10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended June 25, 2008

OR

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

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)	(I.R.S. Employer Identification No.)

28 Executive Park, Suite 200

Irvine, California 92614

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code

(949) 260-1600

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

Title of each class	Name of each exchange on which registered
Common Stock, $0.01 par value	The NASDAQ Global Market

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

None

(Title of Class)

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

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

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

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

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

Large accelerated filer [    ]	Accelerated filer [    ]
Non-accelerated filer [    ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [    ] No [X]

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of December 12, 2007 was $10,773,450.

The number of shares of the registrant’s common stock outstanding, as of September 9, 2008, was 5,468,316.

TABLE OF CONTENTS

		Page
A Warning About Forward-Looking Statements		1
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	13
Item 4.	Submission of Matters to a Vote of Security Holders	13
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	14
Item 6.	Selected Financial Data	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 8.	Financial Statements and Supplementary Data	28
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	28
Item 9A.	Controls and Procedures	28
Item 9B.	Other Information	29
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	29
Item 11.	Executive Compensation	33
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	38
Item 13.	Certain Relationships and Related Transactions, and Director Independence	40
Item 14.	Principal Accountant Fees and Services	41
PART IV
Item 15.	Exhibits and Financial Statement Schedules	42
	Signatures	43
	Financial Statements	F-1
	Index to Exhibits	S-1

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A WARNING ABOUT FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this annual report on Form 10-K 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. 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 annual report on Form 10-K, along with the following possible events or factors:

• the financial and operating performance of our wholesale operations;

• our ability to achieve and/or maintain profitability over time;

• 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.

Additional risks and uncertainties are described elsewhere in this annual report on Form 10-K and in detail under “Item 1A. Risk Factors.” You are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this annual report on Form 10-K. Except where required by law, we do not undertake an obligation to revise or update any forward-looking statements, whether as a result of new information, future events or changed circumstances. Unless the context requires otherwise, the terms “we,” “us,” and “our” refer to Diedrich Coffee, Inc., a Delaware corporation, and its predecessors and subsidiaries.

PART I

Item 1. Business.

Overview

Diedrich Coffee, Inc. is a specialty coffee roaster, wholesaler and retailer. Our brands include Diedrich Coffee, Gloria Jean’s, and Coffee People. The majority of our revenue is generated from wholesale customers located across the United States. Our wholesale operation sells a wide variety of whole bean and ground coffee as well as single serve coffee products through a network of office coffee service (“OCS”) distributors, chain and independent restaurants, coffeehouses, other hospitality operators and specialty retailers. We operate a large coffee roasting facility in Castroville, California that supplies freshly roasted coffee to all of our wholesale and retail customers.

We also 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. The critical components for each of our retail locations include high quality, fresh roasted coffee and superior customer service by knowledgeable employees. As of June 25, 2008, we owned and operated 5 retail locations and franchised 118 other retail locations under the brands described above, for a total of 123 retail coffee outlets. Although the retail specialty coffee industry is presently dominated by a single company, which operates over seven thousand domestic retail locations, we are one of the nation’s largest specialty coffee retailers with annual system-wide retail revenues in excess of $54 million. System-wide retail revenues include sales from company-operated and franchise locations. Our retail units are located in 28 states.

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Company Background

Our predecessor company, Carl E. Diedrich & Sons, Inc., commenced operations in Orange County, California in 1972 and changed its name to Diedrich Coffee when its first retail store opened. We incorporated in California in 1985. We remained a small, family operated business with only three retail locations until 1992. We grew rapidly from 1992 to 1996 through construction of new Diedrich Coffee coffeehouses in Orange County and the acquisition of coffeehouses operated under other brands in Houston, Denver and San Diego, all of which were converted into Diedrich Coffee coffeehouses. In August 1996, we reincorporated under Delaware law as Diedrich Coffee, Inc., and completed an initial public offering of our common stock in September 1996. On July 7, 1999, we acquired Coffee People, Inc. The Coffee People, Inc. brands included Gloria Jean’s, one of the leaders in the mall coffee store market, Coffee People, based primarily in Portland, Oregon, and Coffee Plantation, based primarily in Phoenix, Arizona. The Coffee Plantation coffeehouses have been sold or closed. We continue to operate three brands: Diedrich Coffee, Gloria Jean’s and Coffee People.

Industry Overview

According to a recent report from the National Coffee Association of U.S.A., Inc. (the “NCA”), 128.7 million adults, or 57% of the population over the age of 18, drank coffee daily. The NCA also reported that daily consumption of gourmet coffee has increased over the past seven years from 14% of the adult population in 2001 to 17% of the adult population in the current year.

The United States coffee market consists of two distinct product categories:

• commercial ground roast, mass-merchandised coffee; and

• specialty coffees, which include gourmet coffees (premium grade Arabica coffees sold in whole bean and ground form) and premium coffees (upscale coffees mass-marketed by the leading coffee companies).

We believe that several factors have contributed to the increase in demand for gourmet coffee including:

• greater consumer awareness of gourmet coffee as a result of its increasing availability;

• increased quality differentiation over commercial grade coffees by consumers;

• increased demand for all premium food products, including gourmet coffee, where the differential in price from the commercial brands is small compared to the perceived improvement in product quality and taste; and

• ease of preparation of gourmet coffees resulting from the increased use of automatic drip coffee makers, home espresso machines and single serve coffee systems.

Our Business Model

Our business objective is a logical extension of our Mission Statement, which states: “Every single cup matters.” Therefore, our objective is to roast and sell only the finest coffees in a variety of formats, without compromising our commitment to quality. We buy only the highest quality green coffee beans available, fresh roast them with our proprietary recipes and subject them to a rigorous internal quality control process. We ensure that care is taken at each and every step of the production and distribution process to preserve that quality.

We sell our coffee through multiple distribution channels, and strive to target our resources to increase efficiency and profitability while growing the business within this framework. These distribution channels

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include ecommerce, mass merchandisers, key accounts, distributors and franchise retail outlets. While each of these channels have different customers, cost structures, overhead requirements, competitors, and other fundamental differences, we believe our commitment to quality is essential to successful growth in both of these areas. Important financial information for each of our business segments can be found in Note 14 to our consolidated financial statements.

Wholesale Distribution

As of June 25, 2008, we had over 900 coffee wholesale accounts not affiliated with our retail locations, which purchase coffee from us under the Diedrich Coffee, Coffee People and Gloria Jean’s brands. Our current wholesale accounts are in the OCS (Office Coffee Services) market, chain restaurants, independent restaurants and other hospitality industry accounts and specialty retailers. Additionally, our franchise agreements require Gloria Jean’s, Coffee People and Diedrich Coffee franchisees to purchase substantially all of their coffee from us, and we record a wholesale gross profit on such sales.

Single Serve Coffee

During fiscal 2004, we entered into a license and distribution agreement with Keurig, Inc. which amends and restates the 2000 license agreement, whereby we utilize Keurig’s patented single service coffee brewing technology and its extensive distribution channels within the Away from Home (AFH) and At Home (AH) single serve markets. This multi-channel strategy provides widespread exposure to our three brands in a variety of settings. Utilizing our dedicated sales force, we sell to and ship directly to OCS distributors, who then provide our K-Cups^® along with equipment and other services to office customers. In addition to Keurig^® single-serve K-Cups^®, we sell our premium coffees to OCS distributors in whole bean and ground coffee form for use in traditional coffee brewing equipment found in most office environments.

In addition to being a leader in office-based single-cup brewing choices, Keurig is growing in the AH single serve market. Keurig brewers and K- Cups^® are currently sold in over 8,500 retail locations including Macy’s, Bloomingdale’s, Target, Linens ‘n Things, Bed, Bath & Beyond, Costco, and BJ’s. We are actively participating in this retail channel with the sale of our three branded K- Cups^® through many of these retailers and the sale of at-home brewers and K-cups in most of our franchise stores and internet web stores.

Our current agreement with Keurig, Inc., which expires in July 2013, provides for automatic five-year renewals of the agreement if we meet certain volume thresholds, which we are currently exceeding.

Foodservice & Other Wholesale Accounts

As specialty coffee has grown in overall popularity, more foodservice customers are demanding a high quality cup of coffee as a supplement to a meal. We supply coffee on a wholesale basis to a wide variety of foodservice customers from large chain restaurants to smaller, often independent, operators in the restaurant and hospitality industries and to specialty retailers. Many of our wholesale accounts, such as hotels, restaurants, golf courses and airport concessions have their own “captive” customer base. It is common for our foodservice customers to specify in their menus that they serve Diedrich Coffee which provides us with additional exposure to the restaurants’ patrons and help build brand awareness.

Retail Outlets

Our retail outlet distribution channel is primarily focused on growth through franchised retail outlets. The critical success factors are the same 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 franchisor 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.

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Our primary retail brand is Gloria Jean’s, which consists of retail units located throughout the United States. Over 95% of Gloria Jean’s retail units are franchised. The following table summarizes the relative sizes of each of our brands on a unit count basis and changes in unit count for each brand over the past two years.

	Units at June 28, 2006	Opened	Closed/ Sold (A)		Net transfers between the Company and Franchise (B)		Units at June 27, 2007	Opened	Closed/ Sold		Units at June 25, 2008
Gloria Jean’s Brand
Company-Operated	5	—	(1	)	2		6	—	(2	)	4
Franchise – Domestic	139	13	(14	)	(2	)	136	2	(27	)	111
Subtotal Gloria Jean’s	144	13	(15	)	—		142	2	(29	)	115
Diedrich Coffee Brand
Company-Operated	26	—	(23	)	—		3	—	(2	)	1
Franchise – Domestic	8	—	(4	)	—		4	—	(1	)	3
Subtotal Diedrich	34	—	(27	)	—		7	—	(3	)	4
Coffee People Brand
Company-Operated	21	—	(18	)	(3	)	—	—	—		—
Franchise – Domestic	1	—	—		3		4	—	—		4
Subtotal Coffee People	22	—	(18	)	—		4	—	—		4
Total	200	13	(60	)	—		153	2	(32	)	123

(A) During fiscal 2007, the Company sold 32 retail stores to Starbucks Corporation and seven stores to other third parties.

(B) Two franchise Gloria Jean’s coffeehouses were transferred to company-operated coffeehouses and three company-operated Coffee People coffeehouses were sold to franchisees during fiscal year 2007.

Gloria Jean’s

Gloria Jean’s is a leader in the flavored specialty coffee market, with 115 coffee stores in 27 states throughout the United States. Many of our Gloria Jean’s coffee stores are located in high traffic shopping malls. The consumer traffic pattern in our mall-based stores is driven by mall hours and dynamics. Our mall-based stores are generally busiest on weekends and during holiday seasons. The typical Gloria Jean’s domestic coffee store is staffed with a manager and a staff of 10 to 15 part-time hourly employees who fill the operating shifts. Gloria Jean’s outlets tend to open earlier than most mall stores, but in general, operating hours coincide with mall hours. In addition to coffee beverages and fresh roasted whole bean coffees, Gloria Jean’s carries a wide selection of gift items, coffee accessories, and a small selection of bakery items to complement beverage sales.

The success of Gloria Jean’s coffee retail stores depends on three critical components: product quality, product selection, and service.

Product Quality.    Gloria Jean’s has been a pioneer in developing high quality, flavored, specialty coffees, and continues to be a leader in the sale of flavored coffees. Gloria Jean’s flavored coffees begin with top quality Arabica coffee beans that are roasted and then coated with proprietary flavorings.

Product Selection.    Most Gloria Jean’s retail stores offer as many as 75 varieties of flavored coffees, origins, blends, and decaf coffees, a wide variety of hot and cold beverages, light snack and dessert food items

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and a selection of gift items and coffee related merchandise. The primary function of Gloria Jean’s marketing is to entice consumers with eye-catching signage, window displays and promotions. A large selection of products helps to attract both new and repeat customers.

Service.    Friendly and efficient customer service is always critical in any retail setting, and is especially important for those stores in a mall environment, where shoppers are often in a hurry and have many choices. Because of the opportunity for repeat customers, it is essential that customers receive excellent service.

Diedrich Coffee & Coffee People

The Company currently has no plans to open any additional company-operated or franchised Diedrich Coffee or Coffee People coffeehouses.

Growth Strategy

Wholesale Distribution Growth.    In recent years, the primary growth in the coffee industry has come from the specialty coffee category, driven by the wider availability of high quality coffee, the emergence of upscale coffeehouses throughout the country and the general level of consumer knowledge and appreciation of specialty coffee. Diedrich Coffee has benefited from the overall specialty coffee market trends and what we believe are distinctive advantages over our competitors.

We are focused on building our three brands and our wholesale and ecommerce business channels. We believe that we can continue to grow sales by increasing market share in our existing business channels, expanding into new geographic markets with high-growth market segments and selectively pursuing other opportunities. Among other statements, this statement is forward looking and subject to the risks and uncertainties outlined in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and as described elsewhere in this annual report on Form 10-K.

We continue to expand and strengthen our wholesale sales organization, and we are actively seeking new distribution channels for our coffee products. We intend to pursue continued growth within the AFH single serve coffee market by expanding the number of OCS distributors that carry our Keurig Premium Coffee Systems™ lines of coffees as well as our whole bean and ground coffee product lines. We will aggressively expand our presence in the AH single serve market through building our brand awareness with specialty retailers. We will target large chain foodservice and hospitality customers that are moving up to specialty coffee to satisfy the demands of their guests for high quality coffee. We also offer our coffees on our internet websites, and we believe that this channel of distribution has untapped long-term growth potential.

Retail Segment Growth.    Under a non-compete provision in the asset purchase agreement with Starbucks in fiscal year 2007, we are restricted for a period of three years after the closing of the transaction with Starbucks in our ability to open any new company-operated or franchised Diedrich Coffee and Coffee People coffeehouses in any city in which Diedrich Coffee or Coffee People coffeehouses operated on the date that we and Starbucks entered into the agreement. The non-compete provision does not restrict our ability to open retail Gloria Jean’s stores and does not apply to wholesale sales to retail businesses that are not operated by us or other non-retail businesses or the conversion of our stores existing on the date of the asset purchase agreement to franchise stores.

Opportunistic development of new Gloria Jean’s retail locations by us may be undertaken on a very selective basis; however there are no current plans to open any company stores or franchise additional Diedrich or Coffee People coffeehouses. Development of any new Gloria Jean’s retail units will be through new franchise development. This will require increasing awareness among prospective franchisees and their lenders of the opportunities, assisting potential franchisees in obtaining control of desirable locations in premiere developments, increasing awareness of the Gloria Jean’s specialty coffee brand by real estate developers, improving the cost effectiveness of architectural plans for new prototypes and leveraging purchasing efficiencies system-wide for new unit equipment and fixtures packages.

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Gloria Jean’s Franchise Growth.    Since the acquisition of the Gloria Jean’s brand in 1999, we have made a number of modifications to the Gloria Jean’s franchising business model to strengthen the Gloria Jean’s system. A new form of franchise agreement was adopted which incorporated many provisions common in other successful franchise systems. Screening of financial qualifications of franchise candidates has been improved in terms of consistency and accuracy. Franchisees are required to obtain their own master leases directly from landlords, rather than subleasing their locations from Gloria Jean’s. Franchisees are required to hire their own architects and contractors to develop new Gloria Jean’s locations to approved specifications. Our training program has been completely redesigned in order to improve the quality of store level operations, product quality, and the consistency of brand standards. Although we believe that these and other changes to the Gloria Jean’s franchising model will ultimately result in a stronger Gloria Jean’s franchise system, they may result in slower domestic franchise growth. In addition, our efforts to strengthen our existing franchise retail base may require us to allow many of the weaker performing locations to close.

Franchise Support Programs

We provide a variety of support services to our franchisees. These services include marketing, product sourcing, volume purchasing savings, training and business consultation.

Our primary retail marketing strategy is to develop the Gloria Jean’s brand in the U.S. through penetration of new and existing markets via franchise growth. Gloria Jean’s franchise marketing efforts are based upon the belief that the proprietary roast recipes and the commitment to quality and freshness deliver a distinctive advantage in all Gloria Jean’s coffee products. Gloria Jean’s franchisees use word-of-mouth, local store marketing and the inviting atmosphere of their coffee stores to drive brand awareness and comparable store sales growth. Gloria Jean’s franchisees also conduct in-store coffee tastings, provide brewed coffee at local neighborhood events, and donate coffee to local charities to increase brand awareness.

We have established an intensive training program for our franchisees, which includes training on in-store operations, coffee knowledge, merchandising, buying, controls and accounting. Management works closely with franchisee representatives on issues that affect the operations of stores. Franchisees are surveyed regularly to provide feedback on subjects that affect the operations of their stores.

Product Supply and Roasting

Sourcing.    We are committed to selling only the finest whole bean coffees and coffee beverages. Coffee beans are an agricultural product grown in over 50 countries in tropical regions of the world. The supply and price of coffee are subject to significant volatility and we depend upon our relationships with coffee producers, outside trading companies and exporters for our supply of green coffee. Supply and price can be affected by multiple factors in the producing countries, including weather, political and economic conditions. Although the broader coffee market generally treats coffee as a fungible commodity, the specialty coffee industry focuses on the highest grades of coffee. We purchase premium grade Arabica coffee beans that we believe to be the best available from each producing region.

