, 2004. Mr. Laverty receives employee benefits consistent with our policies for other senior executives.

Matthew McGuinness. Effective March 13, 2000, Mr. McGuinness entered into an employment agreement with us appointing him Senior Vice President and Chief Financial Officer. The agreement provided for an annual base salary of $206,600 and an annual incentive bonus of up to 50% of base salary based on our and Mr. McGuinness' performance against objectives approved by our board of directors. If terminated without cause, Mr. McGuinness is entitled to receive twelve months' salary as severance compensation. Mr. McGuinness also received options to purchase up to 18,750 shares of our common stock at an exercise price of $15.36 per share. The options vested over three years at a rate of 33% per year. In October of 2000, Mr. McGuinness was elected to serve as our Executive Vice President and Chief Financial Officer. As a result, his employment agreement was amended to provide for an annual base salary of $250,000. Mr. McGuinness receives employee benefits consistent with our policies for other senior executives.

Pamela Britton. In February 2001, Ms. Britton became Vice President of Operations for Gloria Jean's Coffee. Her employment letter provided for an annual base salary of $175,000. During Ms. Britton's first year of employment with us, she received a guaranteed bonus of $52,500. The employment letter also provides for an annual incentive bonus of up to 30% of her base salary based on our and Ms. Britton's performance against objectives approved by our board of directors. Ms. Britton also received options to purchase up to 20,000 shares of our common stock at an exercise price $2.84. The options vest over three years at a rate of 33% per year. Upon being promoted to Vice President and Chief Operating Officer of Diedrich Coffee, Ms. Britton's responsibilities were increased to include operational responsibility for our Diedrich Coffee, Coffee People, and Gloria Jean's Coffees brands, and her base salary was increased to $200,000. Ms. Britton receives employee benefits consistent with our policies for other senior executives.

Carl Mount. In October 1999, Mr. Mount became Vice President of Manufacturing and Purchasing. His employment letter provided for an annual base salary of $140,000, a signing bonus of $19,000, and an annual incentive bonus of up to 25% of base salary based on our and Mr. Mount's performance against objectives approved by our board of directors. The employment letter provides that if Mr. Mount is terminated without cause, he is entitled to receive six months' salary as severance compensation. Mr. Mount also received options to purchase up to 5,000 shares of our common stock at

an exercise price of $22.00. The options vest over three years at a rate of 33% per year. In October 2000, Mr. Mount's annual base salary was increased to $175,000. Mr. Mount receives employee benefits consistent with our policies for other executive officers.

Michael Zorehkey. In February 2000, Mr. Zorehkey became Director of Mall Development. His employment letter provided for an annual base salary of $115,000 and an annual incentive bonus based on store openings and other performance measures. The employment letter provides that if Mr. Zorehkey is terminated without cause, he is entitled to receive six months' salary as severance compensation. Mr. Zorehkey also received options to purchase up to 1,875 shares of our common stock at an exercise price of $15.40 per share. The options vested over three years at a rate of 33% per year. In April 2001, Mr. Zorehkey was appointed Vice President of Real Estate and Gloria Jean's Franchising. As a result, his annual base salary was increased to $150,000 and his incentive bonuses were based on the opening of Gloria Jean's coffee stores and other performance criteria. In July 2003, Mr. Zorehkey's responsibilities were modified, and he currently serves as Vice President of Real Estate. Mr. Zorehkey receives employee benefits consistent with our policies for other senior executives.

Employment Agreements and Compensatory Arrangements with Executive Officers No Longer Employed by Diedrich Coffee

Philip Hirsch. Effective January 3, 2003, Philip Hirsch resigned as our Chief Executive Officer. Prior to his resignation, we entered into an at-will employment letter agreement with Mr. Hirsch, dated March 20, 2002, which provided that either we or Mr. Hirsch could terminate his employment with us at any time, with or without cause or notice. Under the terms of this letter agreement, Mr. Hirsch agreed to serve as our interim Chief Executive Officer. The agreement provided that Mr. Hirsch received a base salary of $25,000 per month and was granted options to purchase 20,000 shares of our common stock, which options vested in four monthly installments. The original term of the agreement expired on July 31, 2002. The board of directors extended the term of the original agreement by one month, to August 31, 2002, to enable Mr. Hirsch's long-term employment agreement to be finalized. During the extension period, Mr. Hirsch continued to receive his base salary under the original agreement, and was granted an additional 5,000 options to purchase our common stock, which options vested in August 2002. Effective September 1, 2002, Mr. Hirsch entered into a two-year employment agreement with us appointing him President and Chief Executive Officer. The agreement provided for an annual base salary of $325,000 and an annual incentive bonus of up to 50% of base salary based on our and his performance against objectives approved by our board of directors. If terminated without cause, Mr. Hirsch was entitled to receive up to twelve months' salary and benefits under COBRA as severance compensation. Mr. Hirsch also received options to purchase up to 120,000 shares of our common stock at an exercise price equaling the trailing five day average of the price of the common stock from the day of board approval. The options were scheduled to vest over the two-year contract period at a rate of 50% per year.

Prior to the execution of his separation agreement in January 2003, Mr. Hirsch held options, as described above, to purchase 25,000 shares of our common stock, which were fully vested, and an additional 120,000 options, which were not vested. The separation agreement accelerated the vesting of 35,000 of the non-vested options, causing them to be fully vested on January 3, 2003. The remainder of the non-vested options immediately terminated upon Mr. Hirsch's resignation in accordance with the terms of the option grant. The 60,000 vested options held by Mr. Hirsch will expire on January 3, 2005.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION

The compensation committee is composed of Messrs. Churm, Goelman and Heeschen, none of whom are currently our officers or employees. The compensation committee administers our stock option plans and sets compensation levels for our executive officers. Our executive compensation policies and programs are designed to:

To achieve these goals, our compensation committee and board of directors have established an executive compensation program consisting primarily of three integrated components: base salary, annual bonus and stock options.

Base Salary. Base salaries for executive officers are set by our compensation committee after considering factors such as competitive environment, experience level, position, responsibility and overall contribution of the executive. Base salaries for the executive officers were established in their respective employment and letter agreements.

Annual Bonus. All executive officers, including the Chief Executive Officer, are eligible to receive an annual bonus. The employment and letter agreements for the executive officers provide for discretionary performance bonuses based upon our performance and the respective executive officer's contribution to this performance.

Stock Options. The third component of the compensation program for executive officers is in the form of stock option awards. Our 2000 Equity Incentive Plan provides for long-term incentive compensation for our employees, including executive officers. Stock option awards align the interests of executive officers with those of stockholders by providing them with an equity interest in Diedrich Coffee, thereby providing incentive for the executive officers to maximize stockholder value. Option awards directly tie executive compensation to the value of our stock. Our compensation committee is responsible for determining, subject to the terms of the 2000 Equity Incentive Plan, the individuals to whom grants are made, the timing of grants and the number of shares per grant. The number of shares is determined based upon the individual's position in our company, competitive company practices and the number of unvested shares already held by the individual. Stock options are generally granted with an exercise price equal to the fair market value of our common stock on the date of grant. During the fiscal year ended July 2, 2003, our compensation committee granted stock options to six employees, Philip Hirsch, Roger Laverty, and four other new employees. The compensation committee also made grants to an additional nine employees during the fiscal year 2003 in recognition for services rendered during fiscal year 2002.

Chief Executive Officer. In April 2003, we hired Mr. Laverty as our President and Chief Executive Officer. The terms of Mr. Laverty's employment agreements are described above under the caption "Employment Agreements and Compensatory Arrangements—Employment Agreements and Compensatory Arrangements with Current Executive Officers." The process of establishing the Chief Executive Officer's compensation parallels the process and criteria used in establishing compensation levels for other executive officers.

Policy with Respect to Internal Revenue Code Section 162(m). In 1993, the Internal Revenue Code was amended to add Section 162(m). Section 162(m) and the regulations thereunder place a limit of

$1 million on the amount of compensation that may be deducted by us in any year with respect to certain of our most highly compensated officers. Section 162(m) does not, however, disallow a deduction for qualified "performance-based compensation," the material terms of which are disclosed to and approved by stockholders. At the present time, our executive officer compensation levels, other than "performance-based compensation," do not exceed $1 million. Our compensation committee and board of directors plan to take such actions in the future to minimize the loss of tax deductions related to compensation as they deem necessary and appropriate in light of specific compensation objectives.

During the fiscal year ended July 2, 2003, our compensation committee consisted of Messrs. Churm, Goelman and Heeschen. No member of the compensation committee was, during the fiscal year ended July 2, 2003 or at any other time, an officer or employee of Diedrich Coffee, except that Lawrence Goelman served as our interim Chairman and CEO from March 1997 to November 1997. There are no compensation committee interlocks between us and other entities involving our executive officers and board members who serve as executive officers or board members of these other entities.

The audit committee reviews our financial reporting process on behalf of the board of directors. Our management has the primary responsibility for the financial statements and the reporting process. Our independent auditors are responsible for expressing an opinion on the conformity of our audited financial statements to generally accepted accounting principles.

