10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 24, 2003

OR

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

For the transition period from                to                

Commission file number 0-21203

DIEDRICH COFFEE, INC.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE	33-0086628
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)
28 EXECUTIVE PARK, SUITE 200 IRVINE, CALIFORNIA 92614
(Address of Principal Executive Offices, Including Zip Code)
(949) 260-1600
(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý

As of November 6, 2003, there were 5,161,267 shares of common stock of the registrant outstanding.

DIEDRICH COFFEE, INC.

INDEX

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited)
	Condensed Consolidated Statements of Operations (Unaudited)
	Condensed Consolidated Statements of Cash Flows (Unaudited)
	Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings
Item 6.	Exhibits and Reports on Form 8-K
	Signatures

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PART I - FINANCIAL INFORMATION

Item 1.Financial Statements.

DIEDRICH COFFEE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	September 24, 2003			July 2, 2003
Assets
Current assets:
Cash	$	1,763,000		$	2,625,000
Accounts receivable, less allowance for doubtful accounts of $1,427,000 at September 24, 2003, and $1,375,000 at July 2, 2003	2,517,000			2,454,000
Inventories	3,251,000			2,611,000
Current portion of notes receivable	55,000			58,000
Prepaid expenses	456,000			901,000
Total current assets	8,042,000			8,649,000
Property and equipment, net	6,966,000			7,052,000
Goodwill	10,190,000			10,190,000
Notes receivable	173,000			182,000
Other assets	510,000			469,000
Total assets	$	25,881,000		$	26,542,000
Liabilities and Stockholders’ Equity
Current liabilities:
Current installments of obligations under capital leases	$	178,000		$	185,000
Current installments of long-term debt	1,517,000			1,459,000
Accounts payable	2,072,000			2,108,000
Accrued compensation	1,490,000			1,307,000
Accrued expenses	638,000			738,000
Franchisee deposits	654,000			671,000
Deferred franchise fee income	536,000			549,000
Accrued provision for store closure	433,000			425,000
Total current liabilities	7,518,000			7,442,000
Obligations under capital leases, excluding current installments	514,000			542,000
Long term debt, excluding current installments	1,107,000			1,491,000
Deferred rent	454,000			478,000
Total liabilities	9,593,000			9,953,000
Stockholders’ equity:
Common stock, $0.01 par value; authorized 8,750,000 shares; issued and outstanding 5,161,000 shares at September 24, 2003 and July 2, 2003	52,000			52,000
Additional paid-in capital	58,036,000			58,036,000
Accumulated deficit	(41,800,000		)	(41,499,000		)
Total stockholders’ equity	16,288,000			16,589,000
Commitments and contingencies
Total liabilities and stockholders’ equity	$	25,881,000		$	26,542,000

See accompanying notes to condensed consolidated financial statements.

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DIEDRICH COFFEE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Twelve Weeks Ended September 24, 2003			Twelve Weeks Ended September 25, 2002
Net Revenue:
Retail sales	$	6,873,000		$	7,857,000
Wholesale and other	2,874,000			3,035,000
Franchise revenue	1,564,000			1,454,000
Total revenue	11,311,000			12,346,000
Costs and Expenses:
Cost of sales and related occupancy costs	5,111,000			5,712,000
Operating expenses	3,700,000			4,031,000
Depreciation and amortization	587,000			445,000
General and administrative expenses	2,144,000			2,093,000
Gain on asset disposals	—			(20,000		)
Provision for asset impairment and restructuring costs	4,000			—
Total costs and expenses	11,546,000			12,261,000
Operating income (loss)	(235,000		)	85,000
Interest expense	(63,000		)	(93,000		)
Interest and other income, net	6,000			11,000
Income (loss) before income tax provision	(292,000		)	3,000
Income tax provision	9,000			13,000
Net loss	$	(301,000	)	$	(10,000	)
Net loss per share – basic and diluted	$	(0.06	)	$	0.00
Weighted average shares outstanding – basic and diluted	5,161,000			5,161,000

See accompanying notes to condensed consolidated financial statements.

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DIEDRICH COFFEE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Twelve Weeks Ended September 24, 2003			Twelve Weeks Ended September 25, 2002
Cash flows from operating activities:
Net loss	$	(301,000	)	$	(10,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	587,000			445,000
Amortization of loan fees	20,000			33,000
Provision for bad debt	66,000			23,000
Provision for store closure	35,000			5,000
Gain on disposal of assets	—			(20,000		)
Changes in operating assets and liabilities:
Accounts receivable	(129,000		)	(399,000		)
Inventories	(640,000		)	(647,000		)
Prepaid expenses	445,000			296,000
Other assets	(62,000		)	(125,000		)
Accounts payable	(36,000		)	222,000
Accrued compensation	183,000			321,000
Accrued expenses	(100,000		)	(23,000		)
Accrued provision for store closure	(27,000		)	(72,000		)
Deferred franchise fee income and franchisee deposits	(30,000		)	117,000
Deferred rent	(24,000		)	1,000
Net cash provided by (used in) operating activities	(13,000		)	167,000
Cash flows from investing activities:
Capital expenditures for property and equipment	(502,000		)	(205,000		)
Proceeds from disposal of property and equipment	2,000			140,000
Payments received on notes receivable	12,000			11,000
Net cash used in investing activities	(488,000		)	(54,000		)
Cash flows from financing activities:
Payments on long-term debt	(326,000		)	(226,000		)
Payments on capital lease obligations	(35,000		)	(46,000		)
Net cash used in financing activities	(361,000		)	(272,000		)
Net decrease in cash	(862,000		)	(159,000		)
Cash at beginning of period	2,625,000			2,233,000
Cash at end of period	$	1,763,000		$	2,074,000
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	33,000		$	55,000
Income taxes	$	9,000		$	14,000

See accompanying notes to consolidated financial statements.

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DIEDRICH COFFEE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 24, 2003
(UNAUDITED)

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements of Diedrich Coffee, Inc.  and its subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles, as well as the instructions to Form 10-Q and Article 10 of Regulation S-X.  These statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K/A filed on October 3, 2003.

In the opinion of management, all adjustments (consisting of normal, recurring adjustments and accruals) considered necessary for a fair presentation have been included.  Operating results for interim periods are not necessarily indicative of the results expected for a full year.

Stock Option Plans

The Company applies the intrinsic value-method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for employee stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans.  In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results. The Company has adopted the disclosure provisions of SFAS No. 148 and continues to follow APB 25 for stock-based employee compensation.

Pro forma net loss and pro forma net loss per share, as if the fair value-based method has been applied in measuring compensation cost for stock-based awards, is as follows:

	September 24, 2003			September 25, 2002
Pro Forma
Net loss	$	(301,000	)	$	(10,000	)
Stock based employee compensation expense included in reported net loss	—			—
SFAS 123 option expense	(160,000		)	(57,000		)
Pro forma net loss	$	(461,000	)	$	(67,000	)
Basic and diluted loss per share	$	(0.09	)	$	(0.01	)

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The fair values of the options granted were estimated using the Black-Scholes option-pricing model based on the following weighted average assumptions:

	September 24, 2003	September 25, 2002
Risk free interest rate	N/A	2.57%
Expected life	N/A	6 years
Expected volatility	N/A	99%
Expected dividend yield	N/A	0%

Reclassifications

Certain reclassifications have been made to the September 25, 2002 consolidated financial statements to conform to the September 24, 2003 presentation.

2.INVENTORIES

Inventories consist of the following:

	September 24, 2003		July 2, 2003
Unroasted coffee	$	1,328,000	$	1,034,000
Roasted coffee	697,000		572,000
Accessory and specialty items	151,000		163,000
Other food, beverage and supplies	1,075,000		842,000
	$	3,251,000	$	2,611,000

3.LONG-TERM DEBT

Long-term debt consists of the following:

	September 24, 2003			July 2, 2003
Bank of the West
Note payable bearing interest at a rate of 3.25% over LIBOR, or 4.20% as of September 24, 2003 and payable in monthly installments of $100,000 plus interest. Due March 31, 2005. Note is secured by the assets of the Company and its subsidiaries’ stock.	$	1,700,000		$	2,000,000
Bank of the West
Note payable bearing interest at a rate of 5.77% as of September 24, 2003 and payable in monthly installments of $26,000 plus interest. Due August 28, 2006. Note is secured by coffee packaging equipment.	924,000			950,000
	2,624,000			2,950,000
Less: current installments	(1,517,000		)	(1,459,000		)
Long-term debt, excluding current installments	$	1,107,000		$	1,491,000

On September 3, 2002, the Company entered into a credit agreement (the “Credit Agreement”) with United California Bank, doing business as Bank of the West (“BOW”), in order to repay the balance of all remaining amounts it owed to Fleet National Bank (“Fleet”) under the Company’s credit agreement

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with Fleet. Under the Credit Agreement, the Company immediately borrowed $3,000,000 under a replacement term loan, the proceeds of which were used to repay the Fleet term loan on September 3, 2002, the amended maturity date of the Fleet term loan.

The Company’s obligations under the Credit Agreement are secured by all of the Company’s assets, including the stock of each of its subsidiaries (each of which has guaranteed the Company’s obligations under the Credit Agreement), as well as all intangible assets it owns, including the intellectual property and trademark assets that the Company and its subsidiaries own.

The term loan with BOW requires monthly principal payments of $100,000 over 30 months and all amounts the Company owes under the term loan must be repaid by March 31, 2005.  The Company is required to make monthly interest payments on amounts outstanding under the term loan, computed at either BOW’s prime rate plus 1.0% or a LIBOR rate plus 3.25%.  At September 24, 2003, the applicable interest rate was 4.20%, which was based on the LIBOR rate plus 3.25%.  The Company may periodically elect to convert portions of its prime rate-based borrowings under the Credit Agreement into LIBOR based borrowings in $100,000 increments, subject to restrictions contained in the Credit Agreement.

In addition to the $3,000,000 term loan, the Credit Agreement provided the Company with a revolving $1,000,000 equipment acquisition credit line for the acquisition of specified coffee packaging equipment. On April 10, 2003, the Company borrowed $950,000 under this revolving credit line, which converted to a term loan on August 28, 2003. The equipment term loan is secured by the coffee packaging equipment purchased with the proceeds, and, effective October 1, 2003, a restricted cash balance on deposit with BOW equal to the lesser of $800,000 or the outstanding principal balance of the equipment term loan. The equipment term loan calls for monthly principal payments of $26,000 plus interest at a fixed rate of 5.77% through the maturity date of August 28, 2006.

The Credit Agreement also provides the Company with a $675,000 revolving working capital and letter of credit facility, subject to a number of restrictions. The Company’s working capital facility draws and letters of credit are limited to a combined maximum of $675,000 outstanding at any time. Furthermore, drawdowns against the working capital facility are subject to a sub-limit of $500,000, and letters of credit are subject to a sub-limit of $250,000.  The Company is permitted to draw funds against the working capital facility throughout the fiscal year and may repay amounts that it borrows under the working capital facility at any time. Therefore, the Company may be able to re-borrow such funds on a revolving basis (subject to restrictions).  The working capital facility matures on April 15, 2004 and the letter of credit facility matures on October 15, 2004.  Any payments made by BOW with regard to any letter of credit issued under the letter of credit facility must be repaid by the Company immediately upon the date of such payment by BOW.  As of September 24, 2003, BOW had issued one letter of credit for $179,000.

In October 2003, BOW provided the Company with an additional facility for issuance of up to $250,000 of letters of credit.  The new facility provides that issued letters of credit are to be secured by restricted cash balances of an equal amount maintained on deposit with BOW.

The Company is subject to a number of restrictions under the Credit Agreement, as amended.  These include limitations on the Company’s ability to sell assets, make capital expenditures, incur additional indebtedness, permit new liens upon the Company’s assets, and pay dividends on or repurchase its common stock. The Company must also maintain compliance with agreed-upon financial covenants that require the Company to maintain a specified minimum dollar value level of tangible net worth, maintain a specified minimum dollar value level of EBITDA for the trailing four fiscal quarters and certain minimum ratios of cash flow to debt service obligations, maintain a specified minimum level of profitability, limit the amount of indebtedness it may have outstanding in relation to its tangible net worth and, effective October 1, 2003, requires the Company to maintain restricted cash balances on deposit with BOW equal to the lesser of $800,000 or the outstanding principal balance of its equipment term loan.  As of September 24, 2003, the Company was in compliance with these covenants.

Maturities of long-term debt for years subsequent to September 24, 2003 are as follows:

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Fiscal Year
2004	$	1,517,000
2005	817,000
2006	290,000
Total long-term debt	$	2,624,000

4.ACCRUED PROVISION FOR STORE CLOSURE

Prior to December 31, 2002, the estimated cost associated with closing under-performing stores was accrued in the period in which the store was identified for closure by management under a plan of termination. Effective December 31, 2002, the Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” and now records these estimated costs when they are incurred rather than at the date of a commitment to an exit or disposal plan. Such costs primarily consist of the estimated cost to terminate real estate leases.

	Beg Balance			Amounts Charged to Expense		Adjustments			Cash Payments			End Balance
Year ended July 2, 2003	$	581,000		$	193,000	$	(116,000	)	$	(233,000	)	$	425,000
Twelve weeks ended September 24, 2003	$		425,000	$	35,000	$	—		$	(27,000	)	$	433,000

For the twelve weeks ended September 24, 2003, the $35,000 of amounts charged to expense were comprised of a $31,000 charge to cost of sales and related occupancy costs and a $4,000 charge to the provision for asset impairment. These charges primarily related to negotiated lease settlements finalized during the first quarter of fiscal 2004.

5.EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted net loss per share:

	Twelve Weeks Ended September 24, 2003			Twelve Weeks Ended September 25, 2002
Numerator:
Net loss	$	(301,000	)	$	(10,000	)
Denominator:
Basic weighted average common shares outstanding	5,161,000			5,161,000
Effect of dilutive securities	—			—
Diluted weighted average common shares outstanding	5,161,000			5,161,000
Basic and diluted net loss per share	$	(0.06	)	$	(0.00	)

All 748,000 options outstanding and all of the 730,000 warrants to purchase shares of common stock outstanding during the twelve weeks ended September 24, 2003 were excluded from the calculation of diluted net loss per share as their inclusion would have been anti-dilutive.  All 619,000 options outstanding and all of the 730,000 warrants to purchase shares of common stock outstanding during the twelve weeks ended September 25, 2002 were excluded from the calculation of diluted net loss per share as their inclusion would have been anti-dilutive.

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6.SEGMENT AND RELATED INFORMATION

The Company has three reportable segments:  retail, wholesale, and franchise operations.  The Company evaluates performance of its operating segments based on income before income taxes.

Summarized financial information concerning the Company’s reportable segments is shown in the following table.  The other total assets consist of corporate cash, corporate notes receivable, corporate prepaid expenses, and corporate property and equipment.  The other component of segment profit before tax includes corporate general and administrative expenses, depreciation and amortization expense and interest expense.

	Retail Operations		Wholesale Operations		Franchise Operations		Other			Total
Twelve Weeks Ended September 24, 2003
Total revenue	$	6,873,000	$	2,874,000	$	1,564,000	$	—		$	11,311,000
Interest expense	6,000		—		10,000		47,000			63,000
Depreciation and amortization	273,000		139,000		—		175,000			587,000
Segment income (loss) before income tax provision	159,000		429,000		1,479,000		(2,359,000		)	(292,000		)
Total assets as of September 24, 2003	$	6,410,000	$	12,669,000	$	3,958,000	$	2,844,000		$	25,881,000

	Retail Operations		Wholesale Operations		Franchise Operations		Other			Total
Twelve Weeks Ended September 25, 2002
Total revenue	$	7,857,000	$	3,035,000	$	1,454,000	$	—		$	12,346,000
Interest expense	8,000		—		14,000		71,000			93,000
Depreciation and amortization	311,000		75,000		—		59,000			445,000
Segment income (loss) before income tax provision	334,000		486,000		1,375,000		(2,192,000		)	3,000
Total assets as of July 2, 2003	$	6,834,000	$	11,895,000	$	3,985,000	$	3,828,000		$	26,542,000

7.INTANGIBLE ASSETS

Effective June 28, 2001, the Company adopted SFAS Nos. 141 and 142, “Business Combinations” and “Goodwill and Other Intangible Assets,” respectively, which require that the Company prospectively cease amortization of goodwill and instead conduct periodic tests of goodwill for impairment.

There were no changes in the carrying amount of goodwill for the twelve weeks ended September 24, 2003.

Goodwill by segment was as follows:

	September 24, 2003		July 2, 2003
Retail Operations	$	1,267,000	$	1,267,000
Franchise Operations	6,311,000		6,311,000
Wholesale Operations	2,612,000		2,612,000
Goodwill	$	10,190,000	$	10,190,000

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8.LEASE CONTINGENCIES

We are liable on the master leases for 119 franchise locations. Under our historical franchising business model, we executed the master leases for these locations, and entered into subleases on the same terms with our franchisees, which typically pay their rent directly to the landlords. If any of these franchisees default on their subleases, we would be required to make all payments under the master leases. Our maximum theoretical future exposure at September 24, 2003, computed as the sum of all remaining lease payments through the expiration dates of the respective leases, was $18,991,000. This amount does not take into consideration any mitigating measures that we could take to reduce this exposure in the event of default, including re-leasing the locations, or terminating the master lease by negotiating a lump sum payment to the landlord in an amount that is less than the sum of all remaining future rents.

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Item 2.Management’s Discussion And Analysis Of Financial Condition And Results Of Operations.

A Warning About Forward Looking Statements.

We make forward-looking statements in this quarterly report that are subject to risks and uncertainties.  These forward-looking statements include information about possible or assumed future results of our financial condition, operations, plans, objectives and performance. Additionally, when we use the words “believe,” “expect,” “anticipate,” “estimate” or similar expressions, we are making forward-looking statements.  Many possible events or factors could affect our future financial results and performance.  This could cause our results or performance to differ materially from those expressed in our forward-looking statements. You should consider these risks when you review this document, along with the following possible events or factors:

•the financial and operating performance of our retail operations;

•our ability to maintain profitability over time;

•our ability to perform within the terms of our credit agreement;

•the successful execution of our growth strategies;

•our franchisees’ adherence to our practices, policies, and procedures;

•the impact of competition; and

•the availability of working capital.

Foreseeable risks and uncertainties are described elsewhere in this report and in detail under the caption “Risk Factors and Trends Affecting Diedrich Coffee and Its Business” in our Annual Report on Form 10-K/A for the fiscal year ended July 2, 2003 and in other reports that we file with the Securities and Exchange Commission. We undertake no obligation to publicly release the results of any revision of the forward-looking statements. Unless otherwise indicated, “we,” “us,” “our,” and similar terms refer to Diedrich Coffee, Inc.

General.

Diedrich Coffee, Inc. is a specialty coffee roaster, wholesaler and retailer.  We sell brewed, espresso-based and various blended beverages primarily made from our own fresh roasted premium coffee beans, as well as light food items, whole bean coffee, and accessories through our Company operated and franchised retail locations.  We also sell whole bean and ground coffees on a wholesale basis through a network of distributors in the Office Coffee Service (“OCS”) market, and to other wholesale customers, including restaurant chains and other retailers.  Our brands include Diedrich Coffee, Gloria Jean’s Coffees, and Coffee People.  As of September 24, 2003, we owned and operated 58 retail locations and franchised 372 other retail locations under these brands, for a total of 430 retail coffee outlets.  Our retail units are located in 36 states and 10 foreign countries.  As of September 24, 2003, we also had over 230 wholesale accounts with OCS distributors, chain and independent restaurants and others.  In addition, we operate a large coffee roasting facility in central California that supplies freshly roasted coffee to our retail locations and wholesale accounts.

Retail Outlets

Our retail outlet distribution channel can be divided into two sub-channels, each with its own distinct business model, including differences in revenue and cost structure, overhead, and capital requirements.  These two retail sub-channels are Company operated retail outlets and franchised retail

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outlets.  We view retail outlets as a single distribution channel, despite the differences noted above, primarily because our retail customers do not make any distinction between Company and franchise operated locations.  The critical success factors are, therefore, the same for each type of retail location, whether Company operated or franchised: quality of product, service, and atmosphere.  The economic model and cost structures are also the same for each type of location at the retail unit level, notwithstanding their different direct financial impacts on us in our roles as both an operator and franchiser of retail outlets.  Furthermore, the potential contribution of any given outlet, as measured by the amount of roasted coffee produced through our roasting plant, is the same.

Presently, our largest brand is Gloria Jean’s and over 97% of Gloria Jean’s retail units are franchised. Gloria Jean’s retail units are located throughout the United States, and in 10 foreign countries. Our Diedrich Coffee brand has a higher concentration of Company operated units, with over 78% of retail locations operated by us.  Diedrich Coffee units are located primarily in Orange County, California, although there are a number of Diedrich Coffee locations in Los Angeles, San Diego, Denver, Houston, and elsewhere in the United States. We also operate retail coffee outlets under a third brand, Coffee People, which are 100% Company operated at this time. Our Coffee People outlets are all located in Portland, Oregon.

A table summarizing the relative sizes of each of our brands, on a unit count basis, and changes in unit count for each over the first quarter ended September 24, 2003, is set forth below:

	Units at July 2, 2003	Opened	Closed		Net transfers between the Company and Franchise	Units at September 24, 2003
Gloria Jean’s Brand
Company Operated	11	—	—			11
Franchise – Domestic	143	3	(4	)		142
Franchise – International	206	19	(2	)	—	223
Subtotal Gloria Jean’s	360	22	(6	)	—	376
Diedrich Coffee Brand
Company Operated	25		—		—	25
Franchise – Domestic	10	—	(3	)	—	7
Subtotal Diedrich	35	—	(3	)	—	32
Other Brands
Company Operated	22	—	—		—	22
Total	417	22	(9	)	—	430

Wholesale Distribution

We presently have over 230 wholesale accounts not affiliated with our retail locations, which purchase coffee from us under both the Diedrich Coffee and Gloria Jean’s brands. Our current wholesale accounts are in the Office Coffee Supply market, chain restaurants, independent restaurants, other hospitality industry enterprises and specialty retailers.  Additionally, our franchise agreements require both Diedrich Coffee and Gloria Jean’s franchisees to purchase substantially all of their coffee from us.

Seasonality and Quarterly Results

Our business is subject to seasonal fluctuations as well as economic trends that affect retailers in general. Historically, our net sales are highest during the second fiscal quarter, which includes the November – December holiday season. Hot weather tends to reduce sales. Quarterly results are affected by the timing of the opening of new stores, which may not occur as anticipated due to events outside our control. As a result of these factors, the financial results for any individual quarter may not be indicative of the results that may be achieved in a full fiscal year.

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Results of Operations.

Twelve Weeks Ended September 24, 2003 Compared with the Twelve Weeks Ended September 25, 2002

Total Revenue.  Total revenue for the twelve weeks ended September 24, 2003 decreased by $1,035,000, or 8.4%, to $11,311,000 from $12,346,000 for the twelve weeks ended September 25, 2002. This decrease was attributable to decreases in the retail and wholesale segments, partially offset by an increase in franchise revenue.  Each component is discussed below.

Retail sales for the twelve weeks ended September 24, 2003 decreased by $984,000, or 12.5%, to $6,873,000 from $7,857,000 for the prior year period.  This decrease is primarily composed of two factors.  First, retail sales decreased by approximately $741,000 due to the decrease in the number of Company stores in the current year as a result of the closure of six Company operated locations since the prior year period, and the sale of six other Company operated locations to franchisees.  Second, year-to-year same store sales declined by 3.3%.  These decreases were slightly offset by a  $22,000 increase in e-commerce retail sales.

Wholesale revenue decreased $161,000, or 5.3%, to $2,874,000 for the twelve weeks ended September 24, 2003 from $3,035,000 for the prior year period. Wholesale sales of roasted coffee to our franchisees decreased $200,000, or 15.0%, primarily due to a 19-unit decrease in the number of domestic franchise stores when compared to the prior year period.  Additionally, wholesale sales to independent and chain restaurants and specialty retailers declined by $16,000 as we decreased our focus on these customers and increased our focus on the Keurig “K-cup” and the Office Coffee Service markets.  These decreases were partially offset by a $62,000, or 4.6%, increase in sales of Keurig “K-cup” and OCS items.

Franchise revenue increased over the prior year first quarter by $110,000, or 7.6%, to $1,564,000. Initial franchise fees and franchise renewal fees increased approximately $148,000 for the twelve weeks ended September 24, 2003 versus the prior year, primarily as a result of a dissolution settlement for the Malaysia franchise agreement  Franchise royalties decreased $44,000, or 3.6%, to $1,173,000 for the twelve weeks ended September 24, 2003 versus the prior year period. This was the net impact of a reduction in domestic franchise royalties and an increase in international royalties. Domestic royalties decreased because of the 19-unit reduction in domestic franchise stores from September 25, 2002 to September 24, 2003, and a decline in comparable store sales. The growth in international royalties reflects the continuing strength of those markets with a 52-unit increase in the number of franchise stores compared to the prior year.

Cost of Sales and Related Occupancy Costs.  Cost of sales and related occupancy costs for the twelve weeks ended September 24, 2003 decreased 10.5% to $5,111,000 from the prior year period.  Cost of sales and related occupancy costs decreased to 45.2% of total revenue for the twelve weeks ended September 24, 2003 from 46.3% of total revenue for the twelve weeks ended September 25, 2002.  This margin improvement primarily resulted from the implementation of new in-store operating systems, which help us better control our costs, and a decrease in royalty fees paid to Keurig following the purchase of packaging equipment during the fourth quarter of fiscal year 2003.  Occupancy costs remained constant as a percentage of sales in the first fiscal quarter of each year.

Operating Expenses.Operating expenses for the twelve weeks ended September 24, 2003 decreased  $331,000, or 8.2%, from the prior year period to $3,700,000.  On a margin basis, operating expenses remained constant at 32.7% in the first fiscal quarter of each year.  Labor expense increased as a percentage of revenues primarily as a result of lower revenues due to the closure and sale of coffeehouses, negative comparative sales for the quarter, and a deliberate decision to improve customer service by increasing the staff at our coffeehouses.  Bad debt expense increased from the prior year quarter by $43,000 due to a reduction in bad debt reserves recorded in last year’s first fiscal quarter.  Despite very low loss experience, California worker’s compensation insurance expense increased by $20,000 over the prior year quarter.

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Depreciation and Amortization.  Depreciation and amortization increased by $142,000 to $587,000 for the twelve weeks ended September 24, 2003 from the prior year first fiscal quarter.  This increase was due to depreciation of the Keurig packaging equipment and other capital improvements in our Castroville, California roasting facility and in Company operated retail locations.

General and Administrative Expenses.  General and administrative expenses increased by $51,000, or 2.4%, to $2,144,000 for the twelve weeks ended September 24, 2003 from the prior year fiscal quarter.  As a percentage of revenue, general and administrative expenses increased to 19.0% in the first quarter of fiscal 2003 from 17.0% in the prior year quarter.  This unfavorable percentage increase was the result of an increase in overhead costs combined with an 8.4% decline in revenues.  Salaries increased $142,000 over the prior year quarter largely due to the addition of a Director of Operations and other supervisory personnel for the Company owned retail stores.  Provision for bonuses declined by $121,000 from the prior year quarter. Higher premiums increased the cost of director’s and officer’s insurance by $37,000 over last year’s first quarter.

Interest Expense and Other, Net.Interest expense and other, net decreased by $25,000 to $57,000 for the twelve weeks ended September 24, 2003 from the prior year period.  This decrease is primarily due to lower market interest rates and, to a lesser degree, a 12.5% reduction in total long-term debt from $3,000,000 at September 25, 2002 to $2,624,000 at September 24, 2003, and a 20.4% reduction in our capital lease obligations from $869,000 at September 25, 2002 to $692,000 at September 24, 2003.

Financial Condition, Liquidity and Capital Resources.

Current Financial Condition.  At September 24, 2003, we had working capital of $524,000, as compared to working capital of $1,207,000 as of July 2, 2003, and working capital of $619,000 as of September 25, 2002.  Purchases of fixed assets and decreases in revenues during the current fiscal quarter, resulted in reduced available working capital.

Cash Flows.  Cash used in operating activities for the twelve weeks ended September 24, 2003 totaled $13,000 as compared with $167,000 in net cash provided by operating activities for the twelve weeks ended September 25, 2002.  Operations typically do not generate substantial cash flow in the first fiscal quarter due to seasonal lows in revenues and high inventory build-up in preparation for the second fiscal quarter, which includes the holiday season.  Other factors affecting cash flow are more fully discussed in the Unaudited Condensed Consolidated Statement of Cash Flows in the accompanying financial statements.

Net cash used in investing activities for the twelve weeks ended September 24, 2003 totaled $488,000 as compared with net cash used of $54,000 for the twelve weeks ended September 25, 2002. During the twelve weeks ended September 24, 2003, net cash used in investing activities included  $502,000 used for property and equipment expenditures, which consisted of $200,000 in new roasting plant equipment and approximately $302,000 in store remodeling and improvements.

Net cash used in financing activities for the twelve weeks ended September 24, 2003 totaled $361,000 as compared to the $272,000 in net cash used in financing activities for the twelve weeks ended September 25, 2002. For both periods the net cash used in financing activities consisted of repayment of long-term debt and capital leases.

Bank Revolving Working Capital and Letter of Credit Facility.  We have a $675,000 revolving working capital and letter of credit facility.  The working capital facility draws and letters of credit are limited to a combined maximum of $675,000 outstanding at any time.  Letters of credit are subject to a sub-limit of $250,000. At September 24, 2003, there were no draws against the working capital facility and one letter of credit in the amount of $179,000 was outstanding.

For additional information regarding our banking relationship and further details of the revolving working capital and letter of credit facility please refer to the accompanying Unaudited Condensed Consolidated Financial Statements and related notes.

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Other Commitments.  The following represents a comprehensive list of our contractual obligations and commitments as of September 24, 2003:

	Payments Due by Period
	Total			2004		2005		2006		2007		2008		Thereafter
	(In thousands)
Note payable	$		2,624	$	1,517	$	817	$	290	$	—	$	—	$	—
Capital leases	692			178		146		60		23		24		261
Company operated retail locations  and other operating leases	18,784			4,655		3,849		2,872		2,020		1,549		3,839
Franchise operated retail locations  operating leases	18,991			5,283		4,147		3,049		2,428		1,683		2,401
Green coffee commitments	2,546			1,630		916		—		—		—		—
	$	43,637		$	13,263	$	9,875	$	6,271	$	4,471	$	3,256	$	6,501

We have obligations under non-cancelable operating leases for our coffee houses, roasting facility and administrative offices.  Lease terms are generally for periods of 10 to 20 years with renewal options, and generally require us to pay a proportionate share of real estate taxes, insurance, common area, and other operating costs.  Some retail leases provide for contingent rental payments based on sales thresholds. In addition, we are liable on the master leases for 119 franchise locations. Under our historical franchising business model, we executed the master leases for these locations, and entered into subleases on the same terms with our franchisees, which typically pay their rent directly to the landlords. If any of these franchisees default on their subleases, we would be required to make all payments under the master leases. Our maximum theoretical future exposure at September 24, 2003, computed as the sum of all remaining lease payments through the expiration dates of the respective leases, was $18,991,000. This amount does not take into consideration any mitigating measures that we could take to reduce this exposure in the event of default, including re-leasing the locations, or terminating the master lease by negotiating a lump sum payment to the landlord in an amount that is less than the sum of all remaining future rents.

On August 1, 2003, we executed a seven-year lease for a new home office facility, with a base rent amount of $27,000 per month, which became effective in October 2003.  On September 10, 2003, we executed a three-year lease for a secondary warehouse, with a base rent amount of $5,000 per month, which became effective in October 2003.

Critical Accounting Policies.

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts.  The estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and on various other factors that are believed to be reasonable. Accounts significantly impacted by estimates and assumptions include, but are not limited to, franchise receivables, allowance for bad debt reserves, assets held for sale, fixed asset lives, goodwill, intangible assets, income taxes, self-insurance and workers’ compensation reserves, store closure reserves, and contingencies. We believe that the following represent our critical accounting policies and estimates used in the preparation of our consolidated financial statements. The following discussion, however, does not list all of our accounting policies and estimates.

Revenue Recognition - - Franchise Operations.  Initial franchise fees are recognized when a franchised coffeehouse begins operations, at which time we have performed our obligations related to such fees.  Fees received pursuant to area development agreements, which grant the right to develop franchised units in future periods in specific geographic areas, are deferred and recognized on a pro rata basis as the franchised units subject to the development agreements begin operations. In light of our revenue recognition policies, we have little or no control over when we recognize revenue related to these initial franchise fees and area development fees.  We monitor the financial condition of franchisees and record

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provisions for estimated losses on receivables when we believe that our franchisees are unable to make required payments to us.  Additionally, we cease recording royalties from franchisees that are delinquent in paying us until we have a history of payments being made when due.  If sales or economic conditions worsen for our franchisees, their financial performance may worsen, our collection rates may decline, and we may be required to assume their responsibility for real property lease payments.

Valuation of Long- Lived Assets.  We evaluate the carrying value of assets for impairment when the operations of one or more of our brands experience a negative event, including, but not limited to, a significant downturn in sales, a substantial loss of customers, an unfavorable change in demographics, or unit closures.  Upon the occurrence of a negative event, we estimate the future undiscounted cash flows for the individual units that are affected by the negative event.  If the projected cash flows do not exceed the carrying value of the assets allocated to each unit, we write-down the assets to fair value based on:  the estimated net proceeds we believe we can obtain for the unit upon sale, the discounted projected cash flows derived from the unit, or the historical net proceeds obtained from sales of similar units.  The most significant assumptions in our analysis are those used when we estimate a unit’s future cash flows.  We generally use the assumptions in our strategic plan and modify them as necessary based on unit specific information.  If our assumptions are incorrect, the carrying value of our operating unit assets may be overstated or understated.

Goodwill.  Goodwill is tested for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Our goodwill impairment analysis uses estimates and assumptions in order to determine the fair value of our reporting units, including estimating future cash flows, determining appropriate discount rates and other assumptions. As a result of our changes in executive management during fiscal 2003, we reviewed our competitive position in certain markets in order to better align our resources with our growth strategy.  As a result of this review, we modified certain assumptions used in our goodwill impairment test.  If our assumptions are incorrect, the carrying value of our goodwill may be understated or overstated. Our annual impairment measurement date is our fiscal year end.

Store Closure Reserves.   We decide whether to close a unit based on its recent cash flows and its future estimated profitability.  We evaluate each unit’s performance each financial period.  When units perform poorly, we consider the demographics of the location as well as our ability to cause an unprofitable unit to become profitable. Based on management’s judgment, we estimate the future cash flows of the unit.  If we determine that the unit will not be profitable, and there are no contractual requirements that require us to continue to operate the unit, we close the unit.  We establish a reserve for the net present value of the unit’s future rents and other fixed costs.  The most significant assumptions we make in determining store closure reserves are assumptions regarding the estimated costs to maintain vacant properties or terminate leases.  Additionally, the amount of the reserve established for future lease payments on leased vacant units is dependent on our ability to successfully negotiate early termination lease agreements with our landlords.  If the costs to maintain properties rise or if it takes longer than anticipated to sell properties or terminate leases, we may need to record additional reserves.

Item 3.Quantitative And Qualitative Disclosures About Market Risk.

Market Risk Sensitive Items Entered Into for Trading Purposes

None.

Market Risk Sensitive Items Entered Into for Other Than Trading Purposes

Interest Rate Risk.  We are exposed to market risk from changes in interest rates on our outstanding bank debt.  At September 24, 2003, we had $1,700,000 in bank debt that was tied to changes in

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short term interest rates. At the end of our first fiscal quarter of fiscal 2004, the interest rate was the LIBOR rate plus 3.25%.  The rate can be fixed over periods ranging from one to six months, at our discretion.  At September 24, 2003, a hypothetical 100 basis point increase in the adjusted LIBOR rate would result in additional interest expense of $17,000 on an annualized basis.

Commodity Price Risk.  Green coffee, the principal raw material for our products, is subject to significant price fluctuations caused by a number of factors, including weather, political, and economic conditions.  To date, we have not used commodity based financial instruments to hedge against fluctuations in the price of coffee.  To ensure that we have an adequate supply of coffee, however, we enter into agreements to purchase green coffee in the future that may or may not be fixed as to price.  At September 24, 2003, we had commitments to purchase coffee through fiscal year 2005 totaling $2,546,000 for 1,985,000 pounds of green coffee, all of which were fixed as to price.  The coffee scheduled to be delivered to us in this fiscal year pursuant to these commitments will satisfy approximately 39% of our anticipated green coffee requirements for this fiscal year.  Assuming we require approximately 1,400,000 additional pounds of green coffee during 2004 for which no price has yet been fixed, each $0.01 per pound increase in the price of green coffee could result in $14,000 of additional cost.  However, because the price we pay for green coffee is negotiated with suppliers, we believe that the commodity market price for green coffee would have to increase significantly, by as much as $0.25 per pound, before suppliers would increase the price they charge us.

Item 4.Controls and Procedures.

(a)  As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective in timely alerting them to material information relating to Diedrich Coffee (including our subsidiaries) required to be included in our periodic SEC filings.

(b)  There was no significant change in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.Legal Proceedings.

In the ordinary course of our business, we may become involved in legal proceedings from time to time. During the twelve-week period ending September 24, 2003, we were not a party to any material legal proceedings.

Item 6.Exhibits and Reports on Form 8-K.

(a)Exhibits.

Set forth below is a list of the exhibits included as part of this quarterly report.

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated March 16, 1999, among Diedrich Coffee, Inc., CP Acquisition Corp., a wholly owned subsidiary of Diedrich Coffee, Inc., and Coffee People, Inc.(1)
3.1	Restated Certificate of Incorporation of the Company, dated May 11, 2001(2)
3.2	Bylaws of the Company(3)
4.1	Specimen Stock Certificate(4)
4.2	Purchase Agreement for Series A Preferred Stock dated as of December 11, 1992 by and among Diedrich Coffee, Inc., Martin R. Diedrich, Donald M. Holly, SNV Enterprises, and D.C.H., LP(5)
4.3	Purchase Agreement for Series B Preferred Stock dated as of June 29, 1995 by and among Diedrich Coffee, Inc., Martin R. Diedrich, Steven A. Lupinacci, Redwood Enterprises VII, LP, and Diedrich Partners I, LP(5)
4.4	Form of Conversion Agreement in connection with the conversion of Series A and Series B Preferred Stock into Common Stock(3)
4.5	Common Stock and Warrant Purchase Agreement, dated March 14, 2001(6)
4.6	Form of Warrant, dated May 8, 2001(2)
4.7	Registration Rights Agreement, dated May 8, 2001(2)
4.8	Form of Warrant Agreement with Nuvrty, Inc., Ocean Trust, and Grandview Trust(7)
4.9	Form of Common Stock and Option Purchase Agreement with Franchise Mortgage Acceptance Company, dated as of April 3, 1998(8)
10.1	Form of Indemnification Agreement(5)
10.2	Diedrich Coffee, Inc. 2000 Equity Incentive Plan(9)*
10.3	Diedrich Coffee, Inc. 2000 Non-Employee Directors Stock Option Plan(10)*

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10.4	Amended and Restated Diedrich Coffee, Inc. 1996 Stock Incentive Plan(11)*
10.5	Diedrich Coffee, Inc. 1996 Non-Employee Directors Stock Option Plan(12)*
10.6	Reserved.
10.7	Form of Gloria Jean’s Franchise Agreement
10.8	Form of Diedrich Coffee, Inc. Area Development Agreement
10.9	Form of Diedrich Coffee, Inc. Franchise Agreement
10.10	Credit Agreement, dated September 3, 2002, by and between Diedrich Coffee, Inc. and Bank of the West d/b/a/ United California Bank(13)
10.11	Form of Guaranty(13)
10.12	Form of Guarantor Security Agreement(13)
10.13	Form of Supplemental Security Agreement (Trademarks)(13)
10.14	Security Agreement, dated September 3, 2002, by and between Diedrich Coffee, Inc. and Bank of the West d/b/a/ United California Bank(13)
10.15	First Amendment to Credit Agreement by and between Diedrich Coffee, Inc. and Bank of the West, effective December 17, 2002(14)
10.16	Second Amendment to Credit Agreement by and between Diedrich Coffee, Inc. and Bank of the West, effective March 11, 2003(15)
10.17	Third Amendment to Credit Agreement by and between Diedrich Coffee, Inc. and Bank of the West, effective July 1, 2003(16)
10.18	Fourth Amendment to Credit Agreement by and between Diedrich Coffee, Inc. and Bank of the West, effective October 1, 2003
10.19	Reserved.
10.20	Employment Agreement with Roger M. Laverty, dated April 24, 2003(15)*
10.21	Stock Option Plan and Agreement with Roger M. Laverty, dated April 24, 2003(15)*
10.22	Reserved.
10.23	Form of Employment Agreement with Martin R. Diedrich, dated June 29, 2001(17)*
10.24	Employment Agreement with Matthew McGuinness, effective March 13, 2000(18)*
10.25	Employment Letter regarding the employment of Pamela Britton, dated February 6, 2001*
10.26	Employment Letter regarding the employment of Michael Zorehkey, dated February 3, 2000*
10.27	Employment Letter regarding the employment of Carl Mount dated October 29, 1999(19)*
10.28	Separation Agreement by and between Diedrich Coffee, Inc. and Philip G. Hirsch(15)*
10.29	Reserved.
10.30	Standard Industrial/Commercial Multi-Tenant Lease Agreement by and between The Westphal Family Trust and Diedrich Coffee, Inc., dated September 10, 2003(16)
10.31	Office Space Lease Agreement by and between The Irvine Company and Diedrich Coffee, Inc., dated August 1, 2003(16)
10.32	Reserved.
31.1	Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

________________

*Management contract or compensatory plan or arrangement

(1)Previously filed as Appendix A to Diedrich Coffee’s Registration Statement on Form S-4, filed with the Securities and Exchange Commission on April 23, 1999.

(2)Previously filed as an exhibit to Diedrich Coffee’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 16, 2001.

(3)Previously filed as an exhibit to Diedrich Coffee’s Registration Statement on Form S-1/A (Registration No. 333-08633), filed with the Securities and Exchange Commission on August 28, 1996 and declared effective on September 11, 1996.

(4)Previously filed as an exhibit to Diedrich Coffee’s Registration Statement on Form S-3 (Registration No. 333-66744), filed with the Securities and Exchange Commission on August 3, 2001.

(5)Previously filed as an exhibit to Diedrich Coffee’s Registration Statement on Form S-1 (Registration No. 333-08633), filed with the Securities and Exchange Commission on July 24, 1996 and declared effective on September 11, 1996.

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(6)Previously filed as Appendix B to Diedrich Coffee’ Definitive Proxy Statement, filed with the Securities and Exchange Commission on April 12, 2001.

(7)Previously filed as an exhibit to Diedrich Coffee’s Quarterly Report on Form 10-Q for the period ended October 29, 1997, filed with the Securities and Exchange Commission on December 11, 1997.

(8)Previously filed as an exhibit to Diedrich Coffee’s Annual Report on Form 10-K for the fiscal year ended January 28, 1998, filed with the Securities and Exchange Commission on April 28, 1998.

(9)Previously filed as Appendix A to Diedrich Coffee’s Definitive Proxy Statement, filed with the Securities and Exchange Commission October 25, 2001.

(10)Previously filed as an exhibit to Diedrich Coffee’s Registration Statement on Form S-8, filed with the Securities and Exchange Commission on November 21, 2000.

(11)Previously filed as an exhibit to Diedrich Coffee’s Quarterly Report on Form 10-Q for the period ended September 22, 1999, filed with the Securities and Exchange Commission on November 5, 1999.

(12)Previously filed as an exhibit to Diedrich Coffee’s Registration Statement on Form S-1/A (Registration No. 333-08633), filed with the Securities and Exchange Commission on August 12, 1996 and declared effective on September 11, 1996.

(13)Previously filed as an exhibit to Diedrich Coffee’s Annual Report on Form 10-K for the fiscal year ended July 3, 2002, filed with the Securities and Exchange Commission on October 1, 2002.

(14)Previously filed as an exhibit to Diedrich Coffee’s Quarterly Report on Form 10-Q for the period ended December 18, 2002, filed with the Securities and Exchange Commission on January 31, 2003.

(15)Previously filed as an exhibit to Diedrich Coffee’s Quarterly Report on Form 10-Q for the period ended March 12, 2003, filed with the Securities and Exchange Commission on April 28, 2003.

(16)Previously filed as an exhibit to Diedrich Coffee’s Annual Report on Form 10-K for the fiscal year ended July 2, 2003, filed with the Securities and Exchange Commission on September 30, 2003.

(17)Previously filed as an exhibit to Diedrich Coffee’s Annual Report on Form 10-K for the fiscal year ended June 27, 2001, filed with the Securities and Exchange Commission on September 25, 2001.

(18)Previously filed as an exhibit to Diedrich Coffee’s Annual Report on Form 10-K for the fiscal year ended June 28, 2000, filed with the Securities and Exchange Commission on September 27, 2000.

(19)Previously filed as an exhibit to Diedrich Coffee’s Quarterly Report on Form 10-Q for the period ended September 20, 2000, filed with the Securities and Exchange Commission on November 6, 2000.

(b)Reports on Form 8-K.