Roasting.    We employ a roasting process that varies based upon the variety, quality, origin and physical characteristics of the coffee beans being roasted. Our roast masters are responsible for the green coffee bean roasting process. They are craftsmen who employ our proprietary roasting formulas while adjusting the formula to take into account the specific attributes of each coffee bean being roasted. Each coffee bean contains aromatic oils and flavor characteristics that develop from the soil, climate and environment where the bean is grown. The skilled roast master determines and carefully controls the roasting conditions in an effort to maximize the flavor potential of each batch of coffee. The roast master hears how the roast pops, smells the developing aroma and identifies the right shades of color. They draw upon experience and knowledge to properly adjust airflow, time and temperature while the roast is in progress in order to optimize each roast.

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Competition

The specialty coffee market is intensely competitive and generally highly fragmented. The competitive factors within the specialty coffee market include product quality, customer service, product differentiation and, to a lesser extent, on price. Diedrich Coffee competes against all sellers of specialty coffee in multiple sales channels including Starbucks, Green Mountain, Peet’s, Boyd Coffee and other competitors.

In our wholesale business, we expect increased competition, both within our primary geographic territory, the Western United States, and in other regions of the United States, as we expand from our current markets. In most markets in which we do retail business either through company or franchise locations, there are numerous competitors in the specialty coffee beverage business, and we expect this situation to continue. Our whole bean coffee competes directly against specialty coffees sold at specialty retailers and a growing number of specialty coffee stores. The specialty coffee market is expected to become even more competitive as regional companies expand and attempt to build brand awareness in new markets. We compete primarily by providing high quality coffee, easy access to our products and superior customer service, and we believe we differentiate ourselves from many of our larger competitors, who specialize in one primary channel of distribution. We also believe that our product offering is distinctive because we offer a wide array of coffees, including origins, blends and flavored coffees. Finally, we believe that being an independent roaster allows us to be better focused and react quicker to our wholesale customers’ needs as compared to larger, multi-product competitors. While we believe we currently compete favorably with respect to these factors, there can be no assurance that we will be able to compete successfully in the future.

Other Factors

The performance of individual coffeehouses or mall coffee stores may also be affected by factors such as traffic patterns and the type, number and proximity of competing coffeehouses or mall coffee stores. In addition, factors such as inflation, increased coffee bean, food, labor and employee benefit costs and the availability of experienced management and hourly employees may also adversely affect the specialty coffee retail business in general and our coffeehouses and mall coffee stores in particular.

Seasonality

Our business experiences some variations in sales from quarter to quarter due to the holiday season and other factors including, but not limited to, general economic trends, competition, marketing programs and the weather. The fall and winter months are generally the best sales months but our geographic and product line diversity provide for some sales stability in the warmer months when coffee consumption ordinarily decreases.

Intellectual Property

We own several trademarks and service marks that have been registered with the United States Patent and Trademark Office, including Diedrich Coffee^®, Gloria Jean’s^®, Coffee People^®, Black Tiger^®, Morning Edition Blend^®, Wiener Melange Blend^®, Nepenthe Blend^®, and Flor de Apanas^®, as well as other slogans, product names, design marks and logos. We also own registrations in numerous foreign countries for the protection of the Diedrich Coffee and Coffee People trademark and service mark. These trademark registrations can generally be renewed as long as we continue to use the marks protected by the registrations. The Gloria Jean’s, Coffee People and Diedrich Coffee trademarks are material to our business.

On February 11, 2005, we sold Gloria Jean’s international franchise operations to Jireh International Pty. Ltd., formerly the Gloria Jean’s master franchisee for Australia, and certain of its affiliates (collectively, “Jireh”) for $16,000,000 in cash and an additional $7,020,000 payable over the next six years under license, roasting and consulting agreements. After all payments have been made to us under the license, roasting and consulting agreements, all remaining Gloria Jean’s trademarks, including those in the U.S., will be transferred to Jireh.

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Concurrent with such future transfer, our U.S.-based Gloria Jean’s subsidiary will enter into a perpetual, royalty-free master franchise agreement with Jireh under which we will continue to have exclusive rights to operate, franchise and develop Gloria Jean’s locations throughout the U.S. and Puerto Rico and to continue our wholesale operations under the Gloria Jean’s Coffees brand in these same markets. We also own a number of common law service marks and trademarks in the United States including “Gloria Jean’s Coffee Bean.” We have also received trademark and service mark protection for the name Coffee People and related marks in Canada and Japan. We own copyrights on our promotional materials, coffeehouse graphics and operational and training materials. We do not believe that any of these copyrights, valuable as they are, are material to our business.

Employees

At June 25, 2008, we employed 220 people, 165 of whom were employed full-time. None of our employees are represented by a labor union, and no employees are currently covered by collective bargaining agreements. We consider our relations with our employees to be good. We regularly review our employee benefits, training and other aspects of employment to attract and to retain valuable employees and managers. Franchise employees are not employees of the Company.

Government Regulation

In addition to the laws and regulations relating to the food service industry, we are subject to Federal Trade Commission (“FTC”) regulation and state laws that regulate the offer and sale of franchises as well as the franchise relationship. The FTC’s Trade Regulation Rule relating to Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures generally requires us to give prospective franchisees a franchise offering circular containing information prescribed by the rule. A number of states have laws that regulate the offer and sale of franchises and the franchisor-franchisee relationship. These laws generally require registration of the franchise offering with state authorities before making offers or sales and regulate the franchise relationship by, for example:

• prohibiting interference with the right of free association among franchisees;

• prohibiting discrimination in fees and charges;

• regulating the termination of the relationship by requiring “good cause” to exist as a basis for the termination, advance notice to the franchisee of the termination, and an opportunity to cure a default;

• requiring repurchase of inventories in some circumstances;

• restricting non-renewal by the franchisor;

• limiting restrictions on transfers or inheritance of the franchisee’s interests; and

• regulating placement of competing units that might adversely affect the franchisee’s results.

Failure to comply with applicable franchise laws may adversely affect us. Any changes to the FTC’s rules, or state franchise laws, or future court or administrative decisions, could affect our franchise business. There are also extensive federal, state and local government regulations relating to the development and operation of food service outlets, including laws and regulations relating to: building and seating requirements; the preparation and sale of food; cleanliness; safety in the workplace; and accommodations for the disabled. Our relationship with our employees is also subject to regulation, such as: minimum wage requirements; anti-discrimination laws; overtime and working conditions; and citizenship requirements.

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Compliance with Nasdaq Listing Standards

As a result of J. Russell Phillips’ resignation from the Company’s audit committee due to his appointment as our President and Chief Executive Officer on February 7, 2008, we became non-compliant with Nasdaq’s audit committee requirements as set forth in Nasdaq Marketplace Rule 4350, which requires Nasdaq-listed companies to have an audit committee consisting of at least three independent members. On February 12, 2008, we received a Nasdaq Staff Deficiency Letter indicating that we no longer complied with Nasdaq’s audit committee requirements as set forth in Nasdaq Marketplace Rule 4350. Nasdaq has requested that we provide evidence of compliance with Rule 4350 on or before the earlier of our next annual stockholders meeting or February 7, 2009. We have been undertaking a search for an additional independent director who will serve on the audit committee and intend to be fully compliant with Nasdaq requirements as soon as possible.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and other documents that we may file with or furnish to the SEC from time to time are available on our internet website, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished to the United States Securities and Exchange Commission. These reports are available at www.diedrich.com under the heading “Investor Services.” We intend to disclose future amendments to certain provisions of our Code of Conduct, which is available on the www.diedrich.com website, within four business days following the date of such amendment on our website.

Item 1A. Risk factors

RISK FACTORS RELATING TO DIEDRICH COFFEE AND ITS BUSINESS

Historical losses from continuing operations may continue and, as a result, the price of our common stock may be negatively affected.

We had net losses from continuing operations of $14,547,000 for the fiscal year ended June 25, 2008 and $3,749,000 for the fiscal year ended June 27, 2007. We could continue to suffer losses in the future, which may negatively affect our stock price.

If we are not able to grow our business, the results of our operations and our financial condition may be adversely impacted.

We are a specialty coffee roaster, wholesaler and retailer. The majority of our revenue is generated from wholesale customers. We also sell brewed, espresso-based and various blended beverages through our company-operated and franchised retail locations. To grow, we must:

• expand Diedrich Coffee, Coffee People and Gloria Jean’s wholesale sales;

• attract single and multi-store franchisees for our Gloria Jean’s brand in the United States;

• continue to upgrade Gloria Jean’s products and programs;

• have our single and multi store franchisees obtain suitable sites at acceptable costs in highly competitive real estate markets;

• integrate newly franchised or corporate locations into existing product distribution;

• continue to upgrade inventory control, marketing and information systems; and

• impose and maintain strict quality control from green coffee acquisition to the fresh cup of brewed coffee in a customer’s hand.

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Future inability to grow our business resulting from, among other things, failing to execute any of the above factors may adversely affect the results of our operations and our financial condition.

Our franchisees could take actions that could harm our business.

Franchisees are independent contractors and are not our employees. We provide training and support to our franchisees, and the terms of our franchise agreements require our franchisees to maintain certain minimum operating standards; however, the quality of franchised operations may be diminished by any number of factors beyond our control.

Our growth through single and multi-store franchisees may not occur as rapidly as we currently anticipate.

Our ability to recruit, retain and contract with qualified franchisees has become, and will continue to be, increasingly important to our operations as we expand. Our franchisees are dependent upon the availability of adequate sources of financing on acceptable terms in order to meet their development obligations. Such financing may not be available to our franchisees, or only available upon disadvantageous terms. Failure to execute on our strategy to grow through franchise store development could harm our business, financial condition and results of operations.

Our operating results may fluctuate significantly, which could have a negative effect on the price of our common stock.

From time to time, our operating results may fall below investor expectations. These results are likely to fluctuate from quarter to quarter as a result of a number of factors, including the fluctuations in the price of green coffee; competition from existing and new competitors; the number, timing and mix of franchise store openings or closings; comparable franchisee same-store sales; and changes in consumer preferences. Quarterly fluctuations in our operating results as the result of these factors or for any other reason could cause our stock price to decline.

Because we have only one roasting facility, a significant interruption in the operation of this facility could potentially disrupt our operations.

We currently operate one coffee roasting and distribution facility. A significant interruption in the operation of this facility, whether as a result of a natural disaster or other causes, could significantly impair our ability to operate our business on a day-to-day basis.

Future changes in minimum wage requirements could adversely affect our business, financial condition, results of operations or cash flows.

A number of our employees are subject to minimum wage requirements. There can be no assurance that further increases in minimum wage will not be implemented in jurisdictions in which we operate or seek to operate. There can be no assurance that we will be able to pass additional increases in labor costs through to our customers in the form of price adjustments and, accordingly, such minimum wage increases could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our franchisees may not be able to renew leases or control rent increases at retail locations.

All of our 5 company-operated coffeehouses are presently on leased premises. While some Gloria Jean’s stores are leased by an indirect subsidiary of Coffee People, Inc., in most cases, the franchisees pay their rent directly to their landlord. Upon the expiration of some of these leases, there is no automatic renewal or option to renew. Consequently, these leases may not be renewed. If they are renewed, rents may increase substantially.

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Either of these events could adversely affect us. Other leases are subject to renewal at fair market value, which could involve substantial rent increases, or are subject to renewal with scheduled rent increases, which could result in rents being above fair market value.

Our industry is highly competitive and we may not have the resources to compete effectively.

With low barriers to entry, competition in our industry is expected to increase from national and regional chains, franchise operators and local specialty coffee stores. Our whole bean coffees compete directly against specialty coffees sold at specialty retailers, variety and discount stores, and a growing number of specialty coffee stores. Many specialty coffee companies, including Green Mountain Coffee Roasters, S&D Coffee, Boyd Coffee and Starbucks sell whole bean coffees through these channels. In our sale of coffee beverages and espresso drinks, we compete directly against all other specialty grade coffee roasters, coffeehouses, espresso/coffee bars and mall coffee stores, as well as against restaurant and beverage outlets that serve coffee, and a growing number of espresso stands, carts, and stores. Our competition at this level includes a growing number of specialty coffee retailers, including Starbucks, Barnie’s, Coffee Beanery Ltd., Caribou Coffee, Peet’s Coffee, Tully’s Coffee and many others. The attractiveness of the gourmet specialty coffeehouse market may draw additional competitors with substantially greater financial, marketing and operating resources than we have. In addition, we compete to draw customers of standard or commercial coffee, and consumers of substitute coffee products manufactured by a number of nationwide coffee manufacturers, such as Kraft Foods, Proctor & Gamble and Nestlé, to specialty grade coffee.

Our supply costs may be higher than we expect because of fluctuations in availability and cost of unroasted coffee.

Increases in the price of green coffee, or the unavailability of adequate supplies of green coffee of the quality we seek, whether due to the failure of our suppliers to perform, conditions in coffee-producing countries, or otherwise, could have a material adverse effect on our results of operations. Should this happen, we may not be able to maintain our gross margins by raising prices without affecting demand.

Compliance with health, franchising and other government regulations applicable to us could have a material adverse effect on our business, financial condition and results of operations.

Our roasting facility and retail locations are subject to licensing and reporting requirements by a number of governmental authorities. These governmental authorities include federal, state and local health, environmental, labor relations, sanitation, building, zoning, fire, safety and other departments that have jurisdiction over the development and operation of our retail locations. Changes in any of these laws or regulations could have a material adverse affect on our business, financial condition and results of operations.

We are also subject to federal regulation and certain state laws that govern the offer and sale of franchises and the franchisor-franchisee relationship. The failure to obtain or retain licenses or registration approvals to sell franchises could delay or preclude franchise sales and otherwise adversely affect our business, financial condition and results of operations.

The loss of key personnel or our inability to attract and retain qualified personnel could significantly disrupt our business.

Our continued success largely will depend on the efforts and abilities of our executive officers and other key employees. In addition, our success and the success of our franchisees will depend upon our and their ability to attract and retain highly motivated and qualified employees. The inability to recruit and retain such individuals may delay planned openings of new franchise locations and could have a material adverse effect on our business or results of operations.

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Our lack of diversification may affect business if demand is reduced.

Our business is primarily centered on one product: specialty grade coffee. To date, our operations have been limited to primarily the purchase and roasting of green coffee beans and the sale of whole bean coffee, coffee beverages and espresso drinks through our franchise coffee stores, coffeehouses, and wholesale coffee and mail order businesses. Any decrease in demand for coffee would have a material adverse effect on our business, operating results and financial condition.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

Office Space and Plant

We currently lease approximately 17,620 square feet of office space in Irvine, California and approximately 6,192 square feet of warehouse space in Irvine, California. The lease for the office space will expire in January 2011 and the lease for the warehouse space will expire in December 2010. We also lease a 66,237 square foot roasting facility located in Castroville, California. The term of the current lease expires in December 2015, and is renewable, at our option, for a term of 15 additional years. We believe that our facilities are generally adequate for our current needs, and that suitable additional production and administrative space will be available as needed for the foreseeable future.

Company-Operated Locations

During the year ended June 27, 2007, the Company sold leaseholds and related assets of 32 stores to Starbucks Corporation and seven stores to other third parties. Our strategic direction is currently focused on growing the wholesale business segment and the related distribution channels, including franchise stores. As a result, we have narrowed our focus of the retail business segment primarily to franchise operations. As of June 25, 2008, we were a party to leases for 5 company-operated retail locations.

Franchised Stores

All of our Gloria Jean’s locations are operated on leased premises, 111 of which are franchised. Approximately 40% of the leased premises presently occupied by Gloria Jean’s franchised outlets are leased by us, and we have entered into sublease agreements with the franchisees on a cost pass-through basis. We, however, remain obligated under the lease in all such cases. As further discussed below under the heading “Financial Condition and Liquidity and Capital Resources—Commitments and Contractual Obligations,” our maximum theoretical future exposure under these leases at June 25, 2008, computed as the sum of all remaining lease payments through the expiration dates of the respective leases, was $13,360,000. In the future, new franchisees will generally be required to enter into master leases directly with the landlord. This will also be the case when current leases are up for renewal. Gloria Jean’s stores are designed to accommodate locations in various sizes, ranging from 170 square foot kiosk outlets (which sell principally coffee drinks and other beverages) to 2,000 square foot full service stores.

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Item 3. Legal Proceedings.

In the ordinary course of our business, we may become involved in legal proceedings from time to time. Material pending legal proceedings to the business, to which we became or were a party during the current fiscal year or subsequent thereto, but before the filing of this report, are summarized below:

On September 21, 2006, a purported class action complaint entitled Jason Reid; Kimberly Cornia, et al. v. Diedrich Coffee., et al. was filed against the Company in United States District Court Central District of California by two former employees, who worked in the positions of team member and shift manager. A second similar purported class action complaint entitled Deborah Willems, et al. v. Diedrich Coffee., et al. was filed in Orange County, California Superior Court on February 2, 2007, on behalf of another former employee who worked in the position of general manager. These cases currently involve the issue of whether employees and former employees who worked in California stores during specified time periods were deprived of overtime pay, missed meal and rest breaks. In addition to unpaid overtime, these cases seek to recover waiting time penalties, interest, attorneys’ fees and other types of relief on behalf of the current and former employees in the purported class.

We have entered into a settlement with the plaintiffs in the Reid v. Diedrich lawsuit. This settlement is subject to court approval. As of June 25, 2008, we have estimated that the required amount to settle this claim is $693,000 and have recorded an accrual for this amount included in general and administrative expenses in the accompanying consolidated statement of operations.