In this context, the audit committee has reviewed and discussed with management and KPMG LLP, our independent auditors, the audited financial statements. The audit committee has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61. In addition, the audit committee has received from the independent auditors the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and discussed with them their independence from Diedrich Coffee and its management. The audit committee has also considered whether the independent auditors provision of other non-audit services to us is compatible with the auditor's independence.

In reliance on the reviews and discussions referred to above, the audit committee recommended to our board of directors, and the board has approved, that the audited financial statements be included in our Annual Report on Form 10-K for the year ended July 2, 2003, for filing with the Securities and Exchange Commission.

The following table presents fees for professional services rendered by KPMG LLP for the audit of our annual financial statements for fiscal year 2003, for reviews of the financial statements included in our quarterly reports on Form 10-Q for fiscal year 2003, and fees billed for other services rendered by KPMG LLP.

KPMG LLP performed no services and no fees were incurred or paid relating to financial information systems design and implementation. The audit committee has considered whether the independent auditors provision of non-audit services to us is compatible with maintaining the auditor's independence.

The following graph shows a comparison of the cumulative total returns for the period beginning on July 2, 1998 and ending on July 2, 2003 for:

Each of the below returns assumes an initial value of $100 and reinvestment of dividends. The comparisons in the graph are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of our common stock.

The following table sets forth information regarding the beneficial ownership of our common stock as of October 15, 2003, by:

Percentage of ownership is calculated as required by Rule 13d-3(d)(1) under the Securities Exchange Act of 1934. Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws. The table below includes the number of shares underlying options and warrants that are exercisable within 60 days from October 15, 2003.

Name and Address of Beneficial Owner(1)	Amount and Nature of Beneficial Ownership(2)		Percent of Class (%)
Sequoia Enterprises, LP 450 Newport Center Drive Suite 450 Newport Beach, CA 92660	1,298,375	(3)	24.0
Westcliff Capital Management, LLC 200 Seventh Avenue, Suite 105 Santa Cruz, California 95062	1,163,560	(4)	21.7
D.C.H., L.P. 450 Newport Center Drive Suite 450 Newport Beach, CA 92660	357,690	(5)	6.9
Paul C. Heeschen	1,742,236	(6)	32.1
Richard Spencer	1,167,310	(7)	21.7
Martin Diedrich	185,192	(8)	3.6
Peter Churm	20,000	(9)	*
Lawrence Goelman	36,925	(10)	*
Randy Powell	3,750	(11)	*
Roger M. Laverty	—		*
Matthew McGuinness	59,916	(12)	1.1
Pam Britton	29,999	(13)	*
Carl Mount	18,333	(14)	*
Michael Zorehkey	9,541	(15)	*
Philip Hirsch	60,000	(16)	1.1
All directors and executive officers as a group (17 persons)	3,402,926	(17)	57.1

Section 16 of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than ten percent of a registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. These Section 16 reporting persons are required by Securities and Exchange Commission regulations to furnish us with copies of all Section 16 forms they file.

To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations from Section 16 reporting persons, we believe that during our fiscal year ended July 2, 2003, all Section 16 reporting persons complied with all applicable filing requirements, except that the initial statement of ownership on Form 3 for Philip Hirsch was filed in September 2002.

KPMG LLP served as our independent auditor during our fiscal year ended July 2, 2003, and has again been selected to serve in this capacity for our fiscal year ending June 30, 2004. The board of directors expects that the representatives of KPMG LLP will be present at the meeting, will be given an opportunity to make a statement at such meeting if they desire to do so and will be available to respond to appropriate questions.

In our filings with the Securities and Exchange Commission, information is sometimes "incorporated by reference." This means that we are referring you to information that has previously been filed with the Securities and Exchange Commission, which information should be considered as part of the filing that you are reading. Our 2003 Annual Report is incorporated by reference. Based on Securities and Exchange Commission regulations, the reports of the compensation committee and audit committee, beginning on pages 33 and 34, respectively, and the stock performance graph on page 36 of this proxy statement, specifically are not incorporated by reference into any other filings with the Securities and Exchange Commission.

This proxy statement is sent to you as part of the proxy materials for the 2003 annual meeting of stockholders. You may not consider this proxy statement as material for soliciting the purchase or sale of our common stock.

With regard to the delivery of annual reports and proxy statements, under certain circumstances, the Securities and Exchange Commission permits a single set of documents to be sent to any household at which two or more stockholders reside if they appear to be members of the same family. This procedure, known as "householding," reduces the amount of duplicate information received at a household and reduces mailing and printing costs. Even if householding is implemented, each stockholder will continue to receive a separate proxy card or, in the case of shares of stock held in a street name account, a separate voting instruction form.

We have not implemented householding rules with respect to our record holders. However, banks, brokers, and other firms may have instituted householding and this may impact stockholders whose shares are registered in the name of the bank, broker, or other firm. If a stockholder received a householding notification from its broker, only one annual report and one proxy statement will be

mailed to an address at which two or more stockholders reside unless the stockholder gave instructions to the contrary. If any stockholder residing at such an address wishes to receive a separate annual report or proxy statement, the stockholder should contact his, her, or its broker directly. A stockholder may also receive additional copies of our annual report and proxy statement by calling our Investor Relations department at (949) 260-1600.

Copies of our 2003 Annual Report (which includes our Annual Report on Form 10-K, filed with the Securities and Exchange Commission) have been distributed to stockholders. Additional copies and additional information is available upon request without charge by calling Investor Relations at (949) 260-1600, or by writing to Diedrich Coffee, Inc., 28 Executive Park, Suite 200, Irvine, California 92614, Attn: Investor Relations.

Stockholders who wish to have proposals for action at our 2004 annual meeting of stockholders considered for inclusion in next year's proxy statement and form of proxy must cause their proposals to be received in writing by us at our address set forth on the first page of this proxy statement no later than July 2, 2004. Any stockholder proposal should be addressed to our Corporate Secretary, and may be included in next year's proxy materials only if it complies with the rules and regulations promulgated by the Securities and Exchange Commission. In any event, for stockholder proposals to be considered at an annual meeting, a stockholder must have given timely notice of the proposal in writing to our Corporate Secretary. To be timely for the 2004 annual meeting, a notice must be delivered to or mailed and received by our Corporate Secretary at our principal executive offices by September 15, 2004. Any notice must set forth each matter the stockholder proposes to bring before the annual meeting. No business shall be conducted at any annual meeting except in accordance with the procedures set forth in our bylaws.

Our board of directors knows of no other matters that will be presented for consideration at the annual meeting. If any other matters are properly brought before the annual meeting, it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their best judgment. It is important that the proxies be returned promptly and that your shares be represented. Stockholders are urged to mark, date, execute, and promptly return the accompanying proxy card.

The Company has adopted this Plan to promote the interests of the Company and its stockholders by using investment interests in the Company to attract, retain and motivate its management and other persons, to encourage and reward their contributions to the performance of the Company, and to align their interests with the interests of the Company's stockholders. Capitalized terms not otherwise defined herein have the meanings ascribed to them in Article IX.

This Plan became effective as of the Effective Date and will continue in effect until the Expiration Date, at which time this Plan will automatically terminate.

Awards may be granted only during the Plan Term, but each Award properly granted during the Plan Term will remain in effect after the Expiration Date until such Award has been exercised, terminated or expired in accordance with its terms and the terms of this Plan.

The maximum number of shares of Common Stock that may be issued pursuant to Awards under this Plan is 1,087,500, subject to adjustment as set forth in Section 3.4.

The Common Stock to be issued under this Plan will be made available, at the discretion of the Administrator, either from authorized but unissued shares of Common Stock or from previously issued shares of Common Stock reacquired by the Company, including without limitation shares purchased on the open market.

Shares of Common Stock subject to unexercised portions of any Award that expire, terminate or are canceled, and shares of Common Stock issued pursuant to an Award that are reacquired by the Company pursuant to this Plan or the terms of the Award under which such shares were issued, will again become available for the grant of further Awards under this Plan as part of the shares available under Section 3.1. However, if the exercise price of, or withholding taxes incurred in connection with, an Award is paid with shares of Common Stock, or if shares of Common Stock otherwise issuable

pursuant to Awards are withheld by the Company in satisfaction of an exercise price or the withholding taxes incurred in connection with any exercise or vesting of an Award, then the number of shares of Common Stock available for issuance under the

Plan will be reduced by the gross number of shares for which the Award is exercised or for which it vests, as applicable, and not by the net number of shares of Common Stock issued to the holder of such Award.

(a) Adjustments. If the Company consummates any Reorganization in which holders of shares of Common Stock are entitled to receive in respect of such shares any additional shares or new or different shares or securities, cash or other consideration (including, without limitation, a different number of shares of Common Stock), or if the outstanding shares of Common Stock are increased, decreased or exchanged for a different number or kind of shares or other securities through merger, consolidation, sale or exchange of assets of the Company, reorganization, recapitalization, reclassification, combination, stock dividend, stock split, reverse stock split, spin-off, or similar transaction then, subject to Section 8.1, an appropriate and proportionate adjustment shall be made by the Administrator in its discretion in: (i) the maximum number and kind of shares subject to this Plan as provided in Section 3.1; (ii) the number and kind of shares or other securities subject to then outstanding Awards; (iii) the price for each share or other unit of any other securities subject to, or measurement criteria applicable to, then outstanding Awards; and/or (iv) the number and kind of shares or other securities to be issued as Non-Employee Director Options.