None.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:  November 6, 2003	DIEDRICH COFFEE, INC.
	/s/ Roger M. Laverty
	Roger M. Laverty
	President and Chief Executive Officer
	(Principal Executive Officer)
	/s/ Martin A. Lynch
	Martin A. Lynch
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
10.7	Form of Gloria Jean’s Franchise Agreement
10.8	Form of Diedrich Coffee, Inc. Area Development Agreement
10.9	Form of Diedrich Coffee, Inc. Franchise Agreement
10.18	Fourth Amendment to Credit Agreement by and between Diedrich Coffee, Inc. and Bank of the West, effective October 1, 2003
10.25	Employment Letter regarding the employment of Pamela Britton, dated February 6, 2001
10.26	Employment Letter regarding the employment of Michael Zorehkey, dated February 3, 2000
31.1	Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-10.7

Exhibit 10.7

FORM OF

GLORIA JEAN’S

FRANCHISE AGREEMENT

UNIT NO.:	DATE:
FRANCHISEE:

TABLE OF CONTENTS

1.	BUSINESS BACKGROUND AND PRELIMINARY AGREEMENTS
2.	GRANT AND RENEWAL OF FRANCHISE
	A.	GRANT OF FRANCHISE
	B.	NON-EXCLUSIVITY
	C.	RIGHT OF FIRST OPPORTUNITY
	D.	TERM
	E.	RENEWAL OF FRANCHISE
	F.	MANNER OF RENEWAL
3.	DEVELOPMENT AND OPENING OF STORE
	A.	LEASE OR SUBLEASE OF PREMISES OF STORE
	B.	DEVELOPMENT OF THE STORE
	C.	FIXTURES, EQUIPMENT, STOREFRONT, SUPPLIES AND SIGNS
	D.	STORE OPENING
	E.	TERMINATION UPON FAILURE OF FRANCHISEE TO OPEN THE STORE
	F.	GRAND OPENING PROGRAM
4.	TRAINING AND OPERATING ASSISTANCE
	A.	TRAINING
	B.	HIRING AND TRAINING OF EMPLOYEES BY FRANCHISEE
	C.	OPERATING ASSISTANCE
5.	OPERATING MANUAL
6.	STORE IMAGE AND OPERATING STANDARD
	A.	CONDITION AND APPEARANCE OF STORE
	B.	ALTERATIONS TO THE STORE
	C.	REFURBISHING THE STORE
	D.	AUTHORIZED PRODUCTS
	E.	APPROVED BRANDS AND/OR SUPPLIES
	F.	SUPPLIERS OF COFFEE
	G.	USE OF SUPPLIES IMPRINTED WITH NAMES AND MARKS
	H.	STANDARDS OF SERVICE
	I.	DETERIORATED PRODUCTS AND COMPLAINTS
	J.	SPECIFICATIONS, STANDARDS AND PROCEDURES
	K.	COMPLIANCE WITH LAWS AND GOOD BUSINESS PRACTICES
	L.	MANAGEMENT OF THE STORE
	M.	CONFLICTING AND COMPETING INTERESTS
	N.	INSURANCE
7.	PROPRIETARY AND CONFIDENTIAL INFORMATION OF FRANCHISOR
8.	ADVERTISING AND PROMOTION
	A.	BY FRANCHISOR

i

	B.	MARKETING FUND
	C.	BY FRANCHISEE
	D.	WEBSITE
9.	REPORTS, BOOKS AND RECORDS, INSPECTIONS
	A.	GENERAL REPORTING
	B.	INSPECTIONS
	C.	AUDITS
10.	NAMES AND MARKS
	A.	OWNERSHIP OF NAMES AND MARKS
	B.	LIMITATIONS ON FRANCHISEE’S USE OF NAMES AND MARKS
	C.	NOTIFICATION OF INFRINGEMENTS AND CLAIMS
	D.	DISCONTINUANCE OF USE OF NAME AND/OR MARKS
	E.	INDEMNIFICATION OF THE FRANCHISEE.
11.	INITIAL FRANCHISE FEE
12.	ROYALTY FEE
	A.	AMOUNT OF ROYALTY FEE
	B.	DEFINITION OF “GROSS SALES”
	C.	PAYMENT OF ROYALTY FEE AND MARKETING FUND CONTRIBUTION
	D.	INTEREST ON LATE PAYMENTS AND LATE FEES
13.	TERMINATION OF FRANCHISE
	A.	TERMINATION BY FRANCHISEE
	B.	BY FRANCHISOR
	C.	RIGHT OF FRANCHISOR TO DISCONTINUE PRODUCTS TO FRANCHISEE AFTER NOTICE OF DEFAULT TO FRANCHISEE
	D.	CROSS-DEFAULTS, NON-EXCLUSIVE REMEDIES, ETC.
14.	FRANCHISEE’S OBLIGATION UPON TERMINATION OR EXPIRATION
	A.	PAYMENT OF AMOUNTS OWED TO FRANCHISOR
	B.	RETURN OF MANUALS.
	C.	CANCELLATION OF ASSUMED NAMES AND TRANSFER OF PHONE NUMBERS.
	D.	FRANCHISOR HAS RIGHT TO PURCHASE STORE.
	E.	COVENANT NOT TO COMPETE
	F.	CONTINUING OBLIGATIONS
15.	ASSIGNMENT, TRANSFER AND ENCUMBRANCE
	A.	BY FRANCHISOR
	B.	FRANCHISEE MAY NOT ASSIGN WITHOUT APPROVAL OF FRANCHISOR
	C.	ASSIGNMENT TO PARTNERSHIP, LIMITED LIABILITY COMPANY OR CORPORATION
	D.	FRANCHISOR’S RIGHT OF FIRST REFUSAL
	E.	DEATH OR PERMANENT DISABILITY OF FRANCHISEE
	F.	RELEASE, EFFECT OF TRANSFER

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16.	DISPUTE RESOLUTION
	A.	MEDIATION
	B.	ARBITRATION
	C.	WAIVER OF PUNITIVE DAMAGES AND JURY TRIAL.
	D.	LIMITATION OF CLAIMS.
	E.	CONSENT TO JURISDICTION.
	F.	SURVIVAL AND CONSTRUCTION
	G.	COSTS AND ATTORNEYS’ FEES
	H.	INJUNCTIVE RELIEF
	I.	BINDING EFFECT, MODIFICATION AND REPRESENTATIONS
17.	CONSTRUCTION, ETC
18.	NON-RETENTION OF FUNDS
19.	SEVERABILITY; SUBSTITUTION OF VALID PROVISIONS
20.	WAIVERS
21.	CHOICE OF LAWS
22.	ENTIRE AGREEMENT
23.	INDEPENDENT CONTRACTORS AND INDEMNIFICATION
24.	NOTICES
25.	EFFECTIVE DATE OF AGREEMENT
26.	ACKNOWLEDGMENTS

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GLORIA JEAN’S®

FRANCHISE AGREEMENT

This Agreement is made and entered into by and between Gloria Jean’s Gourmet Coffees Franchising Corp., an Illinois corporation (“FRANCHISOR”), with its principal office at 2144 Michelson Drive, Irvine, California 92612, and                          (“FRANCHISEE”) whose principal address is                                                                               ..

1.BUSINESS BACKGROUND AND PRELIMINARY AGREEMENTS

FRANCHISOR and its affiliated company, Gloria Jean’s Gourmet Coffees Corp. (“GJGC Corp.”), have developed a full service store offering for retail sale bulk gourmet coffees, teas, beverages, coffee and tea makers and related supplies, accessories and gifts.  These stores are known as GLORIA JEAN’S COFFEES STORES (hereinafter referred to as a “GJC STORE(S)”).  Most GJC STORES carry beverages for immediate consumption on the premises, including coffee, espresso, cappuccino and tea.  In addition, some GJC STORES carry pastries, cookies and baked goods and have seating areas.  FRANCHISOR and GJGC Corp. have also developed a kiosk concept and a cart concept, both offering beverages and certain other products offered by GJC STORES (hereinafter referred to as a “GJC KIOSK(S)” and a “GJC CART(S)”).  (Unless otherwise specified, all references to GJC STORES herein include GJC KIOSKS and GJC CARTS.)  Products authorized by FRANCHISOR for sale by GJC STORES are referred to herein as the “PRODUCTS.”  All such GJC STORES are operated with uniform formats, signs, equipment, layout, systems, methods, procedures and designs which utilize a unique architectural design, offer uniform products, and utilize certain trademarks, service marks, trade dress and other commercial symbols, including “Gloria Jean’s Coffees” “Gloria Jean’s Coffee Bean” and “Gloria Jean’s.”  (Such trademarks, service marks and other commercial symbols are hereinafter referred to as the “Names and Marks.”)  GJC STORES operate at locations that feature a distinctive format and method of doing business, including color scheme, signs, equipment, layouts, systems, methods, procedures, designs and marketing and advertising standards and formats (the “GLORIA JEAN’S System”), any element of which FRANCHISOR can modify from time-to-time and with which FRANCHISEE will promptly comply.

FRANCHISOR grants to qualified persons franchises to own and operate GJC STORES, GJC KIOSKS and GJC CARTS offering the PRODUCTS authorized and approved by FRANCHISOR and utilizing the GLORIA JEAN’S System and the Names and Marks.  FRANCHISEE has applied for a franchise to own and operate a GJC STORE, a GJC KIOSK or a GJC CART at the premises identified in Paragraph A of Section 2 below and such application has been approved by FRANCHISOR in reliance upon all of the representations made therein.

FRANCHISEE acknowledges receiving and reading this Agreement and any addenda hereto and FRANCHISOR’s Uniform Franchise Offering Circular (with all exhibits) and has been given an opportunity to clarify any provision FRANCHISEE did not understand. FRANCHISEE further acknowledges that he understands and accepts the terms, conditions and covenants contained in this Agreement as being reasonably necessary to maintain FRANCHISOR’s high standards of quality and service and the uniformity of those standards at all GJC STORES and thereby to protect and preserve the goodwill of the Names and Marks.

2.GRANT AND RENEWAL OF FRANCHISE

A.GRANT OF FRANCHISE

Subject to the provisions of this Agreement, FRANCHISOR hereby grants to FRANCHISEE a franchise (the “FRANCHISE”) to operate a [  ] GJC STORE or [  ] GJC KIOSK or [  ] GJC CART (check one) (the “STORE”) and to use the Names and Marks and the GLORIA JEAN’S System during the Term (as defined below) at the following location:                                                                                                                                                                           &nb sp;  (the “Location”).  FRANCHISEE may not relocate the STORE for any purpose, including, without limitation, a temporary relocation for the purpose of remodeling, without prior written consent of FRANCHISOR.  FRANCHISEE also may not sell any PRODUCTS at other locations or through other channels of distribution without prior written consent of FRANCHISOR, including, without limitation, utilizing any computer media or electronic media (e.g., World Wide Web, Internet, Telnet, electronic mail, bulletin boards, FTP, newsgroup and the like).  Any attempt to do so shall be a material breach hereof.

FRANCHISEE acknowledges and agrees that FRANCHISOR’s approval of the Location does not constitute an assurance, representation or warranty of any kind, express or implied, as to the suitability of the Location for a GJC STORE.  FRANCHISOR’s approval of the Location indicates only that FRANCHISOR believes the Location complies with acceptable minimum criteria established by FRANCHISOR solely for its purposes as of the time of the evaluation.  FRANCHISEE further acknowledges and agrees that its acceptance of a franchise for the operation of a GJC STORE at the Location is based on its own independent investigation of the suitability of the site.  It shall be the sole responsibility of FRANCHISEE to undertake site selection and otherwise secure premises for the STORE.

B.NON-EXCLUSIVITY

The FRANCHISE is a “spot” franchise only and is awarded for a single location only.  FRANCHISEE does not have and has not paid for, any “exclusive territory” or any “exclusive,” “protected” or “reserved” territorial or other rights, and no such rights are granted or will be inferred.  FRANCHISOR (on behalf of itself and its affiliates) retains all rights with respect to GJC STORES, the Names and Marks, the sale of PRODUCTS and any other products and services, anywhere in the world, including, without limitation:  (a) the right to operate or grant others the right to operate gourmet coffee stores and/or other coffee beverage facilities under the Names and Marks or any other trademark at such locations as it deems appropriate regardless of the proximity to the STORE and on such terms and conditions as FRANCHISOR and its affiliates deem appropriate; (b) the right to roast, develop, wholesale, market, distribute and sell PRODUCTS through any channel of distribution (including, without limitation, mail order, the Internet, and wholesale) under or in association with the Names and Marks or any other trademark; and (c) the right to roast, develop, wholesale, market, distribute or sell any other product or service or own or operate any other business under the Names and Marks or any other trademark.

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C.RIGHT OF FIRST OPPORTUNITY

If, during the term of this Agreement, FRANCHISEE is in compliance with this Agreement and FRANCHISOR decides to establish and/or grant a franchisee the right to establish a GJC STORE in the shopping mall in which the STORE is located, FRANCHISOR will give FRANCHISEE the opportunity to be considered for such GJC STORE.  In those circumstances, FRANCHISOR will provide FRANCHISEE with notification of its intent, and may require FRANCHISEE to submit to FRANCHISOR, within thirty (30) days after FRANCHISOR’s notification, any information and material that FRANCHISOR then typically considers in selecting franchisees and granting franchises in order to determine whether FRANCHISEE’s application should be accepted. FRANCHISEE acknowledges the foregoing right of opportunity is only available if the STORE is located in a shopping mall and that FRANCHISOR’s obligation to consider FRANCHISEE for additional GJC STORES apply only with respect to GJC STORES to be located in the same shopping mall as the STORE.  In the event FRANCHISOR accepts FRANCHISEE’s application, FRANCHISEE must acquire an additional franchise for the operation of the GJC STORE by executing FRANCHISOR’s then current form of franchise agreement and paying FRANCHISOR the then current initial franchise fee.

D.TERM

Subject to earlier termination pursuant to Section 13, the term of this Agreement shall begin on the effective date of this Agreement as provided in Section 25 and end on the ten (10) year anniversary of such effective date or the expiration of the initial term of the lease or sublease for the STORE, whichever shall first occur (the “Term”).

E.RENEWAL OF FRANCHISE

If upon expiration of the initial term of the FRANCHISE: (1) FRANCHISEE has fully and continuously complied with this Agreement and all other agreements with FRANCHISOR (and/or any affiliate of FRANCHISOR), in each case without any defaults, cured or uncured, during the Term; and (2) FRANCHISEE maintains possession of the premises of the STORE and, prior to any renewal term beginning, refurbishes, remodels, expands and otherwise brings the STORE and its operation into full compliance with all then-applicable standards (including then-applicable design standards, including equipment) applicable to franchises awarded for new GJC STORES and in compliance with any lease or sublease requirements applicable to the STORE premises, then FRANCHISEE shall have the right to renew the FRANCHISE for a single additional term for a period of ten (10) years or the remaining term of the lease or sublease, whichever is less; provided, however, that in no event shall FRANCHISOR be obligated to negotiate or obtain any renewal, extension or otherwise of any lease or sublease, or solicit or accept any proposal from the landlord (or other person/entity controlling the premises) for a renewal, extension or otherwise of any lease or sublease, even if on the same terms and conditions as have previously been applicable to the premises.

Such renewal shall be with payment of a non-refundable (unless renewal is denied) renewal franchise fee equal to fifty percent (50%) of FRANCHISOR’s then-current initial franchise fee for a first GJC STORE franchise.  FRANCHISEE (and its owners) must also

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execute a general release in a form approved by FRANCHISOR releasing any and all claims, liabilities and/or obligations against FRANCHISOR and its affiliates, officers, directors, employees, agents, successors and assigns.

In connection with any renewal, FRANCHISEE must meet FRANCHISOR’s then-current qualification and training requirements.  FRANCHISOR may require FRANCHISEE and/or any of its personnel to attend and successfully complete any retraining program(s), and at such times and location(s), as FRANCHISOR then specifies.  There will be no charge for any retraining program(s), but FRANCHISEE will be responsible for all compensation, travel, meals, lodging and other expenses of its personnel.

F.MANNER OF RENEWAL

Renewal of the FRANCHISE shall be effected by the execution by FRANCHISOR and FRANCHISEE of FRANCHISOR’s then-current form of franchise agreement (which may provide for higher royalty fees and advertising contributions and other significant provisions of which may vary, but without any further term, successor franchise or right of renewal), general releases and all other agreements and legal instruments and documents then customarily used by FRANCHISOR in the grant of franchises for the ownership and operation of a GJC STORE.  FRANCHISEE agrees to notify FRANCHISOR not more than nine (9) months nor less than six (6) months prior to expiration of the Term in writing of FRANCHISEE’s election to renew the FRANCHISE and pay the renewal fee at the same time.  If FRANCHISOR refuses to renew the FRANCHISE, FRANCHISOR shall state the reasons for its refusal.  Failure or refusal by FRANCHISEE to execute such agreements, instruments and documents necessary to renew the FRANCHISE within sixty (60) days after delivery thereof to FRANCHISEE shall be deemed an election by FRANCHISEE not to renew the FRANCHISE.

3.DEVELOPMENT AND OPENING OF STORE

A.LEASE OR SUBLEASE OF PREMISES OF STORE

FRANCHISEE will contemporaneously with the execution of this Agreement or such later date specified by FRANCHISOR, lease or sublease the Location in the form and manner prescribed by FRANCHISOR and deliver a copy of such lease or sublease to FRANCHISOR at least 15 days prior to the execution thereof.  FRANCHISOR has the right to review and approve any lease or sublease for the premises of the STORE.  FRANCHISEE agrees not to execute any lease or sublease which has not been approved in writing by FRANCHISOR.  FRANCHISEE shall neither create nor purport to create any obligations on behalf of FRANCHISOR, not grant or purport to grant to the landlord thereunder any rights against FRANCHISOR, nor agree to any other term, condition, or covenant which is inconsistent with any provision of this Agreement.  The lease obtained by FRANCHISEE shall be collaterally assigned to FRANCHISOR pursuant to the terms of FRANCHISOR’s standard collateral assignment of lease form, to secure the performance by FRANCHISEE of its obligations hereunder.  The lease or sublease for the premises of the STORE shall contain substantially the following provisions:

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(1)           “Anything contained in this lease to the contrary notwithstanding, Lessor agrees that, without its consent, this lease and the right, title and interest of the Lessee hereunder, may be assigned by the Lessee to Gloria Jean’s Gourmet Coffees Franchising Corp. or its designee; provided that said corporation shall execute such documents evidencing its agreement to thereafter keep and perform, or cause to be kept and performed, all of the obligations of the Lessee arising under this lease from and after the time of such assignment.”

(2)           “Lessee hereby agrees that Lessor may, upon the written request of Gloria Jean’s Gourmet Coffees Franchising Corp., disclose to said corporation all reports, information or data in Lessor’s possession with respect to sales made in, upon or from the leased premises.”

(3)           “Lessor shall give written notice to Gloria Jean’s Gourmet Coffees Franchising Corp. concurrently with the giving of such notice to Lessee of any default or non-renewal by Lessee under the lease and the said corporation shall have, after the expiration of the period during which the Lessee may cure such default, an additional fifteen (15) days to cure, at its sole option, any such default.”

(4)           “Gloria Jean’s Gourmet Coffees Franchising Corp. or its designee will have an option, without cost or expense to Gloria Jean’s Gourmet Coffees Franchising Corp. or its designee, to assume the lease upon termination or expiration of the Franchise Agreement for any reason.”

The lease may not contain any non-competition covenant which purports to restrict FRANCHISOR, its affiliates or any of FRANCHISOR’s franchisees or licensees from operating a GJC STORE or any other retail establishment.

B.DEVELOPMENT OF THE STORE

Following the effective date and prior to any construction or renovation of the STORE, FRANCHISOR shall provide FRANCHISEE with copies of FRANCHISOR’s standard specifications for the design and layout of a typical GJC STORE and required leasehold improvements.  FRANCHISEE shall, in all respects, comply with all such specifications and criteria unless FRANCHISOR shall, in writing, agree to modifications thereof.  FRANCHISEE shall employ licensed architects, engineers and general contractors, at its sole cost and expense, to prepare such architectural, engineering and construction drawings and site plans (collectively referred to as the “Constructions Documents”), and/or to modify the standard Construction Documents which  may be provided by FRANCHISOR; and to obtain all permits required to construct, remodel, renovate, and/or equip the STORE.  All such Construction Documents, and all modifications and revisions thereto, shall be submitted to FRANCHISOR for its prior review and approval before FRANCHISEE’s commencement of construction pursuant thereto.  FRANCHISOR may, from time to time, provide a list of recommended architects and/or general contractors.

When completed, the STORE shall in all respects strictly comply with FRANCHISOR’s specifications therefor, as modified or revised if applicable with FRANCHISOR’s prior written consent.  FRANCHISEE must submit to FRANCHISOR one (1) set of “Project Record Drawings” within sixty (60) days of the STORE opening.  “Project

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Record Drawings” are hereby defined as the set of Construction Documents that are marked to show the changes made in the field, with particular attention paid to the information on concealed elements (e.g. underground utilities) that cannot be readily identified at a later time.  Such drawings should be clearly marked as “Project Record Drawings.”

C.FIXTURES, EQUIPMENT, STOREFRONT, SUPPLIES AND SIGNS

FRANCHISEE agrees to use in the operation of the STORE those fixtures, items of equipment, supplies and signs that FRANCHISOR has approved for a GJC STORE as meeting its specifications and standards for appearance, function, design, quality and performance.  FRANCHISEE further agrees to place or display at the premises of the STORE (interior and exterior) only such signs, emblems, lettering, logos and display materials that are from time to time approved in writing by FRANCHISOR.  If FRANCHISEE proposes to purchase, lease or otherwise use any fixture, equipment, supply or sign which is not then approved by FRANCHISOR, FRANCHISEE shall first notify FRANCHISOR in writing and shall submit to FRANCHISOR sufficient specifications, photographs, drawings and/or other information or samples for a determination by FRANCHISOR of whether such fixture, equipment, supply or sign complies with its specifications and standards, which determination shall be made and communicated in writing to FRANCHISEE within a reasonable time.

D.STORE OPENING

FRANCHISEE agrees to use its best efforts to merchandise the STORE as soon as possible after obtaining possession of the STORE premises and to open the STORE for business and commence the conduct of its business by the period required by FRANCHISEE’s lease or sublease or, if sooner, within five (5) days after notice from FRANCHISOR that it is in suitable condition therefor.  FRANCHISOR may, as it may so deem appropriate, supply an employee who will for a period up to seven (7) days assist FRANCHISEE in the opening of the STORE.

E.TERMINATION UPON FAILURE OF FRANCHISEE TO OPEN THE STORE

If FRANCHISEE fails to lease or sublease the STORE premises as required by Paragraph A of this Section 3, or fails to proceed with the merchandising of the STORE as required by or fails to open the STORE by the date required in Paragraph E of this Section 3,  FRANCHISOR, at its sole option, shall have the right to terminate this Agreement effective upon giving written notice to FRANCHISEE.

F.GRAND OPENING PROGRAM

FRANCHISEE agrees to spend between One Thousand Dollars ($1,000.00) and Four Thousand Dollars ($4,000.00) to conduct grand opening advertising and promotions, such advertising and promotions (which must be approved in advance in writing by FRANCHISOR) to occur within the four (4) month period following the opening of the STORE for business.

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4.TRAINING AND OPERATING ASSISTANCE

A.TRAINING

Prior to the opening of the STORE, FRANCHISOR shall furnish and FRANCHISEE (or the Managing Owner (as defined in Section 6.L) if FRANCHISEE is a business entity) shall attend and complete to FRANCHISOR’s satisfaction a training program on the operation of a GJC STORE, furnished at such time and place as FRANCHISOR may designate.  Such training will be given by FRANCHISOR without charge; provided that FRANCHISEE shall be solely responsible for the compensation of the trainees as well as such trainees’ travel, lodging and personal expenses.  Suchtraining will consist of and four (4) to five (5) weeks of in store training, three (3) days of classroom training, and such additional days as FRANCHISOR may elect of training.If FRANCHISEE (or the Managing Owner) fails to complete training to FRANCHISOR’s satisfaction, FRANCHISOR may require such person to undergo further training by FRANCHISOR at a time scheduled by FRANCHISOR, until FRANCHISOR is satisfied that FRANCHISEE (or the Managing Owner) has satisfactorily completed the training course.  In such event, FRANCHISEE shall advance or reimburse, at FRANCHISOR’s option, all direct and indirect costs and expenses that FRANCHISOR may incur for the wages, lodging, subsistence and travel of FRANCHISOR’s personnel for the duration of the extended training and shall pay FRANCHISOR the then-current standard training fee charged by FRANCHISOR.

B.HIRING AND TRAINING OF EMPLOYEES BY FRANCHISEE

FRANCHISEE shall hire all employees of the STORE, be exclusively responsible for the terms of their employment and compensation and implement a training program for employees of the STORE in compliance with FRANCHISOR’s standards.  FRANCHISEE agrees to maintain at all times a staff of trained employees sufficient to operate the STORE in compliance with FRANCHISOR’s standards.  FRANCHISEE agrees that all management personnel hired by FRANCHISEE may be required to sign an agreement containing non-competition and confidential information covenants substantially similar to those contained in Paragraph E of Section 14 and in Section 7 herein.

C.OPERATING ASSISTANCE

FRANCHISOR will advise FRANCHISEE from time to time of operating problems of the STORE disclosed by reports submitted to or inspections made by FRANCHISOR.  Further, FRANCHISOR will furnish to FRANCHISEE such assistance in connection with the operation of the STORE as is from time to time deemed appropriate by FRANCHISOR.  Operating assistance may consist of advice and guidance with respect to:

(1)           methods and operating procedures utilized by a GJC STORE or the STORE;

(2)           additional products and services authorized for a GJC STORE;

(3)           purchasing of PRODUCTS and supplies;

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(4)           formulating and implementing advertising, merchandising and  promotional programs; and

(5)           the establishment of administrative, bookkeeping, accounting, inventory control, sales training and general operating procedures for the proper operation of a GJC STORE.

FRANCHISEE understands and agrees that all advice and guidance provided by FRANCHISOR is only supportive of the operation of the STORE and that the overall success of the STORE is primarily dependent upon FRANCHISEE’s business abilities and efforts.  FRANCHISOR will not charge FRANCHISEE for such operating assistance unless such operating assistance is made necessary by FRANCHISEE’s failure to comply with this Agreement or if FRANCHISEE requests operating assistance in excess of what is normally provided by FRANCHISOR.  Any such charges will be reasonable and payable upon FRANCHISEE’s receipt of an invoice for the same.

5.OPERATING MANUAL

                FRANCHISOR will loan to FRANCHISEE during the term of the FRANCHISE one copy of an operating manual, which consists of one or more manuals (hereinafter referred to as the “OPERATING MANUAL”), for a GJC STORE containing mandatory and suggested specifications, standards and operating procedures prescribed from time to time by FRANCHISOR for a GJC STORE and information relative to other obligations of FRANCHISEE hereunder.  FRANCHISOR shall have the right to add to and otherwise modify the OPERATING MANUAL from time to time to reflect changes in the type or quantity of authorized PRODUCTS, standards of service or product quality, the operation of a GJC STORE or to meet competition.  Any such addition or modification takes precedence over all prior communications and in the event of a dispute, the master OPERATING MANUAL maintained at FRANCHISOR’s office shall control.  The provisions of the OPERATING MANUAL as modified from time to time by FRANCHISOR and communicated to FRANCHISEE constitute provisions of this Agreement and as such are binding upon FRANCHISEE.  The OPERATING MANUAL contains proprietary information of FRANCHISOR and FRANCHISEE agrees to keep the OPERATING MANUAL and information contained therein confidential at all times during and after the term of the FRANCHISE.

6.STORE IMAGE AND OPERATING STANDARD

A.CONDITION AND APPEARANCE OF STORE

FRANCHISEE agrees to maintain the condition and appearance of the STORE consistent with the image of a GJC STORE as an attractive, clean, convenient and efficiently operated specialty shop offering high quality PRODUCTS and efficient and courteous service, and pleasant ambiance.  FRANCHISEE agrees to effect such maintenance of the STORE as is reasonably required from time to time to maintain such condition, appearance and efficient operation, including, without limitation, replacement of worn out or obsolete fixtures, equipment and signs, repair of the interior and exterior of the STORE and periodic cleaning and decorating or as is required by FRANCHISEE’s lease or sublease.  FRANCHISEE shall also replace and/or

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add additional fixtures and equipment which FRANCHISOR at a later day may require to be installed in all the GJC STORES.  If at any time in FRANCHISOR’s reasonable judgment the general state of repair, appearance or cleanliness of the premises of the STORE or its fixtures, equipment or signs does not meet FRANCHISOR’s standards therefor, FRANCHISOR shall so notify FRANCHISEE, specifying the action to be taken by FRANCHISEE to correct such deficiency.  If FRANCHISEE fails or refuses to initiate within fifteen (15) days after receipt of such notice or such lesser period required by the lease or sublease, and thereafter continue a bona fide program to undertake and complete any such required maintenance, FRANCHISOR shall have the right (in addition to its rights under Section 13), but shall not be obligated, to enter upon the premises of the STORE and effect such repairs, painting and replacement of fixtures, equipment or signs on behalf of FRANCHISEE and FRANCHISEE shall pay the entire costs therefor to FRANCHISOR on demand.

B.ALTERATIONS TO THE STORE

FRANCHISEE shall make no material alterations to the leasehold improvements or appearance of the STORE nor shall FRANCHISEE make any material replacements of or alterations to the fixtures, equipment or signs of the STORE without prior written approval by FRANCHISOR and any approval that may be necessary under the lease or sublease for the premises.

C.REFURBISHING THE STORE

At FRANCHISOR’s request, which shall not be more than once every five (5) years, FRANCHISEE shall refurbish the STORE at its own expense to conform to the building design, trade dress, color schemes, and presentation of the Names and Marks in a manner consistent with the image then in effect for new GJC STORES under the GLORIA JEAN’S System, including, without limitation, remodeling, redecoration, structural changes, and modifications to existing improvements and equipment.

D.AUTHORIZED PRODUCTS

The presentation of a uniform image to the public and the offering of uniform product lines is an essential element of a successful franchise system.  FRANCHISEE therefore agrees that the STORE will offer brands and types of PRODUCTS and services from time to time specified by FRANCHISOR.  FRANCHISEE further agrees that the STORE will not, without prior written approval by FRANCHISOR, offer any other products or services nor shall the STORE or the premises which it occupies be used for any purpose other than the operation of a GJC STORE in compliance with this Agreement and FRANCHISEE’s lease or sublease for the premises.

E.APPROVED BRANDS AND/OR SUPPLIES

The reputation and goodwill of GJC STORES is based upon, and can be maintained only by, the sale of high-quality products.  FRANCHISEE therefore agrees that the STORE will only offer for sale authorized PRODUCTS as specified by FRANCHISOR and other products approved for the STORE from time to time as being acceptable and from approved suppliers.  The term PRODUCTS as used in this Agreement, include all products

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hereafter approved and/or developed by FRANCHISOR.  FRANCHISOR may from time to time modify the list of approved brands and/or suppliers and FRANCHISEE shall not, after receipt in writing of such modification, reorder any brand or from any supplier which has been determined to be no longer of acceptable quality.  Subject to Section 6.F. below, if FRANCHISEE proposes to sell any product of a brand which has not been approved as being acceptable or from a supplier which has not been approved, it shall first notify FRANCHISOR in writing and submit sufficient photographs, drawings, specifications, samples and/or other information concerning the product and/or the supplier and FRANCHISOR shall, within a reasonable time, notify FRANCHISEE in writing whether or not such proposed brand and/or such proposed supplier is acceptable.  FRANCHISOR may approve a supplier for any PRODUCTS and may approve a supplier only as to certain PRODUCTS.  FRANCHISOR may concentrate purchases with one or more suppliers to obtain lower prices and/or the best advertising support and/or services for a group of GJC STORES owned or franchised by FRANCHISOR or its affiliates.  FRANCHISOR and its affiliates reserve the right to receive revenue from approved suppliers based on transactions with franchisees and FRANCHISOR (or its affiliate).  Approval of a supplier may be conditioned on requirements related to the frequency of delivery, standards of service, including prompt attention to customer complaints, consistency and reliability and may be temporary pending a further evaluation of such supplier by FRANCHISOR.  FRANCHISOR will require any supplier applying for approval to allow FRANCHISOR or its affiliates to inspect the proposed supplier’s facilities to assist FRANCHISOR in determining if the proposed supplier meets FRANCHISOR’s criteria.  FRANCHISEE shall at all times maintain an adequate and representative inventory of PRODUCTS, sufficient in quality, quantity and variety, to satisfy customer demand and realize the full potential of the STORE, as prescribed from time to time by FRANCHISOR.  The inventory of the STORE shall contain a representative number of each “Gloria Jean’s” brand or other private brands of FRANCHISOR which shall be given representative display area.  FRANCHISOR shall not have any liability to FRANCHISEE if FRANCHISOR is at any time unable for any reason to offer any “Gloria Jean’s” brand or other brand of PRODUCTS for purchase by FRANCHISEE or at competitive prices.  Certain PRODUCTS may be offered by an affiliate of FRANCHISOR.

F.SUPPLIERS OF COFFEE

In recognition that the quality and uniformity of the coffee carried by GJC STORES are of paramount importance to the reputation and goodwill of GJC STORES, FRANCHISEE must purchase all coffee offered at the STORE from GJGC Corp.  In the event GJGC Corp. ceases supplying FRANCHISEE with coffee, FRANCHISOR will designate another supplier or suppliers of coffee.  In such event, FRANCHISEE may propose a supplier to FRANCHISOR in accordance with the procedure for obtaining approval of suppliers with respect to other PRODUCTS offered by FRANCHISEE, set forth in Section 6.E. above.  In addition to the criteria listed in Section 6.E. a proposed supplier must also meet FRANCHISOR’s criteria as to the size of the coffee bean, the method of preparation of the bean, the region of origin of the bean, the quality of flavoring used in bean preparation the consistency of bean color and moisture content after roasting, the type of packaging and the type of roaster used.  FRANCHISOR will require any supplier applying for approval to allow FRANCHISOR or its affiliates to inspect the proposed supplier’s roasting facilities and green bean purchase contracts to assist FRANCHISOR in determining if the proposed supplier meets FRANCHISOR’s criteria.

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G.USE OF SUPPLIES IMPRINTED WITH NAMES AND MARKS

FRANCHISEE shall in the operation of the STORE use displays, boxes, bags, paper, forms, packaging materials, labels and other paper and plastic products and supplies imprinted with the Names and Marks as prescribed from time to time by FRANCHISOR.

H.STANDARDS OF SERVICE

The STORE shall at all times give prompt, courteous and efficient service to its customers.  FRANCHISEE and the STORE shall in all dealings with customers, suppliers and the public adhere to the highest standards of honesty, integrity, fair dealing and ethical conduct.

I.DETERIORATED PRODUCTS AND COMPLAINTS

FRANCHISEE shall not advertise, offer for sale or sell any damaged, molded or deteriorated PRODUCTS or PRODUCTS which are “out of date” as provided in the OPERATING MANUAL or as specified on the PRODUCT itself.  All damaged, molded, deteriorated or “out of date” PRODUCTS shall be withdrawn from sale and removed from the STORE.  All reasonable complaints by customers shall be honored pursuant to the policy set forth in the OPERATING MANUAL.

J.SPECIFICATIONS, STANDARDS AND PROCEDURES

FRANCHISEE agrees to comply with all mandatory specifications, standards and operating procedures (whether contained in the OPERATING MANUAL or any other document or notice) relating to the operation of a GJC STORE and the STORE, including, without limitation, those relating to:

(1)           type, quality and shelf life of PRODUCTS offered;

(2)           PRODUCT dating programs, including removal of “out of date” PRODUCT;

(3)           merchandising techniques;

(4)           the safety, maintenance, cleanliness, function and appearance of the STORE premises and its fixtures, equipment and signs;

(5)           uniforms and aprons to be worn by and general appearance of STORE employees;

(6)           use of Names and Marks;

(7)           hours during which the STORE will be open for business;

(8)           use and retention of standard forms;

(9)           use and illumination of signs, posters, displays, standard formats and similar items; and

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(10)         identification of FRANCHISEE as the owner of the STORE.

Mandatory specifications, standards and operating procedures prescribed from time to time by FRANCHISOR in the OPERATING MANUAL or otherwise communicated to FRANCHISEE in writing, shall constitute provisions of this Agreement as if fully set-forth herein.  All references herein to this Agreement shall include all such mandatory specifications, standards and operating procedures.  Though FRANCHISOR retains the right to establish and periodically modify such mandatory specifications, standards and operating procedures which FRANCHISEE has agreed to maintain in the operation of the STORE, FRANCHISEE retains the right and sole responsibility for the day-to-day management and operation of the STORE and the implementation and maintenance of such mandatory specifications, standards and operating procedures at the STORE.

K.COMPLIANCE WITH LAWS AND GOOD BUSINESS PRACTICES

FRANCHISEE shall secure and maintain in force all required licenses, permits and certificates relating to the operation of the STORE and shall operate the STORE in full compliance with all applicable laws, ordinances and regulations, including, without limitation, all government regulations relating to handling of food products, occupational hazards and health, worker’s compensation insurance, unemployment insurance and withholding and payment of federal, state and local income taxes, social security taxes and sales taxes.  All advertising and promotion by FRANCHISEE shall be completely factual and shall conform to the highest standards of ethical advertising.  FRANCHISEE agrees to refrain from any business or advertising practice which may be injurious to the business of FRANCHISOR and the goodwill associated with the Names and Marks and other GJC STORES.

L.MANAGEMENT OF THE STORE

The STORE shall be managed by FRANCHISEE.  If FRANCHISEE is a corporation, partnership or limited liability company, one of the owners of FRANCHISEE must be designated as the “Managing Owner” who must be a natural person who owns and controls not less than ten percent (10%) of the equity and voting power of FRANCHISEE. FRANCHISEE (or the Managing Owner) must have at least two (2) years of retail or restaurant management experience.  FRANCHISEE (or the Managing Owner) must complete, to the satisfaction of FRANCHISOR, the training program.  If FRANCHISEE (or the Managing Owner) has completed the franchise training, FRANCHISEE shall be qualified to train its managers.  If and in the event FRANCHISOR, in its sole discretion, determines that the FRANCHISEE (or the Managing Owner) is not properly performing his duties, FRANCHISOR shall advise FRANCHISEE and FRANCHISEE shall take such corrective measures as are necessary to immediately rectify the situation.  FRANCHISEE shall keep FRANCHISOR informed at all times of the identity of any Managing Owner(s) of the STORE.

M.CONFLICTING AND COMPETING INTERESTS

FRANCHISEE agrees that FRANCHISEE will at all times faithfully, honestly and diligently perform its obligations hereunder, that it will continuously exert its best efforts to promote and enhance the business of the STORE and that it will not engage in any business or

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other activity that will conflict with its obligations hereunder.  FRANCHISEE shall not divert elsewhere any trade, commerce or business which ordinarily would be transacted by FRANCHISEE in or from the STORE and to this end, FRANCHISEE shall not at any time sell or rent to anyone any list of customers or permit the use of such list by anyone for any purpose other than the mailing of advertising material for the STORE.  FRANCHISEE further agrees that neither FRANCHISEE nor any of its owners (through a member of the immediate family of FRANCHISEE or an owner of FRANCHISEE or otherwise) will, during the term of the FRANCHISE, have any interest as an owner of (except of publicly-traded securities or interests in other GJC STORES pursuant to other franchise agreements with FRANCHISOR or its affiliates), or assist or perform services as a director, officer, employee, consultant, representative, agent, or in any other capacity for, any other business principally offering products substantially similar to the PRODUCTS then being offered by the majority of the GJC STORES, nor will they have any interest, as aforesaid, in any entity which franchises or otherwise grants to others the right to sell products similar to the PRODUCTS then being offered by the majority of the GJC STORES.

N.INSURANCE

FRANCHISEE shall obtain and maintain insurance coverage with an insurance company approved by FRANCHISOR, which approval shall not be unreasonably withheld as follows:

(1)           comprehensive general liability insurance (including products liability); with coverage of $2,000,000.00 to $4,000,000.00 combined single limit for death, personal injury, and $100,000.00 property damage coverage;

(2)           business liability annual aggregate coverage of $4,000,000;

(3)           business interruption insurance, including Continuing Royalty coverage, for 12 months after casualty, in amounts equal to at least $150,000;

(4)           workers’ compensation insurance coverage of $1,000,000 per employee, $1,000,000 per accident, $1,000,000 per disease; and

(5)           windstorm, fire, and extended coverage insurance, insuring the construction of improvements and completed STORE operated by FRANCHISEE, for the full replacement value thereof.

In the event of damage to the STORE covered by insurance, the proceeds of any such insurance shall be used to restore the STORE to its original condition (but in accordance with FRANCHISOR’s then-current standards and specifications) as soon as possible, unless such restoration is prohibited by the lease or FRANCHISOR has otherwise consented to in writing.  FRANCHISEE shall promptly provide to FRANCHISOR proof of such insurance coverage upon the obtaining of such insurance, and at such other times upon the request of FRANCHISOR.

FRANCHISEE shall, prior to opening the STORE, file with FRANCHISOR, certificates of such insurance and shall promptly pay all premiums on the policies as they become due. All such liability insurance policies shall name FRANCHISOR and its affiliates as

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additional insureds.  In addition, the policies shall contain a provision requiring 30 days prior written notice to FRANCHISOR of any proposed cancellation, modification, or termination of insurance.  If FRANCHISEE at any time fails or refuses to maintain in effect any insurance coverage required by FRANCHISOR, or to furnish satisfactory evidence thereof, FRANCHISOR, at its option and in addition to its other rights and remedies hereunder, may, but need not, obtain such insurance coverage, on behalf of FRANCHISEE, and FRANCHISEE shall promptly execute any applications or other forms or instruments required to obtain any such insurance and pay to FRANCHISOR, on demand, any costs and premiums incurred by FRANCHISOR.

7.PROPRIETARY AND CONFIDENTIAL INFORMATION OF FRANCHISOR

FRANCHISEE acknowledges and agrees that FRANCHISOR possesses certain confidential and proprietary information in which FRANCHISOR possesses valuable industrial and intellectual property rights consisting of the methods, techniques, formats, specifications, procedures, information, systems, methods of business management, sales and promotion techniques and knowledge of and experience in the operation and franchising of GJC STORES (the “Confidential Information”).  FRANCHISOR will disclose such parts of the Confidential Information as are required for the operation of a GJC STORE to FRANCHISEE in furnishing FRANCHISEE the training program, the OPERATING MANUAL and in guidance furnished to FRANCHISEE during the term of the FRANCHISE.

FRANCHISEE acknowledges and agrees that it will not acquire any interest in the Confidential Information, other than the right to utilize it in the development and operation of the STORE during the term of the FRANCHISE, and that the use or duplication of the Confidential Information in any other business would constitute an unfair method of competition with FRANCHISOR and other GJC STORE franchisees.  FRANCHISEE acknowledges that the Confidential Information is disclosed to FRANCHISEE solely on the condition that FRANCHISEE agrees, and FRANCHISEE does hereby agree, that FRANCHISEE (and each of its owners, if the FRANCHISEE is a company, partnership or limited liability company):  (1) will not use the Confidential Information in any other business or capacity; (2) will maintain the absolute confidentiality of the Confidential Information during and after the term of this Agreement; (3) will not make unauthorized copies of any portion of the Confidential Information disclosed in written form; and (4) will adopt and implement all reasonable procedures prescribed from time to time by FRANCHISOR to prevent unauthorized use or disclosure of the Confidential Information, including without limitation, requiring (a) all owners, officers, directors, managing members, and full time managers of FRANCHISEE and any other employee of FRANCHISEE designated by FRANCHISOR to execute confidentiality and non-competition agreements in the form attached hereto as Exhibit B (the “Confidentiality and Non-Competition Agreement”) and (b) any other person who will have access to Confidential Information to execute confidentiality agreements in the form attached hereto as Exhibit C (the “Confidentiality Agreement”).

Notwithstanding anything to the contrary contained in this Agreement, the restrictions on FRANCHISEE’s disclosure and use of the Confidential Information shall not apply to (a) information, processes or techniques which are or become generally known by operators of businesses that are competitive with franchisees of FRANCHISOR, other than through

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disclosure (whether deliberate or inadvertent) by FRANCHISEE; or (b) disclosure of Confidential Information in judicial, arbitral or administrative proceedings to the extent FRANCHISEE is legally compelled to disclose such information, provided FRANCHISEE shall have used its best efforts, and shall have afforded FRANCHISOR the opportunity, to obtain an appropriate protective order or other assurance satisfactory to FRANCHISOR of confidential treatment for the information required to be so disclosed.

All ideas, concepts, techniques or materials relating to a GJC STORE, whether or not protectable intellectual property and whether created by or for FRANCHISEE or FRANCHISEE’s employees, must be promptly disclosed to FRANCHISOR and will be deemed to be FRANCHISOR’s sole and exclusive property, part of the GLORIA JEAN’S System, and works made-for-hire for FRANCHISOR.  To the extent any item does not qualify as a “work made-for-hire” for FRANCHISOR, by this paragraph FRANCHISEE assigns ownership of that item and all related rights to that item, to FRANCHISOR and agrees to sign whatever assignment or other documents FRANCHISOR requests to evidence FRANCHISOR’s ownership or to help FRANCHISOR obtain intellectual property rights in the item.

8.ADVERTISING AND PROMOTION

A.BY FRANCHISOR

FRANCHISOR will develop, prepare and offer to FRANCHISEE (with or without charge) such posters, ad formats, direct mail, point of sale and other advertising materials for the STORE as FRANCHISOR deems appropriate and will implement a marketing program as described below.  FRANCHISEE shall be required to participate in all advertising and/or promotional campaigns which FRANCHISOR may establish.

B.MARKETING FUND

FRANCHISOR’s experience and business judgment is that a unified marketing program, on both a local and broader level, is an essential factor in the potential success of all GJC STORES, to achieve top-of-mind awareness in potential customers, to build and retain goodwill associated with the Name and Marks thereby hopefully benefiting all GJC STORE operators, to create improved brand loyalty among new and future customers and to achieve a favorable retail position for all GJC STORES.  To maximize the possibility of obtaining these goals, FRANCHISOR and FRANCHISEE have agreed to a marketing program as follows:

(1)           FRANCHISOR has instituted an advertising, publicity and marketing fund (the “Marketing Fund”) for such advertising, advertising-related, marketing and/or public relations programs, services and/or materials as FRANCHISOR may deem necessary or appropriate to promote GJC STORES.  The Marketing Fund may be combined with any marketing fund otherwise established for GJC STORES and the funds merged for use in accordance with this Agreement.  FRANCHISEE will contribute to the Marketing Fund two percent (2%) of the gross sales of the STORE (as defined in Paragraph B of Section 13), payable as provided in Paragraph C of Section 12.  FRANCHISOR reserves the right to increase the amount FRANCHISEE is required to contribute to an amount not to exceed three percent (3%) of the gross sales of the STORE.  FRANCHISOR will cause all GJC STORES owned by it to

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make contributions to the Marketing Fund based on the contribution rate generally in effect at the time such GJC STORES most recently came under FRANCHISOR’s ownership.  FRANCHISEE understands that, due to differing forms of franchise agreements or otherwise, some GLORIA JEAN’S franchisees may have different Marketing Funds and/or other obligations than in this Agreement.

(2)           FRANCHISOR will have sole and absolute discretion over all matters relating to the Marketing Fund in any way, including (but not limited to) its management, all financial matters, expenditures, receipts and/or investments by the Marketing Fund, timing of expenditures, creative concepts, content, materials and endorsements for any marketing programs, together with the geographic, market, and media placement and allocation thereof.  The Marketing Fund may be used, in FRANCHISOR’s sole and absolute discretion, to (among other things) pay costs of preparing, producing, distributing and using marketing, advertising and other materials and programs; administering national, regional and other marketing programs, purchasing media, employing advertising, public relations and other agencies and firms; and supporting public relations, market research and other advertising and marketing activities, as well as any expenses associated with any Franchisee Advisory Council(s), if those Councils, and such expenses, are approved by FRANCHISOR.  A brief statement regarding the availability of information regarding the purchase of GLORIA JEAN’S franchises may be included in advertising and other items produced and/or distributed using the Marketing Fund.

(3)           FRANCHISOR may arrange for services, goods and otherwise, including (but not limited to) creative concepts, production, placement, purchase of media, legal, accounting and other services, to be provided to the Marketing Fund by itself, any of its affiliates and/or their employees or agents, including persons/entities who may be owned, operated, controlled by, and/or affiliated with, FRANCHISOR (such as an “in-house advertising agency”) or who may be independent.  FRANCHISOR may use the Marketing Fund to compensate and reimburse any of such persons/entities (including itself) as FRANCHISOR deems appropriate in its sole and absolute discretion (including payment of commissions) and to compensate itself and/or others for administrative and other services, materials, etc. rendered to the Marketing Fund, provided that any compensation to FRANCHISOR or any affiliate will not be unreasonable in amount.  While FRANCHISOR is not required to submit any proposed or other expenditures by (or any other matters relating to) the Marketing Fund for approval by any Franchisee Advisory Council, if FRANCHISOR does submit any matters for approval and approval is granted by a majority of such Franchisee Advisory Council, such approval will be final and binding on FRANCHISEE.

(4)           FRANCHISEE will participate in all advertising and public relations programs instituted by the Marketing Fund but will retain full freedom to set FRANCHISEE’s own prices, except that FRANCHISOR may specify maximum prices above which FRANCHISEE will not sell or otherwise provide any goods or services and FRANCHISEE will comply with all such maximum prices.  The Marketing Fund will, as available, furnish FRANCHISEE with marketing, advertising and promotional formats and sample materials and may charge the direct cost of producing them plus shipping and handling.  FRANCHISOR may use the Marketing Fund to pay the costs of advertising, advertising-related, marketing and/or public relations programs, services and/or materials with respect to locations, programs or

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concepts where products and/or services offered under the Name and/or Marks are to be offered in conjunction with products and/or services offered under other marks, including (but not limited to) any co-branding, dual franchising or other programs, and any other franchised or non-franchised alternative channel of distribution, whether or not controlled by FRANCHISOR.