We have entered into a settlement with the plaintiffs in the Willems v. Diedrich lawsuit. This settlement is subject to court approval. As of June 25, 2008, we have estimated that the required amount to settle this claim is $251,000 and have recorded an accrual for this amount included in general and administrative expenses in the accompanying consolidated statement of operations.

Based on our examination of these matters and our experience to date, we have recorded our best estimate of liability with respect to these matters. However, the ultimate liability cannot be determined with certainty.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

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PART II

Item 5. Market For Registrant’s Common Equity and Related Stockholder Matters.

Our common stock is reported on the Nasdaq Global Market under the symbol “DDRX.” The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported on the Nasdaq Global Market.

	Price Range
Period	High		Low
Fiscal Year Ended June 27, 2007
Twelve Weeks Ended September 20, 2006	$	6.00	$	2.86
Twelve Weeks Ended December 13, 2006		4.29		3.25
Twelve Weeks Ended March 7, 2007		4.10		3.39
Sixteen Weeks Ended June 27, 2007		5.00		3.66
Fiscal Year Ended June 25, 2008
Twelve Weeks Ended September 19, 2007		4.41		3.52
Twelve Weeks Ended December 12, 2007		3.91		3.16
Twelve Weeks Ended March 5, 2008		3.79		2.71
Sixteen Weeks Ended June 25, 2008		3.00		1.75

At September 9, 2008, there were 5,468,316 shares of our common stock outstanding and 721 stockholders of record. We have not paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future.

Item 6. Selected Financial Data.

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

INTRODUCTION

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, the changes in our financial condition and the results of operations. Our discussion is organized as follows:

• Overview.    This section provides a general description of our business, as well as recent significant transactions or events that we believe are important in understanding the results of operations, as well as to anticipate future trends in those operations.

• Results of operations.    This section provides an analysis of our results of operations presented in the accompanying consolidated statements of operations by comparing the results for fiscal 2008 to fiscal 2007.

• Financial condition and liquidity and capital resources.    This section provides an analysis of our cash flows, as well as a discussion of our outstanding debt and commitments, both firm and contingent, that existed as of June 25, 2008. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund our future commitments, as well as a discussion of other financing arrangements.

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• Critical accounting estimates.    This section discusses those accounting policies that both are considered important to our financial condition and results, and require significant judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including the critical accounting policies, are summarized in Note 1 to the accompanying consolidated financial statements.

• New accounting pronouncements.    This section discusses new accounting pronouncements, dates of implementation and impact on our accompanying consolidated financial statements, if any.

OVERVIEW

Business

We are a specialty coffee roaster, wholesaler and retailer. Our brands include Diedrich Coffee, Gloria Jean’s, and Coffee People. The majority of our revenue is generated from wholesale customers located across the United States. Our wholesale operation sells a wide variety of whole bean and ground coffee as well in as single serve coffee products through a network of OCS distributors, chain and independent restaurants, coffeehouses, other hospitality operators and specialty retailers. We operate a large coffee roasting facility in Castroville, California that supplies freshly roasted coffee to all of our wholesale and retail customers.

We also 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. The critical components for each of our retail locations include high quality, fresh roasted coffee and superior customer service by knowledgeable employees. As of June 25, 2008, we owned and operated 5 retail locations and franchised 118 other retail locations under these brands, for a total of 123 retail coffee outlets. Although the retail specialty coffee industry is presently dominated by a single company, which operates over seven thousand domestic retail locations, we are one of the nation’s largest specialty coffee retailers with annual system-wide revenues in excess of $54 million. System-wide revenues include sales from company-operated and franchise locations. Our retail units are located in 28 states.

The Company’s costs of operations include cost of sales consisting of raw materials including green coffee beans, flavorings and packaging materials; a portion of our lease expense; the salaries and related expenses of production and distribution personnel; depreciation on production equipment; and freight and delivery expenses. Operating expenses included the salaries and related expenses for those employees directly supporting our wholesale distribution channels as well as those directly supporting franchise operations and development. In addition to salaries and associated costs, these expenses include some marketing expenses and a portion of our lease expense. General and administrative expenses consist of expenses incurred for corporate support and administration, including a portion of our lease expense and the salaries and related expenses for personnel not elsewhere categorized.

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RESULTS OF OPERATIONS

The following table sets forth the percentage relationship to total revenue of certain items included in our statements of income for the years indicated:

	Year Ended June 25, 2008		Year Ended June 27, 2007
Net revenue:
Wholesale	84.4	%	76.9	%
Franchise revenue	6.1		9.6
Retail sales	9.5		13.5
Total revenue	100.0	%	100.0	%
Costs and expenses:
Cost of sales and related occupancy costs	77.4	%	66.2	%
Operating expenses	19.2		26.3
Depreciation and amortization	2.8		2.9
General and administrative expenses	18.2		18.2
Provision for goodwill and asset impairment	15.4		3.0
Loss on asset disposals	0.2		—
Total costs and expenses	133.2	%	116.6	%
Operating loss from continuing operations	(33.2	)%	(16.6	)%
Interest income and other, net	0.6		0.6
Loss from continuing operations before income tax benefit	(32.6	)	(16.0	)
Income tax benefit	1.2		5.8
Loss from continuing operations	(31.4	)%	(10.2	)%
Discontinued operations:
Loss from discontinued operations, net of income tax	—	%	(4.4	)%
Gain on sale of discontinued operations, net of income tax	1.7		9.8
Net loss	(29.7	)%	(4.8	)%

Sale of Retail Operations

The Company’s strategic direction is to focus on growing the wholesale business segment and the related distribution channels, including franchise stores. During the fiscal year ended June 27, 2007, the Company sold leaseholds and related assets of 32 Diedrich Coffee and Coffee People stores to Starbucks Corporation and seven additional stores to other third parties.

As part of the asset purchase agreement with Starbucks Corporation in fiscal year 2007, the Company agreed to a non-compete provision that for three years after the closing of the transaction, restricts the Company’s ability to operate or have any interest in the ownership or operation of any entity operating any retail specialty coffee stores in any city where a Company Store (as defined in the asset purchase agreement) was located at the time that the asset purchase agreement was executed. The non-compete provision applies only to stores opened after the date of the asset purchase agreement and does not apply to (1) any retail stores operated under the “Gloria Jean’s” brand name, (2) wholesale sales to retail businesses that are not operated by the Company, or other non-retail businesses, or (3) the conversion of company-operated stores existing on the date of the asset purchase agreement to franchise stores. The Company also agreed that it will not solicit any Starbucks Corporation employee to enter the Company’s employment for three years after the closing of the transaction.

Except for the one Diedrich Coffee store that we currently operate, our results of company-operated Diedrich Coffee and Coffee People retail operations are reported as discontinued operations for all periods

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presented. The financial results of company-operated Gloria Jean’s retail operations are reported as continuing operations for all periods presented.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the financial results of the retail operations that were sold or closed are reported as discontinued operations for all periods presented.

Results of Operations

Year Ended June 25, 2008 Compared To Year Ended June 27, 2007

Total Revenue.    Our revenue from continuing operations for the year ended June 25, 2008 increased by $9,733,000, to $46,340,000 from $36,607,000 for the year ended June 27, 2007. This result was the net effect of a 38.9% increase in wholesale revenue, an 11.2% decrease in retail sales, and a 19.1% decrease in domestic franchise revenue. Each component of total revenue is discussed below.

Wholesale Revenue.    Our wholesale sales for the year ended June 25, 2008 increased by $10,958,000, or 38.9%, to $39,103,000 from $28,145,000 for the year ended June 27, 2007. Wholesale sales to OCS and other third party wholesale sales increased $12,069,000, or 53.5% to $34,646,000 led by strong growth in the Keurig “K-cup” sales which increased by 61.6% or $11,810,000 from the prior year. Roasted coffee sales to franchisees decreased $1,111,000 for the year ended June 25, 2008 primarily because of a net decrease of 5.4% same store sales along with a net decrease of 25 retail stores during fiscal 2008 for the Gloria Jean’s domestic franchise system which reduced roasted coffee usage.

Franchise Revenue.    Our domestic franchise revenue decreased by $671,000, or 19.1%, to $2,843,000 for the year ended June 25, 2008 from $3,514,000 for the year ended June 27, 2007. Our franchise revenue consists of initial franchise fees, franchise renewal fees, area development fees and royalties received on sales at franchised locations. Of the decrease in domestic franchise revenue, $494,000 of the decrease resulted from a decrease in royalty income and was due to a net decrease in same stores sales of 5.4% or $2,670,000 for the Gloria Jean’s brand in the current year compared to fiscal 2007. The balance of the decrease of $177,000 was due to fewer new franchise store openings and renewal fees compared to the prior year.

Retail Sales.    Our retail sales revenue for the year ended June 25, 2008 decreased by a net $554,000, or 11.2%, to $4,394,000 from $4,948,000 for the year ended June 27, 2007. This decrease was primarily due to a reduction of 4 company-operated stores during the current year along with a decrease in same store sales of 8.9% for Gloria Jean’s which was offset by an increase in same store sales for Diedrich of 2.1% compared to the prior year. Sales from our retail internet website increased by $392,000 from $1,156,000 in fiscal 2007 to $1,548,000 in fiscal 2008.

Cost of Sales and Related Occupancy Costs.    As a percentage of total revenue, cost of sales increased from 66.2% in fiscal 2007 to 77.4% in fiscal 2008. Because none of these costs relate to franchise revenue, the most relevant benchmark of these costs is their relationship to total retail and wholesale sales. Using that measure, cost of sales and related occupancy costs increased as a percentage of total retail and wholesale sales from 73.3% in fiscal 2007 to 82.5% in fiscal 2008. Retail cost of sales increased from 36.3% to 40.3% in the current year whereas wholesale cost of sales increased from 75.7% to 84.1% of wholesale sales in fiscal 2008 due to a higher percentage of higher cost Keurig business in the current year. Wholesale sales that carry a higher cost of goods sold than retail sales also increased as a percentage of the retail and wholesale sales mix from 85.0% to 89.9%.

Operating Expenses.    Total operating expenses for the year ended June 25, 2008 decreased $744,000 and as a percentage of total revenue, decreased from 26.3% in fiscal 2007 to 19.2% in the current year. This decrease resulted primarily from decreases in retail and franchise operating costs of $572,000 and $242,000, respectively. The operating expenses decrease was offset by an increase in wholesale operating costs of $70,000. The decrease in retail operating costs of $572,000 resulted from a $690,000 net decrease in costs associated with fewer retail

17

stores offset by an increase of $118,000 in labor and marketing costs associated with the internet business. Franchise operating expense decreased by $242,000 and primarily resulted from a decrease in compensation of $182,000, marketing of $166,000, and legal, consulting and other of $268,000 and was partially offset by an increase in allowance for doubtful accounts of $374,000. Operating costs for wholesale increased $70,000 and was primarily related to a decrease in compensation costs of $219,000 associated with a reduction in headcount for wholesale food service. This decrease in wholesale operating costs was offset by increases in allowance for doubtful accounts of $148,000, marketing of $45,000, outside services of $52,000 and other costs of $44,000.

Depreciation and Amortization.    Depreciation and amortization increased $222,000, or 20.9% to $1,281,000 for the year ended June 25, 2008 from $1,059,000 for the year ended June 27, 2007 and was primarily the result of an increase in capital improvements at our Castroville roasting facility.

General and Administrative Expenses.    Our general and administrative expenses increased by $1,778,000, or 26.7%, to $8,439,000 for the year ended June 25, 2008 compared to $6,661,000 for the year ended June 27, 2007. The increase in general administrative expenses was due primarily to legal costs and settlement reserves of $1,328,000, along with $806,000 of costs associated with legal and consulting fees surrounding strategic planning and analysis. These costs were partially offset by a reduction in compensation costs of $264,000 primarily in bonus accruals along with decreases in insurance and other costs of $92,000. As a percentage of total revenue, general and administrative expenses decreased from 18.2% for fiscal 2007 to 17.7% for fiscal 2008.

Provision for goodwill and asset impairment.    We recorded an impairment charge of $7,161,000 during fiscal year 2008 to fully impair goodwill associated with our wholesale and franchise operations of $6,311,000 and $521,000, respectively. In addition, during fiscal 2008 we recorded an asset impairment charge of $329,000 to reduce the carrying value associated with four of our Gloria Jean’s company-owned coffeehouses. During fiscal 2007, we recorded an asset impairment charge of $1,073,000 to reduce the carrying value associated with four of our Gloria Jean’s coffeehouses and three Diedrich coffeehouses.

Interest Expense and Interest and Other Income, Net.    Interest and other income, net less interest expense totaled $306,000 for the year ended June 25, 2008 while interest and other income, net less interest expense totaled $206,000 for the year ended June 27, 2007. This change of $100,000 was primarily due to a net decrease in interest expense associated with borrowings on our credit facility during the current fiscal year compared to the prior year.

Income Tax Benefit.    We had losses from continuing operations for the years ended June 25, 2008 and June 27, 2007. In accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), the income tax benefit generated by the loss from continuing operations were $537,000 and $2,120,000 for the years ended June 25, 2008 and June 27, 2007, respectively. As of June 25, 2008 net operating loss carryforwards of $14,273,000 and $13,731,000 for federal and state income tax purposes, respectively are available to be utilized against future taxable income for years through fiscal 2027, subject to annual limitation pertaining to change in ownership rules under the Internal Revenue Code. Based upon the level of historical taxable income and projections of future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences, and thus has recorded a valuation allowance against the entire deferred tax asset balance.

Results of Discontinued Operations—Retail.    As a result of the sale and closure of certain retail stores during the 2007 fiscal year, the results from this component of our business are presented as discontinued operations for the fiscal years ended June 25, 2008 and June 27, 2007 in accordance with SFAS No. 144. For the year ended June 25, 2008, gain on sale from discontinued operations was $771,000, net of $503,000 in taxes. For the year ended June 27, 2007, net income from discontinued operations was $1,984,000 net of $2,125,000 in taxes, including a gain of $3,580,000, net of $3,835,000 in taxes. For fiscal year ended June 27, 2007, the tax expense associated with the discontinued retail operations differed from the statutory federal effective tax rate primarily due to changes in the valuation allowance and permanently nondeductible goodwill associated with the discontinued operations.

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FINANCIAL CONDITION AND LIQUIDITY AND CAPITAL RESOURCES

Current Financial Condition

At June 25, 2008, we had working capital of $135,000, long term tax liabilities, deferred rent and deferred compensation of $677,000 and $9,742,000 of stockholders’ equity, compared to working capital of $8,592,000, total deferred rent and deferred compensation of $684,000 and $23,152,000 of stockholders’ equity at June 27, 2007. The decrease in working capital of $8,457,000 in the current fiscal year resulted primarily from current year losses from continuing operations of $14,547,000. The losses from continuing operations included a charge of $7,161,000 for the impairment of the Company’s goodwill from its wholesale and franchise operations along with an asset impairment to reduce the carrying value associated with four of our Gloria Jean’s coffeehouses.

Cash Flows

The following is a summary of our cash flows for each of the two years ended June 25, 2008 and June 27, 2007:

	June 25, 2008			June 27, 2007
Cash flows used in operating activities:
Net loss	$	(13,776,000	)	$	(1,765,000	)
Loss from discontinued operations, net		—			1,596,000
Gain on disposal of discontinued operations, net		(771,000	)		(3,580,000	)
Net loss from continuing operations		(14,547,000	)		(3,749,000	)
Net non-cash charges to income		10,534,000			1,039,000
Net increase in operating assets		(1,331,000	)		(2,593,000	)
Net increase (decrease) in operating liabilities		(670,000	)		1,076,000
Cash flows used in continuing operating activities		(6,014,000	)		(4,227,000	)
Cash flows used in discontinued operations		(83,000	)		(2,611,000	)
Cash flows used in investing activities of continuing operations		(3,437,000	)		(1,265,000	)
Cash flows provided by investing activities of discontinuing operations		1,274,000			12,104,000
Cash flows provided by financing activities of continuing operations		2,057,000			290,000
Cash flows used in financing activities of discontinuing operations		—			(11,000	)
Net increase (decrease) in cash		(6,203,000	)		4,280,000
Cash at beginning of year		6,873,000			2,593,000
Cash at end of year	$	670,000		$	6,873,000
Capital commitments at end of year	$	542,000		$	4,478,000

The changes in cash from continuing operations in fiscal year 2008 as compared to fiscal year 2007 are more fully enumerated in the consolidated statements of cash flows in the accompanying consolidated financial statements.

The Company has incurred losses from continuing operations of $14,547,000 and $3,749,000 for the 2008 and 2007 fiscal years, respectively. Net cash used in continuing operations of $6,014,000 for fiscal 2008 resulted primarily from an increase in accounts receivable offset by an increase in accounts payable, of which was primarily attributable to the increased working capital needs due to a 38.9% increase in revenue from our wholesale business compared to fiscal 2007. Since the terms of our wholesale sales are credit, an increase in wholesale sales results in an increase in accounts receivable. Increase in our wholesale business also requires us to carry higher inventory to meet market demand. For fiscal 2007, cash used in continuing operations was $4,227,000 and was primarily the result of an increase in accounts receivable and inventories, offset by increases in accounts payable and accrued expenses as our wholesale business grew by 32.5% over fiscal 2006.

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Cash flow used in operating activities of discontinued operations in 2008 and 2007 of $83,000 and $2,611,000 respectively, were primarily the result of the closure of retail stores and of losses in our retail operations before the sale transaction in fiscal year 2007.