(b) No Fractional Interests. No fractional interests will be issued under the Plan resulting from any adjustments.

(c) Adjustments Related to Company Stock. To the extent any adjustments relate to stock or securities of the Company, such adjustments will be made by the Administrator, whose determination in that respect will be final, binding and conclusive.

(d) Right to Make Adjustment. The grant of an Award will not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets.

(e) Limitations. No adjustment to the terms of an Incentive Stock Option may be made unless such adjustment either: (i) would not cause the Option to lose its status as an Incentive Stock Option; or (ii) is agreed to in writing by the Administrator and the Recipient.

The Company will at all times reserve and keep available shares of Common Stock equaling at least the total number of shares of Common Stock issuable pursuant to all outstanding Awards.

(a) Plan Administration. Subject to the provisions of Section 4.1(b), this Plan will be administered by the Board and may also be administered by a Committee of the Board appointed pursuant to Section 4.1(b).

(b) Administration by Committee. The Board in its sole discretion may from time to time appoint a Committee of not less than two (2) Board members with authority to administer this Plan in whole or part and, subject to applicable law, to exercise any or all of the powers, authority and discretion of the Board under this Plan. As long as the Company has a class of equity securities registered under Section 12 of the Exchange Act, this Plan will be administered by a Committee of not less than two (2) Board members appointed by the Board in its sole discretion from time to time, each of whom is (i) a Non-Employee Director, and (ii) an "Outside Director" as defined in the regulations adopted under Section 162(m) of the IRC. The Board may from time to time increase or decrease (but not below two (2)) the number of members of the Committee, remove from membership on the Committee all or any portion of its members, and/or appoint such person or persons as it desires to fill any vacancy existing on the Committee, whether caused by removal, resignation or otherwise. Unless otherwise required by this Section 4.1(b), the Board may disband the Committee at any time.

(a) Authority to Interpret Plan. Subject to the express provisions of this Plan, the Administrator will have the power to implement, interpret and construe this Plan and any Awards and Award Documents or other documents defining the rights and obligations of the Company and Recipients hereunder and thereunder, to determine all questions arising hereunder and thereunder, and to adopt and amend such rules and regulations for the administration hereof and thereof as it may deem desirable. The interpretation and construction by the Administrator of any provisions of this Plan or of any Award or Award Document, and any action taken by, or inaction of, the Administrator relating to this Plan or any Award or Award Document, will be within the discretion of the Administrator and will be conclusive and binding upon all persons. Subject only to compliance with the express provisions hereof, the Administrator may act in its discretion in matters related to this Plan and any and all Awards and Award Documents.

(b) Authority to Grant Awards. Subject to the express provisions of this Plan, the Administrator may from time to time in its discretion select the Eligible Persons to whom, and the time or times at which, Awards will be granted or sold, the nature of each Award, the number of shares of Common Stock or the number of rights that make up or underlie each Award, the exercise price and period (if applicable) for the exercise of each Award, and such other terms and conditions applicable to each individual Award as the Administrator may determine. Any and all terms and conditions of Awards may be established by the Administrator without regard to existing Awards or other grants and without incurring any obligation of the Company in respect of subsequent Awards. The Administrator may grant at any time new Awards to an Eligible Person who has previously received Awards or other grants (including other stock options) regardless of the status of such other Awards or grants. The Administrator may grant Awards singly or in combination or in tandem with other Awards as it determines in its discretion.

(c) Procedures. Subject to the Company's charter or bylaws or any Board resolution conferring authority on the Committee, any action of the Administrator with respect to the administration of this Plan must be taken pursuant to a majority vote of the authorized number of members of the Administrator or by the unanimous written consent of its members; provided, however, that (i) if the Administrator is the Committee and consists of two (2) members, then actions of the Administrator must be unanimous, and (ii) actions taken by the Board will be valid if approved in accordance with applicable law.

No member of the Board or the Committee or any designee thereof will be liable for any action or inaction with respect to this Plan or any Award or any transaction arising under this Plan or any Award except in circumstances constituting bad faith of such member.

(a) Plan Amendments. The Administrator may at any time and from time to time in its discretion, insofar as permitted by applicable law, rule or regulation and subject to Section 4.4(c), suspend or discontinue this Plan or revise or amend it in any respect whatsoever, and this Plan as so revised or amended will govern all Awards, including those granted before such revision or amendment. Without limiting the generality of the foregoing, the Administrator is authorized to amend this Plan to comply with or take advantage of amendments to applicable laws, rules or regulations, including the Securities Act, the Exchange Act, the IRC, or the rules of any exchange or market system upon which the Common Stock is listed or trades, or any rules or regulations promulgated thereunder. No stockholder approval of any amendment or revision will be required unless such approval is required by applicable law, rule or regulation.

(b) Award Amendments. The Administrator may at any time and from time to time in its discretion, but subject to Section 4.4(c) and compliance with applicable statutory or administrative requirements, accelerate or extend the vesting or exercise period of any Award as a whole or in part, adjust or reduce the purchase or exercise price of an Award either by cancellation of such Award and the granting of a new Award at such modified purchase or exercise price or by amending the terms of the Award to reflect such a modified purchase or exercise price, and make such other modifications in the terms and conditions of an Award as it deems advisable.

(c) Limitation. Except as otherwise provided in this Plan or in the applicable Award Document, no amendment, revision, suspension or termination of this Plan or an outstanding Award that would cause an Incentive Stock Option to cease to qualify as such or that would alter, impair or diminish in any material respect any rights or obligations under any Award theretofore granted under this Plan may be effected without the written consent of the Recipient to whom such Award was granted.

This Plan supersedes and replaces the Company's Amended and Restated 1996 Stock Incentive Plan and the Company's 1996 Non-Employee Directors Stock Option Plan, but the adoption of this Plan will not affect any other stock option, incentive or other compensation plans in effect from time to time for the Company, and this Plan will not preclude the Company from establishing any other forms of incentive or other compensation for employees, directors, advisors or consultants of the Company, whether or not approved by stockholders. Notwithstanding the fact that this Plan supersedes and replaces the Company's Amended and Restated 1996 Stock Incentive Plan and the Company's 1996 Non-Employee Directors Stock Option Plan, this plan does not affect in any way, any outstanding award grants made under such other plans prior to the Effective Date.

Any reference in this Plan to a particular statute, regulation or rule will also refer to any successor provision of such statute, regulation or rule.

In the event that any provision of this Plan is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability is not to be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions are to be

given full force and effect to the same extent as though the invalid and unenforceable provision were not contained herein.

This Plan will be governed by and interpreted in accordance with the internal laws of the State of Delaware, without giving effect to the principles of the conflicts of laws thereof.

Headings herein are for convenience of reference only, do not constitute a part of this Plan, and will not affect the meaning or interpretation of this Plan. References herein to Sections or Articles are references to the referenced Section or Article hereof, unless otherwise specified.

(a) Eligibility to Receive Awards. A person is eligible to receive grants of Awards if, at the time of the grant of the Award, such person is an Eligible Person or has received an offer of employment from the Company, provided, however, that only Non-Employee Directors are eligible to receive Non-Employee Director Options, and provided further, that Awards granted to a person who has received an offer of employment will terminate and be forfeited without consideration if the employment offer is not accepted within such time as may be specified by the Company. Status as an Eligible Person will not be construed as a commitment that any Award will be granted under this Plan to an Eligible Person or to Eligible Persons generally.

(b) Eligibility to Receive Incentive Stock Options. Incentive Stock Options may be granted only to Eligible Persons meeting the employment requirements of Section 422 of the IRC.

(c) Awards to Foreign Nationals. Notwithstanding anything to the contrary herein, the Administrator may, in order to fulfill the purposes of this Plan, modify grants of Awards to Recipients who are foreign nationals or employed outside of the United States to recognize differences in applicable law, tax policy or local custom.

Each Award must be evidenced by an agreement duly executed on behalf of the Company and by the Recipient or, in the Administrator's discretion, a confirming memorandum issued by the Company to the Recipient, setting forth such terms and conditions applicable to the Award as the Administrator may in its discretion determine. Awards will not be deemed made or binding upon the Company, and Recipients will have no rights thereto, until such an agreement is entered into between the Company and the Recipient or such a memorandum is delivered by the Company to the Recipient, but an Award may have an effective date prior to the date of such an agreement or memorandum. Award Documents may be (but need not be) identical and must comply with and be subject to the terms and conditions of this Plan, a copy of which will be provided to each Recipient and incorporated by reference into each Award Document. Any Award Document may contain such other terms, provisions and conditions not inconsistent with this Plan as may be determined by the Administrator. In case of any conflict between this Plan and any Award Document, this Plan shall control.