(5)           The Marketing Fund will be accounted for separately from FRANCHISOR’s other funds (but may be commingled with FRANCHISOR’s other funds) and will not be used to defray any of FRANCHISOR’s general operating expenses, except for such salaries, administrative costs, overhead and other expenses as FRANCHISOR may reasonably incur in activities related to the Marketing Fund and its programs (including, without limitation, conducting market research, preparing advertising and marketing materials, insurance, legal costs and collecting and accounting for the Marketing Fund.)  FRANCHISOR may, in FRANCHISOR’s sole and absolute discretion, spend in any fiscal year an amount greater or less than the aggregate contributions to the Marketing Fund in that year and the Marketing Fund may borrow from FRANCHISOR or other lenders to cover deficits of the Marketing Fund or cause the Marketing Fund to invest any surplus for future use by the Marketing Fund.  FRANCHISEE authorizes FRANCHISOR to collect for remission to the Marketing Fund any advertising or promotional monies or credits offered by any supplier based upon purchases by FRANCHISEE or otherwise.  All interest earned on monies contributed to the Marketing Fund will be contributed to the Marketing Fund and will be used to pay costs before using the Marketing Fund’s other assets.  A statement of monies collected and costs incurred by the Marketing Fund will be prepared annually by FRANCHISOR and be furnished to FRANCHISEE upon written request.  FRANCHISOR may (but is not required to) have financial statements of the Marketing Fund audited and any costs in connection therewith will be paid by the Marketing Fund.  FRANCHISOR will have the right to cause the Marketing Fund to be incorporated or operated through an entity separate from FRANCHISOR as FRANCHISOR deems appropriate in its sole and absolute discretion, and such successor entity will have all rights and duties of FRANCHISOR relating to the Marketing Fund.

(6)           FRANCHISOR may (but is not required to) remit a portion of Marketing Fund contributions back to a franchisee on such terms and conditions as determined by FRANCHISOR including (but not limited to) reimbursement of local advertising expenditures made by a Franchisee and FRANCHISOR may waive and/or compromise claims for contributions to, and/or claims against or with respect to, the Marketing Fund in FRANCHISOR’s sole and absolute discretion, using the Marketing Fund to pay any such claims.  FRANCHISOR will have sole and absolute discretion as to whether or not FRANCHISOR takes legal or other action against any franchisee who is in default of his or her obligations with respect to the Marketing Fund (including obligations to make contributions) or otherwise and whether a franchisee may be allowed to make direct advertising expenditures in place of contributions to the Marketing Fund.

(7)           FRANCHISEE acknowledges and agrees that the Marketing Fund is generally intended to maximize general recognition of the Name and/or Marks and patronage of GJC STORES.  FRANCHISEE understands and acknowledges that the STORE may not benefit directly or in proportion to its contribution to the Marketing Fund from the development and placement of advertising and development of marketing materials. FRANCHISOR will have no

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obligation to cause other GJC STORES, licensees or outlets (some of which may be under different arrangements) to contribute to the Marketing Fund, any cooperative or engage in local marketing.  FRANCHISEE and FRANCHISOR, each having a mutual interest in, and agreeing on the critical practical business importance of, FRANCHISEE’s and FRANCHISOR’s relationship being governed solely by written instruments signed by the parties to be bound (and not having either FRANCHISEE or FRANCHISOR subject to the uncertainty and ambiguity inherent in the application of legal or other concepts not expressly agreed to in writing by FRANCHISEE and FRANCHISOR), agree that FRANCHISEE’s and FRANCHISOR’s rights and obligations with respect to the Marketing Fund and all related matters are governed solely by the express terms of this Agreement and that this Agreement (and the parties’ relationship and all rights and obligations with respect to the Marketing Fund) does not create a “trust,” “fiduciary relationship” or similar special arrangement.  FRANCHISOR may maintain Marketing Fund assets in one or more accounts designated as “trust accounts” (or similarly designated), for purposes of protecting such assets from claims of third-party creditors or otherwise, but such designation and/or treatment will not operate to create any “trust,” “fiduciary relationship” or similar special arrangement as to the Marketing Fund, its assets or otherwise.

C.BY FRANCHISEE.

FRANCHISEE shall submit for prior approval by FRANCHISOR, any and all advertising and promotional materials prepared by FRANCHISEE for the STORE and FRANCHISEE shall not use any disapproved or unapproved advertising or promotional materials.  FRANCHISEE shall comply with any advertising requirements contained in its lease or sublease for the premises of the STORE.  All advertising and promotional materials used by FRANCHISEE must be completely factual, comply with all applicable laws and conform to the highest standards of ethical advertising and policies prescribed from time to time by FRANCHISOR.

FRANCHISEE shall list and advertise the STORE in the principal classified telephone directory distributed within its primary trading area, in such business classifications as FRANCHISOR prescribes from time to time, utilizing FRANCHISOR’s standard classified telephone directory advertisement at FRANCHISEE’s sole expense.  When more than one GJC STORE serves a metropolitan area, FRANCHISOR may require all such GJC STORES to be listed in the classified directory advertisement and FRANCHISEE shall pay an equal share of the cost thereof.

D.WEBSITE.

FRANCHISEE specifically acknowledges and agrees that any Website (as defined below) shall be deemed “advertising” under this Agreement, and will be subject to (among other things) FRANCHISOR’s approval under Paragraph C of this Section.  (As used in this Agreement, the term “Website” means an interactive electronic document, contained in a network of computers linked by communications software that refers to the STORE, other GJC STORES or the Names and Marks.  The term Website includes, but is not limited to, Internet and World Wide Web home pages.)  In connection with any Website, FRANCHISEE agrees to the following:

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(1)           FRANCHISEE shall not establish a separate Website without the prior written consent of FRANCHISOR.  FRANCHISOR shall have the right, but not the obligation, to designate one or more web page(s) to describe FRANCHISEE and/or the STORE, such web page(s) to be located within FRANCHISOR’s Website;

(2)           If FRANCHISOR approves, in writing, a separate Website for FRANCHISEE, then each of the following provisions shall apply:

(a)           FRANCHISEE shall not establish or use the Website without FRANCHISOR’s prior written approval.

(b)           Before establishing the Website, FRANCHISEE shall submit to FRANCHISOR, for FRANCHISOR’s prior written approval, a sample of the proposed Website domain name, format, visible content (including, but not limited to, proposed screen shots), and non-visible content (including, but not limited to, meta tags) in the form and manner FRANCHISOR may reasonably require; and FRANCHISEE shall not use or modify such Website without FRANCHISOR’s prior written approval as to such proposed use or modification.

(c)           In addition to any other applicable requirements, FRANCHISEE shall comply with FRANCHISOR’s standards and specifications for Websites as prescribed by FRANCHISOR from time to time in the OPERATING MANUAL or otherwise in writing.

(d)           If required by FRANCHISOR, FRANCHISEE shall establish such hyperlinks to FRANCHISOR’s Website and others as FRANCHISOR may request in writing.

(e)           FRANCHISOR may revoke its approval at any time, in writing, and require that FRANCHISEE discontinue use of a separate Website.

9.REPORTS, BOOKS AND RECORDS, INSPECTIONS

A.GENERAL REPORTING

FRANCHISEE shall submit monthly financial reporting forms and such other financial, operational and statistical information as FRANCHISOR may require to: (i) assist FRANCHISEE in the operation of the STORE in accordance with the GLORIA JEAN’S System; (ii) allow FRANCHISOR to monitor FRANCHISEE’s Gross Sales, purchases, costs and expenses; (iii) enable FRANCHISOR to develop chain wide statistics which may improve bulk purchasing; (iv) assist FRANCHISOR in the development of new authorized PRODUCTS or the removal of existing unsuccessful products; (v) enable FRANCHISOR to refine existing authorized PRODUCTS; (vi) generally improve chain-wide understanding of the GLORIA JEAN’S System.  Without limiting the generality of the foregoing:

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FRANCHISEE will allow FRANCHISOR to poll on a daily basis, at a time selected by FRANCHISOR, FRANCHISEE’s computerized point of sales system for the STORE to retrieve sales, usage, and operations data.

On or before noon (pacific standard time) each Friday, during the Term hereof, FRANCHISEE shall submit a weekly sales summary, on a form prescribed by FRANCHISOR, reporting all Gross Sales for the preceding week (defined as the seven day period beginning each Thursday and ending on the following Wednesday) either by electronic mail (“e-mail”), by facsimile or, by any other electronic means prescribed by FRANCHISOR.

On or before the 10th day of each month, or fiscal period (if FRANCHISEE has adopted FRANCHISOR’s fiscal accounting cycle, during the Term hereof, FRANCHISEE shall submit a monthly sales summary signed by FRANCHISEE, on a form prescribed by FRANCHISOR, reporting all Gross Sales for the preceding month, or fiscal period as applicable, together with such additional financial information as FRANCHISOR may from time to time request.

On or before the 30th day following each calendar quarter during the Term hereof, FRANCHISEE shall submit to FRANCHISOR financial statements for the preceding quarter, including a Balance Sheet and Profit and Loss Statement, prepared in the form and manner prescribed by FRANCHISOR and in accordance with generally accepted accounting principles (“GAAP”), which shall be certified by FRANCHISEE to be accurate and complete.  FRANCHISEE shall also provide FRANCHISOR with quarterly sales and menu mix data in the format and manner prescribed by FRANCHISOR.

FRANCHISEE shall submit to FRANCHISOR a semi-annual Profit and Loss Statement, signed and certified by FRANCHISEE.  The Profit and Loss Statement shall be prepared by a Certified Public Accountant, in accordance with GAAP, and shall provide FRANCHISEE’s sales, expenses and financial status with respect to the STORE.  FRANCHISEE shall submit to FRANCHISOR a copy of the original signed 1120 or 1120S tax form each and every year or any other forms which take the place of the 1120 or 1120S forms.  FRANCHISEE shall also provide FRANCHISOR with copies of signed original sales and use tax forms contemporaneously with their filing with the appropriate state or local authority.  FRANCHISOR reserves the right to require such further information concerning the STORE as FRANCHISOR may from time to time reasonably request.

Within sixty (60) days following the end of each calendar year, FRANCHISEE shall submit to FRANCHISOR an unaudited annual financial statement prepared in accordance with GAAP, and in such form and manner prescribed by FRANCHISOR, which shall be certified by FRANCHISEE to be accurate and complete.

FRANCHISEE shall immediately (in no event more than 24 hours following) notify FRANCHISOR of any (a) incident that may adversely affect the operation or financial condition of the STORE, FRANCHISOR or its affiliates; (b) legal action (including the commencement of a suit or proceeding, or the threat thereof), (c) issuance of any writ, order, injunction, award or decree of any court, agency or government authority, including any citation,

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fine or closing order, or (d) any other adverse inquiry, notice, demand or sanction received by FRANCHISEE relating to the operation of the STORE or the Location, including any alleged violation of any law, including health, safety or employment law violations, and including any labor dispute or actual or threatened labor strike, work stoppage, lock-out or other incident relating to any labor agreement, and shall provide FRANCHISOR with copies of all related correspondence and other communications and information relating thereto.

B.INSPECTIONS

FRANCHISOR’s authorized representatives shall have the right to enter the Location and the STORE during business hours, with or without notice, without unreasonably disrupting FRANCHISEE’s business operations, for the purposes of examining same, conferring with FRANCHISEE’s employees, inspecting and checking operations, food, beverages, furnishings, interior and exterior decor, supplies, fixtures, and equipment, and determining whether the business is being conducted in accordance with this Agreement, the GLORIA JEAN’S System and the OPERATING MANUALS.  If any such inspection indicates any deficiency or unsatisfactory condition with respect to any matter required under this Agreement or the OPERATING MANUALS, including but not limited to quality, cleanliness, service, health and authorized product line, FRANCHISOR will notify FRANCHISEE in writing of FRANCHISEE’s non-compliance with the OPERATING MANUALS, the GLORIA JEAN’S System, or this Agreement.  FRANCHISEE shall have 24 hours after receipt of such notice, or such other greater time period as FRANCHISOR may provide, to correct or repair such deficiency or unsatisfactory condition, if it can be corrected or repaired within such period of time.  If not, FRANCHISEE shall within such time period commence such correction or repair and thereafter diligently pursue it to completion.

C.AUDITS

Upon ten (10) days prior written notice, FRANCHISOR, its agents or representatives may audit FRANCHISEE’s books and records.  In connection with such audit(s) or other operational visits, FRANCHISEE shall keep its cash receipts records, monthly control forms, accounts payable records including all payments to FRANCHISEE’s suppliers at the Location or at its business office for five (5) years after their due date, which records shall be available for examination by FRANCHISOR or its representative(s), at FRANCHISOR’s request.  Without any prior written notice, FRANCHISOR, its agents or representatives may inspect the STORE and FRANCHISEE’s daily, weekly and monthly statistical information which is required under the OPERATING MANUAL.  FRANCHISEE shall make such information available for such inspections in recognition that an operational inspection cannot succeed without review of essential statistical information.  If any audit or other investigation reveals an under-reporting or under-recording error of two percent (2%) or more, then in addition to any other sums due, the expenses of the audit/inspection shall be borne and paid by FRANCHISEE upon billing by FRANCHISOR, plus interest as provided under Section 12.D below.

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10.NAMES AND MARKS

A.OWNERSHIP OF NAMES AND MARKS

FRANCHISOR is the licensee of GJGC Corp. of the Names and Marks licensed to FRANCHISEE by this Agreement and FRANCHISEE’s right to use the Names and Marks is derived solely from this Agreement and is limited to the operation of the STORE in compliance with this Agreement at the Location (or a substitute premises hereafter approved by FRANCHISOR as provided in Section 2), and by all applicable standards, specifications and operating procedures prescribed by FRANCHISOR from time to time during the term of this FRANCHISE.  FRANCHISEE agrees that all usage of the Names and Marks, including usage on computerized media and/or electronic media if approved by FRANCHISOR (including but not limited to the World Wide Web, the Internet, Telnet, newsgroups, bulletin boards, FTP, and the like), by FRANCHISEE and any goodwill established thereby shall inure to the exclusive benefit of FRANCHISOR and GJGC Corp.  FRANCHISEE further agrees that after the termination or expiration of the FRANCHISE, it will not directly or indirectly at any time or in any manner identify, the STORE, FRANCHISEE, any owner or other business as a GJC STORE, a former GJC STORE or as a franchisee of or otherwise associated with FRANCHISOR, or use in any manner or for any purpose any of the Names and Marks or other indicia of a GJC STORE.

B.LIMITATIONS ON FRANCHISEE’S USE OF NAMES AND MARKS

FRANCHISEE agrees to use the Names and Marks as the sole service mark and trade name identification of the STORE.  FRANCHISEE shall display a notice in such form as FRANCHISOR may prescribe that FRANCHISEE is an independent owner of the STORE pursuant to this Agreement.  FRANCHISEE shall not use any of the Names and Marks as part of any corporate name or with any prefix, suffix or other modifying words, terms, designs or symbols (other than logos licensed to FRANCHISEE hereunder), or in any modified form, nor may FRANCHISEE use any Names and Marks in connection with the sale of any unauthorized product or service or in any other manner including via computerized media and electronic media not explicitly authorized in writing by FRANCHISOR.  All bank accounts, licenses, permits or other similar documents shall contain the actual name of the person or entity owning the STORE and may contain “d/b/a GLORIA JEAN’S COFFEES.”  FRANCHISEE shall obtain any fictitious name, assumed name or “doing business” registration as may be required by law.

C.NOTIFICATION OF INFRINGEMENTS AND CLAIMS

FRANCHISEE shall immediately notify FRANCHISOR of any apparent infringement of or challenge to FRANCHISEE’s use of any of the Names and Marks or claim by any person of any rights in any of the Names and Marks and FRANCHISEE shall not communicate with any person other than FRANCHISOR and GJGC Corp. and their counsel in connection with any such infringement, challenge or claim.  FRANCHISOR and its affiliates shall have sole discretion to take such action as they deem appropriate and the right to exclusively control any litigation or Patent and Trademark Office or other administrative proceeding arising out of any such infringement, challenge or claim or otherwise relating to any Names and Marks.  FRANCHISEE agrees to execute any and all instruments and documents, render such assistance, and do such acts and things as may, in the opinion of FRANCHISOR’s or

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GJGC Corp.’s counsel, be necessary or advisable to protect and maintain FRANCHISOR’s and GJGC Corp.’s interests in any litigation or Patent and Trademark Office or other proceeding or to otherwise protect and maintain FRANCHISOR’s and GJGC Corp.’s interests in any of the Names and Marks.

D.DISCONTINUANCE OF USE OF NAME AND/OR MARKS

If FRANCHISOR believes at any time that it is advisable for FRANCHISOR and/or for FRANCHISEE to modify or discontinue the use of the Name and/or any of the Marks and/or use one or more additional or substitute name(s), trademarks or service marks, FRANCHISEE will promptly comply (at FRANCHISEE’s sole expense) with FRANCHISOR’s directions to modify or otherwise discontinue the use of such Name and/or Marks, or use one or more additional or substitute names, trademarks or service marks, including (but not limited to) replacement of all signage, etc.  Neither FRANCHISOR nor any of its affiliates, including GJGC Corp., will have any liability or obligation (whether of indemnity, expense reimbursement or otherwise) to FRANCHISEE, and FRANCHISEE agrees to make no claim, for, or in connection with, any modification, discontinuance or otherwise, and/or any dispute regarding the Name and/or any of the Marks and/or FRANCHISEE’s and/or FRANCHISOR’s rights in or to them.  FRANCHISOR makes no guaranty that a modification, discontinuance or otherwise may not be required, whether as a result of expiration, termination or limitation of FRANCHISOR’s rights to the Name and/or Marks or otherwise.

E.INDEMNIFICATION OF THE FRANCHISEE.

FRANCHISOR agrees to indemnify FRANCHISEE against and to reimburse FRANCHISEE for all damages for which FRANCHISEE is held liable in any proceeding rising out of FRANCHISEE’s use of any of the Names and Marks pursuant to and in compliance with this Agreement and for all costs reasonably incurred by FRANCHISEE in the defense of any such claim brought against FRANCHISEE or in any such proceeding in which FRANCHISEE is named as a party; provided that FRANCHISEE has timely notified FRANCHISOR of such claim or proceeding and has otherwise complied with this Agreement.

11.INITIAL FRANCHISE FEE

FRANCHISEE shall pay to FRANCHISOR an initial franchise fee for the FRANCHISE in the amount of Thirty Thousand Dollars ($30,000).  The initial franchise fee is payable in immediately available funds upon the execution of this Agreement and is deemed fully earned by FRANCHISOR upon execution of this Agreement and shall be non-refundable in whole or in part, under any circumstances.

12.ROYALTY FEE

A.AMOUNT OF ROYALTY FEE

FRANCHISEE agrees to pay to FRANCHISOR a royalty fee of six percent (6%) of the gross sales of the STORE, as defined in Paragraph B below, payable as provided in Paragraph C below.

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B.DEFINITION OF “GROSS SALES”

As used in this Agreement, the term “gross sales” shall mean and include the total actual gross charges for all products and services sold to customers of the STORE, for cash or credit, whether such sales are made at or from the premises of the STORE, or any other location or other channels of distribution if approved in writing in advance by FRANCHISOR but excluding:  sales, use, service or excise taxes collected from customers and paid to the appropriate taxing authority; customer refunds and adjustments.

C.PAYMENT OF ROYALTY FEE AND MARKETING FUND CONTRIBUTION

The royalty fee (as above provided) and the Marketing Fund contribution (as provided in Section 8) shall be payable on the tenth (10th) day following the end of each four (4) week period, as determined by FRANCHISOR.  This payment shall be accompanied by a sales report (the form of which will be created and furnished by FRANCHISOR) completed, verified and signed by FRANCHISOR.

As directed by FRANCHISOR, FRANCHISEE must participate in FRANCHISOR’s then-current electronic funds transfer program authorizing FRANCHISOR to utilize a pre-authorized bank draft system on a every four-week basis, or otherwise as FRANCHISOR specifies from time-to-time in FRANCHISOR’s sole and absolute discretion.  All royalty fees, advertising contributions and other amounts due FRANCHISOR (and/or any affiliate) for each period must be received by FRANCHISOR (or such affiliate) or credited to the appropriate account by pre-authorized bank debit before 5:00 p.m. on the tenth (10^th) day after each four-week period, or other point in time specified by FRANCHISOR.  If FRANCHISEE fails to submit the sales report by the tenth (10th) day after any four-week period, FRANCHISOR may specify the amount to be credited to FRANCHISOR’s account for royalty fees, advertising contributions and other amounts due to FRANCHISOR based on past reports submitted by FRANCHISEE.

D.INTEREST ON LATE PAYMENTS AND LATE FEES

All royalty fees, advertising contributions and any other amounts owed to FRANCHISOR or its affiliates by FRANCHISEE, pursuant to FRANCHISE, shall bear interest after due date at the highest legal rate for open account business credit in the state in which the STORE is located not to exceed one and one-half percent (1 1/2%) per month.  FRANCHISEE must also pay FRANCHISOR or its affiliates a late fee of Two Hundred Fifty Dollars ($250.00) per occurrence subject to applicable law.  FRANCHISEE acknowledges that this Paragraph D shall not constitute FRANCHISOR’s agreement to accept such payments after they are due or a commitment by FRANCHISOR to extend credit to or otherwise “finance” FRANCHISEE’s operation of the STORE.  Further, FRANCHISEE acknowledges that its failure to pay any amounts when due will constitute a breach of this Agreement as provided in Paragraph A of Section 13 notwithstanding the provisions of this Paragraph D.

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13.TERMINATION OF FRANCHISE

A.TERMINATION BY FRANCHISEE

If FRANCHISEE has materially complied with all of its obligations under this Agreement and FRANCHISOR has materially breached this Agreement, FRANCHISEE will have a right to terminate this Agreement if (1) FRANCHISEE provides FRANCHISOR with written notice of FRANCHISOR’s breach within ninety (90) days of the occurrence of the material breach and (2) FRANCHISOR fails to cure FRANCHISOR’s breach within sixty (60) days after FRANCHISOR receives the written notice of such breach or, in a case where FRANCHISOR’s breach cannot reasonably be cured within sixty (60) days after FRANCHISOR receives written notice of its breach, fail to provide FRANCHISEE with reasonable evidence of FRANCHISOR’s continuing efforts to correct its breach within a reasonable time. If FRANCHISOR disputes the occurrence of a material breach or FRANCHISEE’s allegation that FRANCHISOR has failed to timely cure any breach or to provide FRANCHISEE with reasonable evidence of FRANCHISOR’s continuing efforts to correct its breach within a reasonable time, then FRANCHISOR will provide FRANCHISEE with written notice of the dispute.  FRANCHISEE must then commence mediation pursuant to this Agreement within twenty (20) days after FRANCHISEE receives such written notice.  FRANCHISEE’s failure to commence mediation within such twenty (20) day period shall operate as a waiver of any alleged breach by FRANCHISOR to date.  During the pendency of the mediation proceeding (or arbitration proceeding if the dispute cannot be resolved by mediation pursuant to Paragraph A of Section 16), this Agreement shall not terminate unless otherwise terminable by FRANCHISOR hereunder or upon agreement of the parties.

To terminate this Agreement under this Paragraph A, FRANCHISEE must give FRANCHISOR a separate written notice of termination which will be effective thirty (30) days after delivery of such notice to FRANCHISOR.

B.BY FRANCHISOR

FRANCHISOR may terminate this Agreement effective upon delivery of notice of termination to FRANCHISEE, if:

(1)           FRANCHISEE or any of its owners makes an assignment for the benefit of creditors or an admission of its/his inability to pay its/his obligations as they become due;

(2)           FRANCHISEE or any of its owners files a voluntary petition in bankruptcy, files  any pleading seeking any reorganization, liquidation or dissolution under any law, admits or fails to contest the material allegations of any such pleading filed against it/him, is adjudicated a bankrupt or insolvent, a receiver is appointed for a substantial part of the assets of FRANCHISEE or any of its owners or the STORE, or the claims of creditors of FRANCHISEE or any of its owners or the STORE are abated or subject to a moratorium under any law;

(3)           FRANCHISEE abandons or fails to actively operate the STORE for three (3) or more consecutive days;

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(4)           FRANCHISEE or any of its owners surrenders or transfers control of the STORE’s operations without FRANCHISOR’s prior written consent;

(5)           FRANCHISEE suffers termination of or fails to obtain renewal or extension of the lease or sublease for, or otherwise fails to maintain possession of the Location or a substitute premises approved by FRANCHISOR;

(6)           FRANCHISEE submits to FRANCHISOR on two (2) or more separate occasions at any time during any two (2) year period of the term of the FRANCHISE a monthly report, financial statement, tax return, schedule or other information or supporting record which understates the gross sales of the STORE for any period by more than two percent (2%);

(7)           FRANCHISEE operates the STORE in a manner that presents a health or safety hazard to its customers, employees or the public;

(8)           FRANCHISEE or any of its owners are convicted of, or pleads no contest or guilty to, a felony or other crime which substantially impairs the goodwill associated with the Names and Marks or engages in any misconduct which affects the reputation of the STORE or the goodwill associated with the Names and Marks;

(9)           FRANCHISEE or any of its owners makes an unauthorized assignment of the FRANCHISE, this Agreement, the STORE or its assets or an ownership interest in FRANCHISEE as hereinafter defined in Paragraphs B and C of Section 15;

(10)         FRANCHISEE fails to pay any amount owed to FRANCHISOR or its affiliates when the same is due and payable and does not correct such failure within five (5) days after written notice of such failure to comply is delivered to FRANCHISEE;

(11)         FRANCHISEE sells coffee not purchased from GJGC Corp. pursuant to the requirements set forth herein;

(12)         FRANCHISEE or any affiliate fails on two (2) or more separate occasions within any period of twelve (12) consecutive months, or on three (3) or more separate occasions within any period of twenty-four (24) consecutive months, to comply with any provisions (whether the same or different) of this Agreement, any lease or sublease, any other agreement with FRANCHISOR and/or any affiliate and/or the OPERATING MANUAL, whether or not such failures to comply are timely corrected; or

(13)         FRANCHISEE fails to comply with any other material provision of this Agreement, any lease or sublease, any other agreement with FRANCHISOR and/or any of its affiliates or any mandatory specification, standard or operating procedure prescribed by FRANCHISOR and does not correct such failure within fifteen (15) days after written notice of such failure to comply (which shall describe the action that FRANCHISEE must take) is delivered to FRANCHISEE.

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C.RIGHT OF FRANCHISOR TO DISCONTINUE PRODUCTS TO FRANCHISEE AFTER NOTICE OF DEFAULT TO FRANCHISEE

If FRANCHISOR delivers to FRANCHISEE a notice of default or non-compliance pursuant to Section 13 of this Agreement, in addition FRANCHISOR’s other rights and remedies, FRANCHISOR reserves the right of FRANCHISOR (and its affiliates) if currently selling PRODUCTS, to discontinue selling PRODUCTS to FRANCHISEE until such time as FRANCHISEE corrects the default.  Additionally, if FRANCHISEE fails to adhere to the standard credit terms of FRANCHISOR’s affiliates with respect to payment for any PRODUCTS sold by FRANCHISOR’s affiliates to FRANCHISEE, FRANCHISOR’s affiliates reserve the right to cease selling PRODUCTS to FRANCHISEE or requiring FRANCHISEE to pay C.O.D. (i.e., cash on delivery) by certified check until such time as FRANCHISEE corrects this problem.

D.CROSS-DEFAULTS, NON-EXCLUSIVE REMEDIES, ETC.

Any default by FRANCHISEE (or any person/company affiliated with FRANCHISEE) under the terms and conditions of this Agreement or any lease or sublease, or any other agreement between FRANCHISOR, or its affiliate, and FRANCHISEE, shall be deemed to be a material default of each and every said agreement, and furthermore, in the event of termination, for any cause, of this Agreement, or any other agreement between the parties hereto, FRANCHISOR may, at its option, terminate any or all said agreements.  No right or remedy which FRANCHISOR may have (including termination) is exclusive of any other right or remedy provided under law or equity and FRANCHISOR may pursue any rights and/or remedies available.

14.FRANCHISEE’S OBLIGATION UPON TERMINATION OR EXPIRATION

A.PAYMENT OF AMOUNTS OWED TO FRANCHISOR

FRANCHISEE agrees to pay to FRANCHISOR and its affiliates within ten (10) days after the effective date of termination or expiration of the FRANCHISE, or such later date that the amounts due to FRANCHISOR and its affiliates are determined, such royalty fees, advertising contributions, amounts owed for PRODUCTS purchased by FRANCHISEE from FRANCHISOR and its affiliates and all other amounts owed to FRANCHISOR and its affiliates which are then unpaid, including any interest and late fees due pursuant to this Agreement as provided in Paragraph D of Section 12.

B.RETURN OF MANUALS.

FRANCHISEE agrees that upon termination or expiration of the FRANCHISE, it will immediately return to FRANCHISOR all copies of the OPERATING MANUAL for a GJC STORE which have been loaned to it by FRANCHISOR.

C.CANCELLATION OF ASSUMED NAMES AND TRANSFER OF PHONE NUMBERS.

FRANCHISEE agrees that upon termination or expiration of the FRANCHISE, it will take such action as may be required to cancel all assumed names or equivalent registrations

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relating to its use of the Names and Marks and to notify the telephone company and all listing agencies of the termination or expiration of FRANCHISEE’s right to use any telephone number and any classified and other telephone directory listings associated with any Names and Marks and with a GJC STORE and to authorize transfer of same to FRANCHISOR or its designee.  FRANCHISEE acknowledges that as between FRANCHISOR and FRANCHISEE, FRANCHISOR has the sole right to and interest in all telephone numbers and directory listings associated with any Names and Marks of the STORE and FRANCHISEE authorizes FRANCHISOR, and hereby appoints FRANCHISOR and any officer of FRANCHISOR as its attorney-in-fact, to direct the telephone company and all listing agencies to transfer the same to FRANCHISOR or its designee should FRANCHISEE fail or refuse to do so.  The telephone company and all listing agencies may accept such direction or this Agreement as conclusive evidence of the exclusive rights of FRANCHISOR in such telephone numbers and directory listings and its authority to direct their transfer.

FRANCHISEE shall also be required to cancel or if FRANCHISOR so elects to have assigned to FRANCHISOR, all ownership of any and all computerized media or electronic media, including but not limited to the World Wide Web, the Internet, Telnet, news groups, bulletin boards, FTP, and the like which presently or which may later exist.

D.FRANCHISOR HAS RIGHT TO PURCHASE STORE.

If this Agreement is terminated prior to its scheduled expiration date by FRANCHISOR in accordance with the provisions of this Agreement, FRANCHISOR or its designee shall have the right and option (exercisable by written notice thereof within thirty (30) days after the determination of the purchase price pursuant to this Paragraph) to purchase (at the purchase price determined pursuant to this Paragraph) from FRANCHISEE some or all of the assets (including FRANCHISEE’s inventory of saleable PRODUCTS which have been fully paid for by FRANCHISEE) of the STORE and if the premises were not leased to FRANCHISEE by FRANCHISOR or its affiliates, the right to an assignment of FRANCHISEE’s lease or sublease for the premises of the STORE (or, if assignment is prohibited, a sublease for the full remaining term and on the same terms and conditions as FRANCHISEE’s lease).  There shall be no provision for payment for leasehold improvements, the title of which shall be governed by the terms of FRANCHISEE’s lease or sublease for the STORE premises.  The purchase price for the assets of the STORE shall be the depreciated value of those assets as shown on FRANCHISEE’s most current federal tax return; provided that the purchase price shall not contain any factor or increment for “goodwill” or “going concern value.”  FRANCHISOR may exclude from the assets purchased hereunder any fixtures, equipment, signs or PRODUCTS and supplies in the inventory of the STORE that are not approved as meeting quality standards for a GJC STORE.  The purchase price shall be paid by FRANCHISOR in cash at the closing of the purchase.  Contemporaneously therewith, FRANCHISEE shall: (i) deliver instruments transferring good and merchantable title to the assets purchased, free and clear of all liens and encumbrances to FRANCHISOR or its nominee with all sales and other transfer taxes paid by FRANCHISEE; and (ii) assign or transfer all licenses or permits which may be assigned or transferred.  In the event that FRANCHISEE cannot deliver clear title to all of the purchased assets as aforesaid, or in the event there shall be other unresolved issues, the closing of the sale shall be accomplished through an escrow.  Further, FRANCHISEE and FRANCHISOR shall, prior to closing, comply with any applicable bulk filings required in the state where the STORE is located.  If FRANCHISOR

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exercises its option to purchase, pending the closing of such purchase as hereinabove provided, FRANCHISOR shall have the right to appoint a manager to maintain the operation of the STORE.  Alternatively, FRANCHISOR may require FRANCHISEE to close the STORE during such time period without removing therefrom any assets.  FRANCHISEE shall maintain in force all required insurance policies until the date of closing. In connection with such purchase, FRANCHISEE (and each owner and/or affiliate of FRANCHISEE) will execute a general release, in form prescribed by FRANCHISOR, of any and all claims, liabilities and/or obligations against FRANCHISOR and its affiliates.

If agreement on the depreciated value is not reached by FRANCHISEE and FRANCHISOR within ten (10) days after the effective date of termination, the determination of depreciated value (as above defined) shall be submitted to an independent appraiser selected by FRANCHISOR.  All fees, costs and expenses of such independent appraiser shall be borne equally by FRANCHISOR and FRANCHISEE.

In the event FRANCHISOR does not exercise said option to purchase, FRANCHISEE shall, within ten (10) days after the earlier of (i) the expiration of the option period without exercise by FRANCHISOR of its option or (ii) service by FRANCHISOR upon FRANCHISEE of written notice that FRANCHISOR does not intend to exercise its option, remove from the STORE by physical removal or in the case of signs, by obliteration, painting over or otherwise, and cease to use, either at the STORE or elsewhere, all names, distinctive architectural or other designs, signs, pictures, crests, shields, and other advertising and equipment which are indicative of FRANCHISOR or FRANCHISEE.  All PRODUCTS which are not merchantable due to physical deterioration or which are “out-of-date” shall be destroyed by FRANCHISEE.

E.COVENANT NOT TO COMPETE

If this Agreement expires or is terminated by FRANCHISOR for any reason, FRANCHISEE and its owners agree that for a period of two (2) years, commencing on the effective date of termination of this Agreement or the date on which FRANCHISEE ceases to conduct the business conducted pursuant to this Agreement, whichever is later, neither FRANCHISEE nor its owners (through a member of the immediate family of FRANCHISEE or otherwise) will have any interest as an owner (except of publicly-traded securities and interests in other GJC STORES pursuant to other franchise agreements heretofore or hereafter entered into) of, or assist or perform services as a director, officer, employee, consultant, representative, agent, or in any other capacity for, any business principally offering products substantially similar to the PRODUCTS then being offered by the majority of the GJC STORES and located within either: (i) the Standard Metropolitan Statistical Area wherein the STORE is located; or (ii) a ten (10) mile radius from any then existing GJC STORE, nor will they have any interest, as aforesaid, in any entity which franchises or grants to others the right to sell products similar to the PRODUCTS then being offered by the majority of the GJC STORES.

F.CONTINUING OBLIGATIONS

All obligations of FRANCHISOR and FRANCHISEE which expressly or by their nature survive the expiration or termination of the FRANCHISE shall continue in full force and

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effect subsequent to and notwithstanding the expiration or termination of this Agreement and until they are satisfied in full or by their nature expire.

15.ASSIGNMENT, TRANSFER AND ENCUMBRANCE

A.BY FRANCHISOR.

This Agreement, and any or all of FRANCHISOR’s rights and/or obligations under it, are fully transferable by FRANCHISOR in whole or in part, without the consent of FRANCHISEE and shall inure to the benefit of any person or entity to whom FRANCHISOR transfers it, or to any other legal successor to FRANCHISOR’s interests in this Agreement.

B.FRANCHISEE MAY NOT ASSIGN WITHOUT APPROVAL OF FRANCHISOR

The FRANCHISE is personal to FRANCHISEE (and its owners) and neither the FRANCHISE, this Agreement (except as hereinafter provided with respect to assignment to a partnership, limited liability company or corporation), the STORE or its assets (other than in the ordinary course of its business) nor any part or all of the ownership of FRANCHISEE may be voluntarily, involuntarily, directly or indirectly assigned, subdivided, subfranchised or otherwise transferred by FRANCHISEE or its owners (including, without limitation, in the event of the death of FRANCHISEE or an owner of FRANCHISEE, by will, declaration of or transfer in trust or the laws of intestate succession) without the prior written consent of FRANCHISOR, and any such assignment or transfer without such consent shall constitute a breach hereof and shall convey no rights to or interest in the FRANCHISE, this Agreement, the STORE or its assets or any part or all of the ownership interest in FRANCHISEE, and shall be null and void.  A transfer of ownership in the STORE may only be made in conjunction with a transfer of the FRANCHISE.  If the transfer is of the FRANCHISE, this Agreement or a controlling interest in FRANCHISEE, or is one of a series of transfers which in the aggregate constitute the transfer of the FRANCHISE, this Agreement or a controlling interest in FRANCHISEE, all of the following conditions must be met prior to, or concurrently with the effective date of the transfer: (1) the transferee must have sufficient business experience and financial resources; (2) the transferee must assume all existing obligations of the transferor hereunder and under the lease or sublease; (3) the transferee must attend and complete the training program to the satisfaction of FRANCHISOR; (4) if any part of the sale price of the transferred interest is financed, FRANCHISEE and its owners and the transferor shall have agreed that all obligations of the transferee to either of them shall be subordinate to the obligations of the transferee to pay all fees and other amounts due to FRANCHISOR and its affiliates, and otherwise comply with the Agreement or the franchise agreement executed by the transferee; (5) the STORE must be in compliance with or be brought up to the then-current design and equipment standards for GJC STORES; and (6) the transferee must execute and be bound by all provisions of FRANCHISOR’s then-current form of franchise agreement (and sublease if the STORE was subleased directly from FRANCHISOR or its affiliates), which may provide for a higher royalty fee and advertising contributions and other significant provisions may vary from what is provided hereunder and shall provide for a term equal to the remaining term of the FRANCHISE.  FRANCHISOR shall not charge such transferee an initial franchise fee for the

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FRANCHISE, but will charge the transferor an assignment fee of Five Thousand Dollars ($5,000), to cover FRANCHISOR’s costs in approving and effectuating the assignment.

C.ASSIGNMENT TO PARTNERSHIP, LIMITED LIABILITY COMPANY OR CORPORATION.

If FRANCHISEE is in full compliance with this Agreement, FRANCHISOR shall not unreasonably withhold its consent to a transfer of the FRANCHISE, this Agreement, the STORE and its assets to a partnership, limited liability company or corporation which conducts no business other than the STORE (and other GJC STORES under franchise agreements with FRANCHISOR), which is actively managed by FRANCHISEE and in which FRANCHISEE owns and controls not less than fifty-one percent (51%) of the equity and voting power of all issued and outstanding stock or membership or partnership interest; provided that the corporation, limited liability company or partnership execute FRANCHISOR’s standard assignment and assumption agreement, and the shareholders, members or partners, in form approved by FRANCHISOR, agree to be personally bound jointly and severally by all provisions of this Agreement and guarantee the performance thereof and all other agreements between FRANCHISEE and FRANCHISOR and its affiliates, to the same extent as if they had been parties to the original agreements, and all issued and outstanding stock certificates of such corporation shall bear a legend reflecting or referring to the restrictions of Paragraph B of this Section.

D.FRANCHISOR’S RIGHT OF FIRST REFUSAL.

If FRANCHISEE or its owners shall at any time determine to sell the FRANCHISE, this Agreement, the STORE or its assets or an ownership interest in FRANCHISEE, FRANCHISEE or its owners shall obtain a bona fide, executed written offer accompanied by a cashier’s check for ten percent (10%) of the purchase price to serve as forfeitable earnest money thereunder, from a responsible and fully disclosed purchaser and shall submit an exact copy of such offer to FRANCHISOR.  FRANCHISOR or its designee shall, for a period of thirty (30) days from the date of delivery of such offer, have the right, exercisable by written notice to FRANCHISEE or its owners, to purchase the interest for the price and on the terms and conditions contained in such offer; provided that FRANCHISOR or its designee may substitute cash for any form of payment proposed in such offer.  If FRANCHISOR or its designee does not exercise this right of first refusal, FRANCHISEE or its owners may complete the sale of the FRANCHISE, the STORE and its assets or such ownership interest to such purchaser (on the terms of the bona fide offer subject to FRANCHISOR’s approval of the purchaser as provided in Paragraph B of this Section); provided that if the sale to such purchaser is not completed within one hundred twenty (120) days after delivery of such offer to FRANCHISOR, FRANCHISOR or its designee shall again have the right of first refusal as herein provided.

E.DEATH OR PERMANENT DISABILITY OF FRANCHISEE

Upon the death or permanent disability of FRANCHISEE or if FRANCHISEE is a corporation, limited liability company or partnership, upon the death or permanent disability of the owner of the controlling interest in FRANCHISEE, the executor, administrator, conservator

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or other personal representative of such person shall transfer his interest to the heirs or beneficiaries of such person or to a third party approved by FRANCHISOR within a period of twelve (12) months.  Such transfers, including, without limitation, transfers by devise or inheritance or trust provisions, shall be subject to the same conditions for transfers contained in this Agreement.  Failure to so dispose of such interest within said period of time shall constitute a breach of this Agreement.  FRANCHISEE shall be deemed to have a “permanent disability” if the usual, active participation in the GJC STORE by FRANCHISEE as contemplated pursuant to this Agreement is for any reason curtailed for a continuous period of six (6) months.

If after the death or permanent disability of FRANCHISEE (or the Managing Owner), the STORE is not being managed by a competent and trained manager (as determined by FRANCHISOR in its sole discretion), FRANCHISOR is authorized to immediately appoint a manager to maintain the operation of the STORE for a period not to exceed twelve (12) months or until an approved assignee shall be able to assume the management and operation of the STORE.

F.RELEASE, EFFECT OF TRANSFER

In connection with any assignment, etc. of any interest of or by FRANCHISEE (including, but not limited to, an assignment to a corporation) FRANCHISEE and each of its owners and/or affiliates and the transferee (and each owner and/or affiliate of the transferee) if the transferee or such owner and/or affiliate is or has been a franchisee of, or had any other relationship with, FRANCHISOR or any of its affiliates must execute a general release in the form approved by FRANCHISOR.

FRANCHISOR’s consent to a transfer, or failure to exercise any right-of-first-refusal, will not constitute a waiver of any claims FRANCHISOR may have against FRANCHISEE (or its owners or affiliates), nor will it be deemed a waiver of FRANCHISOR’s right to demand exact compliance with any of the terms or conditions of this Agreement or any other agreement by any transferor or transferee.  Unless FRANCHISOR expressly in writing releases FRANCHISEE from its obligations under this Agreement (which FRANCHISOR has no obligation to do), FRANCHISEE will remain and be liable for all of the payment and other obligations under this Agreement (and any other agreement with us and/or any affiliate) and any Franchise Agreement and/or other agreement executed by any transferee.  Any transfer (including any transfer consented to by FRANCHISOR and even if the transferee executes a new franchise agreement) will not act as a termination of FRANCHISEE’s (or its owner’s) confidentiality, indemnity, covenant not to compete and other obligations under this Agreement which by their nature survive the term of this Agreement.  In the event of a transfer of an ownership interest in FRANCHISEE, the transferring owner must also comply with such obligations, including, without limitation, the covenant not to compete under Section 14.E.

16.DISPUTE RESOLUTION

A.MEDIATION

Except for controversies, disputes, or claims related to or based on FRANCHISEE’s use of the Names and Marks, FRANCHISEE’s obligation to make royalty or

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other payments to FRANCHISOR or FRANCHISEE’s post-termination obligations, the parties agree to submit any dispute arising between them to non-binding mediation before submitting dispute to arbitration.  The mediation is to be administered by the American Arbitration Association and conducted by one (1) mediator selected by the American Arbitration Association under the then-current commercial mediation rules of the American Arbitration Association, at a facility selected by the mediator that is located within fifty (50) miles of FRANCHISOR’s then-current principal place of business.  FRANCHISOR and FRANCHISEE agree that statements made by FRANCHISOR, FRANCHISEE or any other party in any such mediation proceeding will not be admissible in any arbitration or other legal proceeding.  Each party shall bear its own costs and expenses of conducting the mediation and share equally the costs of any third parties who are required to participate in the mediation.

If any dispute between the parties cannot be resolved through mediation within forty-five (45) days following the appointment of the mediator, the parties agree to submit such dispute to arbitration subject to the terms and conditions of Paragraph B below, provided that FRANCHISOR shall have the right at any time to seek injunctive relief as provided in Paragraph H of this Section.

B.ARBITRATION

ALL CONTROVERSIES, DISPUTES OR CLAIMS ARISING BETWEEN FRANCHISOR, ITS AFFILIATES, OFFICERS, DIRECTORS, AGENTS, EMPLOYEES AND ATTORNEYS (IN THEIR REPRESENTATIVE CAPACITY) AND FRANCHISEE (AND ITS OWNERS AND GUARANTORS, IF APPLICABLE) ARISING OUT OF OR RELATED TO IN WHOLE OR IN PART:  (1) THIS AGREEMENT OR ANY RELATED AGREEMENT; (2) THE RELATIONSHIP OF THE PARTIES HERETO; (3) THE VALIDITY OF THIS AGREEMENT OR ANY RELATED AGREEMENT, OR ANY PROVISION THEREOF; OR (4) ANY SPECIFICATION, STANDARD OR OPERATING PROCEDURE RELATING TO THE ESTABLISHMENT OR OPERATION OF THE STORE, SHALL BE SUBMITTED FOR BINDING ARBITRATION TO BE ADMINISTERED BY THE AMERICAN ARBITRATION ASSOCIATION; PROVIDED THAT FRANCHISOR AND ITS AFFILIATES SHALL HAVE THE RIGHT TO ENFORCE BY JUDICIAL PROCESS ANY RIGHTS IT MAY HAVE TO POSSESSION OF THE PREMISES OF THE STORE UNDER ANY SUBLEASE OR COLLATERAL ASSIGNMENT OF LEASE WITH FRANCHISEE.  SUCH ARBITRATION PROCEEDING SHALL BE CONDUCTED BY A SINGLE ARBITRATOR APPROVED BY THE AMERICAN ARBITRATION ASSOCIATION IN ACCORDANCE WITH ITS RULES AT A FACILITY DETERMINED BY THE ARBITRATOR THAT IS LOCATED WITHIN FIFTY (50) MILES OF FRANCHISOR’S PRINCIPAL PLACE OF BUSINESS AND SHALL BE CONDUCTED IN ACCORDANCE WITH THE THEN-CURRENT COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION.  JUDGMENT UPON THE AWARD MAY BE ENTERED IN ANY COURT OF COMPETENT JURISDICTION. THE PARTIES FURTHER AGREE THAT, IN CONNECTION WITH ANY SUCH ARBITRATION PROCEEDING, EACH SHALL SUBMIT OR FILE ANY CLAIM WHICH WOULD CONSTITUTE A COMPULSORY COUNTERCLAIM (AS DEFINED BY RULE 13 OF THE FEDERAL RULES OF CIVIL PROCEDURE) WITHIN THE SAME PROCEEDING AS THE CLAIM TO WHICH IT RELATES.  ANY SUCH CLAIM WHICH IS NOT SUBMITTED OR FILED IN SUCH PROCEEDING SHALL BE FOREVER BARRED.

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THIS PROVISION SHALL CONTINUE IN FULL FORCE AND EFFECT SUBSEQUENT TO AND NOTWITHSTANDING EXPIRATION OR TERMINATION OF THIS AGREEMENT.  FRANCHISEE AND FRANCHISOR AGREE THAT ARBITRATION SHALL BE CONDUCTED ON AN INDIVIDUAL, NOT A CLASS-WIDE, BASIS AND THAT FRANCHISOR (AND/OR ITS AFFILIATE AND THEIR RESPECTIVE SHAREHOLDER, OFFICER, DIRECTORS, AGENTS, AND/OR EMPLOYEES) AND FRANCHISEE (AND/OR ITS OWNERS, GUARANTORS, AFFILIATES, AND/OR EMPLOYEES) SHALL BE THE ONLY PARTIES TO ANY ARBITRATION PROCEEDING DESCRIBED IN THIS SECTION AND THAT NO SUCH ARBITRATION PROCEEDING MAY BE CONSOLIDATED WITH ANY OTHER ARBITRATION PROCEEDING, NOR SHALL ANY OTHER PERSON BE JOINED AS A PARTY TO SUCH ARBITRATION PROCEEDING.