Cash flows used by investing activities of continuing operations during fiscal 2008 totaled $3,437,000. During fiscal 2008, capital expenditures totaled $4,596,000 and was used to invest in property and equipment primarily related to our Castroville roasting facility of $3,550,000, wholesale of $226,000, retail stores of $293,000, and our home office facility of $527,000. These expenditures were partially offset by $1,092,000 of payments received on notes receivable. During fiscal 2007, a total of $2,442,000 was used to invest in property with $1,195,000, $335,000, $182,000 and $730,000 spent on our roasting facility, wholesale business, retail and home office facility. These expenditures were primarily offset by $1,180,000 of payments received on notes receivable. Cash flows provided by investing activities of discontinued operations for 2008 and 2007 of $1,274,000 and $12,121,000 respectively, were primarily the result of the sale of Diedrich Coffee and Coffee People retail stores to Starbucks and other third parties in 2007.

Net cash provided by financing activities of continuing operations for fiscal 2008 of $2,057,000 was primarily the result from borrowings under our credit facility. Net cash provided by financing activities of continuing operations for 2007 of $290,000 was primarily the result from the exercise of employee stock options during the 2007 fiscal year.

Outstanding Debt and Financing Arrangements

On May 10, 2004, we entered into a $5,000,000 Contingent Convertible Note Purchase Agreement with Sequoia Enterprises, L.P. (“Sequoia”), a limited partnership whose sole general partner also serves as the Chairman of the Board of Directors of the Company (the “Note Purchase Agreement”), which provided, at our election, the ability to issue notes with up to an aggregate principal amount of $5,000,000. We have amended the Note Purchase Agreement from time to time and have agreed to refrain from further borrowings under the Note Purchase Agreement in connection with the entry into the Loan Agreement (as defined below) entered into on August 26, 2008. As amended, the notes issued under the Note Purchase Agreement are due in full on March 31, 2009. Interest is payable at three-month LIBOR plus 5.30%, and a facility fee of 1.00% annually is payable on the unused portion of the facility. The Note Purchase Agreement contains covenants, among others, that limit the amount of indebtedness that we may have outstanding in relation to our tangible net worth. As of June 25, 2008, we had $2,000,000 of issued notes outstanding under the Note Purchase Agreement. As of June 25, 2008, the Company was in compliance with all covenants contained in the Note Purchase Agreement, as amended.

Pursuant to the original terms of the Note Purchase Agreement, as amended, we previously issued 4,219 warrants to Sequoia, which were outstanding as of June 25, 2008, and a total of 1,270,738 warrants were issuable to Sequoia upon a change in control for previous debt repayments under this facility. These warrants were cancelled in connection with the entry into the Loan Agreement and the issuance of the 2008 Sequoia Warrant (as defined below), and no further warrants shall be issued under the Note Purchase Agreement to Sequoia, as described below.

Pursuant to the original terms of the Note Purchase Agreement, as amended, the note balance was convertible into common stock of the Company. The amendment on August 26, 2008 provided that all notes issued under the Note Purchase Agreement are no longer convertible into common stock of the Company.

On August 26, 2008, we entered into an Amendment No. 1 to the 2001 Warrant, Amendment No. 4 to the Note Purchase Agreement and Cancellation of Note Purchase Warrant (collectively, the “Amendment”). The Amendment extended the maturity date of the Note Purchase Agreement and the notes issued thereunder until March 31, 2009 and reflected the agreement by Sequoia that we are only required to make monthly payments of interest and the monthly commitment fee, but not principal, until such date. On the maturity date, all outstanding principal, interest and other amounts payable under the Note Purchase Agreement will be due (unless due earlier pursuant to the terms of the Note Purchase Agreement upon a change of control of the Company or an event of

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default). The Amendment also modified the definition of “change of control” contained in the Note Purchase Agreement such that the acquisition of a third party (other than the current Chairman of the Company’s Board of Directors and entities controlled by him) of 25% or more of the voting equity of the Company will constitute a change of control. Previously, the threshold was 15%.

Lastly, the Amendment changed the exercise price of the warrant to purchase 250,000 shares of common stock of the Company issued to Sequoia on May 8, 2001 (the “2001 Sequoia Warrant”), to $2.00 per share, subject to adjustment as provided in the 2001 Sequoia Warrant and the related registration rights agreement. Previously, the exercise price was $3.00 per share, subject to adjustment.

Loan Agreement:

On August 26, 2008, we entered into a new loan agreement with Sequoia (the “Loan Agreement”). The Loan Agreement provides for a $3 million term loan (the “Term Loan”). The Term Loan accrues interest from the funding date at LIBOR plus 5.30%, resetting on the first calendar day of each month. The Company is required to make regular monthly payments of interest, and to cause the principal amount to be reduced to $2 million no later than August 26, 2009. All outstanding principal and interest will be due on the maturity date of August 26, 2011, unless due earlier pursuant to the terms of the Loan Agreement upon a change of control of the Company or an event of default.

The Loan Agreement requires the Company to refrain from further borrowings under the Note Purchase Agreement and contains restrictions on incurring indebtedness on par with, or senior to, the Term Loan. The Loan Agreement also contains a covenant that limits the amount of indebtedness that the Company may have outstanding in relation to tangible net worth, in addition to other standard covenants and events of default.

The Term Loan is senior to all other indebtedness of the Company, except indebtedness pursuant to notes under the Note Purchase Agreement and certain permitted indebtedness identified in the Loan Agreement. Upon repayment of the notes under the Note Purchase Agreement, the Term Loan will be senior to all other indebtedness of the Company, except such permitted indebtedness.

In connection with the Loan Agreement and the Amendment, on August 26, 2008, we issued to Sequoia a warrant (the “2008 Sequoia Warrant”) to purchase 1,667,000 shares of common stock of the Company at an exercise price of $2.00 per share, which represented a premium of $0.25, or approximately 14%, over the $1.75 closing price of the Company’s common stock on such date.

Letter of Credit:

In addition, we entered into a Credit Agreement with Bank of the West on November 4, 2005. The agreement provides for a $750,000 letter of credit facility that expires on October 15, 2008. The letter of credit facility is secured by a deposit account at Bank of the West. As of June 25, 2008, this deposit account had a balance of $623,000, which is shown as restricted cash on the consolidated balance sheets. As of June 25, 2008, $472,000 of letters of credit was outstanding under the letter of credit facility. The agreement contains covenants that, among other matters, require us to submit financial statements to the bank within specified time periods. As of June 25, 2008, the Company was in compliance with all Bank of the West agreement covenants.

Liquidity and Management Plans:

We incurred a net loss of $13.8 million which included a $7.2 million non-cash charge for asset impairment and reported net cash used in operating activities of $6.1 million during the year ended June 25, 2008. We had a cash balance of $670,000 and no ability to access credit under our Note Purchase Agreement as of June 25, 2008. The Note Purchase Agreement expires on March 31, 2009 and the $2 million balance on the note is due in full on that date. As described above, we have obtained the term loan in an amount of $3 million on August 26, 2008.

We have obtained commitments from our lender Sequoia, to extend the maturity date of the $2 million note due under the Note Purchase Agreement and provide additional financing as required.

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In addition, our management has also been working on improvements in several areas that we believe will improve cash flow from operations:

• Product pricing

• Order fulfillment rates

• Outbound freight costs

• Packaging and portion size

• Production efficiency

• Material handling and storage costs

• Inventory carrying costs

Our management has developed the Annual Operating Plan for the 2009 fiscal year and we expect a return to profitability and to generate positive cash flow in the year ahead. We have taken steps to shift focus of our available resources towards strengthening of the wholesale business segments in order to sustain our projected growth in fiscal 2009. However, there is no assurance that we will return to profitability or generate positive cash flow.

Our management believes that cash flow from operations, funds available to us from our credit agreements and additional lending commitments obtained from our lender Sequoia will be sufficient to satisfy working capital needs at the anticipated operating levels for at least the next twelve months.

Our future capital requirements will depend on many factors, including the extent and timing of the rate at which our business grows, if at all, with corresponding demands for working capital. We may be required to seek additional funding through either debt financing, or equity financing or a combination of funding methods to meet our capital requirements and sustain our operations. However, additional funds may not be available on terms acceptable to us or at all.

Off-Balance Sheet Arrangements

As of June 25, 2008, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Commitments and Contractual Obligations

The following is a summary of our contractual obligations and commitments as of June 25, 2008:

	Payments Due By Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In thousands)
Company-operated retail locations and other operating leases	$	7,411	$	2,244	$	2,502	$	1,259	$	1,406
Franchise operated retail locations operating leases		13,360		2,666		4,424		3,309		2,961
Green coffee commitments		2,600		2,600		—		—		—
Note Payable		2,000		2,000		—		—		—
	$	25,371	$	9,510	$	6,926	$	4,568	$	4,367

At June 25, 2008, the Company had capital commitments of $542,000 comprised of $210,000 for our roasting facility and $332,000 for corporate.

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We have also entered into an employment agreement with one executive that provides for a severance payment of nine months salary in the event that this individual is terminated without cause. Our maximum liability for severance under this contract is currently $169,000. Because such amount is contingent, it has not been included in the above table.

We have obligations under non-cancelable operating leases for our coffee houses, roasting facility and administrative offices. Lease terms are generally for 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 45 franchised 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. Should any of these franchisees default on their subleases, we would be responsible for making payments thereunder. Our maximum theoretical future exposure at June 25, 2008, computed as the sum of all remaining lease payments through the expiration dates of the respective leases, was $13,360,000. 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 that is less than the sum of all remaining future rents and other amounts payable.

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CRITICAL ACCOUNTING ESTIMATES

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, fixed asset lives, goodwill, intangible assets, income taxes, self-insurance and workers’ compensation reserves, store closure reserves, stock-based compensation, the valuation allowance for net deferred tax assets and contingencies. We believe that the following represent our critical accounting policies and estimates used in the preparation of our condensed consolidated financial statements. The following discussion, however, does not list all of our accounting policies and estimates.

Impairment of Property and Equipment and Other Amortizable Long-Lived Assets Held and Used

Each quarter, or upon the occurrence of a triggering event as defined in SFAS No. 144, we evaluate the carrying value of individual stores when the operating results have reasonably progressed to a point to adequately evaluate the probability of continuing operating losses or a current expectation that a store will be sold or otherwise disposed of before the end of its previously estimated useful life. In making these judgments, we consider the period of time since the store was opened or remodeled, and the trend of operations and expectations for future sales growth. For stores selected for review, we estimate the future cash flows from operating the store over its estimated useful life. We make judgments about future same-store sales and the operating expenses and estimated useful life that we would expect with such level of same-store sales.

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.

Impairment of Goodwill

At the reporting unit level, goodwill is tested for impairment annually or whenever an event or circumstance indicates that impairment has likely occurred. We consider the reporting unit level to be the segment level since the components within each segment have similar economic characteristics, including products and services, production processes, types or classes of customers and distribution methods. The impairment, if any, is measured based on the estimated fair value of the segment. Fair value can be determined based on discounted cash flows or valuations of similar businesses. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value.

If our assumptions used in performing the impairment test prove inaccurate, the fair value of the segments may ultimately prove to be significantly higher or lower, thereby causing the carrying value to be less than or to exceed the fair value and indicating impairment has or has not occurred. 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. We fully impaired our goodwill as of June 25, 2008.

Estimated Liability for Closing Stores

We make decisions to close stores based on prospects for estimated future profitability and sometimes we are forced to close stores due to circumstances beyond our control (e.g., a landlord’s refusal to negotiate a new lease). Our management team evaluates each store’s performance every period. When stores continue to perform poorly, we consider the demographics of the location, as well as the likelihood of being able to improve the performance of an unprofitable store. Based on the management team’s judgment, we estimate the future net cash flows. If we determine that the store will not, within a reasonable period of time, operate at break-even cash flow

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or be profitable, and we are not contractually obligated to continue operating the store, we may close the store. Additionally, franchisees may close stores for which we are the primary lessee. If the franchisee cannot make payments on the lease, we continue making the lease payments and establish an estimated liability for the closed store if we decide not to operate it as a company-operated store. Effective January 1, 2003, we established the estimated liability on the actual closure date which is generally the date on which we cease to receive economic benefit from the unit. We also review the net cash flows to determine the need to provide for asset impairment.

The estimated liability for closing stores on properties vacated is generally based on the term of the lease and the lease termination fee that we expect to pay, as well as the estimated maintenance costs that we expect to pay until the lease has been abated. A significant assumption used in determining the amount of the estimated liability for closing stores is the amount of the estimated liability for future lease payments on vacant stores, which we determine based on our assessment of our ability to successfully negotiate early terminations of our lease agreements with the lessors or to sublease the property. Additionally, we estimate the cost to maintain leased and owned vacant properties until the lease has been abated. If the costs to maintain properties increase, or it takes longer than anticipated to sell properties or sublease or terminate leases, we may need to record additional estimated liabilities. If the leases on the vacant stores are not terminated or subleased on the terms we used to estimate the liabilities, we may be required to record losses in future periods. Conversely, if the leases on the vacant stores are terminated or subleased on more favorable terms than we used to estimate the liabilities, we reverse previously established estimated liabilities through the line item in which it was originally recorded, resulting in an increase in operating income.

Estimated Liability for Self-Insured Workers’ Compensation

We are self-insured for a portion of our losses related to workers’ compensation insurance for policy years ended prior to October 2006. We obtained stop loss insurance for individual workers’ compensation claims with a $250,000 deductible per occurrence and a program maximum for all claims of $750,000. Insurance liabilities and reserves are accounted for based on actuarial estimates of the amount of incurred and unpaid losses. These estimates rely on actuarial observations of historical claim loss development. Management, in determining the estimated liability, bases the assumptions on the average historical losses on claims we have incurred. The actual loss development may be better or worse than the development we estimated in conjunction with the actuary. In that event, we will modify the reserve. As a result, if we experience a higher than expected number of claims or the costs of claims are greater than expected, then we may adjust the expected losses upward and our future self-insurance expenses will rise.

Franchised Operations

We monitor the financial condition of certain franchisees and record provisions for estimated losses on receivables when we believe that our franchisees are unable to make their required payments to us. Each period we perform an analysis to develop estimated bad debts for each franchisee. We then compare the aggregate result of that analysis to the amount recorded in our consolidated financial statements as the allowance for doubtful accounts and adjust the allowance as appropriate. Over time, our assessment of individual franchisees may change. For instance, we have had franchisees for whom we had estimated a loss equal to the total amount of their receivable, who have paid us in full or established a consistent record of payments (generally one year) such that we determined an allowance was no longer required.

Depending on the facts and circumstances, there are a number of different actions we or our franchisees may take to resolve franchise collections issues. These actions may include the purchase of franchise stores by us or by other franchisees, a modification to the franchise agreement, which may include a provision to defer certain royalty payments or reduce royalty rates in the future, a restructuring of the franchisee’s business or finances (including the restructuring of leases for which we are the primary or secondary obligee) or, if necessary, the termination of the franchise agreement. The allowance established is based on our assessment of the most probable course of action that will occur.

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In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”), which we adopted on January 1, 2003, an estimated liability for future lease obligations on stores operated by franchisees for which we are the primary or secondary obligee is established on the date the franchisee closes the store. Also, we record an estimated liability for subsidized lease payments when we sign a sublease agreement committing us to the subsidy.

The amount of the estimated liability is established using the methodology described in “Estimated Liability for Closing Stores” above. Consistent with SFAS No. 146, we have not established an additional estimated liability for potential losses not yet incurred. If sales trends or economic conditions worsen for our franchisees, their financial health may worsen, our collection rates may decline and we may be required to assume the responsibility for additional lease payments on franchised stores. In addition, entering into restructured franchise agreements may result in reduced franchise royalty rates in the future.

Stock-Based Compensation

As discussed in the notes to consolidated financial statements, we have various stock-based compensation plans that provide options for certain employees and outside directors to purchase common shares of stock. Prior to June 30, 2005, we elected to account for stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” which utilizes the intrinsic value method of accounting for stock-based compensation, as opposed to using the fair-value method prescribed in SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Because of this election, we were required to make certain disclosures of pro forma net income assuming we had adopted SFAS No. 123. Starting June 30, 2005, we adopted the provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”) which sets accounting requirements for “share-based” compensation to employees and non-employee directors, including employee stock purchase plans, and requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation.

We determine the estimated fair value of stock-based compensation on the date of the grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires us to apply highly subjective assumptions, including our historical stock price volatility, expected life of the option and the risk-free interest rate. A change in one or more of the assumptions used in the Black-Scholes option-pricing model may result in a material change to the estimated fair value of the stock-based compensation. See Note 1 of Notes to Consolidated Financial Statements for assumptions used to determine the fair value of stock-based compensation.

Valuation Allowance for Net Deferred Tax Assets and Contingencies

As discussed above, we have recorded a 100% valuation allowance against our net deferred tax assets. If we have been profitable for a number of years and our prospects for the realization of our deferred tax assets are more likely than not, we would then reverse our valuation allowance and credit income tax expense. When circumstances warrant, we assess the likelihood that our net deferred tax assets will more likely than not be realized from future taxable income. As of June 25, 2008, our net deferred tax assets and related valuation allowance totaled approximately $7,215,000.

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NEW ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Not Yet Adopted

In September 2006, the FASB issued Statement on Financial Accounting Standards No. 157, (“SFAS No. 157”), “Fair Value Measurements.” This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company has not yet determined the impact, if any, of adopting SFAS No. 157 on its consolidated financial statements.