(a) Payment of Exercise Price. The exercise price or other payment for an Award is payable upon the exercise of a Stock Option or upon other purchase of shares pursuant to an Award granted hereunder by delivery of legal tender of the United States or payment of such other consideration as the Administrator may from time to time deem acceptable in any particular instance; provided, however, that the Administrator may, in the exercise of its discretion, allow exercise of an Award in a broker-assisted or similar transaction in which the exercise price is not received by the Company until promptly after exercise.

(b) Company Assistance. The Company may assist any person to whom an Award is granted (including, without limitation, any officer or director of the Company) in the payment of the purchase price or other amounts payable in connection with the receipt or exercise of that Award, by lending such amounts to such person on such terms and at such rates of interest and upon such security (if any) as may be consistent with applicable law and approved by the Administrator. In case of such a loan, the Administrator may require that the exercise be followed by a prompt sale of some or all of the underlying shares and that a portion of the sale proceeds be dedicated to full payment of the exercise price and amounts required pursuant to Section 5.10.

(c) Cashless Exercise. If permitted in any case by the Administrator in its discretion, the exercise price for Awards may be paid by capital stock of the Company delivered in transfer to the Company by or on behalf of the person exercising the Award and duly endorsed in blank or accompanied by stock powers duly endorsed in blank, with signatures guaranteed in accordance with the Exchange Act if required by the Administrator; or retained by the Company from the stock otherwise issuable upon exercise or surrender of vested and/or exercisable Awards or other equity awards previously granted to the Recipient and being exercised (if applicable) (in either case valued at Fair Market Value as of the exercise date); or such other consideration as the Administrator may from time to time in the exercise of its discretion deem acceptable in any particular instance.

(d) No Precedent. Recipients will have no rights to the assistance described in Section 5.3(b) or the exercise techniques described in Section 5.3(c), and the Company may offer or permit such assistance or techniques on an ad hoc basis to any Recipient without incurring any obligation to offer or permit such assistance or techniques on other occasions or to other Recipients.

Nothing contained in this Plan (or in Award Documents or in any other documents related to this Plan or to Awards) will confer upon any Eligible Person or Recipient any right to continue in the employ of or engagement by the Company or any Affiliated Entity or constitute any contract or agreement of employment or engagement, or interfere in any way with the right of the Company or any Affiliated Entity to reduce such person's compensation or other benefits or to terminate the employment or engagement of such Eligible Person or Recipient, with or without cause. Except as expressly provided in this Plan or in any statement evidencing the grant of an Award, the Company has the right to deal with each Recipient in the same manner as if this Plan and any such statement evidencing the grant of an Award did not exist, including, without limitation, with respect to all matters related to the hiring, discharge, compensation and conditions of the employment or engagement of the Recipient. Unless otherwise set forth in a written agreement binding upon the Company or an Affiliated Entity, all employees of the Company or an Affiliated Entity are "at will" employees whose employment may be terminated by the Company or the Affiliated Entity at any time for any reason or no reason, without payment or penalty of any kind. Any question(s) as to whether and when there has been a termination of a Recipient's employment or engagement, the reason (if any) for such termination, and/or the consequences thereof under the terms of this Plan or any statement evidencing

the grant of an Award pursuant to this Plan will be determined by the Administrator and the Administrator's determination thereof will be final and binding.

(a) Government Approvals. All Awards will be subject to the requirement that, if at any time the Company determines, in its discretion, that the listing, registration or qualification of the securities subject to Awards granted under this Plan upon any securities exchange or interdealer quotation system or under any federal, state or foreign law, or the consent or approval of any government or regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such an Award or the issuance, if any, or purchase of shares in connection therewith, such Award may not be exercised as a whole or in part unless and until such listing, registration, qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Company. During the term of this Plan, the Company will use its reasonable efforts to seek to obtain from the appropriate governmental and regulatory agencies any requisite qualifications, consents, approvals or authorizations in order to issue and sell such number of shares of its Common Stock as is sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain any such qualifications, consents, approvals or authorizations will relieve the Company of any liability in respect of the nonissuance or sale of such stock as to which such qualifications, consents, approvals or authorizations pertain.

(b) No Registration Obligation; Recipient Representations. The Company will be under no obligation to register or qualify the issuance of Awards or underlying securities under the Securities Act or applicable state securities laws. Unless the issuance of Awards and underlying securities have been registered under the Securities Act and qualified or registered under applicable state securities laws, the Company shall be under no obligation to issue any Awards or underlying securities unless the Awards and underlying securities may be issued pursuant to applicable exemptions from such registration or qualification requirements. In connection with any such exempt issuance, the Administrator may require the Recipient to provide a written representation and undertaking to the Company, satisfactory in form and scope to the Company, that such Recipient is acquiring such Awards and underlying securities for such Recipient's own account as an investment and not with a view to, or for sale in connection with, the distribution of any such securities, and that such person will make no transfer of the same except in compliance with any rules and regulations in force at the time of such transfer under the Securities Act and other applicable law, and that if securities are issued without registration, a legend to this effect (together with any other legends deemed appropriate by the Administrator) may be endorsed upon the securities so issued, and to the effect of any additional representations that are appropriate in light of applicable securities laws and rules. The Company may also order its transfer agent to stop transfers of such shares. The Administrator may also require the Recipient to provide the Company such information and other documents as the Administrator may request in order to satisfy the Administrator as to the investment sophistication and experience of the Recipient and as to any other conditions for compliance with any such exemptions from registration or qualification.

Any Award may be subject to such provisions (whether or not applicable to any other Award or Recipient) as the Administrator deems appropriate, including without limitation provisions for the forfeiture of or restrictions on resale or other disposition of securities of the Company acquired under this Plan, provisions giving the Company the right to repurchase securities of the Company acquired under this Plan in the event the Recipient leaves the Company for any reason or elects to effect any disposition thereof, and provisions to comply with federal and state securities laws.

Except as otherwise set forth herein, a Recipient or a permitted transferee of an Award will have no rights as a stockholder with respect to any shares issuable or issued in connection with the Award until the Recipient has delivered to the Company all amounts payable and performed all obligations required to be performed in connection with exercise of the Award and the Company has issued such shares. No person will have any right, title or interest in any fund or in any specific asset (including shares of capital stock) of the Company by reason of any Award granted hereunder. Neither this Plan (or any documents related hereto) nor any action taken pursuant hereto is to be construed to create a trust of any kind or a fiduciary relationship between the Company and any person. To the extent that any person acquires a right to receive an Award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company.

No Award is assignable or transferable except: (a) by will or by the laws of descent and distribution; or (b) subject to the final sentence of this Section 5.8, upon dissolution of marriage pursuant to a qualified domestic relations order or, in the discretion of the Administrator and under circumstances that would not adversely affect the interests of the Company, transfers for estate planning purposes or pursuant to a nominal transfer that does not result in a change in beneficial ownership. During the lifetime of a Recipient, an Award granted to such person will be exercisable only by the Recipient (or the Recipient's permitted transferee) or such person's guardian or legal representative. Notwithstanding the foregoing, Stock Options intended to be treated as Incentive Stock Options (or other Awards subject to transfer restrictions under the IRC) may not be assigned or transferred in violation of Section 422(b)(5) of the IRC or the regulations thereunder, and nothing herein is intended to allow such assignment or transfer.

(a) Provision of Information. The Administrator in its sole discretion may determine what, if any, financial and other information is to be provided to Recipients and when such financial and other information is to be provided after giving consideration to applicable federal and state laws, rules and regulations, including, without limitation, applicable federal and state securities laws, rules and regulations.

(b) Confidentiality. The furnishing of financial and other information that is confidential to the Company is subject to the Recipient's agreement to maintain the confidentiality of such financial and other information, and not to use the information for any purpose other than evaluating the Recipient's position under this Plan. The Administrator may impose other restrictions on the access to and use of such confidential information and may require a Recipient to acknowledge the Recipient's obligations under this Section 5.9(b) (which acknowledgment is not to be a condition to Recipient's obligations under this Section 5.9(b)).

Whenever the granting, vesting or exercise of any Award, or the issuance of any securities upon exercise of any Award or transfer thereof, gives rise to tax or tax withholding liabilities or obligations, the Administrator will have the right as a condition thereto to require the Recipient to remit to the Company an amount sufficient to satisfy any federal, state and local withholding tax requirements arising in connection therewith. The Administrator may, in the exercise of its discretion, allow satisfaction of tax withholding requirements by accepting delivery of stock of the Company or by withholding a portion of the stock otherwise issuable in connection with an Award, in each case valued at Fair Market Value as of the date of such delivery or withholding, as the case may be, is determined.

Each Award Document and each certificate representing securities acquired upon vesting or exercise of an Award must be endorsed with all legends, if any, required by applicable federal and state securities and other laws to be placed on the Award Document and/or the certificate. The determination of which legends, if any, will be placed upon Award Documents or the certificates will be made by the Administrator in its discretion and such decision will be final and binding.

(a) Termination of Vesting. Notwithstanding anything to the contrary herein, but subject to Section 5.12(b) Awards will be exercisable by a Recipient (or the Recipient's successor in interest) following such Recipient's termination of employment or service only to the extent that installments thereof had become exercisable on or prior to the date of such termination and are not forfeited pursuant to Section 5.15.