C.WAIVER OF PUNITIVE DAMAGES AND JURY TRIAL.

Except as provided under Section 23, FRANCHISOR and FRANCHISEE hereby waive to the fullest extent permitted by law, any right to or claim for any punitive or exemplary damages against the other and agree that in the event of a dispute between them (including arbitration proceedings) each shall be limited to the recovery of any actual damages sustained by it.  FRANCHISOR and the FRANCHISEE irrevocably waive trial by jury in any action, proceeding or counterclaim, whether at law or in equity, brought by either of them.

D.LIMITATION OF CLAIMS.

Except claims for royalty fees and advertising contributions and other amounts owed to FRANCHISOR, any and all claims arising out of or relating to this Agreement or the relationship of FRANCHISEE and FRANCHISOR in connection with FRANCHISEE’s operation of the STORE shall be barred unless an action or proceeding is commenced within one (1) year from the date FRANCHISEE or FRANCHISOR knew or should have known of the facts giving rise to such claims.

E.CONSENT TO JURISDICTION.

FRANCHISEE agrees that any action arising out of or relating to this Agreement otherwise as a result of the relationship between FRANCHISOR and FRANCHISEE (which is not required to be arbitrated hereunder or as to which arbitration is waived) must be commenced in the state or federal court of general jurisdiction closest to FRANCHISOR’s then-current principal place of business, and FRANCHISEE and each of its owners irrevocably submits to the jurisdiction of such courts and waives any objection to jurisdiction or venue of such court.

F.SURVIVAL AND CONSTRUCTION

Each provision of this Section 16, together with the provisions of Section 23, will be deemed to be self-executing and continue in full force and effect subsequent to and notwithstanding the expiration, termination, setting aside, cancellation, rescission, unenforceability or otherwise of this Agreement (or any part of it) for any reason, and will survive and will govern any claim for rescission or otherwise.

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Each party reserves the right to challenge any law, rule or judicial or other construction which would have the effect of varying or rendering ineffective any provision of this Agreement. The benefits and protections of this Agreement which apply to FRANCHISOR (including, but not limited to, all provisions relating to indemnification and/or releases) shall also apply to any past, current and/or future affiliates as if they were expressly named beneficiaries of such provisions.

G.COSTS AND ATTORNEYS’ FEES 

If a claim for amounts owed by FRANCHISEE to FRANCHISOR or its affiliate is asserted in any legal proceeding before a court of competent jurisdiction or an arbitrator, or if FRANCHISOR or FRANCHISEE is required to enforce this Agreement in a judicial or arbitration proceeding, the party prevailing in such proceeding shall be entitled to recover from the other its costs and expenses, including reasonable accounting, paralegal, legal, expert witness, attorneys’ fees and arbitrator fees, whether incurred prior to, in preparation for or in contemplation of the filing of any such proceeding.  If FRANCHISOR engages legal counsel in connection with any failure by FRANCHISEE to pay when due amounts due the FRANCHISOR or to submit when due any reports, information or supporting records, or in connection with any failure to otherwise comply with this Agreement, the FRANCHISEE shall reimburse the FRANCHISOR for any of the above listed costs and expenses incurred by it, whether or not legal proceedings are initiated.

H.INJUNCTIVE RELIEF

Nothing in this Agreement bars FRANCHISOR’s right to obtain specific performance of the provisions of this Agreement and injunctive relief against threatened conduct that will cause FRANCHISOR, the Names and Marks or the GLORIA JEAN’S System loss or damage, under customary equity rules, including applicable rules for obtaining restraining orders and preliminary injunctions (subject to FRANCHISOR’s obligation to arbitrate the underlying claim if required by Section 16.B).  FRANCHISEE  agrees that FRANCHISOR may obtain such injunctive relief in addition to such further or other relief as may be available at law or in equity.  FRANCHISEE agrees that FRANCHISOR will not be required to post a bond to obtain injunctive relief and that FRANCHISEE’s only remedy if an injunction is entered against FRANCHISEE will be the dissolution of that injunction, if warranted, upon due hearing (all claims for damages by injunction being expressly waived hereby).

I.BINDING EFFECT, MODIFICATION AND REPRESENTATIONS

This Agreement is binding on the parties hereto and their respective executors, administrators, heirs, assigns, and successors in interest, and will not be modified or supplemented except by means of a written agreement signed by both FRANCHISEE and FRANCHISOR’s President or one of FRANCHISOR’s Vice Presidents, provided that changes to the OPERATING MANUAL may be made by FRANCHISOR at any time and will be fully binding on FRANCHISEE notwithstanding any provisions of this Section or otherwise.  No other officer, field representative, salesperson or other person has the right or authority to sign on behalf of FRANCHISOR, to make oral or written modifications to this Agreement, or to make

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any representations or agreements on behalf of FRANCHISOR, and any such modifications, representations and/or agreements shall not be binding on FRANCHISOR.

17.          CONSTRUCTION, ETC.

Except as expressly provided otherwise, nothing in this Agreement is intended, nor will be deemed, to confer any rights or remedies on any person or legal entity not a party hereto.  The headings of the several Sections hereof are for convenience only and do not define, limit, or construe the contents of such Sections.  The term “attorneys’ fees” will include, without limitation, legal fees, whether incurred prior to, in preparation for, or in contemplation of, the filing of any written demand or claim, action, hearing or proceeding to enforce the obligations of this Agreement.  References to a “controlling interest” in a business entity will mean fifty percent (50%) or more of the voting control of such entity if such entity is a corporation, and any equity interest if such entity is a partnership or limited liability company.  The term “affiliate” means any past, present or future person, company or other entity which controls, is controlled by or is under common control with another person, company or other entity.  For purposes of this Agreement, “affiliates” of FRANCHISOR includes, without limitation, Gloria Jean’s Gourmet Coffee Corp., Diedrich Coffee, Inc., Gloria Jean’s Inc., Coffee People Inc., Second Cup USA Holdings Ltd. and The Second Cup Ltd.  The singular usage includes the plural and the masculine and neuter usages include the other and the feminine.  If two or more persons are at any time FRANCHISEE hereunder, whether or not as partners or joint venturers, their obligations and liabilities to FRANCHISOR will be joint and several.  This Agreement will be executed in multiple copies, each of which will be deemed an original.  Each of the provisions of this Agreement (including Sections 16 and 23) apply to any claim brought (or which could be brought) by any owner and/or affiliate of FRANCHISEE’s or by or on FRANCHISEE’s behalf.  If any limitation on FRANCHISEE’s rights (including, but not limited to, any limitation on damages, waiver of jury trial, shortened period in which to make any claim or otherwise) is held unenforceable with respect to FRANCHISEE, then such limitation will not apply to FRANCHISOR.

18.NON-RETENTION OF FUNDS

FRANCHISEE does not have the right to offset or withhold payments owed to FRANCHISOR (and/or any affiliate) for amounts purportedly due FRANCHISEE (or any affiliate of FRANCHISEE’s) from FRANCHISOR and/or any of its affiliates as a result of any dispute of any nature or otherwise, but will pay such amounts to FRANCHISOR (or FRANCHISOR’s affiliate) and only thereafter seek reimbursement in accordance with the provisions of Section 16.  If FRANCHISEE believes that FRANCHISOR or any other person/entity has violated any legal duty to FRANCHISEE, FRANCHISEE will, notwithstanding such dispute, pay as designated all sums specified under this Agreement or any other agreement, whether to be paid to FRANCHISOR or any affiliate (including royalties, any unpaid portion of the initial franchise fee and any marketing contributions and/or amounts payable to franchisee councils and/or cooperatives) and will not withhold any payments until and unless such dispute has been finally determined in FRANCHISEE’s favor.

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19.SEVERABILITY; SUBSTITUTION OF VALID PROVISIONS

Except as otherwise stated in this Agreement, each provision of this Agreement, and any portion of any provision, is severable (including, but not limited to, any provision affecting any rights to recovery for breach of any legal obligation, including but not limited to waiver of statutory benefits such as rights to jury trial, exemplary or punitive damages, recovery of attorney’s fees and/or shortening of statutes of limitations),and the remainder of this Agreement will continue in full force and effect.  To the extent that any provision restricting FRANCHISEE’s competitive activities is deemed unenforceable, FRANCHISEE and FRANCHISOR agree that such provisions will be enforced to the fullest extent permissible under governing law.  FRANCHISOR may modify any invalid or unenforceable provision to the extent required to be valid and enforceable and FRANCHISEE will be bound by the modified provisions.

20.WAIVERS

FRANCHISOR’s waiver of any breach(es) under this or any other agreement (whether by failure to exercise a power or right available to FRANCHISOR, failure to insist on strict compliance with the terms, obligations or conditions of any agreement, development of a custom or practice between FRANCHISEE and FRANCHISOR (or others) which is at variance with the terms of any agreement, acceptance of partial or other payments or otherwise), whether with respect to FRANCHISEE or others, will not affect FRANCHISOR’s rights with regard to any breach by FRANCHISEE or anyone else or constitute a waiver of FRANCHISOR’s right to demand exact compliance by FRANCHISEE with the terms of this Agreement or otherwise.  Subsequent or other acceptance by FRANCHISOR of any payments or performance by FRANCHISEE will not be deemed a waiver of any preceding or other breach by FRANCHISEE of this Agreement or otherwise.  The rights and remedies provided in this Agreement are cumulative and FRANCHISOR will not be prohibited from exercising any rights or remedies provided under this Agreement or permitted under law or equity.

21.CHOICE OF LAWS

Except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. §§ 1051 et seq.) and except that all issues relating to arbitrability or the enforcement or interpretation of the agreement to arbitrate set forth in Paragraph B of this Section shall be governed by the Federal Arbitration Act (9 U.S.C. §§ 1 et seq.) and the federal common law relating to arbitration, this Agreement, the FRANCHISE and all other matters concerning FRANCHISEE and FRANCHISOR (and its affiliates) shall be governed by the internal laws of the state where the STORE is located (without reference to the choice of law and conflict of law rules of that state), except that the provisions of any law of that state regarding franchise disclosure, registration or relationship and the regulations thereunder shall not apply unless its jurisdictional requirements are met independently without reference to this Paragraph.

22.ENTIRE AGREEMENT

This Agreement, including the introduction and exhibits to it, together with the OPERATING MANUAL, constitutes the entire agreement between FRANCHISOR and

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FRANCHISEE and there are no other oral or written understandings or agreements between FRANCHISOR and FRANCHISEE concerning the subject matter of this Agreement.  Except as expressly provided otherwise in this Agreement, this Agreement may be modified only by written agreement signed by both FRANCHISOR and FRANCHISEE.

23.INDEPENDENT CONTRACTORS AND INDEMNIFICATION

FRANCHISOR and FRANCHISEE are independent contractors.  FRANCHISOR and FRANCHISEE agree that there does not exist any fiduciary relationship between them.  FRANCHISEE shall conspicuously identify FRANCHISEE at the premises of the STORE and in all dealings with suppliers, as the owner of the STORE.  Neither FRANCHISOR nor FRANCHISEE shall make any agreements or representations in the name of or on behalf of the other or that their relationship is other than FRANCHISOR and FRANCHISEE and neither FRANCHISOR nor FRANCHISEE shall be obligated by or have any liability under any agreements or representations made by the other that are not expressly authorized hereunder, nor shall FRANCHISOR be obligated for any damages to any person or property directly or indirectly arising out of the operation of the STORE or FRANCHISEE’s business conducted pursuant to the FRANCHISE, whether caused by FRANCHISEE’s negligent or willful action or failure to act, FRANCHISOR shall have no liability for any sales, use, excise, income, property or other taxes levied upon the STORE or its assets or in connection with the sales made or business conducted by the STORE.  FRANCHISEE agrees to indemnify FRANCHISOR, its affiliates, and their respective shareholders, directors, officers, employees, agents, representatives, successors and assigns (the “Indemnified Parties”) from and against, and to reimburse any of the Indemnified Parties for, any and all claims, obligations, damages, costs and taxes arising directly or indirectly out of the STORE’s operations, the business FRANCHISEE conducts under this Agreement, or FRANCHISEE’s breach of this Agreement.  This indemnification shall be fully applicable, and shall not be voided or otherwise affected by any allegation or claims that FRANCHISOR has been negligent in any degree.  For the purposes of this indemnification, “claims” includes all obligations, damages (actual, consequential, punitive or otherwise) and costs that any Indemnified Party reasonably incurs in defending any claim against it, including, without limitation, reasonable accountants’, arbitrators’, attorneys’ and expert witness fees, costs of investigation and proof of facts, court costs, and other expenses of litigation, arbitration or alternative dispute resolution, including travel and living expenses, regardless of whether litigation, arbitration or alternative dispute resolution is commenced.  FRANCHISOR shall have the right to defend any such claim against it.  The indemnities and assumptions of liabilities and obligations herein shall continue in full force and effect subsequent to and notwithstanding the expiration or termination of this Agreement.

24.NOTICES

                All written notices permitted or required to be delivered by the provisions of this Agreement or of the OPERATING MANUAL, shall be deemed so delivered on the date when hand delivered; one (1) day after sending by telegraph or after the date of deposit, if deposited with a commercial delivery service which guarantees next day delivery; or three (3) days after placed in the mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed to the party to be notified at its most-current principal business address of which the notifying party has been notified.

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25.EFFECTIVE DATE OF AGREEMENT

The “Term” of this Agreement shall take effect upon the date of FRANCHISOR’s execution of this Agreement.

26.ACKNOWLEDGMENTS

FRANCHISEE acknowledges that it has conducted an independent investiga­tion of the business authorized hereunder and recognizes that the business venture con­templated by this Agreement involves business risks and that its success will be largely dependent upon the ability of FRANCHISEE as an independent business-person.  FRANCHISOR expressly disclaims the making of, and FRANCHISEE acknowledges that it has not received, any warranty or guarantee, express or implied, as to the potential volume, profits, or success of the business venture contemplated by this Agreement.  FRANCHISEE acknowledges that it has read this Agree­ment and the FRANCHISOR’s Uniform Franchise Offering Circular and that it has no knowledge of any representation by the FRANCHISOR, or its officers, directors, sharehold­ers, employees or agents that are contrary to the statements made in the FRANCHISOR’s Uniform Franchise Offering Circular or to the terms herein.

FRANCHISEE acknowledges that it has received, read, and understood this Agreement and FRANCHISOR’s Uniform Franchise Offering Circular; that FRANCHISOR has fully and adequately explained the provisions of each to FRANCHISEE’s satisfaction; and that FRANCHISOR has accorded FRANCHISEE ample time and opportunity to consult with advisors of its own choosing about the potential benefits and risks of entering into this Agreement.

FRANCHISEE acknowledges that it received a copy of this Agreement, and any agreements relating thereto, at least five (5) business days prior to the date on which this Agreement has been executed.  FRANCHISEE further acknowledges that FRANCHISEE has received the disclosure document required by the Trade Regulation Rule of the Federal Trade Commission entitled Disclosure Requirement and Prohibitions Concern­ing Franchising and Business Opportunity Ventures and applicable state laws, if any, at least ten (10) business days prior to the date on which this Agreement has been executed.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date stated below.

FRANCHISOR:		FRANCHISEE(S) (INDIVIDUAL):
GLORIA JEAN’S GOURMET COFFEES FRANCHISING CORP.
		Name
By:		Signature
	Signature
		Name
Name		Signature
Title
Date:
		FRANCHISEE (Corp., LLC or Partnership)
		Name
		a/an                                       corporation a/an                                        partnership a/an                               limited liability company
		By:
		Signature
		Name and Title

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EXHIBIT A

GUARANTY AND ASSUMPTION OF OBLIGATIONS

In consideration of, and as an inducement to, the execution of the above Franchise Agreement and any Addenda thereto (individually or collectively the “Agreement”) by GLORIA JEAN’S GOURMET COFFEES FRANCHISING CORP. (“FRANCHISOR”), each of the undersigned (“GUARANTORS”) hereby personally and unconditionally (1) guarantees to FRANCHISOR and its successors and assigns, for the term of the Agreement and thereafter as provided in the Agreement, that                                         (“FRANCHISEE”) shall punctually pay and perform each and every undertaking, agreement and covenant set forth in the Agreement and (2) agrees to be personally bound by, and personally liable for the breach of, each and every provision in the Agreement, both monetary obligations and obligations to take or refrain from taking specific actions or to engage or refrain from engaging in specific activities.  Each of the undersigned waives:

(1)acceptance and notice of acceptance by FRANCHISOR of the foregoing undertakings;

(2)notice of demand for payment of any indebtedness or nonperformance of any obligations hereby guaranteed;

(3)protest and notice of default to any party with respect to the indebtedness or nonperformance of any obligations hereby guaranteed; and

(4)any right he may have to require that an action be brought against FRANCHISEE or any other person as a condition of liability.

Each of the undersigned consents and agrees that:

(a)his direct and immediate liability under this guaranty shall be joint and several;

(b)he shall render any payment or performance required under the Agreement upon demand if FRANCHISEE fails or refuses punctually to do so;

(c)such liability shall not be contingent upon or conditioned upon pursuit by FRANCHISOR of any remedies against FRANCHISEE or any other person; and

(d)such liability shall not be diminished, relieved or otherwise affected by any extension of time, credit or the indulgence which FRANCHISOR may from time to time grant to FRANCHISEE or to any other person, including, without limitation, the acceptance of any partial payment or performance, or the compromise or release of any claims, none of which shall in any way modify or amend this guaranty, which shall be continuing and irrevocable during the term of the Agreement.

If FRANCHISOR is required to enforce this Guaranty and Assumption of Obligations in any judicial or arbitration proceeding or appeal thereof, the GUARANTORS shall reimburse

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FRANCHISOR for its costs and expenses, including but not limited to, reasonable accountants’, attorneys’, attorney assistants’, arbitrators’ and expert witness fees, costs of investigation and proof of facts, court costs, other litigation expenses and travel and living expenses, whether incurred prior to, in preparation for or in contemplation of the filing of any written demand, claim, action, hearing or proceeding to enforce this Guaranty and Assumption of Obligations.

Each of the undersigned agrees to be personally bound by the arbitration obligations under Section 16 of the Agreement, including, without limitation, the obligation to submit to binding arbitration the claims described in Section 16 of the Agreement in accordance with its terms.

IN WITNESS WHEREOF, each of the undersigned has hereunto affixed his signature on the same day and year as the Agreement was executed.

WITNESS	GUARANTORS
	Name
	Signature
	Name
	Signature

State of                                   }

County of                               }ss.

On                               ,  before me,                                                                                                                                         ,

Date Name and Title of Officer (e.g., “Jane Doe, Notary Public”)

personally appeared                                                                                                                                                                 ,
	Name(s) of Signer(s)

•personally known to me

•proved to me on the basis of satisfactory evidence

to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that his/her/their authorized signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

	Witness my hand and official seal.
Place Notary Seal Above	Signature of Notary Public

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EXHIBIT B

CONFIDENTIALITY AND NON-COMPETITION AGREEMENT

This “Agreement” is made and entered into as of this                day of                                , 20     , by and among Franchisee, Covenantor and GLORIA JEAN’S GOURMET COFFEES FRANCHISING CORP., an Illinois corporation (“Franchisor”).

“Franchisee”:

“Covenantor”:                                                                , being [an owner], [an officer], [a director] [general partner], [managing member] or [manager] of Franchisee.

Address:

1.PREAMBLES

Franchisor has executed or intends to execute a “Franchise Agreement” with Franchisee under which Franchisor grants to Franchisee certain rights with regard to a “Gloria Jeans Coffees Store” (“GJC Store”), a “Gloria Jeans Coffees Kiosk” (“GJC Kiosk”) or a “Gloria Jeans Coffees Cart” (“GJC Cart”).  Unless otherwise specified, all references herein to GJC Stores include GJC Kiosks and GJC Carts.  Before allowing Covenantor to have access to the Confidential Information (as defined below) and as a material term of the Franchise Agreement necessary to protect Franchisor’s confidential know-how and distinctive systems, designs, decor, trade dress, specifications, standards and procedures authorized or required by Franchisor from time to time for use in the operation of Franchisee’s GJC Store, GJC Kiosk or GJC Cart (the “Store”) and Franchisor’s proprietary rights in and Franchisee’s right to use the Confidential Information, Franchisor and Franchisee require that Covenantor enter into this Agreement.

To induce Franchisor to enter into the Franchise Agreement and/or to avoid a material breach thereof Franchisor, Franchisee and Covenantor desire and consider it to be in Covenantor’s best interests that Covenantor enter into this Agreement.  Due to the nature of Franchisor’s and Franchisee’s business any use or disclosure of the Confidential Information other than in accordance with this Agreement will cause Franchisor and Franchisee substantial harm.

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2.PROTECTION OF CONFIDENTIAL INFORMATION

Covenantor acknowledges and agrees that Franchisor possesses certain confidential and proprietary information in which Franchisor possesses valuable industrial and intellectual property rights consisting of the methods, techniques, formats, specifications, procedures, information, systems, methods of business management, sales and promotion techniques and knowledge of and experience in the operation and franchising of GJC STORES (the “Confidential Information”).  Franchisor and Franchisee will disclose such parts of the Confidential Information as are required for Covenantor to perform its obligations to Franchisee in furnishing Covenantor the training program, the Operating Manual (as defined in the Franchise Agreement) and in guidance furnished to Covenantor for his/her performance of services to Franchisee.

Covenantor agrees to use the Confidential Informa­tion only to the extent reasonably necessary to perform Covenantor’s duties for Franchisee taking into consideration the confidential nature of the Confidential Information.  Covenantor may disclose the Confidential Information only as agent for Franchisee.  Covenantor acknowledges and agrees that the unauthorized use or duplication of the Confidential Information, including, without limitation, in connection with any other business would be detrimental to Franchisor and Franchisee and would constitute a breach of Covenantor’s obligations of confidentiality and an unfair method of competition with Franchisor and other GJC Stores owned by Franchisor, its affiliates or franchisees.

Covenantor acknowledges and agrees that the Confidential Information is confidential to and a valuable asset of Franchisor.  The Confidential Information will be disclosed to Covenantor solely on the condition that Covenantor agrees to the terms and conditions of this Agreement.  Covenantor therefore agrees that during the term of the Franchise Agreement and thereafter, he/she:  (a) will not use the Confidential Information in any other business or capacity; (b) will maintain the absolute confidentiality of the Confidential Information; (c) will not make unauthorized copies of any portion of the Confidential Information disclosed or recorded in written or other tangible form; and (d) will adopt and implement all reasonable procedures prescribed from time to time by Franchisor and Franchisee to prevent unauthorized use or disclosure of or access to the Confidential Information.

Notwithstanding anything to the contrary contained in this Agreement the restrictions on Covenantor’s disclosure and use of the Confidential Information shall not apply to the following:  (a) information, methods, procedures, techniques and knowledge which are or become generally known or easily accessible other than by Covenantor’s breach of an obligation of confidentiality; and (b) the disclosure of the Confidential Information pursuant to applicable law or in judicial or administrative proceedings to the extent that Covenantor is legally compelled or required by a regulatory body to disclose such information, provided Covenantor has notified Franchisor and Franchisee prior to disclosure and shall have used his/her best efforts to obtain, and shall have afforded Franchisor and Franchisee the opportunity to obtain, an appropriate assurance reasonably

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satisfactory to Franchisor of confidential treatment for the information required to be so disclosed.

3.IN-TERM RESTRICTIVE COVENANT.

Covenantor acknowledges and agrees that Franchisor and Franchisee would be unable to protect the Confidential Information against unauthorized use or disclosure and Franchisor would be unable to achieve a free exchange of ideas and information among GJC Stores if persons authorized to use the Confidential Information were permitted to engage in, have ownership interests in or perform services for Competitive Businesses (as defined below).  Covenantor therefore agrees that for as long as Covenantor is an owner, director, officer, general partner, managing member or manager of Franchisee or is otherwise employed or engaged by Franchisee, Covenantor shall not  (through a member of the immediate family or otherwise) have any interest as an owner of (except of publicly-traded securities or interests in other GJC Stores pursuant to other franchise agreements with Franchisor or its affiliates), or assist or perform services as a director, officer, employee, consultant, representative, agent or in any other capacity, for, any business principally offering products substantially similar to the products then being offered by the majority of the GJC Stores (a “Competitive Business”), nor will Covenantor have any interest, as aforesaid, in, or serve in any capacity, any entity which franchises or otherwise grants to others the right to operate a Competitive Business.

4.RESTRICTIVE COVENANT UPON TERMINATION OR EXPIRATION OF THE FRANCHISE AGREEMENT OR COVENANTOR’S ASSOCIATION WITH FRANCHISEE.

Upon the first to occur of:  (a) termination or expiration without renewal of the Franchise Agreement; or (b) the date as of which Covenantor ceases to be an owner, director, officer, general partner, managing member or manager of, or otherwise employed or engaged by, Franchisee (both referred to herein as a “Termination Event”), Covenantor agrees that, for a period of two (2) years commencing on the effective date of a Termination Event, Covenantor shall not  (through a member of the immediate family or otherwise) have any interest as an owner of (except of publicly-traded securities or interests in other GJC Stores pursuant to other franchise agreements with Franchisor or its affiliates), or assist or perform services as a director, officer, employee, consultant, representative, agent or in any other capacity for, any Competitive Business located within either (i) the Standard Metropolitan Statistical Area wherein the Store is located or (ii) a ten (10) mile radius from any then existing GJC Store, nor will Covenantor have any interest, as aforesaid, in, or serve in any capacity, any entity which franchises or otherwise grants to others the right to operate a Competitive Business

Covenantor recognizes the broad scope of the restrictive covenants set forth in Sections 3 and 4 of this Agreement, but agrees that they are reasonable.  If any court or tribunal of competent jurisdiction shall refuse to enforce any such covenant because it is more extensive whether as to time limit, geographic area, scope of business or otherwise than is deemed reasonable, it is expressly understood and agreed that such covenants

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shall not be void, but that the restrictions contained therein shall be deemed reduced to the extent necessary to permit the enforcement of such covenants.

Covenantor expressly acknowledges and agrees that Covenantor possesses skills and abilities of a general nature and has opportunities for exploiting such skills.  Consequently enforcement of the covenants made in Sections 3 and 4 of this Agreement will not deprive Covenantor of the ability to earn a living.

5.SURRENDER OF DOCUMENTS.

Covenantor agrees that, as of the effective date of a Termination Event, Covenantor shall immediately cease to use the Confidential Information disclosed to or otherwise learned or acquired by Covenantor and return to Franchisee or to Franchisor if directed by Franchisor all copies of the Confidential Information loaned or made available to Covenantor.

6.COSTS AND ATTORNEYS’ FEES.

In the event that Franchisor or Franchisee is required to enforce this Agreement in an action against Covenantor, Covenantor shall reimburse Franchisor and/or Franchisee if it/they prevail (whether or not awarded a money judgment) for its/their reasonable attorneys’ fees, whether such fees are incurred before, during or after any trial or administrative proceeding or on appeal.

7.WAIVER.

Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or remedy hereunder at any one or more times be deemed a waiver or relinquishment of such right or remedy at any other time or times.

8.SEVERABILITY.

Each section, paragraph, term and provision of this Agreement and any portion thereof shall be considered severable and if for any reason any such provision is held to be invalid or contrary to or in conflict with any applicable present or future law or regulation in a final, unappealable ruling issued by any court, agency or tribunal with competent jurisdiction in a proceeding to which Franchisor is a party, that ruling shall not impair the operation of or have any other effect upon such other portions of this Agreement as may remain otherwise intelligible. Such other portions shall continue to be given full force and effect and bind the parties hereto.  Any portion held to be invalid shall be deemed not to be a part of this Agreement from the date the time for appeal expires if Covenantor is a party thereto or upon Covenantor’s receipt of a notice from Franchisor that it will not enforce the section, paragraph, term or provision in question.

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9.RIGHTS OF PARTIES ARE CUMULATIVE.

The rights of the parties hereunder are cumulative and no exercise or enforcement by a party hereto of any right or remedy granted hereunder shall preclude the exercise or enforcement by them of any other right or remedy hereunder or which they are entitled by law to enforce.

10.BENEFIT.

This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns.  In the event Franchisor does not execute this Agreement (regardless of the reason) Franchisor shall be deemed a third party beneficiary of  this Agreement and shall have the right to enforce this Agreement directly.

11.EFFECTIVENESS.

This Agreement shall be enforceable and effective when signed by Covenantor regardless of whether and when Franchisor or Franchisee signs this Agreement.

12.GOVERNING LAW/CONSENT TO JURISDICTION.

This Agreement and the relationship between the parties hereto shall be construed and governed in accordance with the internal laws of the state in which the Store is located without regard to its conflict of laws principles.  Covenantor and Franchisee agree that they shall institute and that Franchisor may institute any action against any of the parties hereto in any state or federal court of general jurisdiction in the state court of general jurisdiction or the Federal District Court nearest to Franchisor’s principal place of business at the time such action is filed.  Covenantor and Franchisee irrevocably submit to the jurisdiction of such courts and waive any objections to either the jurisdiction or venue of such court.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement in multiple counterparts as of the day and year first above written.

Covenantor:		Franchisee:
Print name of Covenantor		Print name of Franchisee
	By:
Signature of Covenantor	Print Name:
		Title:
		Franchisor:
		GLORIA JEAN’S GOURMET COFFEES FRANCHISING CORP.
		an Illinois corporation
		By:
		Print Name:
		Title:

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EXHIBIT C

CONFIDENTIALITY AGREEMENT

This “Agreement” is made and entered into as of this          day of                            , 20     , by and among Franchisee, Covenantor and GLORIA JEAN’S GOURMET COFFEES FRANCHISING CORP., an Illinois corporation (“Franchisor”).

“Franchisee”:

“Covenantor”:                                                                         , employed or engaged by Franchisee as                                            .

Address:

1.PREAMBLES

Franchisor has executed or intends to execute a “Franchise Agreement” with Franchisee under which Franchisor grants to Franchisee certain rights with regard to “Gloria Jean’s Coffees Stores” (“GJC Stores”), “Gloria Jean’s Coffees Kiosks” (“GJC Kiosks”) or “Gloria Jean’s Coffees Carts” (“GJC Carts”).  Unless otherwise specified, all references herein to GJC Stores include GJC Kiosks and GJC Carts.  Before allowing Covenantor to have access to the Confidential Information (as defined below) and as a material term of the Franchise Agreement necessary to protect Franchisor’s confidential know-how and distinctive systems, designs, decor, trade dress, specifications, standards and procedures authorized or required by Franchisor from time to time for use in the operation of Franchisee’s GJC Store, GJC Kiosk or GJC Cart (the “Store”) and Franchisor’s proprietary rights in and Franchisee’s right to use the Confidential Information, Franchisor and Franchisee require that Covenantor enter into this Agreement.

To induce Franchisor to enter into the Franchise Agreement and/or to avoid a material breach thereof Franchisor, Franchisee and Covenantor desire and consider it to be in Covenantor’s best interests that Covenantor enter into this Agreement.  Due to the nature of Franchisor’s and Franchisee’s business any use or disclosure of the Confidential Information other than in accordance with this Agreement will cause Franchisor and Franchisee substantial harm.

2.PROTECTION OF CONFIDENTIAL INFORMATION.

Covenantor acknowledges and agrees that Franchisor possesses certain confidential and proprietary information in which Franchisor possesses valuable industrial and intellectual property rights consisting of the methods, techniques, formats, specifications, procedures,

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information, systems, methods of business management, sales and promotion techniques and knowledge of and experience in the operation and franchising of GJC STORES (the “Confidential Information”).  Franchisor and Franchisee will disclose such parts of the Confidential Information as are required for Covenantor to perform his/her obligations to Franchisee in furnishing Covenantor the training program, the Operating Manual (as defined in the Franchise Agreement) and in guidance furnished to Covenantor for his/her performance of services to Franchisee.

Covenantor agrees to use the Confidential Informa­tion only to the extent reasonably necessary to perform Covenantor’s duties for Franchisee taking into consideration the confidential nature of the Confidential Information.  Covenantor may disclose the Confidential Information only as agent for Franchisee. Covenantor acknowledges and agrees that the unauthorized use or duplication of the Confidential Information, including, without limitation, in connection with any other business would be detrimental to Franchisor and Franchisee and would constitute a breach of Covenantor’s obligations of confidentiality and an unfair method of competition with Franchisor and other GJC Stores owned by Franchisor, its affiliates or franchisees.

Covenantor acknowledges and agrees that the Confidential Information is confidential to and a valuable asset of Franchisor.  The Confidential Information will be disclosed to Covenantor solely on the condition that Covenantor agrees to the terms and conditions of this Agreement.  Covenantor therefore agrees that during the term of the Franchise Agreement and thereafter, he/she:  (a) will not use the Confidential Information in any other business or capacity; (b) will maintain the absolute confidentiality of the Confidential Information; (c) will not make unauthorized copies of any portion of the Confidential Information disclosed or recorded in written or other tangible form; and (d) will adopt and implement all reasonable procedures prescribed from time to time by Franchisor and Franchisee to prevent unauthorized use or disclosure of or access to the Confidential Information.

Notwithstanding anything to the contrary contained in this Agreement the restrictions on Covenantor’s disclosure and use of the Confidential Information shall not apply to the following:  (a) information, methods, procedures, techniques and knowledge which are or become generally known or easily accessible other than by Covenantor’s breach of an obligation of confidentiality; and (b) the disclosure of the Confidential Information pursuant to applicable law or in judicial or administrative proceedings to the extent that Covenantor is legally compelled or required by a regulatory body to disclose such information, provided Covenantor has notified Franchisor and Franchisee prior to disclosure and shall have used his/her best efforts to obtain, and shall have afforded Franchisor and Franchisee the opportunity to obtain, an appropriate assurance reasonably satisfactory to Franchisor of confidential treatment for the information required to be so disclosed.

4.SURRENDER OF DOCUMENTS.

Covenantor agrees that as of the date on which Covenantor ceases to perform services for Franchisee in connection with the Store, Covenantor shall immediately cease to use the Confidential Information disclosed to or otherwise learned or acquired by Covenantor and return

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to Franchisee or to Franchisor if directed by Franchisor all copies of the Confidential Information loaned or made available to Covenantor.

5.COSTS AND ATTORNEYS’ FEES.

In the event that Franchisor or Franchisee is required to enforce this Agreement in an action against Covenantor, Covenantor shall reimburse Franchisor and/or Franchisee if it/they prevail (whether or not awarded a money judgment) for its/their reasonable attorneys’ fees, whether such fees are incurred before, during or after any trial or administrative proceeding or on appeal.

6.WAIVER.

Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or remedy hereunder at any one or more times be deemed a waiver or relinquishment of such right or remedy at any other time or times.

7.SEVERABILITY.

Each section, paragraph, term and provision of this Agreement and any portion thereof shall be considered severable and if for any reason any such provision is held to be invalid or contrary to or in conflict with any applicable present or future law or regulation in a final, unappealable ruling issued by any court, agency or tribunal with competent jurisdiction in a proceeding to which Franchisor is a party, that ruling shall not impair the operation of or have any other effect upon such other portions of this Agreement as may remain otherwise intelligible. Such other portions shall continue to be given full force and effect and bind the parties hereto.  Any portion held to be invalid shall be deemed not to be a part of this Agreement from the date the time for appeal expires if Covenantor is a party thereto or upon Covenantor’s receipt of a notice from Franchisor that it will not enforce the section, paragraph, term or provision in question.

8.RIGHTS OF PARTIES ARE CUMULATIVE.

The rights of the parties hereunder are cumulative and no exercise or enforcement by a party hereto of any right or remedy granted hereunder shall preclude the exercise or enforcement by them of any other right or remedy hereunder or which they are entitled by law to enforce.

9.BENEFIT.

This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns.  In the event Franchisor does not execute this Agreement (regardless of the reason) Franchisor shall be deemed a third party beneficiary of  this Agreement and shall have the right to enforce this Agreement directly.

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10.EFFECTIVENESS.

This Agreement shall be enforceable and effective when signed by Covenantor regardless of whether and when Franchisor or Franchisee signs this Agreement.

11.GOVERNING LAW/CONSENT TO JURISDICTION.

This Agreement and the relationship between the parties hereto shall be construed and governed in accordance with the internal laws of the state in which the Store is located without regard to its conflicts of laws principles.  Covenantor and Franchisee agree that they shall institute and that Franchisor may institute any action against any of the parties hereto in any state or federal court of general jurisdiction in the state court of general jurisdiction or the Federal District Court nearest to Franchisor’s principal place of business at the time such action is filed.  Covenantor and Franchisee irrevocably submit to the jurisdiction of such courts and waive any objections to either the jurisdiction or venue of such court.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement in multiple counterparts as of the day and year first above written.

Covenantor:	Franchisee:
Print name of Covenantor	Print name of Franchisee
	By:
Signature of Covenantor	Print Name:
	Title:
	Franchisor:
	GLORIA JEAN’S GOURMET COFFEES FRANCHISING CORP.
	an Illinois corporation
	By:
	Print Name:
	Title:

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EX-10.8

Exhibit 10.8

FORM OF

DIEDRICH COFFEE, INC.,

AREA DEVELOPMENT AGREEMENT

Dated:            

TABLE OF CONTENTS

I.	GRANT OF AREA DEVELOPMENT FRANCHISE
	1.1	Grant of Area Development Franchise
	1.2	No Trademark License
	1.3	Definitions
II.	DEVELOPER’S DEVELOPMENT OBLIGATION
	2.1	Minimum Development Obligation
	2.2	Force Majeure
	2.3	Developer May Exceed Minimum Development Obligation
III.	EXCLUSIVITY
	3.1	Exclusivity
IV.	TERM OF AREA DEVELOPMENT AGREEMENT
	4.1	Term
	4.2	Limited Additional Development Right
	4.3	Renewal
	4.4	Exercise of Right of Additional Development.
	4.5	Conditions to Exercise of Right of Additional Development
V.	PAYMENTS BY DEVELOPER
	5.1	Development Area Fees
	5.2	Franchise Agreements for Each Coffeehouse
	5.3	Credit Against Initial Fee
VI.	EXECUTION OF INDIVIDUAL FRANCHISE AGREEMENTS, TRAINING
	6.1	Site Approval, Submission of Offering Circular, Execution of Franchise Agreement
	6.2	Condition Precedent to Company’s Obligations
	6.3	Lease
	6.4	Training
VII.	ASSIGNMENT AND SUBFRANCHISING
	7.1	Assignment By Company
	7.2	No Subfranchising by Developer
	7.3	Assignment by Developer
	7.4	Individual Franchise Agreements
VIII.	NON-COMPETITION, NON-SOLICITATION, TRADE SECRETS
	8.1	In Term
	8.2	Post-Term
	8.3	Modification

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	8.4	Personnel
	8.5	Trade Secrets.
	8.6	Developer’s Affiliates
IX.	TERMINATION
	9.1	Termination Pursuant to a Material Breach of This Agreement.
	9.2	Termination by Reason of a Material Breach of Other Agreement
	9.3	Effect of Termination
X.	BUSINESS ENTITY DEVELOPER
	10.1	Business Entity Developer
	10.2	Limitation on Activities
	10.3	Guaranty and Subordination Agreement
XI.	GENERAL CONDITIONS AND PROVISIONS
	11.1	Relationship of Developer to Company
	11.2	Indemnity by Developer
	11.3	Limitation of Liability
	11.4	Waiver and Delay
	11.5	Survival of Covenants
	11.6	Successors and Assigns
	11.7	Joint and Several Liability
	11.8	Governing Law
	11.9	Entire Agreement
	11.10	Titles For Convenience
	11.11	Gender And Construction
	11.12	Severability
	11.13	Counterparts
	11.14	Fees and Expenses
	11.15	Notices
XII.	SUBMISSION OF AGREEMENT
	12.1	General
XIII.	ACKNOWLEDGMENT
	13.1	General
EXHIBIT A		DEVELOPMENT AREA
EXHIBIT B		MINIMUM DEVELOPMENT OBLIGATIONS
EXHIBIT C		DEVELOPER INFORMATION
EXHIBIT D		EXCEPTIONS TO SECTION 8.1
EXHIBIT E		GUARANTY AND SUBORDINATION AGREEMENT

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AREA DEVELOPMENT AGREEMENT

THIS AREA DEVELOPMENT AGREEMENT (the “Agreement”) is made and entered into this        day of                              ,                   , (the “Effective Date”) by and between Diedrich Coffee, Inc. (“Company”), a Delaware corporation, and                                                                                           , [  ] an individual OR [  ] a                         organized under t he laws of                                      (“the Developer”), with reference to the following facts:

A.            Company owns and intends to license certain proprietary and other property rights and interests in and to the “Diedrich Coffee” trademark and service mark, and such other trademarks, trade names, service marks, logo types, insignias, trade dress,  designs, and commercial symbols which Company may from time to time authorize or direct Developer to use in connection with the operation of “Diedrich Coffee” Coffeehouses (the “Marks”).

B.            Company has developed and continues to develop a system for the operation of coffeehouses, kiosks and coffee carts and merchandising of Diedrich Coffee Authorized Products, which system features distinctive signs, recipes, and various Trade Secrets and other confidential information, and in some cases also includes architectural designs, trade dress, uniforms, equipment specifications, layout plans, inventory, record-keeping and marketing techniques (the “System”).

C.            Company desires to expand and develop its system of “Diedrich Coffee” Coffeehouses, and seeks sophisticated and efficient multi-unit franchisees who will develop numerous “Diedrich Coffee” Coffeehouses within designated areas.

D.            Developer desires to build and operate “Diedrich Coffee” Coffeehouses, and Company desires to grant to Developer the right to build and operate said “Diedrich Coffee” Coffeehouses in accordance with the terms and upon the conditions contained in this Agreement.

WHEREFORE IT IS AGREED

I.

GRANT OF AREA DEVELOPMENT FRANCHISE

1.1           Grant of Area Development Franchise.

Upon the terms and subject to the conditions of this Agreement, Company hereby grants to Developer, and Developer hereby accepts, the right and obligation during the Term hereof, to develop “Diedrich Coffee” Coffeehouses solely at Venues within the Development Area.

1.1.1        Developer within thirty (30) days of execution of this Agreement, shall meet with Company and begin preparation of a market development plan for the Development Area (identifying and specifying key areas and trade areas in the Development Area) and all development pursuant to this Agreement shall be in accordance with this plan (the “Market Plan”).  The Market Plan shall include proposed target trade areas where sites are to be located, ranking and prioritization of site locations and other information customarily utilized by market planners in the restaurant industry.  Developer shall

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propose the Market Plan and Company shall approve or disapprove the Market Plan in its reasonable discretion.  The initial Market Plan shall be completed and approved by Company and Developer no later than sixty (60) days from the date of execution of this Agreement.  Developer acknowledges that no extensions of time with regard to the Minimum Development Obligation shall be granted by Company to Developer as a result of Developer’s failure to complete a satisfactory Market Plan within sixty  (60) days of execution of this Agreement.  The parties recognize that demographics, market economics, real estate values, competition and other conditions may change in the Development Area over the term of this Agreement and that such changes may impact the Market Plan. Therefore, the parties agree that it is in their respective best interests to review the Market Plan periodically throughout the term of this Agreement.  On the first anniversary of the approval of the initial Market Plan and at least once annually thereafter, Developer and Company shall review the Market Plan and make such revisions as are required to maximize the successful development of the Diedrich Coffee brand in the Development Area.

1.1.2        From time to time, Company may request updates, status reports, or other information from Developer regarding development of the Market Area.  Developer shall respond promptly, accurately and completely to such requests within a reasonable time, but in no event more than 30 days after the request by Company.  Without limiting the generality of the foregoing, the information requested may relate to demographics, market economics, real estate values, competition and other conditions in the Development Area.

1.2           No Trademark License.

No right or license is granted to Developer hereunder to use the Marks or the System or any other trademarks, trade names, service marks, logotypes, insignias, trade dress or designs owned by Company, such right and license being granted solely pursuant to Franchise Agreement(s) executed pursuant to Section 6.1 below.

1.3           Definitions.  In this Agreement, (a) capitalized terms not otherwise defined herein shall have the meaning given such term in the Franchise Agreement, and (b) the following capitalized terms shall have the meanings set forth below, unless the context otherwise requires:

“Applicable Law” means and includes applicable common law and all applicable statutes, laws, rules, regulations, ordinances, policies and procedures established by any Governmental Authority, governing the development or operation of a “Diedrich Coffee” Coffeehouse, including all immigration, labor, disability, food and drug laws, health and safety regulations, and Americans With Disabilities Act requirements, as in effect on the Effective Date hereof, and as may be amended, supplemented or enacted  from time to time.

“Authorized Products” means the specific espresso drinks and coffees, roasted coffee beans and blends, premium teas, baked goods, snacks and other food items and ancillary products, which may include coffee making equipment, cups, hats, t-shirts and novelty items, as specified by Company from time to time in Company’s Manuals, or as otherwise directed by Company in writing, for sale at the Developer’s “Diedrich Coffee” Coffeehouses, prepared and served in strict accordance with Company’s recipes, quality standards and specifications, including specifications as to ingredients, brand names, preparation and presentation.

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“Business Entity” means any limited liability company or Partnership, and any association, corporation or other entity which is not an individual.

“Competitive Activities” shall mean to, own, operate, lend to, advise, be employed by, or have any financial interest in any business that engages in the roasting of green coffee beans; the sale of roasted coffee beans or ground coffee produced by third parties; or the production or sale at retail or wholesale of any espresso or coffee product, or any other food products featured by “Diedrich Coffee” coffeehouses.

“Development Area” shall mean and refer to the geographical area set forth in Exhibit “A” which is annexed hereto and by this reference made a part hereof

“Development Period” shall mean each of the time periods during which Developer shall have the right and obligation to construct, equip, open and thereafter continue to operate “Diedrich Coffee” Coffeehouses in accordance with the Minimum Development Obligation.

“Diedrich Coffee Branded Product” is any product now existing or developed in the future that bears or is packaged under any of the Marks.

“‘Diedrich Coffee’ Coffeehouse” means a full service location, kiosk, or coffee cart operated under the Marks and in accordance with the System and specializing in the sale of Authorized Products, pursuant to a validly executed Franchise Agreement.

“Effective Date” means the date indicated in the first paragraph of this Agreement.

“Franchise Agreement” means the Then-current form of agreement prescribed by Company and used to grant to Developer (as “Franchisee”) the right to own and operate a single “Diedrich Coffee” Coffeehouse in the Development Area, including all exhibits, riders, guarantees or other related instruments, all as amended from time to time (references in this Agreement to “Developer’s Franchise Agreements” will mean Franchise Agreements issued to Developer as “Franchisee” under those Franchise Agreements).

“Full Service Coffeehouse” means a “Diedrich Coffee” Coffeehouse consisting of at least 1,200 rentable square feet and which has at least 24 seats dedicated (i.e. exclusive of common seating areas) for use by customers of such “Diedrich Coffee” Coffeehouse.

“Governmental Authority” means and includes all federal, state, county, municipal and local governmental and quasi-governmental agencies, commissions and authorities.

“Gross Sales” of each of Developer’s “Diedrich Coffee” Coffeehouses means gross revenues (excluding allowances and sales taxes) received or receivable by Developer as payment, whether in cash or for credit or barter (and, if for credit or barter, whether or not payment is received therefor), for all espresso, coffee, tea and other beverages, roasted coffee beans, food, and other goods, services, and supplies sold or prepared in the “Diedrich Coffee” Coffeehouse, or which are promoted or sold under any of the Marks.