In February 2007, the FASB issued Statement on Financial Accounting Standards No. 159, (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits companies to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under U.S. GAAP. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact, if any, of adopting SFAS No. 159 on its consolidated financial statements.

In December 2007, the FASB issued Statement on Financial Accounting Standards No. 141R, (“SFAS No. 141R”), “Business Combinations.” SFAS No. 141R establishes the principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS No. 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141R is not permitted. Acquisitions, if any, after the effective date will be accounted for in accordance with SFAS No. 141R.

In December 2007, the FASB issued Statement on Financial Accounting Standards No. 160, (“SFAS No. 160”), “Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51.” SFAS No. 160 applies to all entities that prepare consolidated financial statements but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 establishes accounting and reporting standards that require noncontrolling interests to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. SFAS No. 160 is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008. Acquisitions, if any, after the effective date will be accounted for in accordance with SFAS No. 160.

OTHER MATTERS

Seasonality and Quarterly Results

Our business experiences some variations in sales from quarter to quarter due to the holiday season and other factors including, but not limited to, general economic trends, competition, marketing programs and the weather. The fall and winter months are generally the best sales months but our geographic and product line diversity provide for some sales stability in the warmer months when coffee consumption ordinarily decreases. As a result of these factors, and of the other contingencies and risk factors described elsewhere in this report, 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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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 8. Financial Statements and Supplementary Data.

The financial statements and supplementary data required by this item are set forth at the end of this Annual Report on Form 10-K beginning on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Disclosure Controls and Procedures.    Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), in connection with the preparation of this Annual Report on Form 10-K, as of June 25, 2008.

Based on the review described above, our Chief Executive Officer and Chief Financial Officer determined that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Internal Control Over Financial Reporting.    Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. In addition, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Our management assessed our internal control over financial reporting as of June 25, 2008 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such assessment, our management concluded that our internal control over financial reporting was effective as of June 25, 2008 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

This annual report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report on Form 10-K.

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There were no changes in our internal control over financial reporting that occurred during the fourth quarter ended June 25, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Information Regarding the Directors of Diedrich Coffee, Inc

Our directors are elected once a year at our annual meeting of stockholders. Our bylaws provide that our board of directors shall consist of between three and seven directors with the precise number to be determined by resolution of our board of directors. The authorized number of members of our board of directors is currently four.

Effective February 7, 2008, J. Russell Phillips no longer serves on our audit committee due to his appointment as our President and Chief Executive Officer. Although Mr. Phillips continues to serve as a director of our Company, as a result of his departure from the audit committee, we only have two directors who are eligible to serve on our audit committee. Nasdaq Rule 4350(d)(2)(A) provides, among other matters, that a registrant’s audit committee must consist of at least three independent directors.

We provided Nasdaq with written notice of this matter on February 7, 2008 and we will have until the earlier of our next annual meeting of stockholders or February 7, 2009 to regain compliance with Nasdaq Rule 4350(d)(2)(A). The board of directors has been undertaking a search for an additional independent director who will serve on the audit committee.

The following table lists our directors and provides their respective ages and titles as of June 25, 2008.

Name	Age	Title	Director Since
Paul C. Heeschen (1)	51	Chairman of the Board of Directors	1996
Gregory D. Palmer (2)	51	Director	2006
J. Russell Phillips	58	Director, President and Chief Executive Officer	2007
Timothy J. Ryan (1) (2)	68	Director	2005

(1) Member of the compensation committee of the board of directors.

(2) Member of the audit committee of the board of directors.

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

Paul C. Heeschen joined our board of directors in January 1996. In February 2001, the board of directors elected him as Chairman. For the past 15 years, Mr. Heeschen has been a Principal of Heeschen & Associates, a private investment firm. He is also the sole general partner of Sequoia Enterprises, LP, D.C.H., LP and a trustee of the Paul C. Heeschen Revocable Living Trust, each of which are stockholders of Diedrich Coffee. Mr. Heeschen serves on the board of directors of PC Mall, Inc., a publicly traded supplier of technology solutions for business, government and educational institutions, as well as consumers.

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Gregory D. Palmer joined our board of directors in September 2006. From January 1998 to June 2006, Mr. Palmer was the President and Chief Executive Officer of RemedyTemp, Inc., a staffing services company. Mr. Palmer also served as a director of RemedyTemp, Inc. from January 2001 to June 2006.

J. Russell Phillips joined our board of directors on April 18, 2007 through appointment by our board of directors. On February 7, 2008, Mr. Phillips was appointed our Chief Executive Officer. From 2004 to 2008, Mr. Phillips served as Managing Principal of Transom Partners, an executive consultancy group that facilitates and develops new strategies with CEOs and executive teams. From 1994 to 2004, Mr. Phillips served as Chief Executive Officer and President of SHURflo, the leading manufacturer of high quality precision pumps, controls, motors and systems serving the food service, industrial and RV/marine markets. From 1972 to 1994, Mr. Phillips worked for several pump companies in various managerial capacities.

Timothy J. Ryan joined our board of directors in October 2005. Mr. Ryan previously served as our Chief Executive Officer from November 1997 to October 2000. Since April 1999, he has been a director of Rubio’s Restaurants, Inc., a publicly traded fast-casual fresh Mexican grill restaurant chain. From December 1995 to December 1996, Mr. Ryan served as President and Chief Operating Officer of Sizzler U.S.A., a division of Sizzler International, Inc., and as a director of Sizzler International, Inc., of which he also served as a Senior Vice President. From November 1988 to December 1993, Mr. Ryan served as Senior Vice President of Marketing at Taco Bell Worldwide and, from December 1993 to December 1995, he served as Senior Vice President of Taco Bell’s Casual Dining Division.

Committees of the Board of Directors

The Company has two standing committees: an audit committee and a compensation committee. Each member of the audit and compensation committees of the board of directors has been determined by our board of directors to be “independent.” The committees operate under written charters that are available for viewing on the “Investor Services” segment of our website: www.diedrich.com.

Audit Committee

It is the responsibility of the audit committee to oversee our accounting and financial reporting processes and the audits of our financial statements. In addition, the audit committee assists the board of directors in its oversight of our compliance with legal and regulatory requirements. The specific duties of the audit committee include monitoring the integrity of our financial process and systems of internal controls regarding finance, accounting and legal compliance; selecting our independent registered public accounting firm; monitoring the independence and performance of our independent registered public accounting firm; and facilitating communication among the independent registered public accounting firm, our management and our board of directors. The audit committee has the authority to conduct any investigation appropriate to fulfill its responsibilities and has direct access to all of our employees and the independent registered public accounting firm. The audit committee also has the authority to retain, at our expense and without further approval of the board of directors, special legal, accounting or other consultants or experts that it deems necessary in the performance of its duties.

The audit committee met four times during the 2008 fiscal year and otherwise accomplished its business without formal meetings. During the 2008 fiscal year, the audit committee was composed of three members: Mr. Palmer, Mr. Ryan and Mr. Phillips, until his appointment as our Chief Executive Officer on February 7, 2008. Our board of directors has determined that each of Mr. Palmer and Mr. Ryan is “independent” within the meaning of the enhanced independence standards contained in Nasdaq Marketplace Rule 4350(d) and regulations adopted by the Securities and Exchange Commission that relate specifically to members of audit committees. Our board of directors has also determined that Mr. Ryan is qualified to serve as our “audit committee financial expert,” as that term is defined in Item 407(d)(5) of Regulation S-K.

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As a result of Mr. Phillips’ resignation from the Company’s audit committee due to his appointment as our President and Chief Executive Officer on February 7, 2008, we became non-compliant with Nasdaq’s audit committee requirements as set forth in Nasdaq Marketplace Rule 4350, which requires Nasdaq-listed companies to have an audit committee consisting of at least three independent members. On February 12, 2008, we received a Nasdaq Staff Deficiency Letter indicating that we no longer complied with Nasdaq’s audit committee requirements as set forth in Nasdaq Marketplace Rule 4350. Nasdaq has requested that we provide evidence of compliance with Rule 4350 on or before the earlier of our next annual stockholders meeting or February 7, 2009. We have been undertaking a search for an additional independent director who will serve on the audit committee and intend to be fully compliant with Nasdaq requirements as soon as possible. The audit committee charter was filed with the Securities and Exchange Commission on October 29, 2004 with our 2004 Definitive Proxy Statement.

Information Regarding Executive Officers of Diedrich Coffee, Inc.

Diedrich Coffee’s executive officers as of June 25, 2008 are as follows:

Name	Age	Position(s) Held
J. Russell Phillips	58	Director, President and Chief Executive Officer
Sean M. McCarthy	47	Chief Financial Officer and Secretary
Kimberly A. Myers	38	Vice President—Marketing, Gloria Jean’s
James L. Harris	44	Vice President—Sales

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

J. Russell Phillips became our Chief Executive Officer on February 7, 2008. See “Information Regarding the Directors of Diedrich Coffee, Inc.” for information relating to Mr. Phillips.

Sean M. McCarthy became our Chief Financial Officer and Secretary in January 2006, after serving as Vice President, Controller of Diedrich Coffee since April 2004. From February 2003 to April 2004, Mr. McCarthy was Vice President of ASM Hospitality Group, a privately owned consulting company. From June 1998 to February 2003, Mr. McCarthy served in various financial capacities for FRD Acquisition Company, Inc. (d/b/a. Coco’s & Carrows Restaurants), a subsidiary of Advantica Restaurants Group, Inc., a publicly traded food service company, first as Manager, Field Finance, then Manager, Financial Planning & Analysis, and finally as Director, Finance. From May 1997 to June 1998, Mr. McCarthy was a Business Analyst for Taco Bell, Inc. From August 1986 through May 1997, Mr. McCarthy served in various accounting and financial capacities for El Torito Restaurants, a subsidiary of Family Restaurants, Inc. Mr. McCarthy earned a B.S. degree in business management from Pepperdine University and a master’s degree in business administration from the University of Southern California.

Kimberly A. Myers joined Diedrich Coffee in September 2006 as Vice President—Marketing of our Gloria Jean’s subsidiary. From October 2002 to August 2006, Ms. Myers took a leave from work to pursue philanthropic interests in primary education related initiatives. From December 2000 to September 2002, Ms. Myers was Vice President of Brand Marketing for Johnny Rockets Group, Inc., a privately owned food service company. Ms. Myers terminated from the Company effective July 2, 2008.

James L. Harris joined Diedrich Coffee in June 2008 as Vice President—Sales. From late 2007 to 2008, Mr. Harris was with Hansen’s Beverage Company, a publicly owned company and manufacturer and seller of premium beverages and Monster Energy Drink, as the Vice President of International Sales. From 1997 to 2007, Mr. Harris was with FIJI Water, LLC, a privately owned manufacturer and seller of premium-bottled water in a

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variety of capacities ultimately serving as the Senior Vice President of Sales, Western Region. From 1991 to 1997, Mr. Harris was with Haagen-Dazs Ice Cream first as an Account Executive and ultimately as a Division Manager. From 1985 to 1991, Mr. Harris worked for Pepsi-Cola Bottling Group working his way up to Account Executive and relocating to Southern California.

Section 16(a) Beneficial Ownership Reporting Compliance

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

To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations from Section 16 reporting persons, we believe that during our fiscal year ended June 25, 2008, all Section 16 reporting persons complied with all applicable filing requirements.

Code of Conduct

We have adopted a code of conduct that describes the ethical and legal responsibilities of all of our employees and, to the extent applicable, the members of our board of directors. This code includes, but is not limited to, the requirements of the Sarbanes-Oxley Act of 2002 pertaining to codes of ethics for chief executives and senior financial and accounting officers. Our board of directors has reviewed and approved this code of conduct. Our employees agree in writing to comply with the code at commencement of employment and periodically thereafter. Our employees are encouraged to report suspected violations of the code through various means, and they may do so anonymously. Our code of conduct is available for viewing on the “Investor Services” segment of our website: www.diedrich.com. If we make substantive amendments to the code or grant any waiver, including any implicit waiver, to our principal executive, financial or accounting officer, or persons performing similar functions, we will disclose the nature of such amendment or waiver on our website and/or in a report on Form 8-K in accordance with applicable rules and regulations

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Item 11. Executive Compensation.

Summary Compensation Table

The following table sets forth compensation earned or paid during the fiscal year ended June 25, 2008 by our Chief Executive Officer and two other most highly compensated executive officers who were serving as our executive officers at the end of the last completed fiscal year and two former executive officers for whom disclosure would have been required but for the fact that they were not serving as executive officers at the end of the last completed fiscal year (collectively, the “named executive officers”).

Name and Principal Position	Year	Salary ($)		Bonus ($) (1)		Option Awards ($) (2)		All Other Compensation ($)			Total ($)
J. Russell Phillips,	2008	$	105,769	$	—	$	99,908	$	26,917	(4)	$	232,594
President and Chief Executive Officer (3)	2007		—		—		—		—			—
Sean M. McCarthy,	2008		214,425		—		—		4,014	(5)		218,439
Chief Financial Officer and Secretary	2007		200,000		100,000		7,166		3,788	(6)		310,954
Kimberly A. Myers,	2008		167,792		—		19,992		1,206	(8)		188,990
Vice President—Marketing, Gloria Jean’s (7)	2007		115,031		2,884		7,614		—			125,529
Stephen V. Coffey,	2008		—		—		—		480,000	(10)		480,000
Former Chief Executive Officer (9)	2007		—		—		—		720,000	(10)		720,000
Pamela J. Britton,	2008		77,203		—		—		200,699	(12)		277,902
Former President and Chief Operating Officer, Gloria Jean’s (11)	2007		235,000		23,758		—		12,640	(13)		271,398

(1) Bonuses identified in this column for fiscal year 2007 were discretionary and paid out based on the completion of the Starbucks Corporation transaction.

(2) This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2008 and 2007 fiscal years for the fair value of stock options for each of the named executive officers in accordance with SFAS No. 123R. Pursuant to rules of the Securities and Exchange Commission, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information on the valuation assumptions with respect to the 2008 and 2007 grants, refer to Note 1 to our consolidated financial statements. These amounts reflect our accounting expense for these awards, and do not correspond to the actual value that may be received by the named executive officers. There were no forfeitures of stock awards during fiscal 2008 by our named executive officers other than by Ms. Britton, who forfeited stock awards covering 35,000 shares of common stock in connection with the termination of her employment on November 2, 2007.

(3) Mr. Phillips became our President and Chief Executive Officer in February 2008. Mr. Phillips’ annual base salary is $275,000.

(4) Consists of a signing bonus payment in the amount of $25,000 and health fitness membership reimbursement in the amount of $1,917.

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(5) Consists of 401(k) matching contributions by Diedrich Coffee in the amount of $2,077 and health fitness membership reimbursement in the amount of $1,937.

(6) Consists of 401(k) matching contributions by Diedrich Coffee in the amount of $2,000 and health fitness membership reimbursement in the amount of $1,788.

(7) Ms. Myers resigned from her position with Diedrich Coffee effective July 2, 2008.

(8) Consists of 401(k) matching contributions by Diedrich Coffee in the amount of $1,206.

(9) Mr. Coffey resigned from his position with Diedrich Coffee effective February 7, 2008.

(10) In consideration for Mr. Coffey serving as the Chief Executive Officer of Diedrich Coffee, Mr. Coffey’s engagement agreement provided that his management company would be paid a fee of $60,000 per month. In addition, if we are acquired by any person, other than a current affiliate, within 12 months of February 7, 2008, the termination date of the engagement, and the per share consideration paid in connection with the acquisition multiplied by the then-outstanding shares of capital stock is greater than the market capitalization at February 7, 2008, Mr. Coffey’s management company will receive an additional bonus equal to 5.0% of the difference of the disposition value less the termination market capitalization.

(11) Ms. Britton resigned from her position with Diedrich Coffee effective November 2, 2007.

(12) Consists of payments in the amount of $178,182 for severance payment, $20,559 for accrued vacation payout, health fitness membership reimbursement in the amount of $903 and 401(k) matching contributions by Diedrich Coffee in the amount of $1,055.

(13) Consists of payments for employee’s medical plan of $2,576 (and retroactive “catch-up” payments of $6,439) and 401(k) matching contributions by Diedrich Coffee in the amount of $2,077 and health fitness membership reimbursement in the amount of $1,548.

Employment Agreements with Current Named Executive Officers

J. Russell Phillips.    Effective February 7, 2008, Mr. Phillips entered into an employment agreement with us appointing him President and Chief Executive Officer. Mr. Phillips’s agreement provided for compensation consisting of, among other things, (i) an annual base salary of $275,000 and (ii) a grant of options to purchase 275,000 shares of our common stock, (the “Options”) pursuant to a Stock Option Agreement described below. In addition, Mr. Phillips will be eligible to receive (i) a bonus equal to up to 75% of his annual base salary, 80% of which would be paid upon achievement of certain defined objectives and 20% of which would be paid based upon the discretion of our compensation committee and (ii) benefits under all other benefit plans generally provided to our other executive officers.

Mr. Phillips’s Options granted under the Stock Option Agreement will consist of non-qualified options to purchase up to 275,000 shares of our common stock, which vest over three (3) years, with one-third (1/3) of the options vesting on each anniversary of the effective date until all options have vested. The Options will fully vest and become immediately exercisable upon a change of control (as such term is defined in the Employment Agreement). Unless an earlier termination occurs, the Options will expire ten years after the effective date of the Stock Option Agreement.