(b) Alteration of Vesting and Exercise Periods. Notwithstanding anything to the contrary herein, the Administrator may in its discretion (i) designate shorter or longer periods following a Recipient's termination of employment or service during which Awards may vest or be exercised; provided, however, that any shorter periods determined by the Administrator will be effective only if provided for in this Plan or the instrument that evidences the grant to the Recipient of the affected Award or if such shorter period is agreed to in writing by the Recipient, and (ii) accelerate the vesting of all or any portion of any Awards by increasing the number of shares purchasable at any time.

(c) Leave of Absence. In the case of any employee on an approved leave of absence, the Administrator may make such provision respecting continuance of Awards granted to such employee as the Administrator in its discretion deems appropriate, except that in no event will an Award be exercisable after the date such Award would expire in accordance with its terms had the Recipient remained continuously employed.

(d) General Cessation. Except as otherwise set forth in this Plan or an Award Document or as determined by the Administrator in its discretion, all Awards granted to a Recipient, and all of such Recipient's rights thereunder, will terminate upon termination for any reason of such Recipient's employment or service with the Company or any Affiliated Entity (or cessation of any other service relationship between the Recipient and the Company or any Affiliated Entity in place as of the date the Award was granted).

Each Recipient agrees as a condition to receipt of an Award that, in connection with any public offering by the Company of its equity securities and upon the request of the Company and the principal underwriter (if any) in such public offering, any shares of Common Stock acquired or that may be acquired upon exercise or vesting of an Award may not be sold, offered for sale, encumbered, or otherwise disposed of or subjected to any transaction that will involve any sales of securities of the Company, without the prior written consent of the Company or such underwriter, as the case may be, for a period of not more than 365 days after the effective date of the registration statement for such public offering. Each Recipient will, if requested by the Company or the principal underwriter, enter into a separate agreement to the effect of this Section 5.13.

Common Stock or other securities of the Company issued or issuable in connection with any Award will be subject to all of the restrictions imposed under this Plan upon Common Stock issuable or issued upon exercise of Stock Options, except as otherwise determined by the Administrator.

Unless an Award Document or other separate written agreement binding upon the Company provides otherwise, the Administrator may cancel any unexpired, unpaid or deferred Award (whether or not vested) at any time if the Recipient thereof fails at any time to comply with all applicable provisions of the Award Document or this Plan, or does any of the following:

(a) During employment or engagement with the Company or any Affiliated Entity and without the prior written authorization of the Chief Executive Officer of the Company, renders services for any organization or engages directly or indirectly in any business that, in the judgment of the Chief Executive Officer of the Company or other senior officer designated by the Administrator, is competitive with the Company or any Affiliated Entity, or which organization or business, or the rendering of services to such organization or business, is otherwise prejudicial to or in conflict with the business or interests of the Company or any Affiliated Entity.

(b) During employment with the Company or any Affiliated Entity or at any time thereafter, fails to comply with any confidentiality agreement with the Company or any Affiliated Entity to which the Recipient is party, or with the policies of the Company or Affiliated Entity regarding nondisclosure of confidential information, or without prior written authorization from the Company or any Affiliated Entity, discloses to anyone outside the Company or any Affiliated Entity, or uses for any purpose or in any context other than in performance of the Recipient's duties to the Company or any Affiliated Entity, any confidential or trade secret information of the Company or any Affiliated Entity.

(c) During employment with the Company or any Affiliated Entity or at any time thereafter, breaches any agreement with or duty to the Company or any Affiliated Entity.

Upon and as a condition to exercise of any Award, a Recipient shall certify on a form acceptable to the Company that he or she is in compliance with the terms and conditions of this Plan and any applicable Award Document and has not done any of the things described in this Section 5.15. Furthermore, if a Recipient does any of the things described in this Section 5.15 within 180 days after any exercise, payment or delivery pursuant to an Award, the Company may rescind such exercise, payment or delivery. The Company shall notify the Recipient in writing of any such rescission within two years after such exercise, payment or delivery. Within ten days after receiving such notice from the Company, a Recipient shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery pursuant to an Award. Such payment shall be made by returning to the Company all shares of capital stock that the Recipient received in connection with the rescinded exercise, payment or delivery, or if such shares have been transferred by the Recipient, then by paying the equivalent value thereof at the time of their transfer to the Company in cash. To assist in enforcement of the Company's rescission right described above, the Company may, in its discretion, retain any Common Stock or other consideration otherwise deliverable to a Recipient in connection with an Award until the rescission period described above has lapsed.

Notwithstanding any other provision of this Plan, no one Eligible Person shall be granted awards with respect to more than 200,000 shares of Common Stock in any one calendar year, provided, however, that this limitation shall not apply if it is not required in order for the compensation attributable to Awards hereunder to qualify as Performance-Based Compensation. The limitation set forth in this Section 5.16 will be subject to adjustment as provided in Section 3.4 or under Article VIII, but only to the extent such adjustment would not affect the status of compensation attributable to Awards as Performance-Based Compensation.

(a) Nature of Stock Options. Stock Options may be Incentive Stock Options or Nonqualified Stock Options.

(b) Option Exercise Price. The exercise price for each Stock Option will be determined by the Administrator as of the date such Stock Option is granted.

(c) Option Period and Vesting. Stock Options granted hereunder will vest and may be exercised as determined by the Administrator, except that exercise of Stock Options after termination of the Recipient's employment or service shall be subject to Section 5.12 and Section 6.1(e). Each Stock Option granted hereunder and all rights or obligations thereunder shall expire on such date as may be determined by the Administrator, but not later than ten (10) years after the date the Stock Option is granted and may be subject to earlier termination as provided herein or in the Award Document. Except as otherwise provided herein, a Stock Option will become exercisable, as a whole or in part, on the date or dates specified by the Administrator and thereafter will remain exercisable until the exercise, expiration or earlier termination of the Stock Option.

(d) Exercise of Stock Options. The exercise price for Stock Options will be paid as set forth in Section 5.3. No Stock Option will be exercisable except in respect of whole shares, and fractional share interests shall be disregarded. Not fewer than 100 shares of Common Stock (or such other amount as may be set forth in the applicable Award Document) may be purchased at one time and Stock Options must be exercised in multiples of 100 unless the number purchased is the total number of shares for which the Stock Option is exercisable at the time of exercise. A Stock Option will be deemed to be exercised when the Secretary or other designated official of the Company receives written notice of such exercise from the Recipient in the form of Exhibit A hereto or such other form as the Company may specify from time to time, together with payment of the exercise price in accordance with Section 5.3 and any amounts required under Section 5.10 or, with permission of the Administrator, arrangement for such payment. Notwithstanding any other provision of this Plan, the Administrator may impose, by rule and/or in Award Documents, such conditions upon the exercise of Stock Options (including, without limitation, conditions limiting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements, including, without limitation, Rule 16b-3 and Rule 10b-5 under the Exchange Act, and any amounts required under Section 5.10, or any applicable section of or regulation under the IRC.

(f) Special Provisions Regarding Incentive Stock Options. Notwithstanding anything herein to the contrary,

(g) Non-Employee Director Options. Article VII will govern Non-Employee Director Options to the extent inconsistent with this Section 6.1.

(a) Grant of Performance Award. The Administrator will determine in its discretion the performance criteria (which need not be identical and may be established on an individual or group basis) governing Performance Awards, the terms thereof, and the form and time of payment of Performance Awards.

(b) Payment of Award. Upon satisfaction of the conditions applicable to a Performance Award, payment will be made to the Recipient in cash, in shares of Common Stock valued at Fair Market Value as of the date payment is due, or in a combination of Common Stock and cash, as the Administrator in its discretion may determine.

(a) Award of Restricted Stock. The Administrator will determine the Purchase Price (if any), the terms of payment of the Purchase Price, the restrictions upon the Restricted Stock, and when such restrictions will lapse.

(b) Requirements of Restricted Stock. All shares of Restricted Stock granted or sold pursuant to this Plan will be subject to the following conditions:

(c) Lapse of Restrictions. The restrictions imposed upon Restricted Stock will lapse in accordance with such terms or other conditions as are determined by the Administrator.

(d) Rights of Recipient. Subject to the provisions of Section 6.3(b) and any restrictions imposed upon the Restricted Stock, the Recipient will have all rights of a stockholder with respect to the Restricted Stock granted or sold to such Recipient under this Plan, including, without limitation, the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto.

(e) Termination of Employment. Unless the Administrator in its discretion determines otherwise, if a Recipient's employment or service with the Company or any Affiliated Entity terminates for any reason, all of the Recipient's Restricted Stock remaining subject to restrictions on the date of such termination of employment or service will be repurchased by the Company at the Purchase Price (if any) paid by the Recipient to the Company, without interest or premium, and otherwise returned to the Company without consideration.

(a) Granting of Stock Appreciation Rights. The Administrator may at any time and from time to time approve the grant to Eligible Persons of Stock Appreciation Rights, related or unrelated to Stock Options.