“Internet” means collectively the myriad of computer and telecommunications facilities, including equipment and software, which comprise the interconnected worldwide network of networks that employ the TCP/IP [Transmission Control Protocol/Internet Protocol], or any predecessor or successor protocols

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to such protocol, to communicate information of all kinds by fiber optics, wire, radio, or other methods of transmission

“Lease” means the lease or sublease or other agreement or instrument pursuant to which Developer obtains the right to occupy a “Diedrich Coffee” Coffeehouse location and Premises.

“Manuals” means Company’s Front Line Team Member Training Guide;  training software; Diedrich Coffee Operations Manual and Support Manual, and related manuals now or hereafter created by Company for use in connection with the operation of a “Diedrich Coffee” Coffeehouse, as the same may be amended and revised from time to time, including all bulletins, supplements and ancillary manuals.

“Marks” shall have the meaning set forth in Recital A.

“Minimum Development Obligation” shall mean the Developer’s right and obligation to construct, equip, open and thereafter continue to operate at Venues within the Development Area not less than the cumulative number of Full Service Coffeehouses set forth in Exhibit “B,” which is annexed hereto and by this reference made a part hereof, and within each of the Development Periods specified therein.

“Non-Exclusive Venues” shall mean stores operated at institutional settings and locations of a “non-standard” nature, including, but not limited to, airports and other public transportation facilities, colleges, universities, schools, hospitals, military and other governmental/municipal facilities, office or in-plant food service facilities, shopping mall food courts, hotels, motels, resorts, theme parks, stadiums, and any venue in which food service is or may be provided by a master concessionaire or contract food service provider.

“Offering Circular” means the Uniform Franchise Offering Circular or its equivalent as may be required by applicable law.

“Owner” means any shareholder, member, general or limited partner, trustee, or other equity owner of a Business Entity; except that if Company has any ownership interest in Licensee, the term “Owner” shall not include or refer to the Company or its Owners or affiliates, and no obligation or restriction upon the “Developer”, or its Owners, directors or officers shall bind Company, its Owners or affiliates, or their respective Owners, directors or officers.

“Partnership” means any general partnership, limited partnership or limited liability company

“Partnership Rights” means voting power, property, profits or losses, or partnership interests of a Partner.

“Permits” means and include all applicable franchises, licenses, permits, registrations, certificates and other operating authority required by Applicable Law.

“Premises” means, in the case of a kiosk or cart, the property at which such “Diedrich Coffee” Coffeehouse is located, including unless otherwise expressly provided, any ancillary common areas, campus, buildings and other structures associated with the Premises.

“Term” shall have the meaning set forth in Section 4.1 including any extensions thereof.

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“Then-current” as used in this Agreement and applied to the Offering Circular, Franchise Agreement or area development agreement shall mean the form then currently provided to prospective franchisees or area developers, or if not then being so provided, then such form selected by the Company which previously shall have been delivered to and executed by a franchisee or area developer of Company.

“Trade Secrets” shall have the meaning set forth in Section 8.5.1.

“System” shall have the meaning set forth in Recital B.

“Venue” shall mean all types of locations other than “Non-Exclusive Venues”.

“Week” shall refer to the 7 day period ending on Sunday of each calendar week, or such other reporting period hereafter specified by Company.

II.

DEVELOPER’S DEVELOPMENT OBLIGATION

2.1           Minimum Development Obligation.

2.1.1        Developer shall construct, equip, open and thereafter continue to operate at Venues within the Development Area not less than the cumulative number of Full Service Coffeehouses within each of the Development Periods specified in Exhibit “B”.

2.1.2        Within any 12 month period, Developer shall have the right to close one “Diedrich Coffee” Coffeehouse opened pursuant to this Agreement if Developer demonstrates to Company’s reasonable satisfaction that the site has not operated profitably and is unlikely in the future to operate profitably, provided that Developer obtains Company’s prior written consent to such closure, which Company shall grant or withhold in Company’s reasonable business judgment.  Upon Company’s request, Developer shall promptly provide such substantiating financial data concerning the “Diedrich Coffee” Coffeehouse’s historical performance and its future prospects as Company may require, and which may include market studies prepared by qualified, reputable and independent third parties or other objective evidence satisfactory to Company.  For purposes of Developer’s Minimum Development Obligation, any Full Service Coffeehouse closed pursuant to this Section 2.1.2 with Company’s consent shall continue to be counted as an operating Full Service Coffeehouse for a period of 12 months following closure, and Developer shall be deemed in breach of the Minimum Development Obligation if immediately after said 12 month period the cumulative number of Full Service Coffeehouses then-operating is not equal to or greater than the cumulative number required to have been in operation as of the end of the immediately preceding Development Period. Developer shall execute a new Franchise Agreement pursuant to Section 6.1 for each subsequently opened “Diedrich Coffee” Coffeehouse, even if opened as a “replacement” for the closed “Diedrich Coffee” Coffeehouse.

2.1.3        If a Full Service Coffeehouse opened and operated by Developer is destroyed or damaged, other than by a voluntary act of Developer, so that such “Diedrich Coffee” Coffeehouse cannot continue to operate, the destroyed or damaged Full Service Coffeehouse shall continue to count toward satisfaction of the Minimum Development Obligation (during the period until such substitute location

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opens), but only if (i) Developer shall repair and restore such Full Service Coffeehouse to Company’s then approved plans and specifications within 120 days after the occurrence of such destruction or damage, subject to delays permitted by Section 2.2, or (ii) Developer shall, within 120 days after the occurrence of such destruction or damage, open a Full Service Coffeehouse at a substitute location within the Development Area in accordance with Company’s then approved plans and specifications (any such substitute location and the Lease for such location must be approved in writing in advance by Company pursuant hereto and Developer shall execute a new Franchise Agreement therefor, pursuant to Section 6.1).

2.2           Force Majeure.

Should Developer be unable to meet the Minimum Development Obligation solely as the result of “Force Majeure,” including, but not limited to strikes, material shortages, fires, floods, earthquakes, and other acts of God, or by force of law (including, but not limited to any legal disability of Company to deliver any Offering Circular required by law to be delivered as contemplated by Section 6.1 of this Agreement), which result in the inability of Developer to construct or operate “Diedrich Coffee” Coffeehouse(s) in all or substantially all of the Development Area, and which Developer could not by the exercise of due diligence have avoided, Developer may request that Company extend the affected Development Periods by the amount of time during which such Force Majeure shall exist.  Company will not unreasonably decline to extend the applicable Development Period(s) in such event, provided that Developer shall have promptly (in any event not more than 30 days after commencement of the Force Majeure) submitted its request therefor in writing and promptly furnished Company such information concerning the circumstances as Company may reasonably require.  In the event of any said legal disability of Company to deliver an Offering Circular, Company shall diligently use all commercially reasonable efforts promptly to remove such legal disability.

2.3           Developer May Exceed Minimum Development Obligation.

2.3.1        Provided that Company is satisfied, in its sole subjective judgment, that Developer has the requisite skills, financial resources, management structure, personnel and other capabilities to do so, and subject to the terms and conditions of this Agreement and the Franchise Agreements, Developer may during the Term construct, equip, open and operate more “Diedrich Coffee” Coffeehouses at Venues within the Development Area than required in the Minimum Development Obligation. Only with Company’s prior written consent in each instance, Developer may open Coffeehouses at Non-Exclusive Venues in the Development Area, but such “Diedrich Coffee” Coffeehouses shall not count toward the Developer’s Minimum Development Obligation.  Further, Developer shall not contact or solicit any owner, lessee or operator of a Non-Exclusive Venue about the possibility of opening a “Diedrich Coffee” Coffeehouse without first having obtained Company’s prior written consent to do so.

2.3.2        Although Company reserves the right to assess Developer’s  capabilities to exceed the Minimum Development Obligation, nothing in this Section 2.3 is intended to limit or restrict Developer’s right or ability, subject to the terms of this Agreement, to construct, equip, open and operate the number of “Diedrich Coffee” Coffeehouses within the Development Area required by the Minimum Development Obligation.

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III.

EXCLUSIVITY

3.1           Exclusivity.

3.1.1        During the Term of this Agreement, subject to Sections 3.1.2 and 3.1.3, Company shall not operate or grant a license or franchise to any other person to operate a “Diedrich Coffee” coffeehouse at any site within the Development Area other than a Non-Exclusive Venue.

3.1.2        Company expressly reserves the exclusive, unrestricted right, in its sole and absolute discretion, directly and indirectly, through its employees, affiliates, representatives, licensees, assigns, agents and others, to own or operate and to franchise or license others (which may include its affiliates and joint ventures in which it or its affiliates are participants) to own or operate “Diedrich Coffee” coffeehouses (i) at any location outside the Development Area, including immediately adjacent to the Development Area, and (ii) at any site or location which is a Non-Exclusive Venue, even if located within the Development Area, and regardless of its proximity to any “Diedrich Coffee” Coffeehouse developed or under development or consideration by Developer.

3.1.3        In addition, Company expressly reserves the exclusive, unrestricted right, in its sole and absolute discretion, directly and indirectly, through its employees, affiliates, representatives, licensees, assigns, agents and others, (i) to own or operate and to franchise or license others (which may include its affiliates and joint ventures in which it or its affiliates are participants) to own or operate coffeehouses, restaurants and other businesses which operate under names other than “Diedrich Coffee” at any location, and of any type or category whatsoever, and whether within or outside the Development Area, and regardless of its proximity to any “Diedrich Coffee” Coffeehouse developed or under development or consideration by Developer; and (ii) to produce, promote, license, distribute and market Diedrich Coffee Branded Products, and products bearing other marks, including espresso, ground coffee and roasted coffee beans, tea, and other food and beverage products, clothing, souvenirs and novelty items, at or through any location or outlet, including grocery stores and convenience stores (including those which may be located within the Development Area), and through any distribution channel, at wholesale or retail, including by means of mail order catalogs, direct mail advertising, the Internet, and other distribution methods.

IV.

TERM OF AREA DEVELOPMENT AGREEMENT

4.1           Term.

The Term of this Agreement shall commence on the Effective Date and, unless sooner terminated in accordance with the provisions herein, or extended as provided in Section 2.2, shall continue for a period of                         (     ) years.

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4.2           Limited Additional Development Right.

Within 60 days prior to the expiration of the Term, if Company shall determine that further development of the Development Area is desirable, Company shall notify Developer in writing of Company’s determination to develop additional “Diedrich Coffee” Coffeehouses in the Development Area and a plan for such development over a five year term.  Subject to the conditions set forth in Section 4.5 of this Agreement, Developer shall have a prior right to undertake the additional development which Company shall have set forth in its notice to Developer. This right of additional development by Developer shall be exercised only in accordance with Section 4.4.  If such right of additional development is not exercised by Developer, Company or any franchisee or area developer of Company may construct, equip, open and operate additional “Diedrich Coffee” Coffeehouses in the Development Area.

4.3           Renewal.

Except to the extent otherwise provided in any area development agreement executed pursuant to Section 4.4, Developer shall have no right to renew this Agreement and after the expiration of the Term, or the sooner termination of this Agreement, Company, and its affiliates may construct, equip, open and operate, and license or franchise others to construct, equip, open and operate additional “Diedrich Coffee” Coffeehouses in the Development Area, without any restriction.

4.4           Exercise of Right of Additional Development.

At the time Company delivers to Developer Company’s written notice of its determination to undertake additional development in the Development Area, Company shall also deliver to Developer a copy of Company’s Then-current Offering Circular and two copies of the Then-current area development agreement.  The new area development agreement, which may vary substantially from this Agreement, will reflect Developer’s new development obligation consistent with Company’s plan for additional development set forth in its notice to Developer.  Notwithstanding the foregoing or inconsistent terms of such area development agreement, (a) upon execution thereof, Developer shall pay Company a Development Area Fee for each “Diedrich Coffee” Coffeehouse required to be opened thereunder equal to the then-current Development Area Fee and (b) each Franchise Agreement signed pursuant thereto shall provide for an Initial Fee and Continuing Royalty at the rates specified in the Franchise Agreement.   Within thirty (30) days after Developer’s receipt of the Offering Circular and the new area development agreement, but no sooner than immediately after any applicable waiting periods prescribed by Applicable Law have passed, Developer shall execute two copies of the area development agreement described in the Offering Circular and return them to Company together with the applicable Development Area Fee. If Developer has so executed and returned the copies and has satisfied the conditions set forth in Section 4.5, Company will execute the copies and return one fully executed copy to Developer.

4.5           Conditions to Exercise of Right of Additional Development.

Developer’s right to additional development described in Section 4.2 shall be subject to Developer’s fulfillment of the following conditions precedent:

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4.5.1        Developer shall have fully performed all of its obligations under this Agreement and all other agreements between Company and Developer.

4.5.2        Developer shall have demonstrated to Company Developer’s  financial capacity to perform the additional development obligations set forth in the new area development agreement. In determining if Developer is financially capable, Company will apply the same criteria to Developer as it applies to prospective area developers at that time.

4.5.3        At expiration of the Term, Developer shall continue to operate, in the Development Area, not less than the cumulative number of Full Service Coffeehouses required by the Minimum Development Obligation set forth in Exhibit “B”.

4.5.4        Developer and all affiliates of Developer who then have a currently effective Franchise Agreement or area development agreement with Company shall have signed a general release on a form prescribed by Company.

V.

PAYMENTS BY DEVELOPER

5.1           Development Area Fees.  Developer shall pay a “Development Area Fee” of $                      , payable upon execution of this Agreement.  The Development Area Fees shall be deemed fully earned upon the payment thereof and shall be non-refundable under any circumstances.

5.2           Franchise Agreements for Each Coffeehouse.  Notwithstanding the terms of Company’s Franchise Agreement that Developer shall execute pursuant to Section  6.1 of this Agreement for each “Diedrich Coffee” Coffeehouse opened in the Development Area, the definition of “Gross Sales” set forth herein shall apply to all Franchise Agreements executed by Developer pursuant to Section 6.1, notwithstanding any inconsistent definition in such Franchise Agreements.

5.3           Credit Against Initial Fee.  For each Full Service Coffeehouse developed by Developer in accordance with this agreement, Developer shall receive a credit of $5,000 against the Initial Fee at the time Franchise Agreement is signed, up to a maximum cumulative number of full service Coffeehouses that Developer has committed to develop in accordance with Exhibit “B.”  Developer will receive no credit against the initial fee of “Diedrich Coffee” Coffeehouses that are kiosks or coffee carts, nor will Developer receive any credit for Full Service Coffeehouses in excess of the Minimum Development Obligation.

VI.

EXECUTION OF INDIVIDUAL FRANCHISE AGREEMENTS, TRAINING

6.1           Site Approval, Submission of Offering Circular, Execution of Franchise Agreement.

6.1.1        After Developer has located a site for construction of a “Diedrich Coffee” Coffeehouse, Developer shall submit to Company such information regarding the proposed site as Company shall require, in the form which Company shall from time to time require, together with a copy

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of an executed letter of intent containing the terms of the proposed Lease for such site.  Company may seek such additional information as it deems necessary within 30 days after Developer’s submission of the letter of intent and required site information, and Developer shall respond promptly, accurately and completely to such request for additional information.

6.1.2        If Company shall not reject the site in writing within 30 days, or within 30 days after a receipt of such additional information, whichever is later, the site shall be deemed preliminarily accepted by Company.  Company’s acceptance of a site proposed by Developer will not be unreasonably withheld or delayed.

6.1.3        Promptly after Company’s preliminary acceptance of each site:

(a)        Company shall, if required by Applicable Law and if it has not done so already, transmit to Developer an Offering Circular and two execution copies of the Franchise Agreement pertaining to the approved site.  Immediately upon receipt of the Offering Circular, Developer shall return to Company a signed copy of the Acknowledgment of Receipt of the Offering Circular; and

(b)        Developer shall proceed promptly to negotiate a Lease for the site (which shall comply with Section 6.3 below) and shall submit the proposed Lease to Company for review and approval. Developer shall not execute the Lease for the site until it has been reviewed and accepted by Company; and

(c)        Following Company’s delivery of any such required Offering Circular and any waiting period required by Applicable Law, but not later than the date on which Developer executes the Lease which has been reviewed and accepted by Company: (i) Developer shall execute and deliver to Company two copies of said Franchise Agreement; (ii) Developer and each of its affiliates who then has a currently effective Franchise Agreement or area development agreement with Company shall execute and deliver two copies of a general release on a form prescribed by Company, and (iii) Developer shall pay to the Company the Initial Fee therefor as provided in the applicable Franchise Agreement.

6.1.4        Company shall, promptly upon receipt of said documents and Initial Fee, execute and return to Developer one copy of the Franchise Agreement.  Developer shall then procure the site by purchase or lease, and return one copy of the fully executed Lease (which shall conform to the terms approved by Company) or, if purchased, the deed evidencing Developer’s right to occupy the approved site.  Developer shall then commence construction and operation of the “Diedrich Coffee” Coffeehouse pursuant to the terms of the Franchise Agreement.

6.1.5        Notwithstanding the foregoing, Company’s obligation to deliver Franchise Agreements shall be subject to Company’s legal authority to do so, and if Company is not legally able to deliver an Offering Circular to Developer by reason of any lapse or expiration of its franchise registration, or because Company is in the process of amending any such registration, or for any reason beyond Company’s reasonable control, Company may delay approval of the site for Developer’s proposed “Diedrich Coffee” Coffeehouse and delivery of its Offering Circular until such time as Company is legally able to deliver an Offering Circular.  In no event shall Company be liable to Developer for any loss, cost or expense occasioned by such delays.

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6.2           Condition Precedent To Company’s Obligations.

It shall be a condition precedent to Company’s obligations pursuant to Section 6.1, that Developer shall have performed all of his obligations under and pursuant to all agreements between Developer and Company.

6.3           Lease.

If a site is leased or subleased by Developer, (i) Company shall have the right of approval of such lease or sublease, as applicable (the “Lease”), a true and correct copy of which shall be delivered to Company at least 15 days prior to the execution thereof; (ii) the term of said Lease shall be for a period which is not less than the term of the applicable Franchise Agreement, unless Company shall approve, in writing, a shorter term; (iii) Developer shall neither create nor purport to create any obligations on behalf of Company, nor grant or purport to grant to the landlord thereunder any rights against Company, nor agree to any other term, condition, or covenant which is inconsistent with any provision of the applicable Franchise Agreement; (iv) Developer shall duly and timely perform all of the terms, conditions, covenants and obligations imposed upon him under the Lease; (v) the site shall be constructed and improved pursuant to the provisions of the applicable Franchise Agreement; (vi) the Lease shall grant Company an option, without cost or expense to Company, to assume the Lease in the event of termination or expiration of the applicable Franchise Agreement for any reason, and shall expressly provide that Company shall have the right (but not the obligation) to succeed to Developer’s rights under the Lease if Developer fails to exercise any option to renew, and upon Developer’s default thereunder, and that upon any alleged breach thereof by Developer, the landlord thereunder shall be obligated to notify Company in writing at least 15 days prior to its termination or non-renewal and, in the case of a default, Company shall have the right, but not the obligation, to cure the breach and to succeed to Developer’s rights under said Lease by giving written notice of such election to Developer and such landlord; Developer hereby appoints Company as its attorney-in-fact to execute an assignment and all other documents and instruments which Company deems necessary or appropriate to effectuate the foregoing; (vii) a fully executed copy of said Lease shall be delivered to Company promptly following the execution thereof; (viii) the Lease shall provide that it may not be assigned, subleased, modified or amended without Company’s prior written consent and that Company shall be provided with copies of all such assignments, subleases, modifications and amendments, and the landlord shall consent in advance to any assignment or sublease to Company or a “Diedrich Coffee” franchisee or licensee approved by Company during the initial term or any renewal term of the Lease; and (ix) the Lease may not contain a non-competition covenant which purports to restrict the Company, or any developer or licensee of the Company (or its affiliates), from operating a “Diedrich Coffee” Coffeehouse or any other retail establishment, unless such covenant is approved by the Company in writing prior to the execution of the Lease.  In all cases, the Lease shall provide that upon expiration or termination thereof for any reason, Developer shall, upon Company’s demand, remove all of the Marks from the site and modify the decor of the site so that it no longer resembles, in whole or in part, a “Diedrich Coffee” coffeehouse, kiosk or cart and that if Developer shall fail do so, Company will be given written notice and the right to enter the site to make such alterations, in which event Developer shall reimburse Company for all direct and indirect costs and expense it may incur in connection therewith, including attorney’s fees.

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6.4           Training.

At no extra charge, Company shall provide to up to 3 persons selected by Developer and acceptable to Company an initial developer orientation program to familiarize Developer with Company’s System and methods of operation.  Said initial orientation program shall be for a period of up to 3 days of training, as Company in its reasonable judgment may determine, at one or more of the following locations: (i) Company’s corporate headquarters in Irvine, California, (ii) at a Company-owned or franchised coffeehouse, or (iii) at such place or places as may be designated by Company.  In the case of a Developer which is a Business Entity, Company may require the trainees to include the Developer’s general manager and one or more Owners, officers or other designated representative selected by Developer and acceptable to, and approved by Company (“Designated Developer Representative”). Company will bear its costs of providing the initial orientation program concurrently to up to 3 persons pursuant to this Section 6.4, including Company’s staff salaries, materials, and all technical training tools.  Developer shall pay all travel, living, compensation, and other expenses, if any, incurred by Developer and/or Developer’s Owners and employees in connection with attendance at the program.   Company shall pay no compensation for any services performed by trainee(s) in connection with such training programs.

6.4.1        The contents of the initial orientation program and manner of conducting such program shall be at Company’s sole discretion and control, however, the training course will be structured to provide guidance in locating potential sites for “Diedrich Coffee” Coffeehouses in the Development Area and an overview of the topics which will be addressed in the initial training program that will be provided in connection with the first Coffeehouse opened by Developer.

6.4.2        Pursuant to the first Franchise Agreement executed hereunder, Company shall provide an additional initial training program for the general manager and one or more assistant managers and other employees acceptable to Company (up to a total of 5 persons) for Developer’s first “Diedrich Coffee” Coffeehouse.  Company shall also train Developer’s Designated Developer Representative, or other person acceptable to Company, to act as Developer’s certified trainer who will in turn train the manager, assistant manager(s) and staff of each “Diedrich Coffee” Coffeehouse, other than the first one,  in accordance with Company’s policies and standards. Developer may not open any “Diedrich Coffee” Coffeehouse until the general manager, assistant manager and staff shall have been certified by Company or by Developer’s Company-approved certified trainer as having successfully completed such training.

VII.

ASSIGNMENT AND SUBFRANCHISING

7.1           Assignment By Company.

This Agreement is fully transferable by Company, in whole or in part, without the consent of Developer and shall inure to the benefit of any transferee or their legal successor to Company’s interests herein; provided, however, that such transferee and successor shall expressly agree to assume Company’s obligations under this Agreement.  Without limiting the foregoing, Company may (i) assign any or all of its rights and obligations under this Agreement to a subsidiary or affiliated entity; (ii) sell its assets, its Marks, or its System outright to a third party (including or subject to this Agreement); (iii) go public; (iv) engage in a private placement of some or all of its securities; (v) merge, acquire other

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corporations, or be acquired by another corporation; or (vi) undertake a refinancing, recapitalization, leveraged buy-out or other economic or financial restructuring.  Company shall be permitted to perform such actions without liability or obligation to Developer who expressly and specifically waives any claims, demands or damages arising from or related to any or all of the above actions (or variations thereof).  Company shall have no liability for the performance of any obligations contained in this Agreement after the effective date of such transfer or assignment.

7.2           No Subfranchising by Developer.

Developer shall not offer, sell, or negotiate the sale of “Diedrich Coffee” franchises to any third party, either in Developer’s own name or in the name and on behalf of Company, or otherwise subfranchise, subcontract, share, divide or partition this Agreement, and nothing in this Agreement will be construed as granting Developer the right to do so.

7.3           Assignment by Developer.

7.3.1        This Agreement has been entered into by Company in  reliance upon and in consideration of the individual or collective character, reputation, skill, attitude, business ability, and financial capacity of Developer or, if applicable, its Owners who will actively and substantially participate in the development, ownership and operation of the “Diedrich Coffee” Coffeehouses. Accordingly, except as otherwise may be permitted herein, neither Developer nor any of Developer’s Owners shall directly or indirectly sell, assign, transfer, convey, give away, pledge, mortgage, or otherwise encumber any direct or indirect interest in this Agreement or in all or substantially all of Developer’s assets, voluntarily or involuntarily, in whole or in part, by operation of law or otherwise (an “Assignment”), without Company’s prior written consent,  which consent may be withheld for any reason whatsoever in Company’s sole subjective judgment.

7.3.2        If Developer is a Business Entity, each of the following shall be deemed to be an Assignment of this Agreement: (i) the sale, assignment, transfer, conveyance, gift, pledge, mortgage, or other encumbrance of 50% or more in the aggregate, whether in one or more transactions, of the assets, capital stock, membership interests or voting power of Developer, by operation of law or otherwise; (ii) the issuance of any securities by Developer which itself or in combination with any other transaction(s) results in the Owners existing as of the Effective Date, owning 50% or less of the outstanding shares, membership interests or voting power of Developer as constituted as of the date hereof; (iii) if Developer is a Partnership, the withdrawal, death or legal incapacity of a general partner or limited partner owning 50% or more of the voting power, property, profits or losses, or partnership interests of the Partnership (each of which is referred to hereinafter as a “Partnership Right”), or the admission of any additional general partner or the transfer by any general partner of any of its Partnership Rights in the Partnership; (iv) the death or legal incapacity of any Owner owning 50% or more of the capital stock, voting power, or Partnership Rights of Developer; and (v) any merger, stock redemption, consolidation, reorganization, recapitalization or other transfer control of the Developer, however effected.

7.3.3        Developer shall not in any event have the right to pledge, encumber, hypothecate or otherwise give any third party a security interest in this Agreement in any manner

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whatsoever without the express prior written permission of Company, which permission may be withheld for any reason whatsoever in Company’s sole subjective judgment.

7.4           Individual Franchise Agreements.

Developer shall not execute any Franchise Agreement, or construct or equip any “Diedrich Coffee” Coffeehouse with the intent of transferring or assigning such Franchise Agreement or “Diedrich Coffee” Coffeehouse.  Developer acknowledges and agrees that it will not be permitted to assign any Franchise Agreement executed pursuant to this Agreement except in conjunction with a concurrent assignment to the same assignee of this Agreement and all of the Franchise Agreements executed pursuant to this Agreement, and otherwise in accordance with the terms and conditions of said Franchise Agreement(s).

VIII.

NON-COMPETITION, NON-SOLICITATION, TRADE SECRETS

8.1           In Term.

Subject to the terms and to the exceptions, if any, explicitly set forth in Exhibit “D” hereto, during the Term, neither Developer, nor any officer, director, or direct or indirect Owner of a Developer which is a Business Entity, shall in any capacity, either directly or indirectly, through one or more subsidiaries or affiliated companies engage in any Competitive Activities, at any location, whether within or outside the Development Area, unless Company shall consent thereto in writing; provided that, with Company’s prior written consent, which Company will not unreasonably withhold, Developer or any Owner, officer or director of Developer may own and operate one or more restaurants, or any other retail establishment, which sells brewed coffee, espresso or coffee products if and for so long as such restaurant, or retail establishment, does not derive 20% or more of its gross revenues from the sale of espresso drinks, brewed coffee, roasted coffee beans and blends, premium teas, and coffee-related products and equipment, or any of them, during any day part.

8.2           Post-Term.

Subject to the terms and to the exceptions, if any, explicitly set forth in Exhibit “D”, to the extent permitted by Applicable Law, upon the expiration or termination of this Agreement, or if Developer shall make any Assignment to any person or Business Entity, or if any Owner, officer or director of Developer shall terminate his or her relationship with Developer, then for a period of 24 months thereafter, such terminating Owner, officer or director, if applicable, or in the case of expiration, termination or Assignment, Developer, and each officer, director, and direct or indirect Owner of Developer shall not in any capacity, either directly or indirectly, through one or more subsidiaries or affiliated companies, engage in any Competitive Activities, (i) within the Development Area, (ii) within the County in which any “Diedrich Coffee” Coffeehouse operated by Developer is located, or (iii) within an area within ten (10) miles from the location or any then existing “Diedrich Coffee” Coffeehouse, without the Company’s prior written consent.  In applying for such consent, Developer will have the burden of establishing that any such activity by it will not involve the use of benefits provided under this Agreement or constitute unfair competition with Company or other franchisees or area developers of the

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Company; provided that, with Company’s prior written consent, which Company will not unreasonably withhold, Developer or any Owner, officer or director of Developer may own and operate one or more restaurants, or any other retail establishment,  which sells brewed coffee, espresso or coffee products if and for so long as such restaurant, or retail establishment, does not derive 20% or more of its gross revenues from the sale of espresso drinks, brewed coffee, roasted coffee beans and blends, premium teas, and coffee-related products and equipment, or any of them, during any day part.

8.3           Modification.

The parties have attempted in Sections 8.1 and 8.2 above to limit the Developer’s right to compete only to the extent necessary to protect the Company from unfair competition.  The parties hereby expressly agree that if the scope or enforceability of Section  8.1 and 8.2 is disputed at any time by Developer, a court or arbitrator, as the case may be, may modify either or both of such provisions to the extent that it deems necessary to make such provision(s) enforceable under Applicable Law.  In addition, the Company reserves the right to reduce the scope of either, or both, of said provisions without Developer’s consent, at any time or times, effective immediately upon notice to Developer.

8.4           Personnel.

8.4.1        During the Term of this Agreement, Developer shall not, without the prior written consent of Company, directly or indirectly: (a) employ or attempt to employ any person who at that time is employed by Company, an affiliate of Company, or any other franchisee or area developer, including, without limitation, any coffeehouse manager, assistant coffeehouse manager, or head chef (“Personnel”); (b) employ or attempt to employ any Personnel who within six (6) months prior thereto had been employed by Company, an affiliate of Company, or any other franchisee or area developer; or (c) induce or attempt to induce any Personnel to leave his or her employment with Company, an affiliate of Company, or any other franchisee or area developer.

8.4.2        The prohibitions set forth in Section 8.4.1 above shall also apply during the one (1) year period after the expiration or termination of this Agreement.

8.4.3        During the Term of this Agreement, Company shall not, without the prior written consent of Developer, directly or indirectly: (a) employ or attempt to employ any person who at that time is employed by Developer or an affiliate of Developer; or (b) induce or attempt to induce any person to leave his or her employment with Developer or an affiliate of Developer.

8.5           Trade Secrets.

8.5.1        Company possesses and continues to develop, and during the course of the relationship established hereunder, Developer shall have access to, proprietary and confidential information, including recipes, secret ingredients, specifications, procedures, concepts and methods and techniques of developing, marketing and operating coffeehouses, restaurants and other retail outlets featuring espresso, ground coffee and roasted coffee beans, tea, and other food and beverage products (the “Trade Secrets”).  Certain of the Trade Secrets may be disclosed to Developer in Operating Manuals, bulletins, supplements, confidential correspondence, or other confidential communications, and through the Company’s training program and other guidance and management assistance, and in performing

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Company’s other obligations and exercising Company’s rights under this Agreement or the Franchise Agreements executed pursuant hereto. “Trade Secrets” shall not include information which: (a) has entered the public domain or was known to Developer prior to Company’s disclosure of such information to Developer, other than by the breach of an obligation of confidentiality owed (by anyone) to Company; (b) becomes known to Developer from a source other than Company and other than by the breach of an obligation of confidentiality owed (by anyone) to Company; or (c) was independently developed by Developer without the use or benefit of Company’s Trade Secrets.  The burden of proving the applicability of the foregoing will reside with Developer.

8.5.2        Developer shall acquire no interest in the Trade Secrets other than the right to use them in developing and operating “Diedrich offee” Coffeehouses pursuant to the Franchise Agreements executed pursuant to Section 6.1 during the Term thereof.  Developer’s duplication or use of the Trade Secrets in any other endeavor or business shall constitute an unfair method of competition.  Developer shall: (i) not use the Trade Secrets in any business or other endeavor other than in connection with such “Diedrich Coffee” Coffeehouses; (ii) maintain absolute confidentiality of the Trade Secrets during and after this Agreement’s Term; (iii) make no unauthorized copy of any portion of the Trade Secrets, including without limitation, all or any part of the Manuals, bulletins, supplements, confidential correspondence, or other confidential communications, whether written or oral; and (iv) operate and implement all reasonable procedures prescribed from time to time by Company to prevent unauthorized use and disclosure of the Trade Secrets, including without limitation, restrictions limiting disclosure to certain employees and use of non-disclosure and non-competition provisions as Company prescribes in employment agreements with employees who may have access to the Trade Secrets.  Promptly upon Company’s request, Developer shall deliver executed copies of such agreements to Company.  The provisions of this Section 8.5 shall be in additional to and not in lieu of any other confidentiality obligation of Developer, or any other person, whether pursuant to another agreement, or pursuant to Applicable Law.

8.6           Developer’s Affiliates.  For purposes of this Article only, “Developer” shall mean and include the individual Developer; Developer’s spouse and minor children and its Owners, officers and directors if Developer is a Business Entity and Developer shall, except as Company may otherwise agree, cause each such person to acknowledge and agree to be bound by the provisions of Section 8.1 through 8.5.  The provisions of this Article shall not limit, restrain or otherwise affect any right or cause of action which may accrue to Company for any infringement of, violation of, or interference with, this Agreement, or Company’s Marks, System, trade secrets, or any other proprietary aspects of Company’s business.

IX.

TERMINATION

9.1           Termination Pursuant to a Material Breach of This Agreement. 

This Agreement may be terminated by Company in the event of any material breach by Developer of this Agreement, unless such default is cured by Developer within 15 days following written notice of the default (or 5 days in the case of a default in the payment of money); provided that the following defaults shall be deemed incurable: (i) any attempt by Developer to make any Assignment in violation of the terms of this Agreement, or without the written consents required, pursuant to this

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Agreement; (ii) failure of Developer to meet the Minimum Development Obligation; and (iii) any violation by Developer of Article VIII.

9.2           Termination by Reason of a Material Breach of Other Agreement.

This Agreement may be terminated, at the election of Company, in the event of the termination by reason of a material breach by Developer of an individual Franchise Agreement or any other agreement between Company and Developer, subject to the notice and the opportunity to cure, if any, specified in the Franchise Agreement or other such agreement.

9.3           Effect of Termination.

Upon the expiration of the Term, or upon the prior termination of this Agreement:

9.3.1        Developer shall have no further right to construct, equip, own, open or operate additional “Diedrich Coffee” Coffeehouses which are not, at the time of such termination or expiration, the subject of a then existing Franchise Agreement between Developer and Company which is in full force and effect; and

9.3.2        Company and its affiliates may construct, equip, open, own or operate, or franchise or license others to construct, equip, open, own or operate “Diedrich Coffee” Coffeehouses in the Development Area, except as may be expressly provided to the contrary in any Franchise Agreement executed pursuant to this Agreement.

X.

BUSINESS ENTITY DEVELOPER

10.1         Business Entity Developer.  If Developer is a Business Entity, the following provisions will apply:

10.1.1      Developer represents and warrants that the information set forth in Exhibit “C” which is annexed hereto and by this reference made a part hereof, is accurate and complete in all material respects.

10.1.2      Developer shall notify Company in writing within ten (10) days of any change in the information set forth in Exhibit “C”.

10.1.3      Developer promptly shall provide such additional information as Company may from time to time request concerning all persons who may have any direct or indirect financial interest in Developer.

10.2         Limitation on Activities.  If Developer is a Business Entity, all of Developer’s organizational documents (including articles of partnership, partnership agreements, articles of incorporation, bylaws, shareholders’ agreements, trust instruments, or their equivalent) will provide that the issuance and transfer of any interest in Developer is restricted by the terms of this Agreement, and

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that the sole purpose for which Developer is formed (and the sole activity in which Developer is or will be engaged) is the development and operation of “Diedrich Coffee” Coffeehouses, pursuant to one or more area development agreements and one or more franchise agreements from Company.  Developer will submit to Company, upon the execution of this Agreement, a resolution of Developer (or its governing body) confirming that Developer is in compliance with this provision.

10.3         Guaranty and Subordination Agreement.  Upon the execution of this Agreement, upon each transfer of an interest in Developer, and at any other time upon Company’s request, all holders of a 10% or greater interest in Developer will execute a written agreement in the form of Exhibit “E”, personally guaranteeing, jointly and severally, with all other holders of a 10% or greater interest in Developer, the full payment and performance of Developer’s obligations to Company and to Company’s affiliates.

XI.

GENERAL CONDITIONS AND PROVISIONS

11.1         Relationship of Developer to Company.

It is expressly agreed that the parties intend by this Agreement to establish between Company and Developer the relationship of franchisor and franchisee.  It is further agreed that Developer has no authority to create or assume in Company’s name or on behalf of Company, any obligation, express or implied, or to act or purport to act as agent or representative on behalf of Company for any purpose whatsoever.  Neither Company nor Developer is the employer, employee, agent, partner or co-venturer of or with the other, each being independent.  Developer agrees that he will not hold himself out as the agent, employee, partner or co-venturer of Company.  All employees hired by or working for Developer shall be the employees of Developer and shall not, for any purpose, be deemed employees of Company or subject to Company control.  Each of the parties agrees to file its own tax, regulatory and payroll reports with respect to its respective employees and operations, saving and indemnifying the other party hereto of and from any liability of any nature whatsoever by virtue thereof.

11..2        Indemnity by Developer.

Developer hereby agrees to protect, defend and indemnify Company, and all of its past, present and future direct and indirect Owners, subsidiaries, affiliates, officers, directors, employees, attorneys and designees and hold them harmless from and against any and all costs and expenses, including attorneys’ fees, court costs, losses, liabilities, damages, claims and demands of every kind or nature on account of any actual or alleged loss, injury or damage to any person or Business Entity or to any property arising out of or in connection with Developer’s operation of “Diedrich Coffee” Coffeehouses pursuant hereto, except to the extent resulting from the negligence or intentional misconduct of Company.

11..3        Limitation of Liability

11.3.1      Company shall not be liable to Developer for any consequential damages, including but not limited to lost profits, interest expense, increased construction or occupancy  costs, or other costs and expenses incurred by Developer by reason of any delay in the delivery of Company’s

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Offering Circular caused by legal incapacity during the Term, events beyond Company’s reasonable control, or other conduct not due to the gross negligence or misfeasance of Company.

11.3.2      In the event of the termination of this Agreement solely by reason of Developer’s breach of its Minimum Development Obligation, Company shall waive its right to recover lost profits on account of the undeveloped “Diedrich Coffee” Coffeehouses on condition that Developer shall abide by its obligations under Article VIII.  This Section 11.3.2 shall not otherwise limit any other remedy available to Company at law or in equity, nor limit the recovery of damages to Company, except as provided herein.

11.4         Waiver and Delay.

No waiver by Company of any breach or series of breaches or defaults in performance by Developer, and no failure, refusal or neglect of Company to exercise any right, power or option given to it hereunder or under any other franchise agreement between Company and Developer, whether entered into before, after or contemporaneously with the execution hereof (and whether or not related to the “Diedrich Coffee” Coffeehouses) or to insist upon strict compliance with or performance of Developer’s obligations under this Agreement or any Franchise Agreement between Company and Developer, whether entered into before, after or contemporaneously with the execution hereof (and whether or not related to the “Diedrich Coffee” Coffeehouses), shall constitute a waiver of the provisions of this Agreement with respect to any subsequent breach thereof or a waiver by Company of its right at any time thereafter to require exact and strict compliance with the provisions thereof.

11.5         Survival of Covenants.

The covenants contained in this Agreement which, by their terms, require performance by the parties after the expiration or termination of this Agreement, shall be enforceable notwithstanding said expiration or other termination of this Agreement for any reason whatsoever.

11.6         Successors and Assigns.

This Agreement shall be binding upon and inure to the benefit of the successors and assigns of Company and shall be binding upon and inure to the benefit of Developer and his or their respective heirs, executors, administrators, successors and assigns, subject to the prohibitions against Assignment contained herein.

11.7         Joint and Several Liability.

If Developer consists of more than one person or business entity, or a combination thereof, the obligations and liabilities of each such person or business entity to Company are joint and several.

11.8         Governing Law.

This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to any conflict of laws, excepting however the provisions of Article

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VIII which shall be construed and enforced in accordance with the laws of the State where the breach of said Section occurs.

THE PARTIES HEREBY WAIVE THEIR RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS AGREEMENT, AND THEY AGREE THAT, EXCEPT TO THE EXTENT PROHIBITED BY LAW, ORANGE COUNTY, CALIFORNIA SHALL BE THE VENUE FOR ANY LITIGATION ARISING UNDER THIS AGREEMENT.  THE PARTIES ACKNOWLEDGE THAT THEY HAVE REVIEWED THIS SECTION AND HAVE HAD THE OPPORTUNITY TO SEEK INDEPENDENT LEGAL ADVICE AS TO ITS MEANING AND EFFECT.

11.9         Entire Agreement.

This Agreement and the Exhibits incorporated herein contain all of the terms and conditions agreed upon by the parties hereto concerning the subject matter hereof.  No other agreements concerning the subject matter hereof, written or oral, shall be deemed to exist or to bind any of the parties hereto and all prior agreements, understandings and representations, are merged herein and superseded hereby.  Developer represents that there are no contemporaneous agreements or understandings between the parties relating to the subject matter of this Agreement that are not contained herein.  No officer or employee or agent of Company has any authority to make any representation or promise not contained in this Agreement or any Offering Circular for prospective franchisees required by Applicable Law, and Developer agrees that he has executed this Agreement without reliance upon any such representation or promise.  This Agreement cannot be modified or changed except by written instrument signed by all of the parties hereto.

11.10       Titles For Convenience.

Article and paragraph titles used in this Agreement are for convenience only and shall not be deemed to affect the meaning or construction of any of the terms, provisions, covenants, or conditions of this Agreement.

11.11       Gender And Construction.

All terms used in any one number or gender shall extend to mean and include any other number and gender as the facts, context, or sense of this Agreement or any article or paragraph hereof may require.  As used in this Agreement, the words “include,” “includes” or “including” are used in a non-exclusive sense.  Unless otherwise expressly provided herein to the contrary, any consent, approval or authorization of Company which Developer may be required to obtain hereunder may be given or withheld by Company in its sole discretion, and on any occasion where Company is required or permitted hereunder to make any judgment or determination, including any  decision as to whether any condition or circumstance meets Company’s standards or satisfaction, Company may do so in its sole subjective judgment.

11.12       Severability.

Nothing contained in this Agreement shall be construed as requiring the commission of any act contrary to law.  Whenever there is any conflict between any provisions of this Agreement and any

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present or future statute, law, ordinance or regulation contrary to which the parties have no legal right to contract, the latter shall prevail, but in such event the provisions of this Agreement thus affected shall be curtailed and limited only to the extent necessary to bring it within the requirements of the law.  In the event that any part, article, paragraph, sentence or clause of this Agreement shall be held to be indefinite, invalid or otherwise unenforceable, the indefinite, invalid or unenforceable provision shall (subject to Section 8.3) be deemed deleted, and the remaining part of this Agreement shall continue in full force and effect.

11.13       Counterparts.

This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument.

11.14       Fees and Expenses.

Should any party hereto commence any action or proceeding for the purpose of enforcing, or preventing the breach of, any provision hereof, whether by arbitration, judicial or quasi-judicial action or otherwise, or for damages for any alleged breach of any provision hereof, or for a declaration of such party’s rights or obligations hereunder, then the prevailing party shall be reimbursed by the losing party for all costs and expenses incurred in connection therewith, including, but not limited to, reasonable attorneys’ fees for the services rendered to such prevailing party.

11.15       Notices.

Except as otherwise expressly provided herein, all written notices and reports permitted or required to be delivered by the parties pursuant hereto shall be deemed so delivered at the time delivered by hand, one (1) business day after confirmed transmission by facsimile or other electronic system (with confirmation copy sent by regular U.S. Mail), or three (3) business days after placement in the United States Mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed as follows:

If to Company:
	Diedrich Coffee, Inc.
	2144 Michelson Drive
	Irvine, California 92612
	Attention: Vice President Franchise Sales
	Facsimile No.:  (949) 260-6731

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If to Developer:

Facsimile No.:  (      )

With Copy to:

Facsimile No.:  (      )

or to such other address as such party may designate by ten (10) days’ advance written notice to the other party.

XII.
SUBMISSION OF AGREEMENT

12.1         General.

The submission of this Agreement does not constitute an offer and this Agreement shall become effective only upon the execution thereof by Company and Developer.

XIII.
ACKNOWLEDGMENT

13.1         General.

Developer, and its Owners, jointly and severally acknowledge that they have carefully read this Agreement and all other related documents to be executed concurrently or in conjunction with the execution hereof, that they have obtained the advice of counsel in connection with entering into this Agreement, that they understand the nature of this Agreement, and that they intend to comply herewith and be bound hereby.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the first date set forth above.

ACCEPTED on this      day of                          ,                  .

COMPANY:

Diedrich Coffee, Inc.

By:

Its:

DEVELOPER:

By:

Its:

an Individual

an Individual

an Individual

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EXHIBIT A

DEVELOPMENT AREA

EXHIBIT B

MINIMUM DEVELOPMENT OBLIGATIONS

Development Period Ending	Cumulative Number of Full Service Coffeehouses to be in Operation
1                , 20
2                , 20
3                , 20
4                , 20
5                , 20

EXHIBIT C

DEVELOPER INFORMATION

Developer is a (check as applicable):

o corporation    o limited partnership

o limited liability company    o general partnership

o Other (specify):                                                   

The name and address of each Owner of Developer is:

NAME ADDRESS NUMBER OF
SHARES OR
PERCENTAGE
INTEREST

There is set forth below the name and address of each director, member, or general partner, as applicable, of Developer:

NAME ADDRESS

There is set forth below the names, and addresses and titles of Developer’s principal officers or partners who will be devoting their full time to the “Diedrich Coffee” Coffeehouses:

NAME ADDRESS

The address where Developer’s Financial Records, and Business Entity records (e.g. Articles of Incorporation, Bylaws, Operating Agreement, Partnership Agreement, etc.) are maintained is:

EXHIBIT D

EXCEPTIONS TO SECTION 8.1

If no exceptions are inserted above and initialed by both parties, no exceptions apply.  If any exception is described above, it is limited to the identified business as it exists on the Effective Date of this Agreement and does not extend to or include any material change made to the business after the Effective Date, including any change in the menu or products or services featured by the business.  In no event shall any identified exception include any business if (a) its sales of espresso drinks,  coffee, roasted coffee beans and blends, and premium teas, or any of them, exceeds 20% during any day part, or (b) its sales of bakery goods exceeds 9% of all revenues derived by the business during any day part, or (c) 85% or more of such business’ total beverage sales are comprised of non-coffee beverages.  By way of illustration, and not limitation, even if a restaurant is identified above, the exception will be void if the restaurant’s sales of coffee or bakery goods exceed the stated thresholds, whether on the Effective Date, or by reason of a subsequent change in the restaurant’s menu or marketing.

EXHIBIT E

GUARANTY AND SUBORDINATION AGREEMENT

SPOUSAL CONSENT

Each of the undersigned, each being the spouse of an individual who executed this Agreement as Developer (or if Developer is a partnership, a spouse of a general partner), consents to all of the terms of this Agreement and the execution thereof, and agrees not to assist any person who is a party to this Agreement to violate any of that party’s duties under this Agreement.

By:	Dated:
By:	Dated:

EX-10.9

Exhibit 10.9

FORM OF

DIEDRICH COFFEE, INC.