Sean M. McCarthy.    On January 1, 2006, Mr. McCarthy was promoted to Chief Financial Officer. His letter agreement with us provided for an annual base salary of $200,000 and an annual incentive bonus of up to 25% of his annual base salary. Effective May 1, 2008, our Compensation Committee approved the following compensatory arrangements for Mr. McCarthy: (i) annual base salary of $225,000; (ii) an annual bonus of up to

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40% of his annual base salary based upon objective performance criteria; (iii) a severance payment equal to nine months of annual base salary if Mr. McCarthy is terminated by us without cause, provided that he executes customary releases of us; and (iv) in the event of a “change of control,” Mr. McCarthy shall be entitled to a stock appreciation payment upon consummation of the change of control transaction provided that he executes a general release of us.

Employment Agreements with Former Executive Officers

Stephen V. Coffey.    Effective December 14, 2005, Mr. Coffey entered into an engagement agreement with us appointing him Chief Executive Officer. Mr. Coffey’s engagement agreement provided that his management company would be paid a fee of $60,000 per month. In addition, if we are acquired by any person, other than a current affiliate, within 12 months of February 7, 2008, the termination date of the engagement, and the per share consideration paid in connection with the acquisition multiplied by the then-outstanding shares of capital stock is greater than the market capitalization at February 7, 2008, Mr. Coffey’s management company will receive an additional bonus equal to 5.0% of the difference of the disposition value less the termination market capitalization. On February 7, 2008, Mr. Coffey resigned as our Chief Executive Officer.

Stephen W. Leach.    On April 2, 2008, Mr. Leach resigned effective April 30, 2008. In connection with his resignation, Mr. Leach entered into a Severance and Consultant Agreement and General Release (the “Severance Agreement”). The Severance Agreement entitles Mr. Leach to a payment of $32,133.36 paid out in one lump sum, less statutorily required deductions. In addition, the Separation Agreement, among other things, contains (i) a consulting agreement for a period of two months through and including June 30, 2008, and on a month-to-month basis thereafter (ii) a general release of us by Mr. Leach for any and all claims which he may hold, (ii) provisions related to nondisclosure of trade secrets and confidentiality. Mr. Leach’s departure did not involve any disagreement with us.

Change in Control Agreements

Potential Payments Upon Termination or Change in Control

Some of our officers are entitled to receive certain payments upon a change in control under individual employment agreements or may be entitled to receive certain payments under severance agreements. In addition, our board of directors may in its discretion accelerate the vesting of options upon a change in control.

Upon a termination for cause, officers are not entitled to receive compensation after such termination and their options terminate upon such termination. In the event of an involuntary not for cause termination, termination following a change in control and in the event of disability of the executive officer, certain executive officers may be entitled to receive compensation or payments upon such termination as described below. The amounts shown below assume that such termination was effective as of June 25, 2008 and use the closing price of our common stock as of June 25, 2008 ($2.21), and thus include amounts earned through such time. These figures are estimates of the amounts that would be paid out to the executive officers upon their termination. The actual amounts to be paid can only be determined at the time of such executive officer’s separation from Diedrich Coffee.

J. Russell Phillips.    In the event of a change of control, (as such term is defined in Mr. Phillips’s Employment Agreement), Mr. Phillips’ shall be entitled to receive, upon timely execution of a general release of us, (i) a payment in cash equal to 100% of the base salary and (ii) benefits as set forth in the Stock Option Agreement. As described above, upon a change of control, his Options granted under the Stock Option Agreement will fully vest and become immediately exercisable.

Sean M. McCarthy.    As described above, a (i) severance payment equal to nine months of annual base salary if Mr. McCarthy is terminated by us without cause, provided that he executes customary release of us; and

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(ii) in the event of a “change of control,” Mr. McCarthy shall be entitled to a stock appreciation payment upon consummation of the change of control transaction provided that he executes a general release of us. A change of control is defined as a transaction that results in a non-affiliate of us acquiring 90% of our outstanding common stock. A stock appreciation payment is equal to the product of (i) the difference determined by subtracting $5.00 from the per share price at which at least 90% of our outstanding common stock is acquired, multiplied by (ii) 100,000. Because the disposition value in the event of such an acquisition is indeterminable, the payment to Mr. McCarthy is not calculable.

Stephen V. Coffey.    As described above, if we are acquired by any person, other than a current affiliate, within 12 months of February 7, 2008, the termination date of Mr. Coffey’s engagement, and the per share consideration paid in connection with the acquisition multiplied by the then-outstanding shares of capital stock is greater than the market capitalization at the end of the engagement, Mr. Coffey’s management company will receive a bonus equal to 5.0% of the difference of the disposition value less the termination market capitalization. Because the disposition value in the event of such an acquisition is indeterminable, the payment to Mr. Coffey’s management company would receive in the event of such termination is not calculable.

Outstanding Equity Awards at the 2008 Fiscal Year End

The following table sets forth information relating to stock options held by the named executive officers as of June 25, 2008. Ms. Britton exercised 20,000 options to purchase common stock during the fiscal year ended June 25, 2008.

	Option Awards
Name	Number of Securities Underlying Unexercised Options (#)		Number of Securities Underlying Unexercised Options (#)		Option Exercise Price ($)		Option Expiration Date
	Exercisable		Unexercisable
J. Russell Phillips	7,500	(1)	7,500	(1)	$	3.83	4/18/2017
	—		15,000	(1)		3.58	12/11/2017
	—		275,000	(2)		3.23	2/07/2018
Sean M. McCarthy	20,000	(2)	—			3.69	4/26/2014
Kimberly A. Myers (3)	6,667	(2)	13,333	(2)		3.81	4/18/2017
Stephen V. Coffey (4)	—		—			—	—
Pamela J. Britton (5)	20,000	(2)	—			2.84	2/26/2011
	15,000	(2)	—			3.80	6/1/2011
	20,000	(2)	—			3.97	9/27/2012

(1) These options vest over a two-year period at a rate of one-half per year.

(2) These options vest over a three-year period at a rate of one-third per year.

(3) Ms. Myers resigned from her position with Diedrich Coffee effective July 2, 2008 and her unexercised options were cancelled on August 1, 2008.

(4) Mr. Coffey resigned from his position with Diedrich Coffee effective February 7, 2008.

(5) Ms. Britton resigned from her position with Diedrich Coffee effective November 2, 2007 and her unexercised options were cancelled on December 21, 2007.

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Director Compensation

Directors who are also our employees receive no extra compensation for their service on the board of directors. Non-employee directors receive an annual fee of $12,000, which is paid quarterly. In addition, non-employee directors earn fees of $1,000 per board meeting attended in person, $500 per board meeting attended telephonically and $500 per committee meeting attended, whether in person or telephonically. Non-employee directors are also reimbursed for out-of-pocket expenses incurred in connection with attending meetings of the board of directors and its committees. In the fiscal year ended June 25, 2008, Mr. Heeschen earned $18,500, Mr. Palmer earned $18,500, Mr. Phillips, as a former director, earned $13,500, and Mr. Ryan earned $20,000. In addition, non-employee directors are eligible to receive stock option grants under the Diedrich Coffee, Inc. 2000 Equity Incentive Plan. In the fiscal year ended June 25, 2008, each person who was then a non-employee director was granted 15,000 stock options under the 2000 Equity Incentive Plan.

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

All non-employee director options granted under the 2000 Equity Incentive Plan have a term of ten years and an exercise price equal to the fair market value of our common stock on the date of grant. Vesting of non-employee director options granted under the 2000 Equity Incentive Plan accelerates in certain circumstances in connection with a change in control. During the fiscal year ended June 25, 2008, an aggregate of 60,000 options to purchase shares of our common stock were issued to non-employee directors under the 2000 Equity Incentive Plan. 15,000 of the 60,000 options granted were granted to Mr. Phillips while serving as a non-employee director.

Director Compensation Table

The following table shows the 2008 fiscal year compensation for our non-employee directors.

Name	Fees Earned or Paid in Cash ($)		Option Awards ($) (1)		Total ($)
Paul C. Heeschen	$	18,500	$	23,313	$41,813
Gregory D. Palmer		18,500		31,542	50,042
J. Russell Phillips (2)		13,500		29,386	42,886
Timothy J. Ryan		20,000		27,034	47,034

(1) This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2008 fiscal year for the fair value of stock options for each of the directors in accordance with SFAS No. 123R. Pursuant to rules of the Securities and Exchange Commission, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information on the

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valuation assumptions with respect to the 2008 grants, refer to Note 1 to our consolidated financial statements. These amounts reflect our accounting expense for these awards, and do not correspond to the actual value that may be received by the directors.

(2) The amounts reflected represent Mr. Phillips compensation as a non-employee member of the board of directors and excludes compensation as our President and Chief Executive Officer.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth information regarding the beneficial ownership of our common stock as of June 25, 2008 by:

• each person or group of affiliated persons who we know beneficially owns more than 5% of our common stock;

• each of our directors and nominees;

• each of our named executive officers; and

• all of our directors and executive officers as a group.

Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws. The table below includes the number of shares underlying options and warrants that are exercisable within 60 days from September 25, 2008.

Name And Address Of Beneficial Owner (1)	Amount And Nature Of Beneficial Ownership (2)		Percent Of Class (%)(2)
Sequoia Enterprises, LP 450 Newport Center Drive, Suite 450 Newport Beach, CA 92660	3,940,604	(3)	53.4
Financial & Investment Management Group, LTD 111 Cass Street, Traverse City, MI 49684	766,672	(4)	14.0
D.C.H., L.P. 450 Newport Center Drive, Suite 450 Newport Beach, CA 92660	419,268	(5)	7.7
Clarus Capital Group Management LP 237 Park Avenue, Suite 900 New York, NY 10017	287,733	(6)	5.3
Paul C. Heeschen	4,428,543	(7)	59.4
Timothy J. Ryan	45,000	(8)	*
Gregory D. Palmer	22,500	(9)	*
J. Russell Phillips	7,500	(10)	*
Sean M. McCarthy	20,000	(11)	*
All directors and executive officers as a group (7 persons)	4,535,209	(12)	60.0

* Less than 1%

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(1) Unless otherwise indicated, the address of each person in this table is c/o Diedrich Coffee, Inc., 28 Executive Park, Suite 200, Irvine, California 92614, Attn: Corporate Secretary.

(2) Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act of 1934. Shares not outstanding that are subject to options or warrants exercisable by the holder thereof within 60 days of September 25, 2008 are deemed outstanding for the purposes of calculating the number and percentage owned by such stockholder, but not deemed outstanding for the purpose of calculating the percentage of any other person. Unless otherwise noted, all shares listed as beneficially owned by a stockholder are actually outstanding.

(3) Paul C. Heeschen, the chairman of our board of directors, is the sole general partner of this limited partnership with voting and investment power as to all shares beneficially owned by the limited partnership. Includes 250,000 shares subject to warrants that are immediately exercisable and will expire on May 8, 2011, and 1,667,000 shares subject to warrants that are immediately exercisable and will expire on August 26, 2013.

(4) According to the Schedule 13G, filed on July 18, 2008, Financial & Investment Management Group, LTD (“FIMG”) is a registered investment advisor that manages individual client accounts. All 766,672 shares represented in that filing have shared voting power and are held in accounts owned by the clients of FIMG. FIMG disclaims beneficial ownership of all such shares.

(5) Paul C. Heeschen, the Chairman of our board of directors, is the sole general partner of this limited partnership with voting and investment power as to all shares beneficially owned by the limited partnership.

(6) Includes sole voting power relating to 235,713 and shared voting power relating to 52,020 shares beneficially owned by Clarus Capital Group Management LP. The general partner to Clarus Capital Group Management LP is Clarus Capital Management, LLC. Ephraim Fields is the managing member of Clarus Capital Group Management, LLC and as such controls Clarus Capital Group Management LP.

(7) Includes (i) 3,940,604 shares beneficially owned by Sequoia Enterprises, LP (250,000 shares subject to warrants that are immediately exercisable and will expire on May 8, 2011 and 1,667,000 shares subject to warrants that are immediately exercisable and will expire on August 26, 2013), and (ii) 419,268 shares beneficially owned by D.C.H., LP. Mr. Heeschen is the sole general partner of each of these partnerships with voting and investment power as to all of such shares. Includes 68,421 shares owned personally by Mr. Heeschen (67,500 shares subject to options that are exercisable within 60 days), and 250 shares held by Paul C. Heeschen Revocable Living Trust.

(8) Includes 45,000 shares subject to options that are exercisable within 60 days.

(9) Includes 22,500 shares subject to options that are exercisable within 60 days.

(10) Includes 7,500 shares subject to options that are exercisable within 60 days.

(11) Includes 20,000 shares subject to options that are exercisable within 60 days.

(12) Includes 2,091,166 shares subject to options and warrants that are exercisable within 60 days.

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Equity Compensation Plan Information.

The following table summarizes the equity compensation plans under which our common stock may be issued as of June 25, 2008.

	(a)	(b)	(c)
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	343,300(1)	$4.26	749,750(2)
Equity compensation plans not approved by security holders	275,000(3)	$3.23	—
Total	618,300	$3.80	749,750

(1) Represents options to purchase shares of our common stock issued under: the Diedrich Coffee, Inc. 2000 Equity Incentive Plan; the 2000 Non-Employee Directors Stock Option Plan; the Amended and Restated Diedrich Coffee, Inc. 1996 Stock Incentive Plan; and the Diedrich Coffee, Inc. 1996 Non-Employee Directors Stock Option Plan.

(2) Represents securities available for issuance under the Diedrich Coffee, Inc. 2000 Equity Incentive Plan.

(3) Represents options to purchase shares of our common stock issued under the J. Russell Phillips Stock Option Agreement. The Company will seek stockholder approval of the Stock Option Agreement at the Company’s next annual meeting of stockholders.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Loan Agreement.    On August 26, 2008, we entered into a loan agreement with Sequoia, a limited partnership whose sole general partner also serves as the Chairman of the Board of Directors of the Company.

The Loan Agreement provides for a $3 million Term Loan to the Company. The Term Loan accrues interest from the funding date at LIBOR plus 5.30%, resetting on the first calendar day of each month. The Company is required to make regular monthly payments of interest, and to cause the principal amount to be reduced to $2 million no later than August 26, 2009. All outstanding principal and interest will be due on the maturity date of August 26, 2011, unless due earlier pursuant to the terms of the Loan Agreement upon a change of control of the Company or an event of default.

The Loan Agreement requires the Company to refrain from further borrowings under the Company’s existing Note Purchase Agreement and contains restrictions on incurring indebtedness on par with, or senior to, the Term Loan. The Loan Agreement also contains a covenant that limits the amount of indebtedness that the Company may have outstanding in relation to tangible net worth, in addition to other standard covenants and events of default.

The Term Loan is senior to all other indebtedness of the Company, except indebtedness pursuant to notes under the Note Purchase Agreement and certain permitted indebtedness identified in the Loan Agreement. Upon repayment of the notes under the Note Purchase Agreement, the Term Loan will be senior to all other indebtedness of the Company, except such permitted indebtedness.

40

In connection with the Loan Agreement and the Amendment, on August 26, 2008, the Company issued to Sequoia a warrant (the “2008 Sequoia Warrant”) to purchase 1,667,000 shares of common stock of the Company at an exercise price of $2.00 per share, which represented a premium of $0.25, or approximately 14%, over the $1.75 closing price of the Company’s common stock on such date.

Consistent with the Company’s procedures for approving related party transactions, the audit committee of the Board of Directors, comprised of Timothy J. Ryan and Gregory D. Palmer, authorized and approved the Loan Agreement, the Amendment, the 2008 Warrant and the transactions contemplated thereby.

Director Independence.    Our board of directors has affirmatively determined that each of Paul C. Heeschen, Gregory D. Palmer and Timothy J. Ryan is “independent” within the meaning of Nasdaq Marketplace Rule 4200(a)(15). During its review, the board of directors considered transactions and relationships between each director or any member of his or her immediate family and Diedrich Coffee and its subsidiaries and affiliates.

Mr. Heeschen’s daughter became employed with the Company as a part-time marketing intern effective August 19, 2008 with base pay at $12.00 per hour. The board of directors considered this relationship and concluded that it was not a material relationship that would impair Mr. Heeschen’s independence.

Item 14. Principal Accountant Fees and Services.

The following table presents the aggregate fees billed by BDO Seidman, LLP for services provided during our 2008 and 2007 fiscal years.

	2008		2007
Audit Fees	$	308,000	$	312,000
Audit Related Fees		32,000		88,000
Tax Fees		145,000		57,000
Total	$	485,000	$	457,000

Audit Fees.    The fees identified under this caption were for professional services rendered by BDO Seidman, LLP for fiscal years 2008 and 2007 in connection with the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q. The amounts also include fees for services that are normally provided by the independent public registered accounting firm in connection with statutory and regulatory filings and engagements for the years identified.

Audit-Related Fees.    The fees identified under this caption were for assurance and related services that were related to the performance of the audit or review of our financial statements and were not reported under the caption “Audit Fees.” Audit-related fees consisted primarily of fees paid for Securities and Exchange Commission reporting matters and consents related to our uniform franchise offering circulars.

Tax Fees.    Tax fees consist principally of assistance related to tax compliance and reporting.

Approval Policy.    Our audit committee approves in advance all services provided by our independent registered public accounting firm. All engagements of our independent registered public accounting firm in fiscal years 2008 and 2007 were pre-approved by the audit committee.

41

PART IV

Item 15. Exhibits and Financial Statement Schedules.

Financial Statements and Schedules.

The financial statements and schedules required to be filed hereunder are set forth at the end of this Annual Report on Form 10-K beginning on page F-1.