(c) SARs Unrelated to Options. The Administrator may grant Stock Appreciation Rights unrelated to Stock Options. Section 6.4(b)(iii) will govern the amount payable at exercise under such Stock Appreciation Right, except that in lieu of an option exercise price the initial base amount specified in the Award shall be used.

(d) Limits. Notwithstanding the foregoing, the Administrator, in its discretion, may place a dollar limitation on the maximum amount that will be payable upon the exercise of a Stock Appreciation Right.

(e) Payments. Payment of the amount determined under the foregoing provisions may be made solely in whole shares of Common Stock valued at their Fair Market Value on the date of exercise of the Stock Appreciation Right or, alternatively, at the discretion of the Administrator, in cash or in a combination of cash and shares of Common Stock as the Administrator deems advisable. The Administrator has full discretion to determine the form in which payment of a Stock Appreciation Right will be made and to consent to or disapprove the election of a Recipient to receive cash in full or partial settlement of a Stock Appreciation Right. If the Administrator decides to make full payment in shares of Common Stock, and the amount payable results in a fractional share, payment for the fractional share will be made in cash.

The Administrator may approve Stock Payments to any Eligible Person on such terms and conditions as the Administrator may determine. Stock Payments will replace cash compensation at the Fair Market Value of the Common Stock on the date payment is due.

The Administrator may grant Dividend Equivalents to any Recipient who has received a Stock Option, SAR or other Award denominated in shares of Common Stock. Dividend Equivalents may be paid in cash, Common Stock or other Awards; the amount of Dividend Equivalents paid other than in cash will be determined by the Administrator by application of such formula as the Administrator may deem appropriate to translate the cash value of dividends paid to the alternative form of payment of the Dividend Equivalent. Dividend Equivalents will be computed as of each dividend record date and will be payable to recipients thereof at such time as the Administrator may determine. However, if it is intended that an Award qualify as Performance-Based Compensation, and the amount of compensation the Eligible Person could receive under the Award is based solely on an increase in value of the underlying stock after the date of the grant or Award, then the payment of any Dividend Equivalents related to the Award shall not be made contingent on the exercise of the Award.

The Administrator may issue Stock Bonuses to Eligible Persons on such terms and conditions as the Administrator may determine.

The Administrator may sell to Eligible Persons shares of Common Stock on such terms and conditions as the Administrator may determine.

The Administrator may grant Awards of Phantom Stock to Eligible Persons. Phantom Stock is a cash payment measured by the Fair Market Value of a specified number of shares of Common Stock on a specified date, or measured by the excess of such Fair Market Value over a specified minimum, which may but need not include a Dividend Equivalent.

The Administrator is authorized to grant Other Stock-Based Benefits. Other Stock-Based Benefits are any arrangements granted under this Plan not otherwise described above that: (a) by their terms might involve the issuance or sale of Common Stock or other securities of the Company; or (b) involve a benefit that is measured, as a whole or in part, by the value, appreciation, dividend yield or other features attributable to a specified number of shares of Common Stock or other securities of the Company.

Each Non-Employee Director shall, upon first becoming a Non-Employee Director, receive a one-time grant of an option to purchase up to 15,000 shares of the Company's Common Stock (an "Initial Option") at an exercise price per share equal to the Fair Market Value of the Company's Common Stock on the date of grant, subject to: (a) vesting as set forth in Section 7.3, and (b) adjustment as set forth in this Plan.

Immediately following the annual meeting of stockholders of the Company next following a Non-Employee Director's becoming a Non-Employee Director, and immediately following each subsequent annual meeting of stockholders of the Company, in each case if the Non-Employee Director has served as a director since his or her election or appointment and has been re-elected as a director at such annual meeting, such Non-Employee Director shall automatically receive an option to purchase up to 15,000 shares of the Company's Common Stock (an "Additional Option"). In addition to the Additional Options described above, an individual who was previously a Non-Employee Director and received an initial grant of stock options under this Plan or pursuant to a prior option plan for the Company's directors, who then ceased to be a director for any reason, and who then again becomes a Non-Employee Director, shall upon again becoming a Non-Employee Director automatically receive an Additional Option. The exercise price per share for all Additional Options shall be equal to the Fair Market Value of the Company's Common Stock on the date of grant, subject to: (a) vesting as set forth in Section 7.3, and (b) adjustment as set forth in this Plan.

Initial Options shall vest and become exercisable (a) 50% upon the earlier of (i) the first anniversary of the grant date or (ii) immediately prior to the first annual meeting of stockholders of the Company following the grant date, if the Recipient has remained a Non-Employee Director for the entire period from the date of grant to such earlier date; and (b) 50% upon the earlier of (i) the second anniversary of the grant date or (ii) immediately prior to the second annual meeting of stockholders of the Company following the date of grant to such earlier date. Additional Options shall vest and become exercisable with respect to all underlying shares upon the earlier of (y) the first anniversary of the grant date or (z) immediately prior to the annual meeting of stockholders of the Company next following the grant date, if the Recipient has remained a Non-Employee Director for the entire period from the date of grant to such earlier date. Notwithstanding the foregoing, however, Initial Options and Additional Options that have not vested and become exercisable at the time the Recipient ceases to be a director shall terminate.

Non-Employee Director Options will be exercisable, and the exercise price therefor shall be paid, in the same manner as provided herein for other Stock Options.

Notwithstanding any other provision of the Plan, no Non-Employee Director Option granted under the Plan shall be exercisable after the expiration of ten years from the effective date of its grant. In the event that the recipient of any Non-Employee Director Options granted under the Plan shall cease to be a director of the Company, (a) all Initial Options granted under this plan to such recipient shall be

exercisable, to the extent already exercisable at the date such recipient ceases to be a director and regardless of the reason the recipient ceases to be a director, for a period of 365 days after that date (or, if sooner, until the expiration of the option according to its terms), and shall then terminate; and (b) all Additional Options granted under this Plan to such recipient shall be exercisable, to the extent already exercisable at the date such recipient ceases to be a director, for a period of 365 days after that date (or, if sooner, until the expiration of the option according to its terms) if he or she ceases to be a director because of death or permanent disability, or for a period of 90 days after that date (or, if sooner, until the expiration of the option according to its terms) if he or she ceases to be a director for any other reason, and shall then terminate. In the event of the death of a Recipient while such Recipient is a director of the Company or within the period after termination of such status during which he or she is permitted to exercise an option, such option may be exercised by any person or persons designated by the Recipient on a beneficiary designation form adopted by the Plan administrator for such purpose or, if there is no effective beneficiary designation form on file with the Company, by the executors or administrators of the Recipient's estate or by any person or persons who shall have acquired the option directly from the Recipient by his or her will or the applicable laws of descent and distribution.

The Administrator may at any time and from time to time in its discretion (a) change the number of shares or vesting periods associated with the Non-Employee Director Options, and (b) suspend and reactivate this Article VII.

As of the effective time and date of any Change in Control, this Plan and any then outstanding Awards (whether or not vested) will automatically terminate unless: (a) provision is made in writing in connection with such transaction for the continuance of this Plan and for the assumption of such Awards, or for the substitution for such Awards of new awards covering the securities of a successor entity or an affiliate thereof, with appropriate adjustments as to the number and kind of securities and exercise prices or other measurement criteria, in which event this Plan and such outstanding Awards will continue or be replaced, as the case may be, in the manner and under the terms so provided; or (b) the Board otherwise provides in writing for such adjustments as it deems appropriate in the terms and conditions of the then-outstanding Awards (whether or not vested), including, without limitation, (i) accelerating the vesting of outstanding Awards, and/or (ii) providing for the cancellation of Awards and their automatic conversion into the right to receive the securities, cash or other consideration that a holder of the shares underlying such Awards would have been entitled to receive upon consummation of such Change in Control had such shares been issued and outstanding immediately prior to the effective date and time of the Change in Control (net of the appropriate option exercise prices). If, pursuant to the foregoing provisions of this Section 8.1, this Plan and the Awards terminate by reason of the occurrence of a Change in Control without provision for any of the action(s) described in clause (a) or (b) hereof, then subject to Sections 5.12 and 5.15, any Recipient holding outstanding Awards will have the right, at such time prior to the consummation of the Change in Control as the Board designates, to exercise or receive the full benefit of the Recipient's Awards to the full extent not theretofore exercised, including any installments which havenot yet become vested.

(a) Acceleration of Awards. If a Change in Control occurs and provision for Awards is made as described in part (a) or (b) of Section 8.1 such that a Recipient continues to own Awards or replacement awards, but in connection with such Change in Control the Recipient's employment with the Company or an Affiliated Entity is terminated by the Company or an Affiliated Entity as described in Section 8.2(b), then, subject to Sections 5.12 and 5.15 and the terms of any written employment agreement between the Company or any Affiliated Entity and the Recipient and the specific terms of any Award, such Recipient will have the right to exercise or receive the full benefit of the Recipient's Awards during the applicable time period provided in Section 5.12, without regard to any vesting or performance requirements or other milestones.