FRANCHISE AGREEMENT

TABLE OF CONTENTS

ARTICLE 1	DEFINITIONS
ARTICLE 2	GRANT
2.1	Grant
2.2	No Sublicensing Rights
2.3	No Exclusive Territory
ARTICLE 3	TERM
3.1	Initial Term
3.2	Renewal
3.3	Form and Manner of Renewal
3.4	Conditions Precedent to Renewal
3.5	Notice Required by Law
ARTICLE 4	PAYMENTS
4.1	Initial Franchise Fees
4.2	Continuing Royalty
4.3	Advertising Fee
4.4	Pre-Authorized Payments.
4.5	Other Payments
4.6	Application of Funds
4.7	Interest and Charges for Late Payments
ARTICLE 5	CONSTRUCTION AND COMMENCEMENT OF BUSINESS
5.1	Location
5.2	Company Site Selection Assistance
5.3	Lease
5.4	Construction and Renovation
5.5	Maintaining and Remodeling of “Diedrich Coffee” Coffeehouse
ARTICLE 6	TRAINING AND ASSISTANCE
6.1	Initial Training Program
6.2	Additional Training
6.3	Other Assistance
ARTICLE 7	OBLIGATIONS OF COMPANY
7.1	General
7.2	Company Default

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7.3	No Other Obligations
ARTICLE 8	MANUALS AND STANDARDS OF FRANCHISEE QUALITY, CLEANLINESS AND SERVICE
8.1	Product Line and Service
8.2	Containers, Fixtures and Other Goods
8.3	Menus
8.4	POS System
8.5	Manuals
8.6	Hours
8.7	Compliance with Applicable Law
8.8	Signs, Designs and Forms of Publicity
8.9	Uniforms and Employee Appearance
8.10	Vending or Other Machines
8.11	Co-Branding
ARTICLE 9	ADVERTISING AND CO-OPS
9.1	General Requirements
9.2	Local Advertising
9.3	Co-op Advertising
9.4	Advertising Program
9.5	Telephone Numbers and Directory Advertising
9.6	Promotional Campaigns
ARTICLE 10	DISTRIBUTION AND PURCHASE OF EQUIPMENT, SUPPLIES, AND OTHER PRODUCTS
10.1	Coffee and Diedrich Coffee Brand Products
10.2	Proprietary Products
10.3	Non-Proprietary Products
10.4	Purchases from Company, Extensions of Credit
10.5	Purchase/Distribution Programs
10.6	Test Marketing
ARTICLE 11	REPORTS, BOOKS AND RECORDS, INSPECTIONS
11.1	General Reporting
11.2	Inspections
11.3	Audits
ARTICLE 12	MARKS
12.1	Use of Marks
12.2	Non-Use of Trade Name
12.3	Use of Other Marks
12.4	Non-ownership of Marks

ii

12.5	Defense of Marks
12.6	Prosecution of Infringers
12.7	Modification of Marks
12.8	Acts in Derogation of the Marks
12.9	Assumed Name Registration
ARTICLE 13	COVENANTS REGARDING OTHER BUSINESS INTERESTS
13.1	Non-Competition
13.2	Confidential Information
13.3	Franchisee’s Affiliates
ARTICLE 14	INTERFERENCE WITH EMPLOYMENT RELATIONS
14.1	Prohibitions During Term
14.2	Prohibitions After Term
14.3	Prohibitions Applicable to Company
ARTICLE 15	NATURE OF INTEREST, ASSIGNMENT
15.1	Assignment by Company
15.2	Assignment by Franchisee
15.3	Business Entity Franchisee
ARTICLE 16	DEFAULT AND TERMINATION
16.1	General
16.2	Automatic Termination Without Notice
16.3	Option to Terminate Without Notice
16.4	Termination With Notice and Opportunity To Cure
16.5	Reimbursement of Company Costs
16.6	Cross-Default
16.7	Notice Required By Law
ARTICLE 17	RIGHTS AND OBLIGATIONS UPON TERMINATION
17.1	General
17.2	Survival of Obligations
17.3	No Ownership of Marks
17.4	Government Filings
ARTICLE 18	INSURANCE
18.1	Insurance
18.2	Use of Proceeds
18.3	Proof of Insurance
ARTICLE 19	RELATIONSHIP OF PARTIES, DISCLOSURE
19.1	Relationship of Franchisee to Company

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19.2	Indemnity by Franchisee
ARTICLE 20	NOTICES
20.1	General
ARTICLE 21	MISCELLANEOUS PROVISIONS
21.1	Company’s Right To Cure Defaults
21.2	Waiver and Delay
21.3	Survival of Covenants
21.4	Successors and Assigns
21.5	Joint and Several Liability
21.6	General Release
21.7	Governing Law/Consent to Jurisdiction
21.8	Waiver of Punitive Damages and Jury Trial
21.9	Limitations of Claims
21.10	Entire Agreement
21.11	Titles For Convenience
21.12	Gender And Construction
21.13	Severability
21.14	Counterparts
21.15	Fees and Expenses
21.16	Counsel
ARTICLE 22	SUBMISSION OF AGREEMENT
22.1	General
ARTICLE 23	ACKNOWLEDGMENT
23.1	General
23.2	Due Execution

iv

DIEDRICH COFFEE

FRANCHISE AGREEMENT

THIS AGREEMENT is made this        day of                    ,        (the “Effective Date”) by and between Diedrich Coffee, Inc., a Delaware corporation, located at 2144 Michelson Drive, Irvine, California  92612, (“Company”), and                                                          , [  ] an individual OR [  ] a                                organized under the laws of                                  (the “Franchisee”), with reference to the following facts:

A.            Company owns certain proprietary and other property rights and interests in and to the “Diedrich Coffee” trademark and service mark, and such other trademarks, service marks, logo types, insignias, trade dress, designs, and commercial symbols as Company may from time to time authorize or direct Franchisee to use in connection with the operation of a “Diedrich Coffee” Coffeehouse (the “Marks”).

B.            Company has developed and continues to develop a system for the operation of coffeehouses, kiosks and coffee carts and merchandising of Diedrich Coffee Authorized Products, which system features distinctive signs, recipes, and various trade secrets and other confidential information, and in some cases also includes architectural designs, trade dress, uniforms, equipment specifications, layout plans, inventory, record-keeping and marketing techniques (the “System”).

C.            Franchisee desires to obtain a license and franchise to operate a single “Diedrich Coffee” Coffeehouse under the Marks and in strict accordance with the System, and the standards and specifications established by Company, and Company is willing to grant Franchisee such license and franchise under the terms and conditions of this Agreement.

NOW, THEREFORE, the parties agree as follows:

ARTICLE 1

DEFINITIONS

In this Agreement the following capitalized terms shall have the meanings set forth below, unless the context otherwise requires:

“Advertising Co-op” shall have the meaning set forth in Section 9.3.

“Advertising Co-op Region” shall have the meaning set forth in Section 9.3.

“Advertising Fee” shall have the meaning set forth in Section 4.3.

“Advertising Fee Rate” shall have the meaning set forth in Section 4.3.

“Applicable Calendar Year” shall have the meaning set forth in Section 4.3.2.

“Applicable Law” means and includes applicable common law and all applicable statutes, laws, rules, regulations, ordinances, policies and procedures established by any Governmental Authority governing the operation of the “Diedrich Coffee” Coffeehouse, including all immigration, labor, disability, food and drug laws, health and safety regulations, and Americans With Disabilities Act requirements, as in effect on the Effective Date hereof, and as may be amended, supplemented or enacted from time to time.

“Assignment” shall have the meaning set forth in Section 15.2.

“Authorized Diedrich Coffee Products” means the specific espresso drinks and coffees, roasted coffee beans and blends, premium teas, baked goods, snacks and other food items and ancillary products, which may include coffee making equipment, cups, hats, t-shirts and novelty items, as specified by Company from time to time in Company's Manuals, or as otherwise directed by Company in writing, for sale at the Franchisee's “Diedrich Coffee” Coffeehouse, prepared and served in strict accordance with Company's recipes, quality standards and specifications, including specifications as to ingredients, brand names, preparation and presentation.

“Barista” means a person who has been certified by Company as an expert in the knowledge and preparation of espresso drinks.

“Business Entity” means any Partnership, limited liability company, and any association, corporation or other entity which is not an individual.

“Competitive Activities” shall mean to, own, operate, lend to, advise, be employed by, or have any financial interest in any business that engages in the roasting of green coffee beans; the sale of roasted coffee beans or ground coffee produced by third parties; or the production or sale at retail or wholesale of any espresso or coffee product, or any other food products featured by “Diedrich Coffee” Coffeehouses.

“Confidential Information” shall have the meaning set forth in Section 13.2.

“Continuing Royalty” shall have the meaning set forth in Section 4.2

“Co-op Advertising Regions” shall have the meaning set forth in Section 9.3.

“Designated Franchisee Representative” shall have the meaning set forth in Section 6.1.1.

“Diedrich Coffee Branded Product” is any product now existing or developed in the future that bears or is packaged under any of Company's Marks.

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“'Diedrich Coffee' Coffeehouse” shall refer to the full service location, kiosk, or coffee cart operated pursuant to this Agreement under Company's Marks and in accordance with the System and specializing in the sale of Authorized Diedrich Coffee Products.

“Effective Date” means the date indicated in the first paragraph of this Agreement.

“Franchisee” shall mean the person or Business Entity identified in the first paragraph of this Agreement, and for purposes of Article 13 only, shall include Franchisee's spouse and minor children and its Owners, officers and directors if Franchisee is a Business Entity.

“Governmental Authority” means and include all Federal, state, county, municipal and local governmental and quasi-governmental agencies, commissions and authorities.

“Gross Sales” means gross revenues (excluding allowances and sales taxes) received or receivable by Franchisee as payment, whether in cash or for credit or barter (and, if for credit or barter, whether or not payment is received therefor), for all espresso, coffee, tea and other beverages, roasted coffee beans, food, and other goods, services, and supplies sold or prepared in Franchisee's “Diedrich Coffee” Coffeehouse, or which are promoted or sold under any of the Marks.

“Internet” means collectively the myriad of computer and telecommunications facilities, including equipment and software, which comprise the interconnected worldwide network of networks that employ the TCP/IP [Transmission Control Protocol/Internet Protocol], or any predecessor or successor protocols to such protocol, to communicate information of all kinds by fiber optics, wire, radio, or other methods of transmission

“Initial Fee” shall have the meaning set forth in Section 4.1

“Lease” shall have the meaning set forth in Section 5.3.

“Leasehold Improvements” shall have the same meaning set forth in Section 5.4.1.

“Location” shall have the meaning set forth in Section 5.1.1.

“Manuals” means Company's Front Line Team Member Training Guide; Diedrich Coffee Operations Manual and Support Manual, and all related manuals now or hereafter created by Company for use in the operation of a “Diedrich Coffee” Coffeehouse, as the same may be amended and revised from time to time, including all bulletins, supplements and ancillary manuals.

“Marks” shall have the meaning set forth in Recital A above.

“Maximum Advertising Co-op Fee” shall have the meaning set forth in Section 9.3.2.

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“Owner” means any shareholder, member, general or limited partner, trustee, or other equity owner of a Business Entity; except that if Company has any ownership interest in Licensee, the term “Owner” shall not include or refer to the Company or its Owners or affiliates, and no obligation or restriction upon the “Franchisee”, or its Owners, directors or officers shall bind Company, its Owners or affiliates, or their respective Owners, directors or officers.

“Partnership” means any general partnership, limited partnership or limited liability company.

“Partnership Rights” means voting power, property, profits or losses, or partnership interests of a Partner.

“Permits” means and include all applicable franchises, licenses, permits, registrations, certificates and other operating authority required by Applicable Law.

“Premises” means, in the case of a kiosk or cart, the property at which the Franchisee's “Diedrich Coffee” Coffeehouse is located, including, unless otherwise expressly provided, any ancillary common areas, campus, buildings and other structures associated with the Premises.

“Restricted Persons” means the Franchisee (if the franchisee is an individual), each officer, director, or direct or indirect Owner of an interest in Franchisee (if franchisee is a Business Entity); and the spouse and family members who live in the same household of each of the foregoing persons.

“Supplier” shall have the meaning set forth in Section 10.3.

“System” shall have the meaning set forth in Recital B.

“Term” shall have the meaning set forth in Section 3.1, including any extensions thereof.

“Transfer Fee” shall have the meaning set forth in Section 15.2.12.

“Week” shall refer to the 7 day period ending on Sunday of each calendar week, or such other reporting period hereafter specified by Company.

ARTICLE 2

GRANT

2.1           Grant.

2.1.1        Company hereby awards Franchisee the right and license during the Term, upon the terms and subject to the provisions of this Agreement, to use and display the Marks, and to use the System, to operate at, and only at, the Location, one:  (check one)

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o Full Service “Diedrich Coffee” Coffeehouse

o Kiosk

o Cart

2.1.2        Franchisee may not use or operate any permanent or temporary cart, kiosk or other vending device in connection with any Full Service “Diedrich Coffee” Coffeehouse pursuant to this Agreement, except with Company's prior written consent and pursuant to a separate addendum hereto on a form specified by Company.

2.2           No Sublicensing Rights.  Franchisee shall not subfranchise, sublicense, subcontract, sublease, or enter any management agreement providing for the right to operate the “Diedrich Coffee” Coffeehouse or to use the System granted pursuant to this Agreement.

2.3           No Exclusive Territory.  The license and franchise granted to the Franchisee under this Agreement is non-exclusive, and does not grant Franchisee any protected trading area or territory, nor any rights to obtain additional franchises from Company.  Without limiting the generality of the foregoing, the Company expressly reserves the exclusive, unrestricted right, in its sole and absolute discretion, directly and indirectly:

(a)           to own or operate, and to franchise and license others to own, operate or co-brand, coffeehouses, kiosks, and carts at any location other than at the specific Location identified in Section 5.1.1, regardless of its proximity to the “Diedrich Coffee” Coffeehouse operated pursuant hereto; and

(b)           to produce, promote, license, distribute and market products, whether or not they bear any of the Marks, at wholesale or retail, through its employees, affiliates, representatives, licensees, franchisees, assigns, agents and others, including bulk and pre-packaged roasted coffee, premium teas, ice cream, beverages, snacks and other food products; clothing; books, souvenirs and novelty items, through any outlet or channel of commerce, including grocery stores and convenience stores (regardless of their proximity to Franchisee's “Diedrich Coffee” Coffeehouse), sales by means of the Internet, mail order catalogs, direct mail advertising, vending machines and other distribution methods.

ARTICLE 3

TERM

3.1           Initial Term.  Subject to earlier termination pursuant to Article 16, the “Term” of this Agreement shall begin on the Effective Date and continue for a period of 10 years.

3.2           Renewal.  Subject to the conditions contained in Section 3.4, at the expiration of the Term hereof, Franchisee shall have the right (the “Renewal Right”) to enter into a new franchise agreement in the form then generally being offered to prospective “Diedrich Coffee”

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coffeehouse franchisees (the “Renewal Franchise Agreement”) for one 10 year period (the “Renewal Term”).  The term of the Renewal Franchise Agreement shall commence upon the date of expiration of the Term hereof; provided, however, notwithstanding the terms of Company's then-current form of  Franchise Agreement: (a) Franchisee shall not have the right to renew or extend the term thereof or enter into any additional Renewal Franchise Agreement for a period following the Renewal Term; and (b) the Renewal Franchise Agreement shall be modified to conform to the Renewal Rights granted above.

3.3           Form and Manner of Renewal.  Franchisee shall exercise its Renewal Right, if at all, strictly in the following manner:

3.3.1        Between 9 months and 12 months before the expiration of the Term, Franchisee shall notify Company in writing (“Renewal Notice”) that it intends to exercise its Renewal Right and no sooner than 10 business days nor more than 20 business days after Franchisee receives Company's Offering Circular, if applicable, and execution copies of the Renewal Franchise Agreement, Franchisee shall execute the copies of said Renewal Franchise Agreement and deliver them to Company together with the then-current initial fee due to Company.

3.3.2        If Franchisee shall have exercised its Renewal Right in accordance with Section 3.3.1 and satisfied all of the conditions contained in Section 3.4, Company shall execute the Renewal Franchise Agreement executed by Franchisee and at or prior to the expiration of the Term deliver one fully executed copy thereof to Franchisee.

3.3.3        If Franchisee fails to perform any of the acts, or deliver any of the notices required pursuant to the provisions of Sections 3.3 or 3.4, in a timely fashion, such failure shall be deemed an election by Franchisee not to exercise its Renewal Right and shall automatically cause Franchisee's said Renewal Right to lapse and expire.

3.4           Conditions Precedent to Renewal.  Franchisee's Renewal Right is conditioned upon Franchisee's fulfillment of each and all of the following conditions precedent:

3.4.1        At the time Franchisee delivers its Renewal Notice to Franchisor and at all times thereafter until the commencement of the Renewal Term, Franchisee shall have fully performed all of its material obligations under this Agreement, the Manuals and all other agreements then in effect between Franchisee and Company (or its affiliates) including, but not limited to, Area Development Agreement(s), Franchise Agreement(s), or Sublease Agreement(s).

3.4.2        Without limiting the generality of Section 3.4.1, Franchisee shall not have committed 2 or more material breaches of this Agreement during the 12 month period immediately preceding the date of the Renewal Notice for which Franchisor shall have delivered a notice of default, whether or not such default was cured.

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3.4.3        Without limiting the generality of Section 3.4.1, Franchisee shall not have committed 2 or more material breaches of this Agreement during any 12 month period during the Term of this Agreement for which Franchisor shall have delivered notice of default, whether or not such defaults were cured.

3.4.4        Without limiting the generality of Section 3.4.1, Franchisee shall not have committed 4 or more material breaches of this Agreement during the Term of this Agreement for which Franchisor shall have delivered notice of default, whether or not such defaults were cured.

3.4.5        Franchisee shall, and Franchisee shall cause its Owners and affiliates to, execute and deliver to Franchisor a general release, on a form prescribed by Franchisor of any and all known and unknown claims against Franchisor and its affiliates and their officers, directors, agents, shareholders and employees.

3.4.6        At Company's request, Franchisee shall, prior to the date of commencement of the Renewal Term, undertake and complete at its expense the remodeling, renovation or modernization of the Premises and the “Diedrich Coffee” Coffeehouse operated pursuant hereto to comply with the Company's then-current specifications and standards for new “Diedrich Coffee” Coffeehouses.

3.5           Notice Required by Law.  If Applicable Law requires that Company give notice to Franchisee prior to the expiration of the Term, this Agreement shall remain in effect on a week to week basis until Company has given the notice required by such Applicable Law.  If Company is not offering new franchises, is in the process of revising, amending or renewing its form of franchise agreement or offering circular, or is not lawfully able to offer Franchisee its then-current form of franchise agreement, at the time Franchisee delivers its Renewal Notice, Company may, in its sole subjective discretion, (i) offer to renew this Agreement upon the same terms set forth herein for a renewal term determined in accordance with Section 3.2 hereof, or (ii) offer to extend the Term hereof on a week to week basis following the expiration of the Term hereof for as long as it deems necessary or appropriate so that it may lawfully offer its then-current form of franchise agreement.

ARTICLE 4

PAYMENTS

4.1           Initial Franchise Fees.  Franchisee shall pay to Company an initial franchise fee (the “Initial Fee”) equal to $30,000 (or $7,500 if the Franchisee's “Diedrich Coffee” Coffeehouse is a kiosk or cart).  The Initial Fee shall be payable in good funds upon signing this Agreement, and shall be deemed fully earned by Company upon the execution of this Agreement by Company and Franchisee and shall be non-refundable, in whole or in part, under any circumstances.  If Franchisee is party to an Area Development Agreement with Company, then Franchisee will receive a credit against the Initial Fee in accordance with that Area Development Agreement.

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4.2           Continuing Royalty.  Franchisee shall pay to Company each month during the Term, an amount equal to 5% of its Gross Sales during the preceding month (the “Continuing Royalty”).  Franchisee shall cause its Continuing Royalty for each month to be actually received by Company on or before the 10th day of the following month; provided, however, that Franchisee at its election may alternatively adopt a periodic payment cycle that matches Company's fiscal accounting cycle (presently thirteen (13)  four (4) week fiscal periods per fiscal year).  In that event, Franchisee shall notify Company of such election in writing and thereafter cause its Continuing Royalty for each four (4) week fiscal period (“fiscal period”) to be actually received by Company on or before the 10th day following the end of  the fiscal period.

4.3           Advertising Fee.  Franchisee shall pay to Company each month during the Term, simultaneously with its Continuing Royalty payments and in the manner described in Section 4.2, an advertising fee equal to 1% (the “Advertising Fee Rate”)of its Gross Sales during the preceding month (“Advertising Fee”).  Company reserves the right to adjust the Advertising Fee from time to time provided it shall in no event exceed 2% of Franchisee's Gross Sales, and may be amended by the Company no more frequently than annually.  The Advertising Fee shall be in addition to any other co-op expenditures required or permitted under Article 9 hereof.  Company shall administer the Advertising Fee as part of the advertising program provided in Section 9.4.

4.4           Pre-Authorized Payments.

4.4.1        If Franchisee fails to report its sales on a timely basis in accordance with Section 11.1, Company may estimate the amount of Franchisee's sales, and deposit or transfer the reported, or in the absence of a report, the estimated, amounts due into its own account, using the Franchisee's pre-authorized checks or other instruments or authority.

4.4.2        At Company's request, Franchisee shall instruct its bank to pay the amount of its monthly Continuing Royalty, Advertising Fee and other fees directly to Company from Franchisee's account, by electronic funds transfer or such other automatic payment mechanism which Company may designate and upon the terms and conditions set forth in the Operations Manual, and promptly upon Company's request, Franchisee shall execute or re-execute and deliver to Company such pre-authorized check forms and other instruments or drafts required by Company's bank, payable against Franchisee's bank account, to enable Company to draw Franchisee's Continuing Royalty, Advertising Fee and other sums payable under the terms of this Agreement.

4.5           Other Payments.  In addition to all other payments provided herein, Franchisee shall pay to Company, its parent companies, subsidiaries, affiliates and designees, as applicable, promptly when due:

4.5.1        All amounts advanced by Company or which Company has paid, or for which Company has become obligated to pay on behalf of Franchisee for any reason whatsoever.

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4.5.2        All sums due on account of the purchase of products or services by or for the account of Franchisee.

4.5.3        The amount of all sales taxes, use taxes, personal property taxes and similar taxes, which shall be imposed upon Franchisee and required to be collected or paid by Company (a) on account of Franchisee's Gross Sales, or (b) on account of Continuing Royalties, Advertising Fees or Initial Fees collected by Company from Franchisee (but excluding ordinary income taxes).  Company, at its sole discretion, may collect the taxes in the same manner as franchise fees are collected herein and if Company collects such taxes, Company shall promptly pay the tax collections to the appropriate governmental authority; provided, however, that it shall be Franchisee's responsibility to pay any sales, use or other taxes now or hereinafter imposed on Initial Fees, Continuing Royalties, and Advertising Fees imposed by any Governmental Authorities.

4.6           Application of Funds.  If Franchisee shall be delinquent in the payment of any obligation to Company hereunder, or under any other agreement with Company, Company shall have the absolute right to apply any payments received from Franchisee to any obligation owed, whether under this Agreement or otherwise, notwithstanding any contrary designation by Franchisee as to application.

4.7           Interest and Charges for Late Payments.

4.7.1        If Franchisee shall fail to pay to Company the entire amount of the Continuing Royalty, Advertising Fee or any other sums owed to Company, promptly when due, Franchisee shall pay to Company, in addition to all other amounts which are due but unpaid, interest on the unpaid amounts, from the due date thereof, at the rate of 1-1/2% per month, or the highest rate allowable under applicable law, whichever is less.

4.7.2        If any check, draft, electronic or otherwise, is unpaid because of insufficient funds or otherwise, then Franchisee shall pay Company's expenses arising from such non-payment, including bank fees in the amount of at least $30.00, hourly staff charges arising from such default, and any other related expenses incurred by Company.

ARTICLE 5

CONSTRUCTION AND COMMENCEMENT OF BUSINESS

5.1           Location.

5.1.1        Franchisee's “Diedrich Coffee” Coffeehouse shall be located at the following address:                                                                                                                  , and if the “Diedrich Coffee” Coffeehouse is a kiosk or cart, the following specific location at the address inserted above:                                                                                                                   (the “Location”).

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5.1.2        Franchisee may not relocate the “Diedrich Coffee” Coffeehouse, including in the case of a kiosk or cart relocating to any other location within the Premises, without Company's prior written consent.  Any attempt to do so shall be a material breach hereof.

5.2           Company Site Selection Assistance.  Company may voluntarily (without obligation) assist Franchisee in identifying or obtaining a location.  Company's said assistance, if any, shall not be construed to insure or guarantee the profitable or successful operation of the Location by Franchisee, and Company hereby expressly disclaims any responsibility therefor.  Franchisee acknowledges that it is its sole responsibility to find a suitable location, that the location of the “Diedrich Coffee” Coffeehouse will be a critical factor in the success of Franchisee's business, and that Company is not obligated to directly or indirectly identify or obtain a location for Franchisee.

5.3           Lease.  If the Location is leased or subleased by Franchisee, (i) Company shall have the right of approval of such lease or sublease, as applicable (the “Lease”), a true and correct copy of which shall be delivered to Company at least 15 days prior to the execution thereof; (ii) the term of said Lease shall be for a period which is not less than the Term of this Agreement, unless Company shall approve, in writing, a shorter term; (iii) Franchisee shall neither create nor purport to create any obligations on behalf of Company, nor grant or purport to grant to the landlord thereunder any rights against Company, nor agree to any other term, condition, or covenant which is inconsistent with any provision of this Franchise Agreement; (iv) Franchisee shall duly and timely perform all of the terms, conditions, covenants and obligations imposed upon him under the Lease; (v) the Location shall be constructed and improved pursuant to the provisions of Section 5.4 hereof; (vi) the Lease shall grant Company an option, without cost or expense to Company, to assume the Lease in the event of termination or expiration of this Franchise Agreement for any reason, and shall expressly provide that Company shall have the right (but not the obligation) to succeed to Franchisee's rights under the Lease if Franchisee fails to exercise any option to renew, and upon Franchisee's default thereunder, and that upon any alleged breach thereof by Franchisee, the landlord thereunder shall be obligated to notify Company in writing at least 15 days prior to its termination or non-renewal and, in the case of a default, Company shall have the right, but not the obligation, to cure the breach and to succeed to Franchisee's rights under said Lease by giving written notice of such election to Franchisee and such landlord; Franchisee hereby appoints Company as its attorney-in-fact to execute an assignment and all other documents and instruments which Company deems necessary or appropriate to effectuate the foregoing; (vii) a fully executed copy of said Lease shall be delivered to Company promptly following the execution thereof; (viii) the Lease shall provide that it may not be assigned, subleased, modified or amended without Company's prior written consent and that Company shall be provided with copies of all such assignments, subleases, modifications and amendments, and the landlord shall consent in advance to any assignment or sublease to Company or a “Diedrich Coffee” franchisee or licensee approved by Company during the initial term or any renewal term of the Lease; and (ix) the Lease may not contain a non-competition covenant which purports to restrict the Company, or any franchisee or licensee of the Company (or its affiliates), from operating a “Diedrich Coffee” Coffeehouse or any other retail establishment.  In all cases, the Lease shall provide that upon expiration or termination thereof for

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any reason, Franchisee shall, upon Company's demand, remove all of the Marks from the Location and Premises and modify the decor of the Location so that it no longer resembles, in whole or in part, a “Diedrich Coffee” coffeehouse, kiosk or cart and that if Franchisee shall fail do so, Company will be given written notice and the right to enter the Location and Premises to make such alterations, in which event Franchisee shall reimburse Company for all direct and indirect costs and expense it may incur in connection therewith, including attorney's fees.

5.4           Construction and Renovation.

5.4.1        If on the Effective Date the “Diedrich Coffee” Coffeehouse, Location or Premises at which the “Diedrich Coffee” Coffeehouse will operate has not been constructed, or if the same has been constructed but does not comply with Company's current standards in effect for new “Diedrich Coffee” coffeehouses, kiosks or carts, as applicable, Franchisee shall at its sole cost and expense promptly cause the “Diedrich Coffee” Coffeehouse and Location to be constructed, equipped and improved in accordance with such standards and specifications.  Except to the extent otherwise agreed to by Company, all fixtures, furnishings, equipment and signs (“Leasehold Improvements”) shall be purchased by Franchisee only from suppliers and manufacturers approved by Company.

5.4.2        Following the Effective Date and prior to any construction or renovation of the “Diedrich Coffee” Coffeehouse or Location, Company shall provide Franchisee with copies of Company's specifications for the design and layout of the “Diedrich Coffee” Coffeehouse and required Leasehold Improvements.  Franchisee shall, in all respects, comply with all such specifications and criteria unless Company shall, in writing, agree to modifications thereof.  Franchisee shall employ architects, engineers and general contractors of its own selection, and at its sole cost and expense, to prepare such architectural, engineering and construction drawings and site plans (collectively referred to as the “Construction Documents”), and/or to modify the standard Construction Documents which may be provided by Company, and to obtain all Permits required to construct, remodel, renovate, and/or equip the “Diedrich Coffee” Coffeehouse and Location.  All such Construction Documents, and all modifications and revisions thereto, shall be submitted to Company for its prior review and approval before Franchisee's commencement of construction pursuant thereto.  When completed, said “Diedrich Coffee” Coffeehouse and Location shall in all respect strictly comply with the Company's specifications therefor, as modified or revised if applicable with Company's prior written consent.  Franchisee must submit to Company one (1) set of “Project Record Drawings” within sixty (60) days of the “Diedrich Coffee” Coffeehouse opening.  “Project Record Drawings” are hereby defined as the set of Construction Documents that are marked to show the changes made in the field, with particular attention paid to the information on concealed elements (e.g. underground utilities) that cannot be readily identified at a later time.  Such drawings should be clearly marked as “Project Record Drawings.”

5.4.3        Subject only to causes beyond the reasonable control of Franchisee, such as, by way of illustration, strikes, material shortages, fires and other acts of God, which Franchisee could not by the exercise of due diligence have avoided, Franchisee shall complete

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construction or renovation, as the case may be, of the Location and “Diedrich Coffee” Coffeehouse and shall install all Leasehold Improvements therein as soon as possible, but in any event within 3 months after commencement of construction.  At all times prior to Franchisee commencing the operation of the “Diedrich Coffee” Coffeehouse, Company shall have the right, and Franchisee shall provide access to Company, to inspect and examine the Premises, Location, “Diedrich Coffee” Coffeehouse and all Leasehold Improvements, for the purpose of insuring compliance with Company's standards and specifications.

5.4.4        Franchisee shall commence the operation of the “Diedrich Coffee” Coffeehouse not later than 6 months following the Effective Date.

5.4.5        The time periods for the commencement and completion of construction and the installation of Leasehold Improvements as referred to in this Section 5.4 are of the essence of this Agreement.  If Franchisee fails to perform its obligations contained in this Section, the Company may deem the Franchisee's failure to so perform its obligations as aforesaid to constitute a material breach of this Agreement.

5.5           Maintaining and Remodeling of “Diedrich Coffee” Coffeehouse.

5.5.1        Franchisee at all times during the Term shall maintain the condition and appearance of its “Diedrich Coffee” Coffeehouse in accordance with the Manuals and consistent with the image of a “Diedrich Coffee” Coffeehouse as attractive, clean, and efficiently operated, offering high quality food products and beverages, efficient and courteous service, and pleasant ambiance.  If at any time in the Company's reasonable judgment, the general state of repair, appearance or cleanliness of the Location (including the “Diedrich Coffee” Coffeehouse and the non-Coffeehouse portion of Franchisee's Location and Premises, and parking areas) or its Leasehold Improvements, does not meet the Company's standards therefor, Franchisee shall immediately upon receipt of notice from Company specifying the action to be taken by Franchisee to correct such deficiency, repair and refurbish the “Diedrich Coffee” Coffeehouse, the Location and the Premises, as applicable, and make such modifications and additions to its layout, decor and general theme, as may be required from time to time to maintain such condition, appearance, efficient operation, ambiance and overall image, including without limitation, replacement of worn out or obsolete Leasehold Improvements, and repair and paint the interior and exterior of the “Diedrich Coffee” Coffeehouse, and appurtenant parking areas (if any), and periodic cleaning and redecorating.  Franchisee shall fully implement and complete such repairs, painting, refurbishment and changes within 90 days after receipt of said written notice.  Such maintenance shall not be deemed to constitute remodeling, as set forth below.

5.5.2        From time to time during the Term, Company may require Franchisee at Franchisee's sole cost and expense to refurbish, remodel and improve the “Diedrich Coffee” Coffeehouse to conform the Franchisee's building design, trade dress, color schemes, and presentation of Marks to the Company's then current public image.  Such a remodeling may include extensive structural changes to the “Diedrich Coffee” Coffeehouse and replacement or modification

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of Leasehold Improvements as well as such other changes as the Company may direct, and Franchisee shall undertake such a program promptly upon notice from the Company, and shall complete any such remodeling as expeditiously as possible, but in any event within 90 days of commencing same.  Company may, on one or more occasions, waive or defer for such period of time as Company may deem appropriate, Franchisee's obligation to remodel any such “Diedrich Coffee” Coffeehouse, if Company determines that any such “Diedrich Coffee” Coffeehouse is, on the date scheduled for commencement of such remodel, in substantial conformity with Company's then current standard system decor specifications, or if the proposed remodeling is within the last two years prior to the expiration of the Term (subject to Company's right to require remodeling, renovation or modernization as a condition to Franchisee's exercise of its Renewal Right as provided in Section 3.4).

5.5.3        If the “Diedrich Coffee” Coffeehouse is damaged or destroyed by fire or any other casualty, Franchisee, within 30 days thereof, shall initiate such repairs or reconstruction, and thereafter in good faith and with due diligence continue (until completion not more than 120 days after such fire or other casualty) such repairs or reconstruction, in order to restore the premises of the “Diedrich Coffee” Coffeehouse to its original condition prior to such casualty.  If, in Company's reasonable judgment, the damage or destruction is of such a nature or to such extent that it is feasible for Franchisee to repair or reconstruct the Location and the “Diedrich Coffee” Coffeehouse in conformance with the then standard “Diedrich Coffee” decor specifications, the Company may require Franchisee, by giving written notice thereof, that Franchisee repair or reconstruct the Location and “Diedrich Coffee” Coffeehouse in conformance with the then standard System decor specifications.

ARTICLE 6

TRAINING AND ASSISTANCE

6.1           Initial Training Program.

6.1.1        Franchisee shall, at all times, employ a general manager and one or more assistant managers and other employees acceptable to Company each of whom shall have been trained by Company or by a trainer certified by Company and qualified as “Barista” in accordance with Company's policies and standards, and at least one of whom shall be working at the “Diedrich Coffee” Coffeehouse at all times while the “Diedrich Coffee” Coffeehouse is open to the public.  At no extra charge, Company shall provide an initial training program in the Company's System and methods of operation to up to 5 persons selected by Franchisee and who shall include the general manager and assistant manager(s) of the “Diedrich Coffee” Coffeehouse.  Said initial training program shall consist of up to 5 weeks of training, as Company may determine, at one or more of the following locations: (i) Company's corporate headquarters in Irvine, California, (ii) at a Company-owned or franchised coffeehouse, (iii) at Franchisee's Location, or (iv) at such place or places as may be designated by Company.  In the case of a Franchisee which is a Business Entity, Company may require the general manager to be an Owner, officer or other designated representative

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selected by Franchisee and acceptable to, and approved by Company (“Designated Franchisee Representative”).  Subject to Sections 6.1.3 and  6.1.4, Company will bear its costs of providing the initial training program concurrently to up to 5 persons pursuant to this Section 6.1.1, including Company's staff salaries, materials, and all technical training tools.  Franchisee shall pay all travel, living, compensation, and other expenses, if any, incurred by Franchisee and/or Franchisee's employees in connection with attendance at training programs.  Franchisee may not open its “Diedrich Coffee” Coffeehouse until such training shall have been successfully completed by Franchisee's general manager, assistant manager and Franchisee's management team and staff has been certified by Company.  Company shall pay no compensation for any services performed by trainee(s) in connection with such training programs.

6.1.2        The contents of the initial training program and manner of conducting such program shall be at Company's sole discretion and control, however, the training course will be structured to provide practical training in the implementation and operation of a “Diedrich Coffee” Coffeehouse and may include such topics as on-site coffee and espresso drink and food preparation, Barista training, use of point of sale cash register and/or computer systems, inventory, cash handling, Diedrich Coffee standards, personnel management, marketing techniques, reports, equipment maintenance, safety and security, customer service techniques and financial controls.

6.1.3        Company shall provide the initial training at no additional charge pursuant to Sections 6.1.1 and 6.1.2 only if this is the first “Diedrich Coffee” Coffeehouse operated by Franchisee, and not if Franchisee has otherwise previously received such training for this Location.  Unless otherwise agreed in writing by Company, the Designated Franchisee Representative shall become a certified trainer and thereafter train Franchisee's “Diedrich Coffee” Coffeehouse general manager, assistant manager(s) and other employees pursuant to Section 6.1.4.

6.1.4        Unless waived by Company, each of Franchisee's general managers, assistant managers and staff shall have satisfactorily completed Company's initial training program as required pursuant to Section 6.1.1, provided, however, that if general manager or Designated Franchisee Representative has been approved by Company as a certified trainer, Franchisee's general manager, assistant managers or staff for the “Diedrich Coffee” Coffeehouse may be trained by such certified trainer in lieu of attending Company's initial training program as required pursuant to Section 6.1.1.  Should Company determine that any general manager's, assistant manager's or other employee's training is unsatisfactory, Company may require such person(s) (or a replacement trainee acceptable to Company) to undergo further training by Company at a time scheduled by Company, until Company is satisfied that Franchisee's trainee has satisfactorily completed the training course and Franchisee shall advance or reimburse, at Company's option, all direct and indirect costs and expense that Company may incur for the wages, lodging, subsistence and travel of Company's personnel, if conducted at the “Diedrich Coffee” Coffeehouse in Company's discretion, for the duration of the extended training and Company's then current standard training fee.  Franchisee acknowledges that because of Company's superior skill and knowledge with respect to the training and skill required to manage the “Diedrich Coffee” Coffeehouse, its judgment as to whether or not

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the Franchisee or his manager has satisfactorily completed such training shall be determined by Company in its sole subjective judgment, exercised in good faith.

6.2           Additional Training.  Company may, from time to time, at its discretion, make available to Franchisee or its manager and/or Designated Franchisee Representative, or any of them, additional optional training courses or programs during the term of this Agreement held on a national or regional basis at locations selected by Company to instruct Franchisee with regard to new procedures or programs which Company deems, in its reasonable judgment, to be of material importance to the operation of the “Diedrich Coffee” Coffeehouse by its franchisees.  The time and place of such training courses shall be at Company's sole discretion.  Such supplementary training may relate, by way of illustration, to product production techniques, new recipes, marketing, bookkeeping, accounting and general operating procedures, and the establishment, development and improvement of computer systems.  Company may establish charges applicable to all franchisees similarly situated for such optional training courses.   In addition to any charge Company may establish, Franchisee shall pay all transportation costs, food, lodging and similar costs incurred in connection with attendance at such courses.  Company shall pay no compensation for any services performed by trainee(s) in connection with such training programs.

6.3           Other Assistance.

6.3.1        Company will advise Franchisee from time to time regarding the operation of Franchisee's “Diedrich Coffee” Coffeehouse based on Franchisee's reports or Company's inspections.  Company will provide guidance to Franchisee in the Manuals; in bulletins or other written materials; by electronic media; by telephone consultation; and/or Company's office or Franchisee's “Diedrich Coffee” Coffeehouse.  If Franchisee requests and Company agrees to provide additional or special guidance, assistance or training, Franchisee must pay Company then applicable charges, including Company's per diem charges and any transportation costs, food, lodging and similar costs incurred by Company and its personnel.

6.3.2        Company may, from time to time, at its discretion, cause its field representatives to visit Franchisee's “Diedrich Coffee” Coffeehouse for the purpose of rendering advice and consultation or training, with respect to the “Diedrich Coffee” Coffeehouse, its operation and performance, and compliance by Franchisee with the Manuals.  If provided at the Franchisee's request, the Company may require the Franchisee to pay such training charges as may be then in effect, and to reimburse Company for all transportation costs, food, lodging and similar costs incurred by Company and its personnel in connection with such training.

6.3.3        In the event of any sale transfer, or assignment, the transferee/assignee must be trained by Company as a condition of Company's consent to such transfer.  All transfer fees and tuition costs for such training shall be paid to Company in advance of the attendance by such transferee and its employees in accordance with Section 15.2.12 herein.  No “Diedrich Coffee” Coffeehouse shall be opened or re-opened until Company certifies that the transferee is approved to operate the respective “Diedrich Coffee” Coffeehouse.

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ARTICLE 7

OBLIGATIONS OF COMPANY

7.1           General.  Company shall perform the following obligations:

7.1.1        To review and approve or disapprove the Franchisee's proposed Location;

7.1.2        To supply to Franchisee a set of standard decor and layout plans and to thereafter approve the initial decor and layout of Franchisee's “Diedrich Coffee” Coffeehouse as described in Section 5.4;

7.1.3        Subject to Section 8.5.2, to loan Franchisee a copy of its Manuals which contain mandatory and suggested specifications, standards and procedures.  The Manuals are confidential and remains Company's property.

7.1.4        To provide the training and assistance described in Article 6.

7.1.5        To administer the Advertising Program described in Section 9.3, if and when implemented.

7.2           Company Default.  Company shall not, and can not be held in breach of this Agreement until (i) Company has received written notice from Franchisee describing in detail any alleged breach from Franchisee; and (ii) Company has failed to remedy the breach within a reasonable period of time after such notice, which period shall not be less than 60 days plus such additional time as reasonably required by Company if because of the nature of the alleged breach it cannot reasonably be cured within said 60 days, provided Company promptly commences and continues diligently to cure such alleged breach.

7.3           No Other Obligations.  Company shall not be obligated to provide any services to Franchisee except expressly provided herein and any and all other services which Company may provide to Franchisee during the Term shall be at its sole discretion and Company may cease to provide the same without notice of further obligation to Franchisee.

ARTICLE 8

MANUALS AND STANDARDS OF FRANCHISEE

QUALITY, CLEANLINESS AND SERVICE

In order to promote the value and goodwill of Company's Marks and the System and to protect Company's Marks and the other Diedrich Coffee Franchisees who comprise the Diedrich

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Coffee franchise system, Franchisee shall conduct its business in accordance with the standards promulgated by Company as follows:

8.1           Product Line and Service.  Franchisee shall serve all and only Authorized Diedrich Coffee Products at or from the “Diedrich Coffee” Coffeehouse, all of which shall be purchased by Franchisee from a Company or a designated or approved distributor or manufacturer, as provided in Article 10.  Franchisee acknowledges that Authorized Diedrich Coffee Products may differ at “Diedrich Coffee” Coffeehouses, kiosks, carts, and may vary depending on the operating season and geographic location of the Franchisee's “Diedrich Coffee” Coffeehouse or other factors.

8.1.1        Franchisee shall not produce, advertise for sale, sell or give away any goods or services unless the same product has been approved in the Manuals as an Authorized Diedrich Coffee Product approved for sale in Franchisee's “Diedrich Coffee” Coffeehouse and has not been thereafter disapproved in writing by Company.

8.1.2        All coffee, coffee drinks and other food and beverage products sold by Franchisee shall be of the highest quality, and the ingredients, composition, specifications, and preparation of such food products shall conform strictly with the instructions and recipes provided by Company or contained in Company's Manuals, and with the further requirements of Company as they are communicated to Franchisee from time to time.

8.2           Containers, Fixtures and Other Goods.  Franchisee agrees that all food and drink items served at the “Diedrich Coffee” Coffeehouse shall be served in approved containers bearing accurate reproductions of Company's Marks.  All containers, napkins, bags, cups, matches, menus and other packaging and like articles used in connection with Franchisee's “Diedrich Coffee” Coffeehouse shall conform to Company's specifications, shall be imprinted with Company's Marks and shall be purchased by Franchisee from a distributor or manufacturer approved in writing by Company, as provided in Article 10, which approval will not be unreasonably withheld.  No item of merchandise, furnishings, interior and exterior decor items, supplies, fixtures, equipment or utensils bearing any of Company's Marks shall be used in or upon any “Diedrich Coffee” Coffeehouse unless the same shall have been first submitted to and approved in writing by Company.

8.3           Menus.  All Authorized Diedrich Coffee Products shall be distributed under the specific name designated by Company.  Franchisee shall not remove any Authorized Diedrich Coffee Product from the Franchisee's menu unless Franchisee is so instructed by Company.

8.3.1        Authorized Diedrich Coffee Products shall be marketed by approved menu formats to be utilized in Franchisee's “Diedrich Coffee” Coffeehouse.  The approved and authorized menu and menu format(s) may include, in Company's discretion, requirements concerning organization, graphics, product descriptions, illustrations, and any other matters (except prices) related to the menu, whether or not similar to those listed.  In Company's discretion, the menu and/or menu format(s) may vary depending upon region, market size, season and other factors.  Company

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may change the menu and/or menu format(s) from time to time or region to region or authorize tests from region to region or authorize non-uniform regions or coffeehouses within regions, in which case Franchisee will be given a reasonable time (not longer than 60 days) to discontinue use of any old menu format(s) and implement use of the new menu format(s).

8.3.2        Franchisee shall, upon receipt of notice from Company, add any Authorized Diedrich Coffee Products to its menu according to the instructions contained in the notice.  Franchisee shall have a minimum of 30 days after receipt of written notice in which to fully implement any such change.  Franchisee shall cease selling any previously approved or discontinued product within 30 days after receipt of notice that the product is no longer approved.

8.4           POS System.  Franchisee shall purchase, use and maintain the point of sale cash collection system (the “POS System”) as specified in the Manuals or otherwise by Company in writing.  The POS System may include a cash register, register tape printer, magnetic stripe reader and cash drawer.  Upon at least 90 days prior written notice, Company may require Franchisee to computerize the POS System and connect the POS System to Franchisee's telephone line(s) via modem or other communications medium. The POS System must accept and use the PLU file sent from Company.  In addition, the POS System must be able to create a sales mix file, in the format defined by Company.  The POS System must be connected to a telephone line at all times and be capable of accessing the internet via a designated third party network (such as MSN, Worldnet, etc.) for the purpose of implementing software, transmitting and receiving data, accessing the internet for ordering and maintaining the POS System.  Within a reasonable time upon Company's request, Franchisee shall apply for and maintain debit cards, credit cards or other non-cash systems existing or developed in the future to enable customers to purchase Authorized Diedrich Coffee Products via such procedure, as specified by Company.  Company may require an upgrade to the POS hardware and/or software.

8.5           Manuals.  Franchisee shall operate the “Diedrich Coffee” Coffeehouse in strict compliance with the standard procedures, policies, rules and regulations established by Company and incorporated in Company's Manual(s).  The subject matter of the Manuals may include, without limitation, matters such as:  forms, information relating to product and menu specifications, cash control, purchase orders, general operations, labor schedules, personnel, Gross Sales reports, payroll procedures, training and accounting; safety and sanitation; design specifications and color of uniforms; display of signs and notices; authorized and required equipment and fixtures, including specifications therefor; Mark usage; insurance requirements; lease requirements; decor; standards for management and personnel, hours of operation; local advertising formats; standards of maintenance and appearance of the “Diedrich Coffee” Coffeehouse; and required posting of notices to customers as to how to contact the Company to submit complaints.  Without limiting the generality of the foregoing, the Company may establish emergency procedures pursuant to which it may require Franchisee to temporarily close the “Diedrich Coffee” Coffeehouse to the public, in which event Company shall not be liable to Franchisee for any losses or costs, including consequential damages or loss profits occasioned thereby.

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8.5.1        Company shall have the right to modify the Manuals at any time and from time to time by the addition, deletion or other modification to the provisions thereof.  All such modifications shall be equally applicable to all similarly situated franchisees who are required by their franchise agreements to comply therewith, and no such modification shall alter Franchisee's fundamental status and rights under this Agreement.  Modifications in the Manuals shall become effective upon delivery of written notice thereof to Franchisee unless a longer period is specified in such written notice.  The Manuals, as modified from time to time as hereinabove provided shall be an integral part of this Agreement and reference made in this Agreement, or in any amendments, exhibits or schedules hereto, to the Manuals shall be deemed to mean the Manuals kept current by amendments from time to time.