Exhibits.

The Exhibit Index attached hereto is incorporated herein by reference.

42

SIGNATURES

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

	DIEDRICH COFFEE, INC.
October 8, 2008	By:	/s/ J. RUSSELL PHILLIPS
		J. Russell Phillips
		Chief Executive Officer
		(on behalf of the registrant)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ PAUL HEESCHEN Paul Heeschen	Chairman of the Board of Directors	October 8, 2008
/s/ J. RUSSELL PHILLIPS J. Russell Phillips	Director, President and Chief Executive Officer	October 8, 2008
/s/ SEAN M. MCCARTHY Sean M. McCarthy	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	October 8, 2008
/s/ TIMOTHY J. RYAN Timothy J. Ryan	Director	October 8, 2008
/s/ GREGORY D. PALMER Gregory D. Palmer	Director	October 8, 2008

43

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Stockholders’ Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-8
Schedule II – Valuation and Qualifying Accounts	F-31

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Diedrich Coffee, Inc.:

We have audited the accompanying consolidated balance sheets of Diedrich Coffee, Inc. and subsidiaries (the “Company”) as of June 25, 2008 and June 27, 2007 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended June 25, 2008. In connection with our audits of the consolidated financial statements, we also have audited the supplementary information included in Schedule II. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diedrich Coffee, Inc. and subsidiaries as of June 25, 2008 and June 27, 2007, and the results of their operations and their cash flows for each of the two years in the period ended June 25, 2008, in conformity with accounting principles generally accepted in the United States.

Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As more fully described in Note 11 to the consolidated financial statements, effective June 28, 2007, the Company adopted the provisions of FIN 48 “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.”

/s/ BDO Seidman, LLP

Costa Mesa, California

October 8, 2008

F-2

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 25, 2008			June 27, 2007
Assets
Current assets:
Cash	$	670,000		$	6,873,000
Restricted cash and short term investments		623,000			669,000
Accounts receivable, less allowance for doubtful accounts of $508,000 at June 25, 2008 and $163,000 at June 27, 2007		5,015,000			4,069,000
Inventories		4,652,000			4,323,000
Income tax refund receivable		—			533,000
Current portion of notes receivable, less allowance of $247,000 at June 25, 2008 and $63,000 at June 27, 2007		1,074,000			1,031,000
Advertising fund assets, restricted		6,000			339,000
Prepaid expenses		412,000			252,000
Total current assets		12,452,000			18,089,000
Property and equipment, net		7,327,000			4,437,000
Goodwill		—			6,832,000
Notes receivable, less allowance of $0 at June 25, 2008 and $75,000 at June 27, 2007		2,663,000			3,386,000
Cash surrender value of life insurance policy		162,000			430,000
Other assets		132,000			159,000
Total assets	$	22,736,000		$	33,333,000
Liabilities and Stockholders’ Equity
Current liabilities:
Liabilities of discontinued operations	$	89,000		$	125,000
Note payable, net of discount		1,741,000			—
Accounts payable		5,169,000			3,814,000
Accrued compensation		1,412,000			2,052,000
Accrued expenses		2,232,000			1,725,000
Franchisee deposits		587,000			674,000
Deferred franchise fee income		34,000			82,000
Advertising fund liabilities		204,000			339,000
Accrued provision for store closure		849,000			686,000
Total current liabilities		12,317,000			9,497,000
Income tax liability		261,000			—
Deferred rent		190,000			216,000
Deferred compensation		226,000			468,000
Total liabilities		12,994,000			10,181,000
Commitments and contingencies (Notes 8 and 9)
Stockholders’ equity:
Common stock, $.01 par value; authorized 8,750,000 shares; issued and outstanding 5,468,000 shares at June 25, 2008 and 5,448,000 shares at June 27, 2007		55,000			54,000
Additional paid-in capital		60,281,000			59,671,000
Accumulated deficit		(50,594,000	)		(36,573,000	)
Total stockholders’ equity		9,742,000			23,152,000
Total liabilities and stockholders’ equity	$	22,736,000		$	33,333,000

See accompanying notes to consolidated financial statements.

F-3

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended June 25, 2008			Year Ended June 27, 2007
Net revenue:
Wholesale and other	$	39,103,000		$	28,145,000
Franchise revenue		2,843,000			3,514,000
Retail sales		4,394,000			4,948,000
Total revenue		46,340,000			36,607,000
Costs and expenses:
Cost of sales and related occupancy costs (exclusive of depreciation shown separately below)		35,886,000			24,244,000
Operating expenses		8,887,000			9,631,000
Depreciation and amortization		1,281,000			1,059,000
General and administrative expenses		8,439,000			6,661,000
Provision for goodwill and asset impairment		7,161,000			1,073,000
Loss on asset disposals		76,000			14,000
Total costs and expenses		61,730,000			42,682,000
Operating loss from continuing operations		(15,390,000	)		(6,075,000	)
Interest expense		(136,000	)		(230,000	)
Interest and other income, net		442,000			436,000
Loss from continuing operations before income tax benefit		(15,084,000	)		(5,869,000	)
Income tax benefit		537,000			2,120,000
Loss from continuing operations		(14,547,000	)		(3,749,000	)
Discontinued operations:
Loss from discontinued operations, net of tax benefit of $0, and $1,710,000, respectively		—			(1,596,000	)
Gain on sale of discontinued operations, net of tax expense of $503,000 and $3,835,000, respectively		771,000			3,580,000
Net loss	$	(13,776,000	)	$	(1,765,000	)
Basic and diluted net income (loss) per share:
Loss from continuing operations	$	(2.66	)	$	(0.70	)
Income from discontinued operations, net	$	0.14		$	0.37
Net loss	$	(2.52	)	$	(0.33	)
Weighted average and equivalent shares outstanding:
Basic and diluted		5,459,000			5,391,000

See accompanying notes to consolidated financial statements.

F-4

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit			Total Stockholders’ Equity
Balance, June 28, 2006	5,308,000	$	53,000	$	59,022,000	$	(34,808,000	)	$	24,267,000
Exercise of stock options	140,000		1,000		289,000		—			290,000
Stock compensation expense	—		—		284,000		—			284,000
Common Stock warrants	—		—		76,000		—			76,000
Net loss	—		—		—		(1,765,000	)		(1,765,000	)
Balance, June 27, 2007	5,448,000		54,000		59,671,000		(36,573,000	)		23,152,000
Adjustment to adopt FIN 48	—		—		—		(245,000	)		(245,000	)
Exercise of stock options	20,000		1,000		56,000		—			57,000
Stock compensation expense	—		—		280,000		—			280,000
Common Stock warrants	—		—		274,000		—			274,000
Net loss	—		—		—		(13,776,000	)		(13,776,000	)
Balance, June 25, 2008	5,468,000	$	55,000	$	60,281,000	$	(50,594,000	)	$	9,742,000

See accompanying notes to consolidated financial statements.

F-5

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended June 25, 2008			Year Ended June 27, 2007
Cash flows from operating activities:
Net loss	$	(13,776,000	)	$	(1,765,000	)
Loss from discontinued operations		—			1,596,000
Gain on disposal of discontinued operations, net		(771,000	)		(3,580,000	)
Loss from continuing operations:		(14,547,000	)		(3,749,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,281,000			1,059,000
Amortization and write off of loan fees		—			25,000
Amortization of note payable discount		15,000			76,000
Provision for bad debt		756,000			233,000
Income tax benefit		(537,000	)		(2,120,000	)
Provision for inventory obsolescence		(34,000	)		90,000
Provision for goodwill and asset impairment		7,161,000			1,073,000
Provision for store closure		806,000			609,000
Provision for legal settlement		944,000			—
Stock compensation expense		280,000			284,000
Notes receivable issued		(214,000	)		(304,000	)
Loss on disposal of assets		76,000			14,000
Changes in operating assets and liabilities:
Accounts receivable		(1,702,000	)		(1,473,000	)
Inventories		(294,000	)		(997,000	)
Prepaid expenses		(161,000	)		135,000
Notes receivable		(198,000	)		(184,000	)
Income tax refund		533,000			(22,000	)
Other assets		491,000			(52,000	)
Accounts payable		1,355,000			885,000
Accrued and deferred compensation		(882,000	)		14,000
Accrued expenses		(386,000	)		339,000
Deferred franchise fee income and franchise deposits		(135,000	)		53,000
Accrued provision for store closure		(596,000	)		(215,000	)
Deferred rent		(26,000	)		—
Net cash used in continuing operations		(6,014,000	)		(4,227,000	)
Net cash used in discontinued operations		(83,000	)		(2,611,000	)
Net cash used in operating activities		(6,097,000	)		(6,838,000	)
Cash flows from investing activities:
Capital expenditures for property and equipment		(4,596,000	)		(2,442,000	)
Proceeds from disposal of property and equipment		21,000			83,000
Payments received on notes receivable		1,092,000			1,180,000
Change in restricted money market account		46,000			(86,000	)
Net cash used in investing activities of continuing operations		(3,437,000	)		(1,265,000	)

See accompanying notes to consolidated financial statements.

F-6

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

	Year Ended June 25, 2008			Year Ended June 27, 2007
Capital expenditures for property and equipment of discontinued operations		—			(17,000	)
Proceeds from sale of discontinued operations, net		1,274,000			12,121,000
Net cash provided by (used in) investing activities		(2,163,000	)		10,839,000
Cash flows from financing activities:
Payments on long-term debt		—			(3,000,000	)
Exercise of stock options		57,000			290,000
Borrowings under credit agreement		2,000,000			3,000,000
Net cash provided by financing activities of continuing operations		2,057,000			290,000
Net cash used in financing activities of discontinued operations		—			(11,000	)
Net cash provided by financing activities		2,057,000			279,000
Net (decrease) increase in cash		(6,203,000	)		4,280,000
Cash at beginning of year		6,873,000			2,593,000
Cash at end of year	$	670,000		$	6,873,000
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	114,000		$	125,000
Income taxes	$	46,000		$	74,000
Non-cash transactions:
Issuance of notes receivable	$	214,000		$	304,000

See accompanying notes to consolidated financial statements.

F-7

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Summary of Significant Accounting Policies and Practices

Business

Diedrich Coffee, Inc. (“Company”) is a specialty coffee roaster, wholesaler, franchiser and retailer whose brands include Diedrich Coffee, Gloria Jean’s, and Coffee People. The Company owns and operates 5 retail locations and is the franchiser of 118 retail locations as of June 25, 2008, all of which are located in 28 states. The Company also has wholesale accounts with businesses and restaurant chains. In addition, the Company operates a coffee roasting facility in central California that supplies freshly roasted coffee beans to its retail locations and to its wholesale customers.

Basis of Presentation and Fiscal Year End

The consolidated financial statements include the accounts of Diedrich Coffee, Inc. and its wholly owned subsidiaries. All significant intercompany transactions are eliminated. The Company’s fiscal year end is the Wednesday closest to June 30. In fiscal years 2007 and 2008, this resulted in a 52-week year.

Discontinued Retail Operations

The Company’s strategic direction is to focus on growing the wholesale business segment and the related distribution channels, including franchise stores. During the fiscal year ended June 27, 2007, the Company sold leaseholds and related assets of 32 Diedrich Coffee and Coffee People stores to Starbucks Corporation and seven additional stores to other third parties.

As part of the asset purchase agreement with Starbucks Corporation, the Company agreed to a non-compete provision that for three years after the closing of the transaction, restricts the Company’s ability to operate or have any interest in the ownership or operation of any entity operating any retail specialty coffee stores in any city where a Company Store was located at the time that the asset purchase agreement was executed. The non-compete provision applies only to stores opened after the date of the asset purchase agreement and does not apply to (1) any retail stores operated under the “Gloria Jean’s” brand name, (2) wholesale sales to retail businesses that are not operated by the Company, or other non-retail businesses, or (3) the conversion of company-operated stores existing on the date of the asset purchase agreement to franchise stores. The Company has also agreed that it will not solicit any Starbucks Corporation employee to enter the Company’s employment for three years after the closing of the transaction.

Except for the one Diedrich Coffee store that the Company currently operates, the results of company-operated Diedrich Coffee and Coffee People retail operations are reported as discontinued operations for all periods presented. The financial results of company-operated Gloria Jean’s retail operations are reported as continuing operations for all periods presented.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the financial results of the retail operations that were sold or closed are reported as discontinued operations for all periods presented.

The following accounts are reflected in Loss from Discontinued Operations in the condensed consolidated statements of operations:

• Retail revenues for Diedrich Coffee, Inc. and Coffee People, Inc.

• Cost of sales and related occupancy costs

F-8

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

• Operating expenses

• Depreciation and amortization

• Interest expense

• Provision for taxes paid

• Impairment of assets

• Employee termination costs

• Operating lease termination costs

Liabilities of discontinued operations in the consolidated balance sheet at June 25, 2008 and June 27, 2007 include accrued provision for store closure related to retail stores under Diedrich Coffee and Coffee People brands.

The financial results included in discontinued operations were as follows:

	Year Ended June 25, 2008		Year Ended June 27, 2007
Net Retail revenue	$	—	$	15,608,000
Net revenue from discontinued operations	$	—	$	15,608,000
Loss from discontinued Retail operations, net of tax benefit of $0 and $1,710,000, respectively	$	—	$	(1,596,000	)
Gain on sale of discontinued Retail operations, net of tax expense of $503,000 and $3,835,000, respectively		771,000		3,580,000
Total earnings from discontinued operations, net of tax	$	771,000	$	1,984,000

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company had $0 and $5,000,000 of invested cash at June 25, 2008 and June 27, 2007, respectively. The Company maintains cash balances at financial institutions that are in excess of FDIC insurance coverage limits.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is based on management’s best estimate of the amount of probable credit losses in existing accounts receivable. The Company evaluates its allowance for doubtful accounts based upon knowledge of its customers and their compliance with credit terms. The evaluation process includes a review of customers’ accounts on a regular basis. The review process evaluates all account balances with amounts outstanding 90 days and other specific amounts for which information obtained indicates that the balance may be uncollectible. The allowance for doubtful accounts is adjusted based on such evaluation, with a corresponding provision included in operating expenses. Account balances are charged off against the allowance when management believes it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its customers.

F-9

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Inventories

Raw materials consist primarily of green bean coffee. Finished goods include roasted coffee, tea, accessory products, and packaged foods. All products are valued at the lower of cost or market using the first-in, first-out method.

Property and Depreciation

Property and equipment, including assets under capital leases, are recorded at cost. Depreciation for property and equipment is calculated using the straight-line method over estimated useful lives of three to seven years. Property and equipment held under capital leases and leasehold improvements are generally amortized using the straight-line method. Property and equipment held under capital leases are generally amortized over the shorter of their estimated useful lives or the term of the related leases. Leasehold improvements are generally amortized over the shorter of their estimated useful lives or 9 years or the term of the related leases.

Major remodels and improvements are capitalized. Maintenance and repairs that do not improve or extend the life of the respective assets are charged to expense as incurred.

Deferred Financing Costs

Costs related to the issuance of debt are deferred and amortized using a method that approximates the effective interest method as a component of interest expense over the terms of the respective debt issues.

Store Pre-opening Costs

Direct and incremental costs incurred prior to the opening of a retail coffeehouse location are expensed as incurred.

Fair Value of Financial Instruments

The carrying amounts of cash, accounts receivable, inventories, other assets, notes receivable, accounts payable, accrued compensation, accrued expenses, and franchisee deposits approximate fair value because of the short-term maturity of these financial instruments. The Company believes the carrying amounts of the Company’s long-term debt approximates fair value because the interest rate on these instrument are subject to change with market interest rates and other terms and conditions are consistent with terms currently available to the Company.

Cost of Sales and Related Occupancy Costs

Cost of sales and related occupancy costs include cost of purchased products, inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and all other costs of our distribution network and retail store occupancy costs.

Certain lease agreements provide for scheduled rent increases during the lease terms or for rental payments commencing on a date other than the date of initial occupancy. Rent expense is recorded for the total rent payable during the lease term on a straight-line basis over the respective terms of the leases. The lease term used for straight-line rent expense is calculated from the date the Company obtains possession of the leased premises through the lease termination date.

F-10

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Operating Expenses

Operating expenses include compensation costs, utilities, advertising and marketing, business insurance, taxes, licenses, fees and bank charges.

General and Administrative Expenses

General and administrative expenses include compensation costs, consulting and outside services, auditing and accounting, legal, office rent, telephone, and Director’s and Officer’s insurance.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company’s assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Net Income (Loss) Per Common Share

“Basic” earnings per-share represents net earnings divided by the weighted average shares outstanding, excluding all potentially dilutive common shares. “Diluted” earnings per-share reflects the dilutive effect of all potentially dilutive common shares.

Goodwill

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” (“SFAS No. 141”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead are tested for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers 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. The Company’s annual impairment measurement date is the fiscal year end. The Company has performed annual evaluations of its goodwill since June 30, 2001 in order to properly state its goodwill (see Notes 7 and 12). The Company recorded impairment charges during fiscal year 2008 to fully impair goodwill. No provision for impairment was recorded in fiscal 2007.

Stock Option Plans

On June 30, 2005, the Company adopted the provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R sets accounting requirements for “share-based” compensation to employees and non-employee directors, including employee stock purchase plans, and requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation.