(b) Employment Termination. For purposes of this Section, and subject to any separate written agreement binding upon the Company, a Recipient's employment with the Company or any Affiliated Entity will be deemed to have been terminated in connection with a Change in Control if: (i) the Recipient is removed from the Recipient's employment by, or resigns the Recipient's employment upon the request of, a Person exercising practical voting control over the Company following the Change in Control or a person acting upon authority or at the instruction of such Person; or (ii) the Recipient's position is eliminated as a result of a reduction in force made to reduce over-capacity or unnecessary duplication of personnel within 180 days after the consummation of the Change in Control and the Recipient is not offered a replacement position with compensation substantially similar to the compensation in effect immediately before the Change in Control. Unless otherwise provided in a written agreement with the Company or any Affiliated Entity, assignment of a Recipient to different duties or reporting will not be deemed to constitute or justify termination of Recipient's employment in connection with the Change in Control.

Capitalized terms used in this Plan and not otherwise defined have the meanings set forth below:

"Additional Option" means a right to purchase stock of the Company granted under Section 7.2 of the Plan.

"Administrator" means the Board as long as no Committee has been appointed and is in effect and also means the Committee to the extent that the Board has delegated authority thereto.

"Affiliated Entity" means any Parent Corporation of the Company or Subsidiary Corporation of the Company or any other entity controlling, controlled by, or under common control with the Company.

"Applicable Dividend Period" means (i) the period between the date a Dividend Equivalent is granted and the date the related Stock Option, SAR, or other Award is exercised, terminates, or is converted to Common Stock, or (ii) such other time as the Administrator may specify in the written instrument evidencing the grant of the Dividend Equivalent.

"Award" means any Stock Option, Performance Award, Restricted Stock, Stock Appreciation Right, Stock Payment, Stock Bonus, Stock Sale, Phantom Stock, Dividend Equivalent, or Other Stock-Based Benefit granted or sold to an Eligible Person under this Plan, or any similar award granted by the Company prior to the Effective Date and outstanding as of the Effective Date that is governed by this Plan.

"Award Document" means the agreement or confirming memorandum setting forth the terms and conditions of an Award.

"Change in Control" means the following and shall be deemed to occur if any of the following events occurs:

"Committee" means any committee appointed by the Board to administer this Plan pursuant to Section 4.1.

"Common Stock" means the common stock of the Company, $0.01 par value per share, as constituted on the Effective Date, and as thereafter adjusted under Section 3.4.

"Dividend Equivalent" means a right granted by the Company under Section 6.6 to a holder of a Stock Option, Stock Appreciation Right or other Award denominated in shares of Common Stock to receive from the Company during the Applicable Dividend Period payments equivalent to the amount

of dividends payable to holders of the number of shares of Common Stock underlying such Stock Option, Stock Appreciation Right, or other Award.

"Effective Date" means the date this Plan is approved and adopted by the Company's stockholders.

"Eligible Person" includes directors, including Non-Employee Directors, officers, employees, consultants and advisors of the Company or of any Affiliated Entity.

"Fair Market Value" of a share of the Company's capital stock as of a particular date means: (i) if the stock is listed on an established stock exchange or exchanges (including for this purpose, the Nasdaq National Market), the arithmetic mean of the highest and lowest sale prices of the stock for the trading day immediately preceding such date on the primary exchange upon which the stock trades, as measured by volume, as published in The Wall Street Journal, or, if no sale price was quoted for such date, then as of the next preceding date on which such a sale price was quoted; or (ii) if the stock is not then listed on an exchange or the Nasdaq National Market, the average of the closing bid and asked prices per share for the stock in the over-the-counter market on such date (in the case of (i) or (ii), subject to adjustment as and if necessary and appropriate to set an exercise price not less than 100% of the fair market value of the stock on the date an Award is granted); or (iii) if the stock is not then listed on an exchange or quoted in the over-the-counter market, an amount determined in good faith by the Administrator, provided, however, that (A) when appropriate, the Administrator in determining Fair Market Value of capital stock of the Company may take into account such other factors as it may deem appropriate under the circumstances, and (B) if the stock is traded on the Nasdaq SmallCap Market and both sales prices and bid and asked prices are quoted or available, the Administrator may elect to determine Fair Market Value under either clause (i) or (ii) above.

Notwithstanding the foregoing, the Fair Market Value of capital stock for purposes of grants of Incentive Stock Options must be determined in compliance with applicable provisions of the IRC. The Fair Market Value of rights or property other than capital stock of the Company means the fair market value thereof as determined by the Administrator on the basis of such factors as it may deem appropriate.

"Incentive Stock Option" means a Stock Option that qualifies as an incentive stock option under Section 422 of the IRC.

"Initial Option" means a right to purchase stock of the Company granted under Section 7.1 of the Plan.

"Just Cause Dismissal" means a termination of a Recipient's employment for any of the following reasons: (i) the Recipient violates any reasonable rule or regulation of the Board, the Company's President or Chief Executive Officer or the Recipient's superiors that results in damage to the Company or any Affiliated Entity or which, after written notice to do so, the Recipient fails to correct within a reasonable time not exceeding 15 days; (ii) any willful misconduct or gross negligence by the Recipient in the responsibilities assigned to the Recipient; (iii) any willful failure to perform the Recipient's job as required to meet the objectives of the Company or any Affiliated Entity; (iv) any wrongful conduct of a Recipient which has an adverse impact on the Company or any Affiliated Entity or which constitutes a misappropriation of assets of the Company or any Affiliated Entity; (v) the Recipient does any of the things described in Section 5.15; or (vi) any other conduct that the Administrator reasonably determines constitutes Just Cause for Dismissal; provided, however, that if a Recipient is party to an employment agreement with the Company or any Affiliated Entity providing

for just cause dismissal (or some comparable concept) of Recipient from Recipient's employment with the Company or any Affiliated Entity, "Just Cause Dismissal" for purposes of this Plan will have the same meaning as ascribed thereto or to such comparable concept in such employment agreement.

"Non-Employee Director" means a director of the Company who qualifies as a "Non-Employee Director" under Rule 16b-3 under the Exchange Act.

"Non-Employee Director Option" means an Initial Option or an Additional Option granted pursuant to Article VII of this Plan.

"Nonqualified Stock Option" means a Stock Option that is not an Incentive Stock Option.

"Parent Corporation" means any Parent Corporation as defined in Section 424(e) of the IRC.

"Performance Award" means an Award under Section 6.2, payable in cash, Common Stock or a combination thereof, that vests and becomes payable over a period of time upon attainment of performance criteria established in connection with the grant of the Award.

"Performance-Based Compensation" means performance-based compensation as described in Section 162(m) of the IRC. If the amount of compensation an Eligible Person will receive under any Award is not based solely on an increase in the value of Common Stock after the date of grant or award, the Administrator, in order to qualify an Award as performance-based compensation under Section 162(m) of the IRC, can condition the grant, award, vesting, or exercisability of such an Award on the attainment of a preestablished, objective performance goal. For this purpose, a preestablished, objective performance goal may include one or more of the following performance criteria: (a) cash flow, (b) earnings per share (including earnings before interest, taxes, and amortization), (c) return on equity, (d) total Shareholder return, (e) return on capital, (f) return on assets or net assets, (g) income or net income, (h) operating income or net operating income, (i) operating margin, (j) return on operating revenue, and (k) any other similar performance criteria.

"Permanent Disability" means that the Recipient becomes physically or mentally incapacitated or disabled so that the Recipient is unable to perform substantially the same services as the Recipient performed prior to incurring such incapacity or disability (the Company, at its option and expense, being entitled to retain a physician to confirm the existence of such incapacity or disability, and the determination of such physician to be binding upon the Company and the Recipient), and such incapacity or disability continues for a period of three consecutive months or six months in any 12-month period or such other period(s) as may be determined by the Administrator with respect to any Award, provided, however, that for purposes of determining the period during which an Incentive Stock Option may be exercised pursuant to Section 6.1(e), Permanent Disability shall mean "permanent and total disability" as defined in Section 22(e) of the IRC.

"Person" means any person, entity or group, within the meaning of Section 13(d) or 14(d) of the Exchange Act, but excluding (i) the Company and its subsidiaries, (ii) any employee stock ownership or other employee benefit plan maintained by the Company and (iii) an underwriter or underwriting syndicate that has acquired the Company's securities solely in connection with a public offering thereof.

"Plan Term" means the period during which this Plan remains in effect (commencing the Effective Date and ending on the Expiration Date).

"Purchase Price" means the purchase price (if any) to be paid by a Recipient for Restricted Stock as determined by the Administrator (which price shall be at least equal to the minimum price required

under applicable laws and regulations for the issuance of Common Stock which is nontransferable and subject to a substantial risk of forfeiture until specific conditions are met).

"Restricted Stock" means Common Stock that is the subject of an Award made under Section 6.3 and that is nontransferable and subject to a substantial risk of forfeiture until specific conditions are met, as set forth in this Plan and in any statement evidencing the grant of such Award.

"Retirement" of a Recipient means the Recipient's resignation from the Company or any Affiliated Entity after reaching age 60 and at least five years of full-time employment by the Company or any Affiliated Entity, without any circumstances that would justify a Just Cause Dismissal of the Recipient.