8.5.2        Upon the execution of this Agreement, Company shall furnish to Franchisee one copy of the Manuals, unless Franchisee purchased the “Diedrich Coffee” Coffeehouse from an existing franchisee or entered into this Agreement as a renewal or extension of a pre-existing franchise agreement for the same Location.  The Manuals and all amendments to the Manuals (and copies thereof) are copyrighted and remain Company's property.  They are loaned to Franchisee for the term of this Agreement, and must be returned to Company upon the Agreement's termination or expiration.  The Manuals are highly confidential documents which contain certain Confidential Information of Company, and Franchisee shall never reveal, and shall take all reasonable precautions, both during and after the Term of this Agreement, to assure that its employees or any other party under Franchisee's control, shall never reveal any of the contents of the Manuals or any other publication, recipe or secret provided by Company, except as is necessary for the operation of Franchisee's “Diedrich Coffee” Coffeehouse.  Upon the expiration or termination of this Agreement for any reason whatsoever, Franchisee shall immediately return the Manuals to Company.  Franchisee shall not make, or cause or allow to be made, any copies or reproductions of all or any portion of the Manuals without Company's express prior written consent.

8.6           Hours.  Subject to Applicable Law to the contrary, Company and Franchisee agree that Franchisee's “Diedrich Coffee” Coffeehouse shall be open and operational during at least the minimum hours and days set forth on Exhibit A which is attached hereto and incorporated herein by this reference.  Franchisee shall diligently and efficiently exercise its best efforts to achieve the maximum Gross Sales possible from its Location, and shall remain open for longer hours if additional opening hours are reasonably required to maximize operations and sales.  Without limiting the foregoing, if the hours set forth in Exhibit A are incorrect in relation to the sales potential of Franchisee's “Diedrich Coffee” Coffeehouse, then Company and Franchisee shall reasonably adjust such hours by jointly establishing new hours of operation.  It is acknowledged that the hours of other Franchisees will vary in relation to each respective location, and local legal restrictions, if any.

8.7           Compliance with Applicable Law.  Franchisee shall operate its “Diedrich Coffee” Coffeehouse as a clean, orderly, legal and respectable place of business in accordance with Company's business standards and merchandising policies, and shall comply with all Applicable Laws.  Franchisee shall not cause or allow any part of its Location or Premises to be used for any immoral or illegal purpose.

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8.8           Signs, Designs and Forms of Publicity.  Franchisee shall maintain suitable signs and/or awnings at, on, or near the front of the Location and Premises, identifying the Location as a “Diedrich Coffee” Coffeehouse, which shall conform in all respects to Company's specifications and requirements and the layout and design plan approved for the Location, subject only to restrictions imposed by Applicable Law.  Without limiting the foregoing:

8.8.1        Franchisee will cause to have Diedrich Coffee signs (a) on each pole sign and each monument sign existing or to be erected; (b) on any other free standing sign on the Location existing or to be erected, and (c) on two sides of the Location and, in the case of a kiosk or cart, the Premises building.

8.8.2        No sign used at or in connection with the “Diedrich Coffee” Coffeehouse shall contain any trademark, service mark, logo type or commercial symbol of any other person or Business Entity except as expressly authorized by Company in writing.

8.8.3        No exterior or interior sign or any design, advertisement, sign, or form of publicity, including form, color, number, location, and size, shall be used by Franchisee unless first submitted to Company and approved in writing (except with respect to prices).

8.9           Uniforms and Employee Appearance.  Franchisee shall cause all employees, while working in “Diedrich Coffee” Coffeehouses, to: (i) wear uniforms of such color, design, and other specifications as Company may designate from time to time, and (ii) present a neat and clean appearance.  In the event the type of uniform utilized by Franchisee is removed from the list of approved uniforms, Franchisee shall have 180 days from receipt of written notice of such removal to discontinue use of its existing inventory of uniforms and implement the approved type of uniform.

8.10         Vending or Other Machines.  Except with Company's prior written approval, Franchisee shall not cause or allow vending or game machines or any other mechanical device to be installed or maintained in its Location, and in the case of a kiosk or cart shall use its best efforts to prevent the installation or maintenance of same at the Premises.

8.11         Co-Branding.  Franchisee may not install any co-brand at Franchisee's Location without Company's prior written consent, which may be granted or withheld in its sole discretion, and, if granted may be subject to such terms and conditions as Company may establish.  For the purpose of this article, a co-brand shall be defined as an independent operating system owned by another person or entity (and not by Company or any affiliate) that is incorporated as an operational part within the Franchisee's Premises.  An example would be an independent ice cream/yogurt operation installed within Franchisee's Location.  Nothing herein shall prevent Company from co-branding or authorizing any third party to co-brand “Diedrich Coffee” coffeehouses, kiosks or carts in conjunction with such third party's operations.

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ARTICLE 9

ADVERTISING AND CO-OPS

9.1           General Requirements.  Franchisee shall conduct all local advertising and promotion in accordance with such policies and provisions with respect to format, content, media, geographic coverage and other criteria as are from time to time contained in the Manuals, or as otherwise directed by Company, and shall not use or publish any advertising material which does not conform to said policies and provisions or as to which Franchisee shall not have received Company's prior written approval; provided, however, that if Company shall not object to any proposed advertisement submitted by Franchisee for approval within 10 business days after Company's receipt thereof, such advertisement shall be deemed approved subject to Company's right to subsequently withdraw its approval.  Franchisee may not develop, create, generate, own, license, lease or use in any manner any computer medium or electronic medium (including any Internet home page, website, bulletin board, newsgroup or other Internet-related medium) which in any way uses or displays the Marks, in whole or part, and Franchisee shall not cause or allow the Marks, or any of them, to be used or displayed in whole or part, as an Internet domain name, or on or in connection with any Internet home page, website, bulletin board, newsgroup or other Internet-related activity without Company's express prior written consent, and then only in such manner and in accordance with such procedures, policies, standards and specifications as Company may establish.

9.2           Local Advertising.  Each calendar quarter, Franchisee shall expend an amount of not less than 1% of its Gross Sales for local advertising relating to Franchisee's “Diedrich Coffee” Coffeehouse.  Such local advertising does not include the cost of Franchisee listing its Store in the white pages or yellow pages of such telephone directories distributed in Franchisee's area as Company authorizes or directs in accordance with Section 9.5.  Amounts contributed to an Advertising Co-op, if any, pursuant to Section 9.3 during any calendar quarter shall be credited against Franchisee's local advertising requirement described in this Section 9.2.  Franchisee shall deliver evidence of such expenditures in the form and manner prescribed by Company from time to time.  Until further notice from Company, Franchisee shall deliver to Company quarterly (no later than the 15^th day of the months of January, April, July, and October), copies of invoices showing that Franchisee made the required expenditures during the preceding calendar quarter.  If the invoices submitted do not demonstrate expenditure of at least the minimum amount required for local advertising, Franchisee shall pay to Company the amount necessary to total 1% of Franchisee's Gross Sales during the prior quarter, less actual expenditures on local advertising.  Those funds will be used by Company in accordance with Section 9.4, below.

9.3           Co-op Advertising.  The Company shall have the right at any time to designate, and from time to time to redefine, a region (the “Advertising Co-op Region”) within which the Coffeehouse operated by Franchisee pursuant to this Agreement is located, which region may comprise a Designated Market Areas (“DMA”) established periodically by Nielson Media Research, an Area of Dominant Influence (“ADI”) established periodically by Arbitron, a Standard Metropolitan Statistical Area (“SMSA”) or such other geographic area  established by Company from time to time to identify the market area in which the Franchisee's “Diedrich Coffee”

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Coffeehouse is located, which shall function for the purpose of creating a cohesive team (an “Advertising Co-op”) to coordinate advertising, marketing efforts and programs and maximizing the efficient use of local and/or regional advertising media.

9.3.1        If and when Company creates an Advertising Co-op for the region in which Franchisee's “Diedrich Coffee” Coffeehouse is located, Franchisee (and, if Company owns a “Diedrich Coffee” Coffeehouse in such Advertising Co-op Region, Company), shall become subscribers and members of the Advertising Co-op and shall execute a subscription agreement on a form prescribed by Company, and participate therein in accordance with the Subscription Agreement and the Certificate of Incorporation and Bylaws of such Advertising Co-op.  The geographic size, configuration and content of such regions, when and if established by the Company, shall be binding upon Franchisee, all other “Diedrich Coffee” franchisees similarly situated who are by the terms of their franchise agreements required to participate, and Company, if Company owns and operates a Coffeehouse in such Advertising Co-op Region; provided that the Company alone may from time to time (but not more frequently than one time per calendar year) amend the geographic size, configuration and content of such Advertising Co-op Region.  At all meetings of such Advertising Co-op, each participating Franchisee, as well as Company, if applicable, shall be entitled to one vote for each “Diedrich Coffee” Coffeehouse owned and located within the region of the Advertising Co-op.  At any time upon reasonable notice, 20% of the total eligible member votes, a majority of the directors of such Advertising Co-op (who shall be elected in accordance with the Bylaws of such Advertising Co-op), or Company by itself, may call a meeting of all members of the Advertising Co-op.  Except for any amendment of the Certificate of Incorporation, Operating Agreement or By-laws of the Advertising Co-op (which shall require the affirmative vote of the Company), all matters concerning operation of the Advertising Co-op shall be decided by the affirmative vote of at least 2/3's of the total eligible member votes, and such vote shall bind all members of said Advertising Co-op, including Company.

9.3.2        Franchisee and other franchisees who are members of the Advertising Co-op will contribute to the Advertising Co-op such amount as may be determined by vote of the Advertising Co-op, not to exceed an amount equal to 3% of the Gross Sales of each Advertising Co-op member's “Diedrich Coffee” Coffeehouse(s) located in the region (the “Maximum Advertising Co-op Fee”);  provided that if the Advertising Fee Rate for any year shall exceed 1%, then the percentage rate of the Maximum Advertising Co-op Fee shall be reduced for that year by an amount equal to said excess (e.g. if the Advertising Fee Rate is increased to 2%, the Maximum Advertising Co-op Fee shall be reduced to equal to 2% of the Gross Sales).   The precise amount of such contribution shall be established from time to time by the Advertising Co-op.  Payments will be made monthly, on the same day as the Continuing Royalty payments pursuant to Section 4.2.

9.3.3        Each Advertising Co-op will (subject to Section 9.1) decide as to the usage of funds contributed pursuant to Section 9.3.2 for media time, production of media materials, whether for radio, television, newspapers or store level materials such as flyers, or posters, or for any other type of advertising or marketing use, and then such Advertising Co-op shall in writing request approval from Company to use said funds in said manner.  No placement of advertising or

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commitment of advertising funds on behalf of the Advertising Co-op will be made without Company's prior written approval.  Company reserves the right to establish general standards concerning the operation of the Advertising Co-op, advertising agencies retained by the Advertising Co-op, and advertising programs conducted by the Advertising Co-op.  From time to time Company may propose certain general or specific uses of the funds contributed pursuant to Section 9.3.2, and in each instance Franchisee shall attend (by any means permitted by the Advertising Co-op) and vote (by any means permitted by the Advertising Co-op) at a meeting of the Advertising Co-op wherein such proposal shall be considered.

9.4           Advertising Program.

9.4.1        Company shall administratively segregate on its books and records all Advertising Fees received from Franchisee and all other franchisees of Company.  Nothing herein shall be deemed to create a trust fund, and Company may commingle Advertising Fees with its general operating funds and expend such sums in the manner herein provided.  For each “Diedrich Coffee” Coffeehouse that Company or any of its affiliate operates,  Company or such affiliate will similarly allocate Advertising Fees in the amount that would be required to be paid if a franchisee operated a franchised “Diedrich Coffee” Coffeehouse in the same location.

9.4.2        If Company expends less than the total of all Advertising Fees contributed by franchisees and allocated for “Diedrich Coffee” Coffeehouses operated by Company and its affiliates during any fiscal year, such excess may be accumulated for use during subsequent years.  If Company advances money for advertising, Company will be entitled to be reimbursed for such advances, including interest at the rate equal to the Company's cost of funds.  Each determination by Company of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error.

9.4.3        Company will use Advertising Fees for national, regional, or local advertising, public relations or promotional campaigns or programs designed to promote and enhance the image, identity or patronage of franchised and Company-owned “Diedrich Coffee” Coffeehouses.  Such expenditures may include, without limitation (a) expenditures to conduct marketing studies, and to produce and purchase advertising art, commercials, musical jingles, print advertisements, point of sale materials, media advertising, outdoor advertising art, and direct mail pamphlets and literature; and (b) a payment to Company or its affiliates, for internal expenses incurred to administer the Advertising Fees.  Company shall determine the cost, media, content, format, style, timing, allocation and all other matters relating to such advertising, public relations and promotional campaigns.  Nothing herein shall be construed to require Company to allocate or expend Advertising Fees so as to benefit any particular franchisee or group of franchisees on a pro rata or proportional basis or otherwise.  Company may make copies of advertising materials available to Franchisee with or without additional reasonable charge, as determined by Company.  Any additional advertising shall be at the sole cost and expense of Franchisee.

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9.4.4        Upon written request, Company shall furnish to Franchisee within 120 days after the end of each calendar year, a report for the preceding year, prepared and certified correct by an officer of the Company containing the calculations of the Advertising Fees which Company actually expended during such calendar year and the amount remaining which shall be carried over for use during the following year(s).

9.5           Telephone Numbers and Directory Advertising.  In addition to the Advertising Fees, local advertising, and Franchisee's required expenditures for Co-op Advertising, Franchisee shall, at its sole expense, subscribe for and maintain throughout the Term, or such lesser period designated by Company, one or more listed telephone numbers which shall be listed in the white pages of such telephone directory or directories as Company may designate or approve which service Franchisee's Location and adjacent or nearby areas.  Company reserves the right to establish general standards concerning directory and other types of advertising.

9.6           Promotional Campaigns.  From time to time during the term hereof, Company shall have the right to establish and conduct promotional campaigns on a national or regional basis, which may by way of illustration and not limitation promote particular products or marketing themes.  Franchisee agrees to participate in such promotional campaigns upon such terms and conditions as the Company may establish.  Franchisee acknowledges and agrees that such participation may require Franchisee to purchase point of sale advertising material, posters, flyers, product displays and other promotional material, and to the extent permitted by Applicable Law may establish the maximum prices which Franchisee may impose for products offered in the promotion.

ARTICLE 10

DISTRIBUTION AND PURCHASE OF

EQUIPMENT, SUPPLIES, AND OTHER PRODUCTS

10.1         Coffee and Diedrich Coffee Brand Products.

10.1.1      At all times throughout the Term, Franchisee shall purchase and maintain in inventory such types and quantities of Authorized Diedrich Coffee Products as are needed to meet reasonably anticipated consumer demand.  Franchisee shall purchase Diedrich Coffee Brand Products, and all roasted coffee beans and blends served, offered or sold at the “Diedrich Coffee” Coffeehouse, solely and exclusively from Company or its designated third party distributors or suppliers, and all such Diedrich Coffee Brand Products, roasted coffee beans and blends which are purchased from Company or its designated third party distributors or suppliers shall be used, offered and sold by Franchisee only on a retail basis, at the “Diedrich Coffee” Coffeehouse pursuant hereto, or at other “Diedrich Coffee” coffeehouses opened by Franchisee under Company's Marks and in accordance with the System pursuant to other validly subsisting franchise agreements with Company.

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10.2         Proprietary Products.  Company may, from time to time throughout the Term hereof, require that Franchisee  purchase, use, offer and/or promote, and maintain in stock at the “Diedrich Coffee” Coffeehouse in such quantities as are needed to meet reasonably anticipated consumer demand, certain proprietary powder mixes and other ingredients and raw materials, which are manufactured in accordance with Company's proprietary recipes, specifications and/or formulas (“Proprietary Products”).  Franchisee shall purchase Proprietary Products only from Company (if it sells the same) or its designees.  If Franchisee shall purchase Proprietary Products from Company, Franchise shall purchase the same at Company's then current published prices charged to similarly situated franchisees, which may be changed or modified from time to time without prior notice, and which will include a profit to the Company.  Company shall not be obligated to reveal such recipes, specifications and/or formulas of such Proprietary Products to Franchisee, non-designated suppliers, or any other third parties.

10.3         Non-Proprietary Products.  Company may designate baked goods and other food and dairy products, condiments, beverages, paper goods, fixtures, furnishings, equipment (including espresso and coffee-making equipment), uniforms, supplies, menus, packaging, forms, POS and cash register systems, computer hardware, software, modems and peripheral equipment and other products, supplies and equipment other than Proprietary Products which Franchisee may or must use and/or offer and sell at the “Diedrich Coffee” Coffeehouse (“Non-Proprietary Products”).  Franchisee may, but shall not be obligated to, purchase such Non-Proprietary Products from Company, if Company supplies same.  Franchisee may use, offer or sell only such Non-Proprietary Products that Company has expressly authorized, or that were purchased or obtained from Company or a producer, manufacturer or supplier (“Supplier”) designated or approved by Company pursuant to Section 10.3.2 below.

10.3.1      Franchisee may purchase authorized Non-Proprietary Products from (i) Company, (ii) Suppliers designated by Company, or (iii) Suppliers selected by Franchisee and approved in writing by Company prior to Franchisee making such purchase(s).  Each such Supplier designated or approved by Company must comply with Company's usual and customary requirements regarding insurance, indemnification, and non-disclosure, and shall have demonstrated to the reasonable satisfaction of Company: (a) its ability to supply a Non-Proprietary Product meeting the specifications of Company, which may include, without limitation, specifications as to brand name and model, contents, quality, freshness and compliance with governmental standards and regulations; and (b) its reliability with respect to delivery and the consistent quality of its products or services.

10.3.2      If Franchisee should desire to procure authorized Non-Proprietary Products from a Supplier other than Company or one previously approved or designated by Company, Franchisee shall deliver written notice to Company of its desire to seek approval of such Supplier, which notice shall (i) identify the name and address of such Supplier, (ii) contain such information as may be requested by Company or required to be provided pursuant to the Manuals (which may include reasonable financial, operational and economic information regarding its business ), and (iii) identify the authorized Non-Proprietary Products desired to be purchased from

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such Supplier.  Company shall, upon request of Franchisee, furnish to Franchisee specifications for such Non-Proprietary Products if such are not contained in the Manuals.  The Company may thereupon request that the proposed Supplier furnish Company at no cost to Company product samples, specifications and such other information as Company may require.  Company or its representatives shall also be permitted to inspect the facilities of the proposed Supplier and establish economic terms, delivery, service and other requirements consistent with other distribution relationships for other “Diedrich Coffee” Coffeehouses.

(a)           Company will use its reasonable efforts to notify Franchisee of its decision within 90 days after Company's receipt of Franchisee's request for approval and other requested information and items in full compliance with Section 10.3.2.  Nothing in this Article shall require Company to approve any distributor, and without limiting Company's right to approve or disapprove a Supplier in its discretion, Franchisee acknowledges that it is generally disadvantageous to the system generally from a cost and service basis to have more than one distributor in any given market area and that among the other factors Company may consider in deciding whether to approve a proposed Supplier, it may consider the affect that such approval may have on the ability of Company and its franchisees to obtain the lowest distribution costs and on the quality and uniformity of products offered system-wide by Diedrich Coffee franchisees.  Company may revoke its approval upon the Supplier's failure to continue to meet any of Company's criteria.

(b)           As a further condition of such approval, Company may require such Supplier to agree in writing: (i) to provide from time to time upon Company's request free samples of any Non-Proprietary Product it intends to supply to Franchisee, (ii) to faithfully comply with Company's specifications for applicable Non-Proprietary Products sold by it, (iii) to sell any Non-Proprietary Product bearing the Marks only to franchisees of Company and only pursuant to a trademark license agreement in form prescribed by Company (which may require payment of a royalty), (iv) to provide to Company duplicate purchase invoices for Company's records and inspection purposes and (v) to otherwise comply with Company's reasonable requests.

(c)           Franchisee or the proposed Supplier shall pay to Company in advance all of Company's reasonably anticipated costs in reviewing the application of the Supplier to service the Franchisee and all current and future reasonable costs and expenses, including travel and living costs, related to inspecting, reinspecting and auditing the Suppliers' facilities, equipment, and food products, and all product testing costs paid by Company to third parties.

10.4         Purchases from Company, Extensions of Credit.

10.4.1      Company shall not be liable to Franchisee on account of any delay or failure in the manufacture, delivery or shipment of roasted coffee beans, blends or other products caused by events or circumstances beyond Company's reasonable control including such events as labor or material shortages, conditions of supply and demand, import/export restrictions, or disruptions in Company's supply sources.

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10.4.2      All product orders by Franchisee shall be subject to acceptance by Company at Company's designated offices, and Company reserves the right to accept or reject, in whole or in part, any order placed by Franchisee.  Company will establish the payment terms upon which it will accept Franchisee's orders, and may require Franchisee to pay for orders on a cash-in-advance or cash-on-delivery basis.

10.4.3      Each order placed by Franchisee for any product shall be deemed to incorporate all of the terms and conditions of this Agreement, shall be deemed subordinate to this Agreement in any instance where any term or condition of such order conflicts with any term or condition of this Agreement, and shall include such information as Company may from time to time specify, and shall be submitted on such form of purchase order as my be prescribed by Company from time to time.  No purchase order submitted by Franchisee shall contain any terms except as approved in writing by Company, nor be deemed complete unless all of the information required by the prescribed purchase order form, as revised from time to time, is provided by Franchisee.  No new or additional term or condition contained in any order placed by Franchisee shall be deemed valid, effective or accepted by Company unless such term or condition shall have been expressly accepted by Company in writing.

10.5         Purchase/Distribution Programs.  Franchisee agrees that at such times that Company establishes a regional purchase or distribution program, or both, for any of the Franchisee's goods, raw materials or supplies, which may benefit Franchisee by reduced price, lower labor costs, production of improved Authorized Product(s), increased reliability in supply, improved distribution, cost control (establishment of consistent pricing for reasonable periods to avoid market fluctuations), improved operations by Franchisee or other tangible benefits to Franchisee, Franchisee will participate in such purchasing program in accordance with the terms of such program.

10.6         Test Marketing.  Company may, from time to time, require Franchisee to test market products and/or services in connection with the operation of the “Diedrich Coffee” Coffeehouse.  Franchisee shall cooperate with Company in connection with  the conduct of such test marketing programs and shall comply with the Company's rules and regulations established from time to time in connection herewith.

ARTICLE 11

REPORTS, BOOKS AND RECORDS, INSPECTIONS

11.1         General Reporting.  Franchisee shall submit monthly financial reporting forms and such other financial, operational and statistical information as Company may require to: (i) assist Franchisee in the operation of its “Diedrich Coffee” Coffeehouse in accordance with the System; (ii) allow Company to monitor the Franchisee's Gross Sales, purchases, costs and expenses; (iii) enable Company to develop chain wide statistics which may improve bulk purchasing; (iv) assist Company in the development of new Authorized Products or the removal of existing unsuccessful products; (v) enable Company to refine existing Authorized Diedrich Coffee Products; (vi) generally improve

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chain-wide understanding of the System (collectively, the “Information”).  Without limiting the generality of the foregoing:

11.1.1      Franchisee will allow Company to poll on a daily basis at a time selected by the Company the Franchisee's “Diedrich Coffee” Coffeehouse computerized POS system to retrieve sales, usage, and operations data.

11.1.2      On or before noon (pacific standard time) each Friday, during the Term hereof, Franchisee shall submit a weekly sales summary, on a form prescribed by Company, reporting all Gross Sales for the preceding week (defined as the seven day period beginning each Thursday and ending on the following Wednesday) either by electronic mail (“e-mail”), by facsimile or, by any other electronic means prescribed by Company.

11.1.3      On or before the 10th day of each month, or fiscal period (if Franchisee has adopted Company's fiscal accounting cycle as described in Article 4 above), during the Term hereof, Franchisee shall submit a monthly sales summary signed by Franchisee, on a form prescribed by Company, reporting all Gross Sales for the preceding month, or fiscal period as applicable, together with such additional financial information as Company may from time to time request.

11.1.4      On or before the 30th day following each calendar quarter during the Term hereof, Franchisee shall submit to Company financial statements for the preceding quarter, including a Balance Sheet and Profit and Loss Statement, prepared in the form and manner prescribed by the Company and in accordance with generally accepted accounting principles, which shall be certified by Franchisee to be accurate and complete.  Franchisee shall also provide Company with quarterly sales and menu mix data in the format and manner prescribed by Company.

11.1.5      Franchisee shall submit to Company a semi-annual Profit and Loss Statement, signed and certified by Franchisee.  The Profit and Loss Statement shall be prepared by a Certified or Public Accountant, in accordance with generally accepted accounting principles, and shall provide Franchisee's sales, expenses and financial status with respect to Franchisee's “Diedrich Coffee” Coffeehouse.  Franchisee shall submit to Company a copy of the original signed 1120 or 1120S tax form each and every year or any other forms which take the place of the 1120 or 1120S forms.  Franchisee shall also provide Company with copies of signed original sales and use tax forms contemporaneously with their filing with the appropriate state or local authority.  Company reserves the right to require such further information concerning Franchisee's “Diedrich Coffee” Coffeehouse as Company may from time to time reasonably request.

11.1.6      Within 60 days following the end of each calendar year, Franchisee shall submit to Company an unaudited annual financial statement prepared in accordance with generally accepted accounting principles, and in such form and manner prescribed by Company, which shall be certified by Franchisee to be accurate and complete.

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11.1.7      Franchisee shall immediately (in no event more than 24 hours following) notify Company of any (a) incident that may adversely affect the operation or financial condition of Franchisee's “Diedrich Coffee” Coffeehouse, Company or its affiliates; (b) legal action (including the commencement of a suit or proceeding, or the threat thereof), (c) issuance of any writ, order, injunction, award or decree of any court, agency or Government authority, including any citation, fine or closing order, or (d) any other adverse inquiry, notice, demand or sanction received by Franchisee relating to the operation of the “Diedrich Coffee” Coffeehouse or Location, including any alleged violation of any Applicable Law, including health, safety or employment law violations, and including any labor dispute or actual or threatened labor strike, work stoppage, lock-out or other incident relating to any labor agreement, and shall provide Company with copies of all related correspondence and other communications and information relating thereto.

11.2         Inspections.  Company's authorized representatives shall have the right to enter Franchisee's Location and “Diedrich Coffee” Coffeehouse during business hours, with or without notice, without unreasonably disrupting Franchisee's business operations, for the purposes of examining same, conferring with Franchisee's employees, inspecting and checking operations, food, beverages, furnishings, interior and exterior decor, supplies, fixtures, and equipment, and determining whether the business is being conducted in accordance with this Agreement, the System and the Manuals.  If any such inspection indicates any deficiency or unsatisfactory condition with respect to any matter required under this Agreement or the Manuals, including but not limited to quality, cleanliness, service, health and authorized product line, Company will notify Franchisee in writing of Franchisee's non-compliance with the Manuals, the System, or this Agreement.  Franchisee shall have 24 hours after receipt of such notice, or such other greater time period as Company in its sole discretion may provide, to correct or repair such deficiency or unsatisfactory condition, if it can be corrected or repaired within such period of time.  If not, Franchisee shall within such time period commence such correction or repair and thereafter diligently pursue it to completion.

11.3         Audits.  Upon 10 days prior written notice, Company, its agents or representatives may audit Franchisee's books and records in accordance with generally accepted standards established by certified public accountants.  In connection with such audit(s) or other operational visits, Franchisee shall keep its cash receipts records, monthly control forms, accounts payable records including all payments to Franchisee's Suppliers in its “Diedrich Coffee” Coffeehouse or at its business office for 5 years after their due date, which records shall be available for examination by Company or its representative(s), at Company's request.  Without any prior written notice, Company, its agents or representatives may inspect Franchisee's entire “Diedrich Coffee” Coffeehouse and Franchisee's daily, weekly and monthly statistical information which is required under the Manuals.  Franchisee shall make such information available for such inspections in recognition that an operational inspection cannot succeed without review of essential statistical information.  If any audit or other investigation reveals an under-reporting or under-recording error of 5% percent or more, then in addition to any other sums due, the expenses of the audit/inspection shall be borne and paid by Franchisee upon billing by Company, plus interest at the highest compound rate authorized by law, but not to exceed the rate of 15% percent per annum.

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ARTICLE 12

MARKS

12.1         Use of Marks.  Subject to Section 12.7, the “Diedrich Coffee” Coffeehouse herein licensed and franchised shall be named “Diedrich Coffee” without any suffix or prefix attached thereto and Franchisee shall use and display such of the Company's Marks and such signs, advertising and slogans as Company may from time to time prescribe or approve.  Upon expiration or sooner termination of this Agreement, Company may, if Franchisee does not do so, execute in Franchisee's name and on Franchisee's behalf, any and all documents necessary in Company's judgment to end and cause the discontinuance of Franchisee's use of the Marks and Company is hereby irrevocably appointed and designated as Franchisee's attorney-in-fact so to do.

12.2         Non-Use of Trade Name.  If Franchisee is a Business Entity, it shall not use Company's Marks, or Company's trade name, or any words or symbols which are confusingly similar to the Marks, as all or part of Franchisee's name.

12.3         Use of Other Marks.  Franchisee shall not display the trademark, service mark, trade name, insignia or logotype of any other person or Business Entity in connection with the operation of the “Diedrich Coffee” Coffeehouse.

12.4         Non-ownership of Marks.  Nothing herein shall give Franchisee any right, title or interest in or to any of the Marks, except a mere privilege and license during the term hereof, to display and use the same according to the terms and conditions herein contained.

12.5         Defense of Marks.  If Franchisee receives notice, or is informed, of any claim, suit or demand against Franchisee on account of any alleged infringement, unfair competition, or similar matter on account of its use of the Marks in accordance with the terms of this Agreement, Franchisee shall promptly notify Company of any such claim, suit or demand.  Thereupon, Company shall take such action as it may deem necessary and appropriate to protect and defend Franchisee against any such claim by any third party; Company shall not be obligated to take any such action, however.  Franchisee shall not settle or compromise any such claim by a third party without the prior written consent of Company.  Company shall have the sole right to defend, compromise or settle any such claim, in its discretion, at Company's sole cost and expense, using attorneys of its own choosing, and Franchisee shall cooperate fully with Company in connection with the defense of any such claim.  Franchisee may participate at its own expense in such defense or settlement, but Company's decisions with regard thereto shall be final.

12.6         Prosecution of Infringers.  If Franchisee shall receive notice or is informed or learns that any third party, which it believes to be unauthorized to use the Marks, is using the Marks or any variant thereof, Franchisee shall promptly notify Company of the facts relating to such alleged infringing use.  Thereupon, Company shall, in its sole discretion, determine whether or not it wishes to take any action against such third person on account of such alleged infringement of the

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Marks.  Franchisee shall have no right to make any demand against any such alleged infringer or to prosecute any claim of any kind or nature whatsoever against such alleged infringer for or on account of such infringement.

12.7         Modification of Marks.  From time to time, in the Manuals or in directives or bulletins supplemental thereto, Company may add to, delete or modify any or all of the Marks.  Franchisee shall use, or cease using, as may be applicable, the Marks, including but not limited to, any such modified or additional trade names, trademarks, service marks, logotypes and commercial symbols, in strict accordance with the procedures, policies, rules and regulations contained in the Manuals or in written directives issued by Company to Franchisee, as though they were specifically set forth in this Agreement.

12.8         Acts in Derogation of the Marks.  Franchisee agrees that the Marks are the exclusive property of Company and Franchisee now asserts no claim and will hereafter assert no claim to any goodwill, reputation or ownership thereof by virtue of Franchisee's licensed and/or franchised use thereof, or otherwise.  Franchisee shall not do or permit any act or thing to be done in derogation of any of the rights of Company in connection with the same, either during the Term of this Agreement or thereafter, and that it will use the Marks only for the uses and in the manner licensed and/or franchised hereunder and as herein provided.  Without limiting the foregoing, Franchisee shall not interfere in any manner with, or attempt to prohibit, the use of Company's Marks by any other franchisee or licensee of Company.

12.9         Assumed Name Registration.  Franchisee agrees to obtain any fictitious or assumed name registration required under applicable law.  Promptly upon the expiration or termination of this Agreement for any reason whatsoever, Franchisee shall promptly execute and file such documents as may be necessary to revoke or terminate such assumed name registration, and if Franchisee shall fail to promptly execute and file such documents as may be necessary to effectively revoke and terminate such assumed name registration, Franchisee hereby irrevocably appoints Company as its attorney-in-fact to do so for and on behalf of Franchisee.

ARTICLE 13

COVENANTS REGARDING OTHER BUSINESS INTERESTS

13.1         Non-Competition.  Franchisee acknowledges that the Diedrich Coffee System is unique and distinctive and has been developed by Company at great effort, time, and expense, and that Franchisee has regular and continuing access to valuable and confidential information and training regarding the Diedrich Coffee System.  Franchisee recognizes its obligations to keep confidential such information as set forth herein.  Franchisee therefore agrees as follows:

13.1.1      During the Term, no Restricted Person shall in any capacity, either directly or indirectly, through one or more subsidiaries or affiliated companies, engage in any Competitive Activities at any location; provided that with Company's prior written consent, which

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Company will not unreasonably withhold, a Restricted Person may own and operate one or more restaurants, or any other retail establishment, which sells brewed coffee, espresso or coffee products if and for so long as such restaurant, or retail establishment, does not derive 20% or more of its gross revenues from the sale of espresso drinks, brewed coffee, roasted coffee beans and blends, premium teas, and coffee-related products and equipment, or any of them, during any day part.

13.1.2      Upon the expiration or termination of this Agreement, or if Franchisee shall make any Assignment to any person or Business Entity, or if any Owner, officer or director of Franchisee shall terminate his or her relationship with Franchisee, then for a period of 24 months thereafter, each person who was a Restricted Person before that event shall not in any capacity, either directly or indirectly, through one or more subsidiaries or affiliated companies, engage in any Competitive Activities, (i) within the County in which any “Diedrich Coffee” Coffeehouse operated by Franchisee is or was located, or (ii) within an area within ten (10) miles from the location or any then existing “Diedrich Coffee” Coffeehouse; provided that, with Company's prior written consent, which Company will not unreasonably withhold, the  former Restricted Person may own and operate one or more restaurants, or any other retail establishment, which sells brewed coffee, espresso or coffee products if and for so long as such restaurant, or retail establishment, does not derive 20% or more of its gross revenues from the sale of espresso drinks, brewed coffee, roasted coffee beans and blends, premium teas, and coffee-related products and equipment, or any of them, during any day part.

13.1.3      The parties have attempted in Sections 13.1.1 and 13.1.2 above to limit the Restricted Person's right to compete only to the extent necessary to protect the Company from unfair competition.  The parties hereby expressly agree that if the scope or enforceability of Section 13.1.1 and 13.1.2 is disputed at any time by a Restricted Person, a court or arbitrator, as the case may be, may modify either or both of such provisions to the extent that it deems necessary to make such provision(s) enforceable under Applicable Law.  In addition, the Company reserves the right to reduce the scope of either, or both, of said provisions without the consent of Franchisee or any Restricted Person, at any time or times, effective immediately upon notice to Franchisee.

13.2         Confidential Information

13.2.1      Company possesses and continues to develop, and during the course of the relationship established hereunder, Franchisee shall have access to, trade secrets and other proprietary and confidential information, including, without limitation, the Manuals, recipes, secret ingredients, specifications, procedures, concepts and methods and techniques of operating the “Diedrich Coffee” Coffeehouse and producing Authorized Diedrich Coffee Products (the “Confidential Information”).  Company will disclose certain of its Confidential Information to Franchisee in the Manuals, bulletins, supplements, confidential correspondence, or other confidential communications, and through the Company's training program and other guidance and management assistance, and in performing Company's other obligations and exercising Company's rights under this Agreement.  Confidential Information shall not include information which: (a) has entered the public domain or was known to Franchisee prior to Company's disclosure of such information to

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Franchisee, other than by the breach of an obligation of confidentiality owed (by anyone) to Company; or (b) becomes known to Franchisee from a source other than Company and other than by the breach of an obligation of confidentiality owed (by anyone) to Company.  The burden of proving the applicability of the foregoing will reside with Franchisee.

13.2.2      Franchisee shall acquire no interest in the Confidential Information other than the right to use them in developing and operating the Business during the Term of this Agreement.  Franchisee's duplication or use of any Confidential Information in any other endeavor or business shall constitute an unfair method of competition.  Franchisee shall: (i) not use the Confidential Information in any business or other endeavor other than in connection with Franchisee's “Diedrich Coffee” Coffeehouse; (ii) maintain absolute confidentiality of the Confidential Information during and after the Term of this Agreement; (iii) make no unauthorized copy of any portion of the Confidential Information, including without limitation, the Manuals, bulletins, supplements, confidential correspondence, or other confidential communications, whether written or oral; and (iv) operate and implement all reasonable procedures prescribed from time to time by Company to prevent unauthorized use and disclosure of the Confidential Information, including without limitation, restrictions on disclosure to employees and use of non-disclosure and non-competition provisions as Company prescribes in employment agreements with employees who may have access to the Confidential Information.  Promptly upon Company's request, Franchisee shall deliver executed copies of such agreements to Company.

13.2.3      In the event any portion of the above covenants violates laws affecting Franchisee, or is held invalid or unenforceable in a final judgment to which Company and Franchisee are parties, then the maximum legally allowable restriction permitted by law shall control and bind Franchisee.  Company may at any time unilaterally reduce the scope of any part of the above covenants, and Franchisee shall comply with any such reduced covenant upon receipt of written notice.  The provisions of this Section 13.2 shall be in addition to and not in lieu of any other confidentiality obligation of Franchisee, or any other person, whether pursuant to another agreement, or pursuant to Applicable Law.

13.3         Franchisee's Affiliates.  For purposes of this Article only, “Franchisee” shall mean and include the individual Franchisee; Franchisee's spouse and minor children and its Owners, officers and directors if Franchisee is a Business Entity and Franchisee shall, except as Company may otherwise agree, cause each such person to acknowledge and agree to be bound by the provisions of Sections 13.1 and 13.2.  The provisions of this Article shall not limit, restrain or otherwise affect any right or cause of action which may accrue to Company for any infringement of, violation of, or interference with, this Agreement, or Company's Marks, System or Confidential Information.

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ARTICLE 14

INTERFERENCE WITH EMPLOYMENT RELATIONS

14.1         Prohibitions During Term. During the Term of this Agreement, Franchisee shall not, without the prior written consent of Company, directly or indirectly: (a) employ or attempt to employ any person who at that time is employed by Company, an affiliate of Company, or any other franchisee or area developer of Company, including, without limitation, any coffeehouse manager or assistant coffeehouse manager; (b) employ or attempt to employ any person who within six (6) months prior thereto had been employed by Company, an affiliate of Company, or any other franchisee or area developer of Company; or (c) induce or attempt to induce any person to leave his or her employment with Company, an affiliate of Company, or any other franchisee or area developer of Company.

14.2         Prohibitions After Term. The prohibitions set forth in Section 14.1 above shall also apply during the one (1) year period after the expiration or termination of this Agreement.

14.3         Prohibitions Applicable to Company. During the Term of this Agreement, Company shall not, without the prior written consent of Franchisee, directly or indirectly: (a) employ or attempt to employ any person who at that time is employed by Franchisee or an affiliate of Franchisee; or (b) induce or attempt to induce any person to leave his or her employment with Franchisee or an affiliate of Franchisee.

ARTICLE 15

NATURE OF INTEREST, ASSIGNMENT

15.1         Assignment by Company. This Agreement is fully transferable by Company, in whole or in part, without the consent of Franchisee and shall inure to the benefit of any transferee or their legal successor to Company's interests herein; provided, however, that such transferee and successor shall expressly agree to assume Company's obligations under this Agreement.  Without limiting the foregoing, Company may (i) assign any or all of its rights and obligations under this Agreement to a subsidiary or affiliated entity; (ii) sell its assets, its Marks, or its System outright to a third party (including or subject to this Agreement); (iii) go public; (iv) engage in a private placement of some or all of its securities; (v) merge, acquire other corporations, or be acquired by another corporation; or (vi) undertake a refinancing, recapitalization, leveraged buy-out or other economic or financial restructuring.  Company shall be permitted to perform such actions without liability or obligation to Franchisee who expressly and specifically waives any claims, demands or damages arising from or related to any or all of the above actions (or variations thereof). Company shall have no liability for the performance of any obligations contained in this Agreement after the effective date of such transfer or assignment.

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15.2         Assignment by Franchisee.

15.2.1      The rights and duties created by this Agreement are personal to Franchisee.  Accordingly, except as otherwise may be permitted herein, neither Franchisee nor any person with an interest in Franchisee shall directly or indirectly sell, assign, transfer, convey, give away, pledge, mortgage, or otherwise encumber any direct or indirect interest in this Agreement or in all or substantially all of the assets of the “Diedrich Coffee” Coffeehouse, voluntarily or involuntarily, in whole or in part, by operation of law or otherwise (an “Assignment”), without Company's prior written consent, which consent may be withheld for any reason whatsoever in Company's sole subjective judgment.  Any such purported Assignment occurring by operation of law or otherwise without Company's prior written consent shall constitute a default of this Agreement by Franchisee, and shall be null and void.  Except in the instance of Franchisee advertising to sell its “Diedrich Coffee” Coffeehouse pursuant to the terms hereof, Franchisee shall not, without Company's prior written consent, offer for sale or transfer at public or private auction or advertise publicly for sale or transfer, the furnishings, interior and exterior decor items, supplies, fixtures, equipment, Franchisee's Lease or the real or personal property used in connection with Franchisee's “Diedrich Coffee” Coffeehouse. Franchisee shall not subfranchise, subcontract, share, divide or partition this Agreement, and nothing in this Agreement will be construed as granting Franchisee the right to do so.

15.2.2      If Franchisee is a Business Entity, each of the following shall be deemed to be an Assignment of this Agreement: (i) the sale, assignment, transfer, conveyance, gift, pledge, mortgage, or other encumbrance of 50% or more in the aggregate, whether in one or more transactions, of the capital stock, membership interests or voting power of Franchisee, by operation of law or otherwise or any other event(s) or transaction(s) which, directly or indirectly, effectively changes management control of Franchisee; (ii) the issuance of any securities by Franchisee which itself or in combination with any other transaction(s) results in the shareholders, members or partners existing as of the Effective Date, as applicable, owning 50% or less of the outstanding shares, membership interests or voting power of Franchisee as constituted as of the date hereof; (iii) if Franchisee is a Partnership, the withdrawal, death or legal incapacity of a general partner or limited partner owning 50% or more of the Partnership Rights of the Partnership, or the admission of any additional general partner or the transfer by any general partner of any of its Partnership Rights in the Partnership; (iv) the death or legal incapacity of any shareholder, member or partner owning 50% or more of the capital stock, voting power, or Partnership Rights of Franchisee; and (v) any merger, stock redemption, consolidation, reorganization, recapitalization or other transfer control of the Franchisee, however effected.

Without limiting Company's discretion in granting or withholding its consent to any Assignment, Company may impose any or all of the following conditions thereto:

15.2.3      Upon the execution of this Agreement and upon each direct or indirect transfer of an interest in this Agreement or in Franchisee and at any other time upon Company's request, Franchisee shall, within 5 days prior to such transfer or at any other time at Company's

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request, furnish Company with an estoppel agreement indicating any and all causes of action, if any, that Franchisee may have against Company or if none exist, so stating, and a list of all Owners having an interest in this Agreement or in Franchisee, the percentage interest of Owner, and a list of all officers and directors, in such form as Company may require;

15.2.4      Franchisee's written request for consent to any Assignment must be accompanied by an offer to Company of a right of first refusal at the same cash price offered by any bona fide buyer (the proposed buyer may not offer non-cash consideration).  Company shall have the right and option, exercisable within 15 days after receipt of such written notification, to send written notice to Franchisee or such person that Company or its third-party designee, intends to purchase the interest which is proposed to be transferred, on the same terms and conditions offered by the third party.  If Company accepts such offer, the training and transfer/administrative fees due by Franchisee in accordance with Section 15.2.12 shall be waived by Company.  Any material change in the terms of an offer prior to closing shall cause it to be deemed a new offer, subject to the same right of first refusal by Company, or its third-party designee, as in the case of the initial offer.  Company's failure to exercise such option shall not constitute a waiver of any other provision of this Agreement, including any of the requirements of this Article with respect to the proposed transfer;

15.2.5      The Franchisee is not in default under the terms of this Agreement, the Manuals or any other obligations owed Company, and all of its then-due monetary obligations to Company have been paid in full;

15.2.6      The Franchisee and its Owners, if the Franchisee is a Business Entity, have executed a general release under seal, in a form prescribed by Company, of any and all claims against Company, its affiliates, subsidiaries, shareholders, directors, officers, and employees;

15.2.7      The transferee/assignee has demonstrated to Company's satisfaction that it meets all of Company's then-current requirements for new Franchisees or for holders of an interest in a franchise, including, without limitation, possession of good moral character and reputation, satisfactory credit ratings, acceptable business qualifications, and the ability to fully comply with the terms of this Agreement;

15.2.8      The transferee/assignee has assumed this Agreement by a written assumption agreement approved by Company, or has agreed to do so at closing, and at closing executes an assumption agreement approved by Company;

15.2.9      The transferee/assignee, its manager or other employees responsible for the operation of the “Diedrich Coffee” Coffeehouse have satisfactorily completed Company's training program;

15.2.10    The transferee/assignee executes such other documents as Company may require, including a replacement franchise agreement on the form then currently being provided to prospective franchisees, or if not then being so provided, then such form selected by the Company

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which previously shall have been delivered to and executed by a franchisee or area developer of Company.

15.2.11    The Franchisee transfers all Franchise Agreements between Franchisee and Company to the same transferee/assignee; and

15.2.12    Upon submission Franchisee's request for Company's consent to any proposed Assignment, Franchisee shall pay to Company a transfer fee (“Transfer Fee”) equal to the greater of: (a) 2% of all consideration received or receivable, directly or indirectly, by Franchisee in connection with the Assignment, or (b) the sum of (i) a $15,000 training fee (payable only for the first assigned franchise agreement in the case of multiple franchise agreements being assigned simultaneously to the same assignee) plus (ii) a $1,500 administrative/transfer fee (not limited to the first assigned franchise agreement in the case of multiple franchise agreements being assigned simultaneously to the same assignee).

15.2.13    Company's consent to a transfer shall not constitute a waiver of any claims it may have against the transferring party arising out of this Agreement or otherwise.

15.3         Business Entity Franchisee.  If a Franchisee is a Business Entity, the following provisions will apply:

15.3.1      Franchisee represents and warrants that the information set forth in Exhibit “B”, which is annexed hereto and by this reference made a part hereof, is accurate and complete in all material respects.  Franchisee shall notify Company in writing within 10 days of any change in the information set forth in Exhibit “B.”  Franchisee promptly shall provide such additional information as Company may from time to time request concerning all persons who may have any direct or indirect financial interest in Franchisee.

15.3.2      All of Franchisee's organizational documents (including articles of partnership, partnership agreements, articles of incorporation, bylaws, shareholders agreements, trust instruments, or their equivalent) will provide that the issuance and transfer of any interest in Franchisee is restricted by the terms of this Agreement, and that sole purpose for which Franchisee is formed (and the sole activity in which Franchisee is or will be engaged) is the development and operation of “Diedrich Coffee” Coffeehouses, pursuant to one or more franchise agreements from Company.  Franchisee shall submit to Company, upon the execution of this Agreement and thereafter from time to time upon Company's request, a resolution of Franchisee (or its governing body) confirming that Franchisee is in compliance with this provision.

15.3.3      Upon the execution of this Agreement, upon each transfer of an interest in Franchisee, and at any other time upon Company's request, all holders of a 10% or greater interest in Franchisee will execute a written agreement in a form prescribed by Company, the current form of which is attached hereto as of Exhibit “C”, personally, irrevocably and unconditionally guarantees, jointly and severally, with all other holders of a 10% or greater interest in Franchisee the

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full payment and performance of Franchisee's obligations to Company and to Company's affiliates.

ARTICLE 16

DEFAULT AND TERMINATION

16.1         General.  Company shall have the right to terminate this Agreement prior to its scheduled expiration date pursuant to Section 3.1 only for “cause”.  “Cause” is hereby defined as a material breach of this Agreement.  Company shall exercise its right to terminate this Agreement upon notice to Franchisee upon the following circumstances and manners.

16.2         Automatic Termination Without Notice.  Subject to Applicable Laws of the jurisdiction in which Franchisee's “Diedrich Coffee” Coffeehouse is located to the contrary, Franchisee shall be deemed to be in default under this Agreement, and all rights granted herein shall automatically terminate without notice to Franchisee if: (i) Franchisee shall be adjudicated bankrupt or judicially determined to be insolvent (subject to any contrary provisions of any applicable state or federal laws), shall admit to its inability to meet its financial obligations as they become due, or shall make a disposition for the benefit of its creditors; (ii) Franchisee shall allow a judgment against him in the amount of more than $5,000 to remain unsatisfied for a period of more than 30 days (unless a supersedeas or other appeal bond has been filed); (iii) the “Diedrich Coffee” Coffeehouse or Location, or the Franchisee's assets are seized, taken over or foreclosed by a government official in the exercise of its duties, or seized, taken over, or foreclosed by a creditor or lienholder provided that a final judgment against the Franchisee remains unsatisfied for 30) days (unless a supersedes or other appeal bond has been filed); (iv) a levy of execution of attachment has been made upon the license granted by this Agreement or upon any property used in the “Diedrich Coffee” Coffeehouse, and it is not discharged within 5 days of such levy or attachment; (v) Franchisee permits any mechanics lien to attach to the “Diedrich Coffee” Coffeehouse or to any equipment or other Leasehold Improvements; (vi) Franchisee allows or permits any judgment to be entered against Company or its subsidiaries or affiliated corporations, arising out of or relating to the operation of Franchisee's “Diedrich Coffee” Coffeehouse; or (vii) Franchisee is convicted of any felony, or any criminal misconduct relevant to the operation of the “Diedrich Coffee” Coffeehouse.

16.3         Option to Terminate Without Notice.  Franchisee shall be deemed to be in default and Company may, at its option, terminate this Agreement and all rights granted hereunder, without affording Franchisee any opportunity to cure the default, effective immediately upon receipt of notice by Company upon the occurrence of any of the following events:

16.3.1      Abandonment.  If Franchisee shall abandon the “Diedrich Coffee” Coffeehouse.  For purposes of this Agreement, “abandon” shall refer to (i) Franchisee's failure, at any time during the term of this Agreement, to keep the “Diedrich Coffee” Coffeehouse open and operating for business for a period of 5 consecutive days, except as provided in the Manuals, (ii) Franchisee's failure to keep the “Diedrich Coffee” Coffeehouse open and operating for any period after which it is not unreasonable under the facts and circumstances for Company to conclude that

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Franchisee does not intend to continue to operate the franchise, unless such failure to operate is due to fire, flood, earthquake or other similar causes beyond Franchisee's control, and (iii) failure to actively and continuously maintain and answer Franchisee's telephone;

16.3.2      Assignment, Death or Incapacity.  If Franchisee shall purport to make any Assignment without the prior written consent of Company; provided, however, that on written request and on condition that the “Diedrich Coffee” Coffeehouse continues to be operated in conformity with this Agreement, (i) upon the death or legal incapacity of a Franchisee who is an individual, Company shall allow up to 6 months after such death or legal incapacity for the heirs, personal representatives, or conservators (the “Heirs”) of Franchisee either to enter into a new Franchise Agreement upon Company's then current form (except that no initial franchise fee or transfer fee shall be charged), if Company is subjectively satisfied that the Heirs meet Company's standards and qualifications, or if not so satisfied to allow the Heirs to sell the “Diedrich Coffee” Coffeehouse to a person approved by Company, or (ii) upon the death or legal incapacity of an Owner owning 50% or more of the capital stock, membership interests or voting power of a corporate or limited liability company Franchisee, or a general or limited partner owning 50% or more of any of the Partnership Rights of a Franchisee which is a Partnership, Company shall allow a period of up to 6 months after such death or legal incapacity for the Heirs to seek and obtain Company's consent to the transfer or Assignment of such stock, membership interests or Partnership Rights to the Heirs or to another person acceptable by Company.  If, within said 6 month period, the Heirs fail either to enter into a new franchise agreement or to sell the “Diedrich Coffee” Coffeehouse to a person approved by Company pursuant to Section 15.2, or fail either to receive Company's consent to the Assignment of such stock, membership interest or Partnership Rights to the Heirs or to another person acceptable by Company, as provided in Section 15.2, this Agreement shall thereupon automatically terminate;

16.3.3      Repeated Defaults.  If Franchisee shall default in any material obligation as to which Franchisee has previously received 3 or more written notices of default from Company setting forth the material breach complained of within the preceding 12 months, such repeated course of conduct shall itself be grounds for termination of this Agreement without further notice or opportunity to cure;

16.3.4      Misrepresentation.  If Franchisee makes any material misrepresentations relating to the acquisition of the “Diedrich Coffee” Coffeehouse.

16.3.5      Violation of Law.  If Franchisee fails, for a period of 10 days after having received notification of noncompliance from Company or any governmental or quasi-governmental agency or authority, to comply with any federal, state or local law or regulation applicable to the operation of the “Diedrich Coffee” Coffeehouse;

16.3.6      Health or Safety Violations.  Franchisee's conduct of the “Diedrich Coffee” Coffeehouse licensed pursuant to this Agreement is so contrary to this Agreement, the System and the Manuals as to constitute an imminent danger to the public health (for example,

39

selling spoiled food knowing that the food products are spoiled or allowing a dangerous condition arising from a failure to strictly comply with any health code or ordinance or other Applicable Law to continue despite Franchisee's knowledge of such condition), or selling expired or other unauthorized products to the public after notice of default and continuing to sell such products whether or not Franchisee has cured the default after one or more notices;

16.3.7      Unfair Competition.  Any violation by Franchisee of Section 13.1; Franchisee's disclosure or use in violation of this Agreement of the contents of the Manual, or any other Confidential Information provided to Franchisee by Company;

16.3.8      Under Reporting.  If an audit or investigation conducted by Company hereof discloses that Franchisee has knowingly maintained false books or records, or submitted false reports to Company, or knowingly understated its Gross Sales or withheld the reporting of same as herein provided;

16.3.9      Criminal Offenses.  If Franchisee is convicted of a felony or any other crime or offense that is reasonably likely, in the sole opinion of Company, to adversely affect the System, the Marks, the goodwill associated therewith, or Company's interest therein;

16.3.10    Intellectual Property.  If Franchisee misuses or makes any unauthorized use of the Marks or otherwise materially impairs the goodwill associated therewith or Company's rights therein, or which reflects materially and unfavorably upon the operation and reputation of the “Diedrich Coffee” Coffeehouse or System.

16.3.11    Termination of Other Agreements.  If Franchisee or any of its affiliates is party to any other Development Agreement, Sublease, Management Agreement, Promissory Note, or Franchise Agreements with Company, and that other agreement is terminated by Company for default by Franchisee (after any applicable right to cure).  Notwithstanding the foregoing, however, Company may not terminate this Agreement if the other agreement is a Development Agreement, and the only grounds for termination of that Development Agreement is failure by Franchisee to meet its minimum development obligations under the Development Agreement.

16.4         Termination With Notice and Opportunity To Cure.  Except for any default by Franchisee under Sections 16.2 or 16.3, or as otherwise expressly provided in this Agreement, Franchisee shall have 10 days (5 days in the case of any default in the timely payment of sums due to Company or its affiliates), after Company's written notice of default within which to remedy any default under this Agreement, and to provide evidence of such remedy to Company.  If any such default is not cured within that time period, or such longer time period as Applicable Law may require or as Company may specify in the notice of default, this Agreement and all rights granted by it shall thereupon automatically terminate without further notice or opportunity to cure.

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Franchisee shall be in material default under this Article for any failure to comply with any of the requirements imposed by this Agreement.  Such material defaults shall include the occurrence of any one or more of the following events:

16.4.1      Franchisee's failure, refusal, or neglect to promptly pay any monies owed to Company, its subsidiaries or affiliates, or any Advertising Co-op, when due, or to submit the financial or other information required by Company under this Agreement;

16.4.2      Franchisee's failure to maintain the standards specified by Company in the Manual or otherwise;

16.4.3      Franchisee's failure, refusal or neglect to obtain Company's prior written approval or consent as required by this Agreement;

16.4.4      Franchisee's misuse or unauthorized use of Company's Marks or other material impairment of the goodwill associated therewith or Company's rights therein;

16.4.5      Franchisee's commencement of or conducting any business operation, or marketing of any product, under a name or mark which, in Company's reasonable opinion, is confusingly similar to Company's Marks;

16.4.6      Franchisee's default, without cure after the applicable grace period, under any Lease, mortgage, or deed of trust covering the Location; or

16.4.7      Franchisee's failure to procure or maintain the insurance required by this Agreement or in the Lease for the Location.

16.5         Reimbursement of Company Costs.  In the event of a default by Franchisee, all of Company's costs and expenses arising from such default, including reasonable legal fees and reasonable hourly charges of Company's administrative employees shall be paid to Company by Franchisee within 5 days after cure.

16.6         Cross-Default.  Any material default by Franchisee under the terms and conditions of this Agreement or any Lease, or any other agreement between Company, or its affiliate, and Franchisee, or any default by Franchisee of its obligations to any Advertising Cooperative of which it is a member, shall be deemed to be a material default of each and every said agreement.  Furthermore, in the event of termination, for any cause, of this Agreement or any other agreement between the parties hereto, Company may, at its option, terminate any or all said agreements.

16.7         Notice Required By Law.  Notwithstanding anything to the contrary contained in this Article 16, in the event any valid, Applicable Law of a competent Governmental Authority having jurisdiction over this Agreement and the parties hereto shall limit Company's rights of termination hereunder or shall require longer notice periods than those set forth above, this

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Agreement shall be deemed amended to conform to the minimum notice periods or restrictions upon termination required by such laws and regulations.  Company shall not, however, be precluded from contesting the validity, enforceability or application of such laws or regulations in any action, hearing or dispute relating to this Agreement or the termination thereof.

ARTICLE 17

RIGHTS AND OBLIGATIONS UPON TERMINATION

17.1         General.  Upon the expiration or termination of Franchisee's rights granted under this Agreement:

17.1.1      Franchisee shall immediately cease to use Company's Marks, and any confusingly similar trademark, service mark, trade name, logotype, or other commercial symbol or insignia.  Franchisee shall at its own cost, make cosmetic changes to Franchisee's “Diedrich Coffee” Coffeehouse so that it no longer contains or resembles Company's proprietary designs including, but not limited to, Franchisee shall remove all Diedrich Coffee identifying materials and distinctive Diedrich Coffee cosmetic features and finishes, interior wall coverings and colors, exterior finishes and colors, signage and Diedrich Coffee counter equipment (which shall be deemed proprietary to Company) from the Location as Company may reasonably direct.

17.1.2      Company may retain all fees paid pursuant to this Agreement, and Franchisee shall immediately pay any and all amounts owing to Company, its subsidiaries and affiliates.

17.1.3      Any and all obligations of Company to Franchisee under this Agreement shall immediately cease and terminate.

17.1.4      Any and all rights of Franchisee under this Agreement shall immediately cease and terminate.

17.1.5      Company shall have the option, exercisable by written notice within 30 days after the termination of this Agreement, to take an assignment of all telephone numbers (and associated listings) for Franchisee's “Diedrich Coffee” Coffeehouse.  Franchisee is not entitled to any compensation from Company if Company exercises this option.

17.1.6      Franchisee shall, at Company's option, cancel or assign to Company or its designee all of Franchisee's right, title and interest in any Internet and website home pages, domain name listings and registrations which contain the Marks, or any of them, in whole or and part, and Franchisee shall notify Network Solutions, InterNIC or other applicable domain name registrar and all listing agencies, upon the termination or expiration hereof, of the termination of Franchisee's right to use any domain name, web page and other Internet devise associated with Company or any “Diedrich Coffee” Restaurant, and authorize and instruct their cancellation or

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transfer to Company, as directed by Company. Franchisee is not entitled to any compensation from Company if Company exercises its said rights or options.

17.2         Survival of Obligations.  In no event shall a termination or expiration of this Agreement affect Franchisee's obligations to take or abstain from taking any action in accordance with this Agreement.  The provisions of this Agreement which constitute post-termination or post-expiration covenants or agreements shall survive the termination or expiration of this Agreement.

17.3         No Ownership of Marks.  Franchisee acknowledges and agrees that rights in and to Company's Marks and the use thereof shall be and remain the property of Company.

17.4         Government Filings.  In the event Franchisee has registered any of Company's Marks or the name “Diedrich Coffee” as part of Franchisee's assumed, fictitious or corporate name, Franchisee shall promptly amend such registration to delete Company's Marks therefrom.

ARTICLE 18

INSURANCE

18.1         Insurance.  Franchisee shall obtain and maintain insurance coverage which shall in each instance designate Company and designated parent companies, subsidiaries, and affiliates as additional named insureds, with an insurance company approved by Company, which approval shall not be unreasonably withheld as follows:

18.1.1      comprehensive general liability insurance (including products liability); with coverage of $2,000,000.00 to $4,000,000.00 combined single limit for death, personal injury, and $100,000.00 property damage coverage;

18.1.2      business interruption insurance, including Continuing Royalty coverage, for 12 months after casualty, in amounts equal to at least $150,000 ($50,000 in the case of a cart or kiosk);

18.1.3      workers' compensation insurance as required by Applicable Law; and

18.1.4      windstorm, fire, and extended coverage insurance, insuring the construction of improvements and completed “Diedrich Coffee” Coffeehouse operated by Franchisee, for the full replacement value thereof.

18.2         Use of Proceeds.  In the event of damage to the “Diedrich Coffee” Coffeehouse covered by insurance, the proceeds of any such insurance shall be used to restore the “Diedrich Coffee” Coffeehouse to its original condition (but in accordance with Company's then current standards and specifications) as soon as possible, unless such restoration is prohibited by the Lease or Company has otherwise consented to in writing.  Franchisee shall promptly provide to

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Company proof of such insurance coverage upon the obtaining of such insurance, and at such other times upon the request of Company.

18.3         Proof of Insurance.  Franchisee shall, prior to opening its “Diedrich Coffee” Coffeehouse, file with Company, certificates of such insurance and shall promptly pay all premiums on the policies as they become due.  In addition, the policies shall contain a provision requiring 30 days prior written notice to Company of any proposed cancellation, modification, or termination of insurance.  If Franchisee fails to obtain and maintain the required insurance, Company may, at its option, in addition to any other rights it may have, procure such insurance for Franchisee without notice and Franchisee shall pay, upon demand, the premiums and Company's costs in taking such action.

ARTICLE 19

RELATIONSHIP OF PARTIES, DISCLOSURE

19.1         Relationship of Franchisee to Company.  It is expressly agreed that the parties intend by this Agreement to establish between Company and Franchisee the relationship of Company and franchisee.  It is further agreed that Franchisee has no authority to create or assume in Company's name or on behalf of Company, any obligation, express or implied, or to act or purport to act as agent or representative on behalf of Company for any purpose whatsoever.  Neither Company nor Franchisee is the employer, employee, agent, partner or co-venturer of or with the other, each being independent.  Franchisee agrees that it will not hold himself out as the agent, employee, partner or co-venturer of Company.  All employees hired by or working for Franchisee shall be the employees of Franchisee and shall not, for any purpose, be deemed employees of Company or subject to Company control.  Each of the parties shall file its own tax, regulatory and payroll reports, and be responsible for all employee benefits and workers compensation payments, with respect to its respective employees and operations, saving and indemnifying the other party hereto of and from any liability of any nature whatsoever by virtue thereof.

Neither shall have the power to bind or obligate the other except specifically as set forth in this Agreement.  Company and Franchisee agree that the relationship created by this Agreement is not a fiduciary relationship.  Franchisee shall not, under any circumstances, act or hold itself out as an agent or representative of Company.

19.2         Indemnity by Franchisee. Franchisee hereby agrees to protect, defend and indemnify Company, and all of its past, present and future partners, shareholders, direct and indirect parent companies, subsidiaries, affiliates, officers, directors, employees, attorneys and designees and hold them harmless from and against any and all costs and expenses, including attorneys' fees, court costs, losses, liabilities, damages, claims and demands of every kind or nature on account of any actual or alleged loss, injury or damage to any person or Business Entity or to any property arising out of or in connection with Franchisee's operation of the Location and “Diedrich Coffee” Coffeehouse pursuant hereto.

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ARTICLE 20

NOTICES

20.1         General.  Except as otherwise expressly provided herein, all written notices and reports permitted or required to be delivered by the parties pursuant hereto shall be deemed so delivered at the time delivered by hand, one business day after confirmed transmission by facsimile, telegraph or other electronic system (with confirmation copy sent by regular U.S. mail), or 3 business days after placement in the United States Mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed as follows:

If to Company:	Diedrich Coffee
	2144 Michelson Drive
	Irvine, CA  92612
	Attn:   Vice President - Franchise Sales
	Facsimile No.: (949) 260-260-6731
If to Franchisee:
	Facsimile No.
With copy to:
	Facsimile No.

Any party may change his or its address by giving 10 days prior written notice of such change to all other parties.

ARTICLE 21

MISCELLANEOUS PROVISIONS

21.1         Company's Right To Cure Defaults.  In addition to all other remedies herein granted if Franchisee shall default in the performance of any of its obligations or breach any term or condition of this Agreement or any related agreement, Company may, at its election, immediately or at any time thereafter, without waiving any claim for breach hereunder and without notice to

45

Franchisee, cure such default for the account and on behalf of Franchisee, and the cost to Company thereof shall be due and payable on demand and shall be deemed to be additional compensation due to Company hereunder and shall be added to the amount of compensation next accruing hereunder, at the election of Company.

21.2         Waiver and Delay.  No waiver by Company of any breach or series of breaches or defaults in performance by Franchisee, and no failure, refusal or neglect of Company to exercise any right, power or option given to it hereunder or under any other franchise agreement between Company and Franchisee, whether entered into before, after or contemporaneously with the execution hereof (and whether or not related to the “Diedrich Coffee” Coffeehouse) or to insist upon strict compliance with or performance of Franchisee's obligations under this Agreement, any other franchise agreement between Company and Franchisee, whether entered into before, after or contemporaneously with the execution hereof (and whether or not related to the “Diedrich Coffee” Coffeehouse) or the Manuals, shall constitute a waiver of the provisions of this  Agreement or the Manuals with respect to any subsequent breach thereof or a waiver by Company of its right at any time thereafter to require exact and strict compliance with the provisions thereof.  Company will consider written requests by Franchisee for Company's consent to a waiver of any obligation imposed by this Agreement.  Franchisee agrees, however, that Company is not required to act uniformly with respect to waivers, requests and consents as each request will be considered on a case by case basis, and nothing shall be construed to require Company to grant any such request.  Any waiver granted by Company shall be without prejudice to any other rights Company may have, will be subject to continuing review by Company, and may be revoked, in Company's sole discretion, at any time and for any reason, effective upon 10 days prior written notice to Franchisee.  Company makes no warranties or guarantees upon which Franchisee may rely, and assumes no liability or obligation to Franchisee by providing any waiver, approval, consent, assistance, or suggestion to Franchisee in connection with this Agreement, or by reason of any neglect, delay, or denial of any request.

21.3         Survival of Covenants.  The covenants contained in this Agreement which, by their terms, require performance by the parties after the expiration or termination of this Agreement, shall be enforceable notwithstanding said expiration or other termination of this Agreement for any reason whatsoever.

21.4         Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the successors and assigns of Company and shall be binding upon and inure to the benefit of Franchisee and its or their respective heirs, executors, administrators, successors and assigns, subject to the restrictions on transfer or Assignment contained herein.

21.5         Joint and Several Liability. If Franchisee consists of more than one person or entity, or a combination thereof, the obligations and liabilities of each such person or entity to Company are joint and several.

21.6         General Release.  If Franchisee has a currently-effective franchise agreement or area development agreement from Company, then it shall be a condition to the effectiveness of

46

this Agreement that Franchisee has executed and delivered to Company a general release, in a form prescribed by Company, of all existing claims against Company arising out of those former agreements.

21.7         Governing Law/Consent to Jurisdiction.  Except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. §§ 1051 et seq.), this Agreement, the franchise and all other matters concerning Franchisee and Company (and its affiliates) shall be governed by the internal laws of the state where the Franchisee's “Diedrich Coffee” Coffeehouse is located (without reference to the choice of law and conflict of law rules of that state), except that the provisions of any law of that state regarding franchise disclosure, registration or relationship and the regulations thereunder shall not apply unless its jurisdictional requirements are met independently without reference to this Section.  The parties agree that, except to the extent prohibited by law, Orange County, California shall be the venue for any litigation arising under this Agreement. Franchisee irrevocably submits to the jurisdiction of those courts and waives any objection Franchisee might have to either the jurisdiction of or venue in those courts.

21.8         Waiver of Punitive Damages and Jury Trial.  Except for Franchisee's obligation to indemnify Company under Section 19.2 and claims Company bring against Franchisee for Franchisee's unauthorized use of the Marks or unauthorized use or disclosure of any Confidential Information, Company and Franchisee waive to the fullest extent permitted by law any right to or claim for any multiple, punitive or exemplary damages against the other and agree that, in the event of a dispute between Company and Franchisee, the party making a claim will be limited to equitable relief and to recovery of any actual damages it sustains.

Company and Franchisee irrevocably waive trial by jury in any action, proceeding, or counterclaim, whether at law or in equity, brought by either of them.

21.9         Limitations of Claims.  Except for claims arising from Franchisee's non-payment or underpayment of amounts Franchisee owes Company or its affiliates, any and all claims arising out of or relating to this Agreement or Company's relationship with Franchisee will be barred unless a proceeding is commenced within one (1) year from the date on which the party asserting the claim knew or should have known of the facts giving rise to the claim.

21.10       Entire Agreement.  This Agreement contains all of the terms and conditions agreed upon by the parties hereto with reference to the subject matter hereof.  No other agreements oral or otherwise shall be deemed to exist or to bind any of the parties hereto and all prior agreements, understandings and representations are merged herein and superseded hereby.  Franchisee represents that there are no contemporaneous agreements or understandings relating to the subject matter hereof between the parties that are not contained herein.  No officer or employee or agent of Company has any authority to make any representation or promise not contained in this Agreement or in any Offering Circular for prospective franchisees required by applicable law, and Franchisee agrees that it has executed this Agreement without reliance upon any such representation

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or promise.  This Agreement cannot be modified or changed except by written instrument signed by all of the parties hereto.

21.11       Titles For Convenience.  Article and Section titles used in this Agreement are for convenience only and shall not be deemed to affect the meaning or construction of any of the terms, provisions, covenants, or conditions of this Agreement.

21.12       Gender And Construction.  All terms used in any one number or gender shall extend to mean and include any other number and gender as the facts, context, or sense of this Agreement or any article or Section hereof may require.  As used in this Agreement, the words “include,” “includes” or “including” are used in a non-exclusive sense.  Unless otherwise expressly provided herein to the contrary, any consent, approval or authorization of Company which Franchisee may be required to obtain hereunder may be given or withheld by Company in its sole discretion, and on any occasion where Company is required or permitted hereunder to make any judgment or determination, including any decision as to whether any condition or circumstance meets Company's standards or satisfaction, Company may do so in its sole subjective judgment.

21.13       Severability.  Nothing contained in this Agreement shall be construed as requiring the commission of any act contrary to law.  Whenever there is any conflict between any provisions of this Agreement or the Manuals and any present or future statute, law, ordinance or regulation contrary to which the parties have no legal right to contract, the latter shall prevail, but in such event the provisions of this Agreement or the Manuals thus affected shall be curtailed and limited only to the extent necessary to bring it within the requirements of the law.  If any part, article, section, sentence or clause of this Agreement or the Manuals shall be held to be indefinite, invalid or otherwise unenforceable, the indefinite, invalid or unenforceable provision shall (subject to Section 13.2.3) be deemed deleted, and the remaining part of this Agreement shall continue in full force and effect.

21.14       Counterparts.  This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument.

21.15       Fees and Expenses.  Should any party hereto commence any action or proceeding for the purpose of enforcing, or preventing the breach of, any provision hereof, whether by judicial or quasi-judicial action or otherwise, or for damages for any alleged breach of any provision hereof, or for a declaration of such party's rights or obligations hereunder, the prevailing party shall be reimbursed by the losing party for all costs and expenses incurred in connection therewith, including, but not limited to, attorneys' fees.  All sums which are due but unpaid to Company or Franchisee shall bear interest from the date due at the highest rate permissible by applicable law.

21.16       Counsel.  Franchisee and its Owners acknowledge and warrant that they understand the terms and conditions of this Agreement and that they have had an opportunity in

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connection with this Agreement to confer with counsel of their choice regarding their rights and obligations under this Agreement.

ARTICLE 22

SUBMISSION OF AGREEMENT

22.1         General.  The submission of this Agreement does not constitute an offer and this Agreement shall become effective only upon the execution thereof by Company and Franchisee.

ARTICLE 23

ACKNOWLEDGMENT

23.1         General.  Franchisee, and its Owners, jointly and severally acknowledge that they have carefully read this Agreement and all other related documents to be executed concurrently or in conjunction with the execution hereof, that they have obtained the advice of counsel in connection with entering into this Agreement, that they understand the nature of this Agreement, and that they intend to comply herewith and be bound hereby.

23.2         Due Execution.  The submission of this Agreement to Franchisee does not constitute an offer and this Agreement shall become effective only upon the execution thereof by Company and Franchisee.

IN WITNESS WHEREOF, the parties hereof have executed this Agreement as of the date of execution by Company.

Company:

DIEDRICH COFFEE, INC.,

a Delaware corporation

By:

Its: Vice President

Franchisee:

By:

Its:_

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EXHIBIT A

Minimum Hours of Operation

Minimum Operating Hours:  [ :  ] a.m. to [ :  ] p.m.

             days per week

A-1

EXHIBIT B

FRANCHISEE INFORMATION

Franchisee is a (check as applicable):

o corporation   o limited partnership

o limited liability company   o general partnership

o Other (specify):                             

The name and address of each Owner of Franchisee is:

NAME ADDRESS NUMBER OF
SHARES OR
PERCENTAGE
INTEREST

There is set forth below the name and address of each director, member, or general partner, as applicable, of Franchisee:

NAME ADDRESS

There is set forth below the names, and addresses and titles of Franchisee's principal officers or partners who will be devoting their full time to the “Diedrich Coffee” Coffeehouses:

NAME ADDRESS

The address where Franchisee's Financial Records, and Business Entity records (e.g. Articles of Incorporation, Bylaws, Operating Agreement, Partnership Agreement, etc.) are maintained is:

B-1

EXHIBIT C

GUARANTY AND SUBORDINATION AGREEMENT

C-1

SPOUSAL CONSENT

Each of the undersigned, each being the spouse of an individual who executed this Agreement as Franchisee (or if Franchisee is a partnership, a spouse of a general partner), consents to all of the terms of this Agreement and the execution thereof, and agrees not to assist any person who is a party to this Agreement to violate any of that party's duties under this Agreement.

By:	Dated:
By:	Dated:

EX-10.18

Exhibit 10.18

FOURTH AMENDMENT
TO CREDIT AGREEMENT

THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (the “Amendment”) is made and dated as of the       day of October, 2003 by and between DIEDRICH COFFEE, INC., a Delaware corporation (the “Company”), and BANK OF THE WEST (the “Lender”).

RECITALS

A.Pursuant to that certain Credit Agreement dated as of September 3, 2002 by and between the Company and the Lender (as amended, extended and replaced from time to time, the “Credit Agreement,” and with capitalized terms used herein and not otherwise defined used with the meanings given such terms in the Credit Agreement), the Lender agreed to extend credit to the Company on the terms and subject to the conditions set forth therein.

B.The Company has requested the Lender to amend the Credit Agreement in certain respects and the Lender has agreed to do so on the terms and subject to the conditions set forth herein.

NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows:

AGREEMENT

1.Addition of Workers’ Compensation Letter of Credit Facility.  To reflect the agreement of the parties hereto to add a letter of credit facility in support of the Company’s workers’ compensation obligations, as of the Effective Date (as defined in Paragraph 2 below):

(a)Paragraph 5 of the Credit Agreement is hereby amended to read in its entirety as follows:

“5.Letter of Credit Facilities.

5(a)Working Capital Letter of Credit Facility Sublimit.  On the terms and subject to the conditions set forth herein, the Lender shall from time to time from and after the Effective Date, issue standby letters of credit in support of various working capital obligations of the Company (each a “Working Capital Letter of Credit” and, collectively, the “Working Capital Letters of Credit”) for the account of the Company; provided, however that in no event shall the Lender issue any Working Capital Letter of Credit hereunder if after giving effect to such issuance:

(1)The aggregate dollar amount of Outstanding Working Capital Letters of Credit and unrepaid L/C Drawings with respect to Working Capital Letters of Credit would exceed the Working Capital L/C Facility Sublimit; or

(2)The aggregate dollar amount of all Outstanding Working Capital Letters of Credit and unrepaid L/C Drawings with respect to Working Capital Letters of Credit plus

1

the aggregate amount of all Working Capital Loans outstanding would exceed $675,000.00.

5(b)Workers’ Compensation Letter of Credit Facility Credit Limit.  Subject to the terms and subject to the conditions set forth herein, including, without limitation, the terms and conditions set forth in Paragraph 5(c) below, the Lender shall from time to time from and after October __, 2003, issue standby letters of credit in support of the Company’s workers’ compensation obligations (each a “Workers’ Compensation Letter of Credit” and, collectively, the “Workers’ Compensation Letters of Credit”) for the account of the Company; provided, however that in no event shall the Lender issue any Workers’ Compensation Letter of Credit hereunder if after giving effect to such issuance the aggregate dollar amount of Outstanding Workers’ Compensation Letters of Credit and unrepaid L/C Drawings with respect to Workers’ Compensation Letters of Credit would exceed the Workers’ Compensation L/C Facility Credit Limit.

5(c)Collateral Security for the Workers’ Compensation Letters of Credit.  Prior to the issuance of the first Workers’ Compensation Letter of Credit hereunder, the Company shall have opened a new no-access account with the Lender (the “Workers’ Compensation Collateral Account”).  As an additional condition precedent to the issuance of any Workers’ Compensation Letter of Credit (including the first Workers’ Compensation Letter of Credit hereunder), the Company shall deposit a dollar amount equal to the face amount of the Workers’ Compensation Letter of Credit being requested.  The Company hereby pledges, assigns and grants to the Lender a security interest in the Workers’ Compensation Collateral Account, any and all funds from time to time contained therein, and all products and proceeds of the foregoing.  The Obligations secured by the Workers’ Compensation Collateral Account shall only consist of the that portion of the Obligations arising out of or related to the Workers’ Compensation Letters of Credit.  At such time the Obligations with respect to any Workers’ Compensation Letter of Credit shall have been fully satisfied or otherwise terminated, the Lender shall release its Lien on the portion of the funds contained in the Workers’ Compensation Collateral Account attributable to such Workers’ Compensation Letter of Credit and remit such funds to the Company.

5(d)Issuance of Letters of Credit.  Each Letter of Credit, and any amendment, renewal or extension thereof, shall be requested by the Company at least thirty (30) Business Days prior to the proposed issuance, amendment, renewal or extension date (other than in the case of the first Workers’ Compensation Letter of Credit issued hereunder) by delivery to the Lender of a duly executed Letter of Credit Application, accompanied by all other L/C Documents which the Lender may require as a condition to the requested action.  No Letter of Credit shall have a stated expiration date (or provide for the extension of such stated expiration date or the issuance of any replacement therefor) later than October 15, 2004.

5(e)Repayment of L/C Drawings.  Each L/C Drawing shall be payable in full by the Company on the date of such L/C Drawing.

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5(f)Absolute Obligation to Repay.  The Company’s obligation to repay L/C Drawings shall be absolute, irrevocable and unconditional under any and all circumstances whatsoever and irrespective of any set-off, counterclaim or defense to payment which the Company may have or have had, against any Lender or any other Person, including, without limitation, any set-off, counterclaim or defense based upon or arising out of:

(1)Any lack of validity or enforceability of this Agreement or any of the other Loan Documents;

(2)Any amendment or waiver of or any consent to departure from the terms of any Letter of Credit;

(3)The existence of any claim, setoff, defense or other right which the Company or any other Person may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting);

(4)Any allegation that any demand, statement or any other document presented under any Letter of Credit is forged, fraudulent, invalid or insufficient in any respect, or that any statement therein is untrue or inaccurate in any respect whatsoever or that variations in punctuation, capitalization, spelling or format were contained in the drafts or any statements presented in connection with any L/C Drawing;

(5)Any payment by the Lender under any Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit, or any payment made by the Lender under any Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of any Letter of Credit, including any arising in connection with any insolvency proceeding;

(6)Any exchange, release or non-perfection of any Collateral; or

(7)Any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of the Company.

Nothing contained herein shall constitute a waiver of any rights of the Company against the Lender arising out of the gross negligence or willful misconduct of the Lender in connection with any Letter of Credit issued hereunder; provided, however, that the exercise of such rights is subject to and conditioned upon the prior payment in full of all Obligations, including, without limitation, unrepaid L/C Drawings, and termination of the credit facility evidenced hereby.

5(g)Uniform Customs and Practice.  The Uniform Customs and Practice for Documentary Credits as published by the International Chamber of Commerce most recently at the time of issuance of any Letter of Credit shall

3

(unless otherwise expressly provided in such Letter of Credit) apply to such Letter of Credit.

5(h)Relationship to Letter of Credit Applications.  In the event of any inconsistency between the terms and provisions of this Agreement and the terms and provisions of the Letter of Credit Applications, the terms and provisions of this Agreement shall supersede and govern.

(b)Paragraph 4(a) of the Credit Agreement is hereby amended in its entirety to read as follows:

“4(a)Credit Limit.  Subject to the terms and conditions set forth herein, from and after the Effective Date, the Lender agrees that it shall from time to time to but not including the Working Capital Facility Maturity Date make loans (each, a “Working Capital Loan”) to the Company in an aggregate amount not to exceed at any one time outstanding the lesser of:  (i) $500,000.00, and (ii) $675,000.00 minus the dollar amount of all Outstanding Working Capital Letters of Credit and unrepaid L/C Drawings related to Working Capital Letters of Credit as of such date (the “Working Capital Facility Credit Limit”).  Principal amounts prepaid hereunder prior to the Working Capital Facility Maturity Date may be reborrowed on the terms and subject to the conditions set forth in Paragraph 10(b) below, it being expressly acknowledged and agreed that the credit facility provided under this Paragraph 4 is a revolving credit facility.”

(c)Paragraph 10(b)(2) of the Credit Agreement is hereby amended in its entirety to read as follows:

“(2)In the case of the issuance of a Letter of Credit, there shall have been delivered to the Lender a Letter of Credit Application and all required L/C Documents relating thereto, and the Company shall be in compliance with the limits set forth in Paragraphs 5(a) and 5(b) above, as applicable.”

(d)The definition of the term “Letter of Credit” set forth in Paragraph 16 of the Credit Agreement is hereby amended to read in its entirety as follows:

“‘Letter of Credit’ or ‘Letters of Credit’ shall mean either a Working Capital Letter or Credit or a Workers’ Compensation Letter of Credit or all Working Capital Letters of Credit and Workers’ Compensation Letters of Credit, collectively, as applicable.”

(e)The definition of the term “L/C Facility Sublimit” set forth in Paragraph 16 of the Credit Agreement is hereby deleted in its entirety.

(f)The following new definitions are hereby added to Paragraph 16 of the Credit Agreement in correct alphabetical order:

“‘Working Capital L/C Facility Credit Limit’ shall mean $250,000.00.”

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“‘Working Capital Letter of Credit’ and ‘Working Capital Letters of Credit’ shall have the meanings given such terms in Paragraph 5(a) above.”

“‘Workers’ Compensation Cash Collateral Account’ shall have the meaning given such term in Paragraph 5(c) above.”

“‘Workers’ Compensation L/C Facility Sublimit’ shall mean $247,500.00.”

“‘Workers’ Compensation Letter of Credit’ and ‘Workers’ Compensation Letters of Credit’ shall have the meaning given such terms in Paragraph 5(b) above.”

2.Effective Date.  This Amendment shall be effective as of the date first written above upon the date that the Lender shall have received:

(a)This Amendment, duly executed by all parties signatory hereto; and

(b)Such corporate resolutions, incumbency certificates and other authorizing documentation for the Company and the Guarantors as the Lender may request.

3.Reaffirmation of the Loan Documents.  The Company and each of the Guarantors, by executing this Amendment as provided below, hereby affirms and agrees that:  (a) the execution and delivery by it of and the performance of its obligations under this Amendment shall not in any way amend, impair, invalidate or otherwise affect any of its obligations under the Loan Documents to which it is party except to the extent expressly amended hereby, (b) the term “Obligations” as used in the Loan Documents include, without limitation, the Obligations of the Company under the Credit Agreement as amended by this Amendment, and (c) except as expressly amended hereby, the Loan Documents remain in full force and effect as written.

4.Representations and Warranties.  The Company and each of the Guarantors by executing this Amendment as provided below, hereby represents and warrants to the Lender that:

(a)It has the requisite power and authority and the legal right to execute, deliver and perform this Amendment and has taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment.

(b)This Amendment has been duly executed and delivered on its behalf and constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms.

(c)There does not exist an Event of Default or Potential Default.

(d)None of such Persons has any existing claims, counterclaims, defenses, personal or otherwise, or rights of setoff whatsoever with respect to any of the Loan Documents, and the Loan Documents, as amended hereby, constitute valid, legal, binding and enforceable obligations of such Persons, as appropriate.

5.No Other Amendment.  Except as expressly amended hereby, the Credit Agreement and other Loan Documents shall remain in full force and effect as written.

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6.Counterparts.  This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement.

[Signatures Page Following]

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written.

		DIEDRICH COFFEE, INC., a Delaware corporation
		By:	/s/ Roger Laverty
		Name:		Roger Laverty, President and Chief Executive Officer
		By:	/s/ Matthew C. McGuinness
		Name:		Matthew C. McGuinness, Executive Vice President and Chief Financial Officer
		BANK OF THE WEST
		By:	/s/ Bruce Young
			Bruce Young, Vice President
ACKNOWLEDGED AND AGREED TO:
COFFEE PEOPLE WORLDWIDE, INC., a Delaware corporation
By:	/s/ Matthew C. McGuinness
Name: Matthew C. McGuinness, President
By:	/s/ Matt Kimble
Name: Matt Kimble, Assistant Secretary

7

COFFEE PEOPLE, INC., an Oregon corporation
By:	/s/ Matthew C. McGuinness
Name: Matthew C. McGuinness, President
By:	/s/ Matt Kimble
Name: Matt Kimble, Assistant Secretary
GLORIA JEAN’S, INC.,
a Delaware corporation
By:	/s/ Matthew C. McGuinness
Name: Matthew C. McGuinness, President
By:	/s/ Matt Kimble
Name: Matt Kimble, Assistant Secretary
EDGLO ENTERPRISES, INC., an Illinois corporation
By:	/s/ Matthew C. McGuinness
Name: Matthew C. McGuinness, President
By:	/s/ Matt Kimble
Name: Matt Kimble, Assistant Secretary

8

GLORIA JEAN’S GOURMET COFFEES CORP., an Illinois corporation
By:	/s/ Matthew C. McGuinness
Name: Matthew C. McGuinness, President
By:	/s/ Matt Kimble
Name: Matt Kimble, Assistant Secretary
GLORIA JEAN’S GOURMET COFFEES FRANCHISING CORP., an Illinois corporation
By:	/s/ Matthew C. McGuinness
Name: Matthew C. McGuinness, President
By:	/s/ Matt Kimble
Name: Matt Kimble, Assistant Secretary

9

EX-10.25

Exhibit 10.25

February 6, 2001

Pam Britton

28092 Paseo Rincon

Mission Viejo, CA  92692

Dear Pam:

We are pleased to offer you the position of Executive Vice President of Operations for Gloria Jean’s Gourmet Coffee.  This is a critical position with responsibility for the successful operations of Gloria Jean’s franchisees.  As you know, we are currently the second largest specialty Coffee Company in the United States. We view this as a unique opportunity to create something really special.

Our offer is as follows:

• Base salary - $3,365.38 per week (paid on a bi-weekly basis) which equates to $175,000 annually.

• Incentive/Bonus plan - For the first year of employment only this award will pay out a guaranteed amount of $52,500 at the end of 12 months of employment.  You will then be eligible to participate in our Executive Vice President level incentive plan, up to 30% of your annual base salary, which is paid based upon achievement of specific financial goals agreed upon with the Chief Executive Officer.  This award will be prorated for stub portion remaining of fiscal 2001/2002 only.

• Stock Options - The Company will issue you options to purchase at least 20,000 shares of Diedrich Coffee.  The strike price of the shares will be the trailing 5 day average of the price of the shares from the day you begin employment.  These options vest over 3 years at a rate of 33% per year.  The Board reviews issuance of additional stock options annually. This option grant will be subject to Board approval.

• Vacation - You will be entitled to 3 weeks of vacation during your first year of employment.  Additional vacation time will be earned as plan eligibility requirements are met.

• Benefits - You will participate in the company’s executive benefits plan. Your initial salary will be increased $99.06 per bi-week to provide employee +1 coverage and deducted pretax to pay your portion of the premium.  The benefit program may be modified from time to time.  Future changes to employee contribution levels will be your responsibility.

• 401(k) participation based on plan eligibility criteria.

• Employment at will - you may resign at any time and Diedrich Coffee may terminate your employment at any time, with or without cause or notice.

• Termination not for cause - Should your employment be terminated for reasons other than cause (cause meaning willful misconduct, repeated failure to perform duties, fraud or dishonesty, felonious, or criminal acts), and you execute a simple release of claims agreement you will be entitled to bi-weekly payments equal to six months of your then current salary.  In any event, these payments would cease if you accept other employment or accept work as an independent contractor.  Additionally, this benefit would not apply in the event of your death or inability to perform the job due to disability.

• This position reports directly to the Mike Jenkins, Chief Executive Officer of Diedrich Coffee.

• Start date will be on or before February 26, 2001.

We look forward to your early response in becoming part of our team.  Please confirm your acceptance of this offer by signing and returning an executed copy to Matt Kimble.

Very truly yours,

J. Michael Jenkins

Chief Executive Officer, Diedrich Coffee Inc.

I accept the position of Executive Vice President of Operations for Gloria Jean’s Gourmet Coffee, effective on or before February 26, 2001 on the above terms and conditions.

Pamela Britton Date

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EX-10.26

Exhibit 10.26

February 3, 2000

Michael Zorehkey

17  Tanzanite

Rancho Santa Margarita, CA  92688

Dear Mike:

We are pleased to offer you the position of Director of Mall Development for Diedrich Coffee.  This is a critical position with our Company that will take total responsibility for the maintenance and expansion of the Company in malls. As you know, we are currently the second largest specialty coffee company in the United States with plans to expand significantly in the near future.  We view this as a growth position and a unique opportunity to help create something really special.

Our offer is as follows:

• Base salary - $2,211.54 per week (paid on a bi-weekly basis) which equates to $115,000 annually at the completion of one full year of employment.  Wages are reviewed annually as anniversary dates are reached.

• Incentive/Bonus plan - For traditional full line stores, a bonus of $1,000 will be paid for each new opening you complete and paid upon store opening. Non-traditional locations (e.g. kiosks, carts, airports, colleges, hospitals) are paid at .15% of first year sales and is paid on the 13^th month anniversary of the location opening.  A bonus of $250 will be paid for each lease renewal you complete and will be paid on the execution of the lease by both parties (excludes extensions of less than 3 years or exercise of options).  For each sublease you complete during the fiscal year, a payment of $500 will be paid upon full execution of the sublease. For each occupancy cost reduction or early termination of a lease you negotiate, you will receive a payment equal to 5% of the net savings realized by the Company up to a maximum of $5,000.  This award will be paid upon full execution of the appropriate document.  This plan is for the time period of February 21, 2000 through the end of the Company fiscal year and is intended to reward personal performance.  It is not intended to pay for work completed by others (e.g. you do the deal - you receive the reward).  In order to be eligible for payment you must be employed when the payment is due.

• Stock Options - The Company will issue you options to purchase 7,500 shares of Diedrich Coffee.  The strike price of the shares will be the trailing 5 day average of the price of the shares from the day you begin employment.  These options vest over 3 years at a rate of 33% per year.  The Board reviews issuance of additional stock options annually.

• Signing bonus - a lump sum payment of $10,000, less applicable withholdings, will be made within your initial 30 days of employment. Should you voluntarily leave the Company within 12 months from the effective date of employment, for any reason, you will be responsible for repaying the Company this bonus on a prorated basis.

• Car allowance - In this position you will receive a car allowance of $400 per month (paid on a bi-weekly basis).

• Vacation - Based on your experience, you will be entitled to earn 2 weeks of vacation during your first year of employment.  You will retain this benefit until the vacation earning potential increases based on Company vacation policy.

• Benefits - You will participate in the Company’s benefits plan.  A copy is attached.  The benefit program may be modified from time to time.

• 401(k) participation based on current eligibility criteria.

• Employment at will - you may resign at any time and Diedrich Coffee may terminate your employment at any time, with or without cause or notice.

• Termination not for cause - Should your employment be terminated for reasons other than cause (cause meaning willful misconduct, repeated failure to perform duties, fraud or dishonesty, felonious, or criminal acts), you will be entitled to a one-time payment equal to six month’s salary.

• Position reports directly to Tony Bonwell - Vice President, Real Estate & Construction for Diedrich Coffee.

• Start date on or before March 6, 2000.

We look forward to your early response in becoming part of our team.  Please confirm your acceptance of this offer by signing and returning an executed copy to Matt Kimble.

Very truly yours,

Tim Ryan

Chief Executive Officer

I accept the position of Director of Mall Development, Diedrich Coffee on the above terms and conditions.

Michael Zorehkey Date

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EX-31.1

EXHIBIT 31.1

Section 302 Certification

I, Roger M. Laverty, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Diedrich Coffee, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:	November 6, 2003	/s/  Roger M. Laverty
		Name:  Roger M. Laverty
		Title: President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Section 302 Certification

I, Martin A. Lynch, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Diedrich Coffee, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:	November 6, 2003	/s/  Martin A. Lynch
		Name:  Martin A. Lynch
		Title: Executive Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, in his capacity as an officer of Diedrich Coffee, Inc. (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

•the Quarterly Report on Form 10-Q for the period ended September 24, 2003 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

•the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Dated:	November 6, 2003	/s/  Roger M. Laverty
		Roger M. Laverty
		President and Chief Executive Officer

Note:  A signed original of this written statement required by Section 906 has been provided to Diedrich Coffee, Inc. and will be retained by Diedrich Coffee, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, in his capacity as an officer of Diedrich Coffee, Inc. (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

•the Quarterly Report on Form 10-Q for the period ended September 24, 2003 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

•the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Dated:	November 6, 2003	/s/  Martin A. Lynch
		Martin A. Lynch
		Executive Vice President and Chief Financial Officer

Note:  A signed original of this written statement required by Section 906 has been provided to Diedrich Coffee, Inc. and will be retained by Diedrich Coffee, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.