"Significant Stockholder" is an individual who, at the time a Stock Option is granted to such individual under this Plan, owns more than ten percent (10%) of the combined voting power of all classes of stock of the Company or of any Parent Corporation or Subsidiary Corporation (after application of the attribution rules set forth in Section 424(d) of the IRC).

"Stock Appreciation Right" or "SAR" means a right granted under Section 6.4 to receive a payment that is measured with reference to the amount by which the Fair Market Value of a specified number of shares of Common Stock appreciates from a specified date, such as the date of grant of the SAR, to the date of exercise.

"Stock Bonus" means an issuance or delivery of unrestricted or restricted shares of Common Stock under Section 6.7 as a bonus for services rendered or for any other valid consideration under applicable law.

"Stock Payment" means a payment in shares of the Company's Common Stock under Section 6.5 to replace all or any portion of the compensation or other payment (other than base salary) that would otherwise become payable to the Recipient in cash.

"Stock Option" means a right to purchase stock of the Company granted under Section 6.1 or Article VII of this Plan.

"Stock Sale" means a sale of Common Stock to an Eligible Person under Section 6.8.

"Subsidiary Corporation" means any Subsidiary Corporation as defined in Section 424(f) of the IRC.

This Stock Option Plan and Agreement (this "Agreement"), is made effective as of April 24, 2003 (the "Effective Date"), by and between Diedrich Coffee, Inc., a Delaware corporation (the "Company") and Roger M. Laverty ("Grantee").

WHEREAS, the Company has agreed to employ Grantee under terms and conditions set forth in that certain employment agreement dated of even date herewith (the "Employment Agreement"), by and between the Company and Grantee.

WHEREAS, for the purpose of encouraging and rewarding Grantee's contributions to the performance of the Company and aligning Grantee's interests with the interests of the Company's stockholders, and as inducement material to Grantee entering into the Employment Agreement with the Company, the Company, in the Employment Agreement, has agreed to grant to Grantee options to purchase 200,000 shares of Company common stock, $0.01 par value per share (the "Common Stock"), as of the Effective Date.

NOW, THEREFORE, to evidence the grant of options by the Company and to set forth the terms and conditions of the grant of options, the Company and Grantee hereby agree as follows:

1. Grant of Options. The Company hereby grants to Grantee, effective as of the Effective Date, non-qualified options to purchase up to 200,000 shares of Common Stock on the terms and subject to the conditions set forth herein (the "Options").

2. Exercisability and Exercise Price. The Options will become exercisable as follows:

4. Registration of Options. Promptly after the stockholders of the Company approve this Agreement, the Company, at its expense, shall file a registration statement on Form S-8 to register the shares of Common Stock subject to the Options.

5. Restrictions on Exercise. Notwithstanding anything to the contrary in this Agreement, the Options may not be exercised, and no shares of Common Stock issuable upon exercise (the "Exercise Shares") shall be issued: (a) unless all requisite approvals and consents of any governmental authority of any kind having jurisdiction over the exercise of options shall have been secured and (b) unless all applicable federal, state and local tax withholding requirements shall have been satisfied. The Company shall use commercially reasonable efforts to obtain the consents and approvals referred to in this Section 5(a) so as to permit the Options to be exercised.

6. Non-Transferability of Options. None of the Options are assignable or transferable, in whole or in part, and may not, directly or indirectly, be offered, transferred, sold, pledged, assigned, alienated, hypothecated or otherwise disposed of or encumbered (including without limitation by gift, operation of law or otherwise) other than by will or by the laws of descent and distribution to the estate of Grantee upon his death, provided that the deceased Grantee's beneficiary or the representative of his estate acknowledge and agree in writing, in a form reasonably acceptable to the Compensation Committee of the Company's Board of Directors (the "Compensation Committee") to be bound by this Agreement as if such beneficiary or the estate were Grantee.

7. Withholding. Whenever shares of Common Stock are to be issued pursuant to the exercise of Options, the Compensation Committee may require the recipient of the shares of Common Stock to remit to the Company an amount sufficient to satisfy any applicable federal, state and local tax withholding requirements. Upon request by Grantee, the Company may also withhold shares of Common Stock to satisfy applicable withholding requirements, subject to any rules adopted by the Compensation Committee regarding compliance with applicable law, including, but not limited to, Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").

9. No Rights as Stockholder. Grantee will have no voting or other rights as a stockholder of the Company with respect to any shares of Common Stock covered by the Options until the exercise of such Options and the issuance of a certificate or certificates to him for such shares of Common Stock. No adjustment will be made for dividends or other rights for which the record date is prior to the issuance of such certificate or certificates.

10. Capital Adjustments. The number and any applicable option price of the shares of Common Stock covered by the Options will be proportionately and appropriately adjusted by the Compensation Committee to reflect any stock dividend, stock split or share combination of the Common Stock or any recapitalization of the Company. Subject to any required action by the stockholders of the Company, in any merger, consolidation, reorganization, exchange of shares, liquidation or dissolution, the Options will pertain to the securities and other property, if any, that a holder of the number of shares of Common Stock covered by the Options would have been entitled to receive in connection with such event.

11. General Provisions. This Agreement shall be governed by Section 9 of the Employment Agreement with the same force and effect as though Section were set forth in its entirety herein.

IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement as of the date first above written.

DIEDRICH COFFEE, INC.
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 2, 2003

The undersigned hereby appoints Roger M. Laverty and Martin A. Lynch, and each of them individually, as proxies, each with power of substitution, to vote and otherwise represent all of the shares of common stock of Diedrich Coffee, Inc., held of record by the undersigned, at the annual meeting of stockholders of Diedrich Coffee to be held on Tuesday, December 2, 2003 at 10:00 a.m. local time, and any adjournment(s) thereof, as indicated on the reverse side hereof.

The undersigned acknowledges receipt of the Notice of Annual Meeting and Proxy Statement, dated in each case October 30, 2003. All other proxies heretofore given by the undersigned to vote shares of Diedrich Coffee's common stock are expressly revoked.

The shares represented by this proxy will be voted as described on the reverse hereof by the stockholder. If not otherwise directed, this proxy will be voted FOR the election as directors of all nominees nominated in Proposal 1 and FOR Proposals 2, 3, 4, 5, and 6.

Please Detach Here
- You Must Detach This Portion of the Proxy Card -
Before Returning it in the Enclosed Envelope

Filed by the Registrant ý
Filed by a Party other than the Registrant o
Check the appropriate box:
o		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
ý		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to §240.14a-12

DIEDRICH COFFEE, INC.
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
ý	No fee required
o	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
	(1)	Title of each class of securities to which transaction applies:
	(2)	Aggregate number of securities to which transaction applies:
	(3)	Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
	(4)	Proposed maximum aggregate value of transaction:
	(5)	Total fee paid:
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o	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
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	(4)	Date Filed:

							Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(1)
	Number of Securities Underlying Options Granted(#)		Percent of Total Options Granted to Employees in Fiscal Year
Name				Exercise Price ($/share)		Expiration Date
Name				Exercise Price ($/share)		Expiration Date	5%($)		10%($)
Roger Laverty	200,000(2	)	39.1	$	3.44	4/24/13	$	452,226	$	1,127,620
Philip Hirsch(3)	5,000		*		2.49	1/03/05		11,821		26,197
	120,000(4	)	23.5		2.49	1/03/05		283,693		628,722
Matthew McGuinness	10,000		2.0		3.97	9/27/12		22,850		59,900
Pamela Britton	20,000		3.9		3.97	9/27/12		45,699		119,799
Carl Mount	10,000		2.0		3.97	9/27/12		22,850		59,900
Michael Zorehkey	17,000		3.3		3.97	9/27/12		38,844		101,830

	(a)	(b)		(c)
Plan category	Number of securities to be issued upon exercise of outstanding options and rights	Weighted-average exercise price of outstanding options		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	548,867	$	6.72	25,750

Total	548,867	$	6.72	25,750

Audit fees, excluding audit related fees		$	174,500

All other fees:
	Audit related fees (1)	$	8,000
	Other non-audit services (2)		61,000

	Total all other fees	$	69,000

		By order of the board of directors,

		Martin R. Diedrich Vice Chairman of the Board and Secretary
Irvine, California October 30, 2003

		Respectfully submitted,

		Peter Churm Paul Heeschen Lawrence Goelman

		Respectfully submitted,

		Peter Churm Lawrence Goelman Randy Powell

		By order of the board of directors,

		Martin R. Diedrich Vice Chairman of the Board and Secretary

Irvine, California October 30, 2003

		DIEDRICH COFFEE, INC.:
		/s/ PAUL C. HEESCHEN Paul C. Heeschen Chairman of the Board of Directors
		GRANTEE:
		/s/ ROGER M. LAVERTY Roger M. Laverty

Nominees:	Peter Churm	Martin Diedrich	Lawrence Goelman	Paul Heeschen
	Roger Laverty	Randy Powell	Richard Spencer
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EXCEPTIONS:

I plan to attend the annual meeting	o	Change of address or comments mark here	o
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Date: , 2003
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