F-11

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company chose the modified-prospective transition alternatives in adopting SFAS No. 123R. Under the modified-prospective transition method, compensation cost is recognized in financial statements issued subsequent to the date of adoption for all stock-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were granted prior to the date of adoption. Because the Company previously adopted only the pro forma disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123”), it will recognize compensation cost relating to the unvested portion of awards granted prior to the date of adoption using the same estimate of the grant-date fair value and the same attribution method used to determine the pro forma disclosures under SFAS No. 123, except that forfeitures rate will be estimated for all options, as required by SFAS No. 123R.The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of the price of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination rates within the valuation model. The expected term of options is derived from the output of the option valuation model and represents the period of time that options are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The fair values of the options were estimated using the Black-Scholes option-pricing model based on the following weighted average assumptions:

	Year Ended June 25, 2008	Year Ended June 27, 2007
Risk free interest rate	1.91% - 4.91%	4.54% - 5.29%
Expected life	2 - 3 years	2 years
Expected volatility	53% - 59%	55% - 64%
Expected dividend yield	0%	0%
Forfeiture rate	4.52% - 9.38%	5.02% - 6.32%

Long-Lived Assets

The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144. This requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company recorded an asset impairment charge of $329,000 in fiscal 2008 to reduce the carrying value associated with four Gloria Jean’s coffeehouses and recorded an asset impairment charge of $1,073,000 in fiscal 2007 associated with four of its Gloria Jean’s coffeehouses and three Diedrich coffeehouses.

Revenue Recognition

The Company’s wholesale sales terms are FOB shipping point. Revenue from the sale of our wholesale products is recognized when ownership legally transfers to the customer, which is upon shipment. These sales are not subject to customer right of inspection or acceptance. Revenue from retail sales are recognized at the point of sale. Initial franchise fees (“Front end fees”) are recognized when a franchised coffeehouse begins operations, at which time the Company has performed its obligations related to such fees. Initial franchise fees apply primarily in the case of domestic franchise development. Franchise royalties are recognized as earned, based upon a percentage of a franchise coffeehouse sales over time.

F-12

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table details the various components included in franchise revenue:

	June 25, 2008		June 27, 2007
Royalties	$	2,782,000	$	3,276,000
Front end fees		61,000		238,000
Total	$	2,843,000	$	3,514,000

Shipping and Handling Costs

Shipping and handling costs are included as a component of cost of sales and related occupancy costs. A corresponding amount is billed to the Company’s wholesale customers, and is included as a component of wholesale and other revenue.

Concentrations

The Company generated 66.9% and 52.4% of its total revenues from the sale of K-cups for fiscal 2008 and 2007, respectively. The manufacturing and distribution of K-cups is licensed from a single licensor. During fiscal 2008 and 2007, the Company had sales to this licensor that represented approximately 20.9% and 14.3% of wholesale sales, respectively.

Advertising and Promotion Costs

The following table details the components of advertising and promotion costs:

Advertising and Promotion Costs:	June 25, 2008		June 27, 2007
Advertising and promotion payments	$	1,138,000	$	1,047,000
Less franchisee ad fund contributions		864,000		922,000
Net advertising and promotion payments	$	274,000	$	125,000
Included in operating expenses	$	274,000	$	125,000

Total advertising and promotion costs are for Gloria Jean’s eCommerce and Gloria Jean’s Company brands sold in company-operated and franchise units. Franchisees are required to contribute 2% of sales to an ad fund that is segregated and designated for advertising. The Company acts as an agent for the franchisees with regard to these contributions. The Company consolidates the fund into its financial statements on a net basis, whereby contributions from franchisees, when received, are recorded as offsets to the Company’s reported advertising expenses, in accordance with SFAS No. 45, “Accounting for Franchisee Fee Revenue”. As discussed in this Note 1 below, in Variable Interest Entities, the Company began to consolidate the advertising fund as of June 30, 2004, also on a net basis, as required for accounting periods ending after March 15, 2004.

The Company charges advertising costs to expense as incurred.

F-13

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Store Closures

Effective January 1, 2003, 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.

	Beginning Balance		Amounts Charged to Expense		Adjustments		Cash Payments			Ending Balance
Accrued provision for store closure
Year ended June 27, 2007	$	401,000	$	1,051,000	$	—	$	(641,000	)	$	811,000
Year ended June 25, 2008	$	811,000	$	806,000	$	—	$	(679,000	)	$	938,000

Amounts charged to expense for the years ended June 27, 2007 and June 25, 2008 were $1,051,000 and $806,000, respectively. The 2008 fiscal year expense of $806,000 is charged to cost of sales and related occupancy costs on the consolidated statements of operations. Of the $938,000 reserve balance for store closures at June 25, 2008, $849,000 and $89,000 are reserved for continuing operations and discontinued operations, respectively. Of the $1,051,000, net charged to expense in the 2007 fiscal year, $609,000 and $442,000 are charged to cost of sales and related occupancy costs and discontinued operations, respectively, on the consolidated statements of operations. Of the $811,000 reserve balance for store closures at June 27, 2007, $686,000 and $125,000 are reserved for continuing operations and discontinued operations, respectively.

Variable Interest Entities

On June 30, 2004 the Company adopted FASB Interpretation (“FIN”) No. 46 (revised), “Consolidation of Variable Interest Entities—an interpretation of Accounting Research Bulletin (“ARB”) No. 51” (“FIN 46R”) which addresses the consolidation of entities in which a reporting enterprise has an economic interest but for which the traditional voting interest approach to consolidation, based on voting rights, is ineffective in identifying where control of the entity lies, or in which the equity investors do not bear the economic risks and rewards of the entity. FIN 46R refers to those entities as variable interest entities (“VIEs”). FIN 46R requires the consolidation of VIEs by the primary beneficiary that absorbs a majority of the economic risks and rewards from the VIEs activities.

The Company acquired its franchise operations in 1999. At June 25, 2008, there were 118 domestic franchise units, all of which are owned by franchisees. The Company, as the franchisor, receives royalty fees on franchise sales, but has no equity interest and does not share in profits or losses of the franchise operation. The franchisees make the key decisions that impact the success of their operations. The Company’s rights are protective in nature and are designed to preserve the value of the brand that it licenses to the franchisee through the franchise agreement. Of the 118 domestic franchise locations, the Company provides subordinated financial support to the extent that it is the primary lessee on 45 of the coffeehouse leases and subleases the premises to the franchisees on a pass-through basis on the same terms as the primary lease. The franchisees generally pay rent directly to the primary lease landlord.

The Company calculated the present value of the subordinated financial support provided to each of the franchisees by the lease arrangements and compared it to the overall subordinated financing support as defined by FIN 46R and determined that for all but ten stores the Company was providing less than 50% of the franchisees’ total subordinated financial support. For one store a further quantitative test of the franchisee’s equity indicated that it was well above the 10% minimum and that the franchisee would not be considered a VIE. This remaining store may be considered a VIE, however, management has not consolidated these franchise operations into the Company’s financial statements because the Company is not the primary beneficiary.

F-14

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company believes its risk of loss is not significant. As a condition to acquire a franchise, the prospective franchisee is required to have a personal net worth of at least $350,000, an amount believed to be sufficient to absorb possible franchise losses. Each franchisee is personally liable, either through direct ownership of the franchise or by a personal guarantee if the franchise is operated as a company. The Company looks to the franchisee’s personal assets to satisfy the franchise’s obligations, including the lease on which the Company is the primary lessee. The Company’s maximum theoretical future exposure at June 25, 2008, computed as the sum of all remaining lease payments through the expiration dates of these 45 leases, was $13,360,000. This amount does not take into consideration any mitigating measures that the Company 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 that is less than the sum of all remaining future rents and other amounts payable.

The Company’s franchise agreements require that the franchisees pay an advertising fund contribution of 2% of franchise sales. These funds are maintained in a segregated fund and used to pay for franchise brand marketing. All contributions are used solely for brand advertising and none are revenue or income to the Company. The fund is administered by an employee of the Company and is subject to audit by a franchisee committee. In the event that the advertising fund is not sufficient to pay all outstanding invoices, the Company could be contingently liable for their payment. Accordingly, the Company determined that consolidation of the fund is appropriate under FIN 46R and adopted it in the quarter ended June 30, 2004. The Company included $6,000 and $204,000 of advertising fund assets, restricted, and advertising fund liabilities in the consolidated balance sheet as of June 25, 2008 and $339,000 of advertising fund assets, restricted, and advertising fund liabilities at June 27, 2007. Advertising fund assets are primarily cash, which is segregated and restricted to use for franchise brand advertising. Advertising fund liabilities consist mainly of accounts payable, accrued expenses and deferred obligations. As noted in “Advertising and Promotion Costs” above, the advertising contributions and disbursements are reported in the consolidated statement of operations on a net basis whereby contributions are recorded as offsets to the Company’s reported operating and general and administrative expenses.

Cash Surrender Value of Life Insurance

The change in the cash surrender value (“CSV”) of company owned life insurance (“COLI”) contracts excluding distributions, net of insurance premiums paid and gains realized, is reported in compensation and benefits expense (see Note 16).

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement on Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”), This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company has not yet determined the impact, if any, of adopting SFAS No. 157 on its consolidated financial statements.

F-15

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In February 2007, the FASB issued Statement on Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under U.S. GAAP. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact, if any, of adopting SFAS No. 159 on its consolidated financial statements.

In December 2007, the FASB issued Statement on Financial Accounting Standards No. 141R, “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R establishes the principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS No. 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141R is not permitted. Acquisitions, if any, after the effective date, will be accounted for in accordance with SFAS No. 141R.

In December 2007, the FASB issued Statement on Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 applies to all entities that prepare consolidated financial statements but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 establishes accounting and reporting standards that require noncontrolling interests to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. SFAS No. 160 is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008. Acquisitions, if any, after the effective date will be accounted for in accordance with SFAS No. 160.

2.    Liquidity and Management Plans

The Company incurred a net loss of $13.8 million which included a $7.2 million non-cash charge for asset impairment and reported net cash used in operating activities of $6.1 million during the year ended June 25, 2008. The Company had a cash balance of $670,000 and no additional credit facility available under its Note Purchase Agreement as of June 25, 2008. The Note Purchase Agreement expires on March 31, 2009 and $2 million balance on the note is due in full on that date. The Company obtained a new term loan of $3 million on August 26, 2008.

The Company has obtained commitments from its lender Sequoia Enterprises, L.P., a limited partnership whose sole general partner also serves as the Chairman of the Board of Directors of the Company, to extend the maturity date of the $2 million note due under the Note Purchase Agreement and provide additional financing as required.

The Company has also been working on improvements in several areas that the Company believes will improve cash flow from operations:

• Product pricing

• Order fulfillment rates

F-16

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

• Outbound freight costs

• Packaging and portion size

• Production efficiency

• Material handling and storage costs

• Inventory carrying costs

The Company has developed the Annual Operating Plan for the 2009 fiscal year and expects a return to profitability and to generate positive cash flow in the year ahead. The Company has taken steps to shift focus of available resources towards strengthening of the wholesale business segments in order to sustain the Company’s projected growth in fiscal 2009. However, there is no assurance that the Company will return to profitability or generate positive cash flow.

3.    Accounts Receivable

During the current fiscal year, the Company provided for $978,000 of additional allowance for doubtful accounts and charged off $633,000 of accounts receivable against the reserve. The addition of $978,000 resulted from charges for Franchise rent and related receivables of $679,000 with the balance of $299,000 from wholesale accounts. Of the $633,000 of write off, $541,000 resulted from Franchise rent and related receivables with the balance of $92,000 from wholesale accounts.

The following table details the components of net accounts receivable:

	June 25, 2008			June 27, 2007
Wholesale receivables	$	4,814,000		$	3,591,000
Allowance for wholesale receivables		(285,000	)		(79,000	)
		4,529,000			3,512,000
Franchise and other receivables		709,000			641,000
Allowance for franchise and other receivables		(223,000	)		(84,000	)
		486,000			557,000
Total accounts receivable, net	$	5,015,000		$	4,069,000

4.    Inventories

Inventories consist of the following:

	June 25, 2008		June 27, 2007
Unroasted coffee	$	1,608,000	$	2,101,000
Roasted coffee		1,163,000		962,000
Accessory and specialty items		104,000		99,000
Other food, beverage and supplies		1,777,000		1,161,000
	$	4,652,000	$	4,323,000

F-17

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.    Notes Receivable

Notes receivable consist of the following:

	June 25, 2008			June 27, 2007
Notes receivable bearing interest at rates from 0% to 8.0%, payable in monthly installments varying between $115 and $3,869 and due on various dates through August 2016. Notes are secured by the assets sold under the asset purchase and sale agreements or general security agreement. Fiscal 2008 amounts are net of a $247,000 allowance and fiscal 2007 amounts are net of a $138,000 allowance.	$	177,000		$	164,000
Notes receivable from a corporation discounted at an annual rate of 8.0%, payable annually in installments varying between $1,000,000 and $2,000,000, due between January 31, 2009 and January 31, 2011.		3,560,000			4,253,000
Less: current portion of notes receivable		(1,074,000	)		(1,031,000	)
Long-term portion of notes receivable	$	2,663,000		$	3,386,000

6.    Property and Equipment

Property and equipment is summarized as follows:

	June 25, 2008			June 27, 2007
Leasehold improvements	$	2,192,000		$	2,089,000
Equipment		13,707,000			11,597,000
Furniture and fixtures		92,000			108,000
Construction in progress		1,871,000			1,066,000
		17,862,000			14,860,000
Accumulated depreciation and amortization		(10,535,000	)		(10,423,000	)
	$	7,327,000		$	4,437,000

The Company recorded an asset impairment charge in fiscal 2008 of $329,000 to reduce the carrying value associated with four of its Gloria Jean’s coffeehouses. In fiscal 2007, the Company recorded an asset impairment charge of $1,073,000 to reduce the carrying value associated with four of its Gloria Jean’s coffeehouses and three Diedrich coffeehouses.

7.    Intangible Assets

The Company recorded an impairment charge of $6,832,000 during fiscal year 2008 to fully impair goodwill associated with the wholesale and franchise operations. The Company did not record any goodwill impairment adjustments during fiscal year 2007.

Goodwill by segment was as follows:

	June 25, 2008		June 27, 2007
Wholesale Operations	$	—	$	6,311,000
Franchise Operations		—		521,000
Goodwill	$	—	$	6,832,000

F-18

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.    Note Payable

	June 25, 2008			June 27, 2007
Note payable amount bearing interest at a rate of LIBOR plus 5.30% (7.98% as of June 25, 2008) is due and payable on March 31, 2009. Note is unsecured.	$	2,000,000		$	—
Discount on note payable		(259,000	)		—
	$	1,741,000		$	—

On May 10, 2004 the Company entered into a $5,000,000 Note Purchase Agreement with Sequoia Enterprises, L.P. (“Sequoia”), a limited partnership whose sole general partner also serves as the Chairman of the Board of Directors of the Company (the “Note Purchase Agreement”), which provided, at the Company’s election, the ability to issue notes with up to an aggregate principal amount of $5,000,000. The Company has amended the Note Purchase Agreement from time to time and has agreed to refrain from further borrowings under the Note Purchase Agreement in connection with the entry into the Loan Agreement (as defined below) entered into on August 26, 2008. As amended, the notes issued under the Note Purchase Agreement are due in full on March 31, 2009. Interest is payable at three-month LIBOR plus 5.30%, and a facility fee of 1.00% annually is payable on the unused portion of the facility. The Note Purchase Agreement contains covenants, among others, that limit the amount of indebtedness that the Company may have outstanding in relation to its tangible net worth. As of June 25, 2008, we had $2,000,000 of issued notes outstanding under the Note Purchase Agreement. As of June 25, 2008, the Company was in compliance with all covenants contained in the Note Purchase Agreement, as amended.

Pursuant to the original terms of the Note Purchase Agreement, as amended, the Company previously issued 4,219 warrants to Sequoia, which were outstanding as of June 25, 2008, and a total of 1,270,738 warrants were issuable to Sequoia upon a change in control for previous debt repayments under this facility. These warrants were cancelled in connection with the entry into the Loan Agreement and the issuance of the 2008 Sequoia Warrant (see Note 10), and no further warrants shall be issued under the Note Purchase Agreement to Sequoia, as described below.

Pursuant to the original terms of the Note Purchase Agreement, as amended, the note balance was convertible into common stock of the Company. The amendment on August 26, 2008 provided that all notes issued under the Note Purchase Agreement are no longer convertible into common stock of the Company.

On August 26, 2008, the Company entered into an Amendment No. 1 to the 2001 Warrant, Amendment No. 4 to the Note Purchase Agreement and Cancellation of Note Purchase Warrant (collectively, the “Amendment”). The Amendment extended the maturity date of the Note Purchase Agreement and the notes issued thereunder until March 31, 2009 and reflected the agreement by Sequoia that the Company is only required to make monthly payments of interest and the monthly commitment fee, but not principal, until such date. On the maturity date, all outstanding principal, interest and other amounts payable under the Note Purchase Agreement will be due (unless due earlier pursuant to the terms of the Note Purchase Agreement upon a change of control of the Company or an event of default). The Amendment also modified the definition of “change of control” contained in the Note Purchase Agreement such that the acquisition of a third party (other than the current Chairman of the Company’s Board of Directors and entities controlled by him) of 25% or more of the voting equity of the Company will constitute a change of control. Previously, the threshold was 15%.

Lastly, the Amendment changed the exercise price of the warrant to purchase 250,000 shares of common stock of the Company issued to Sequoia on May 8, 2001 (the “2001 Sequoia Warrant”), to $2.00 per share,

F-19

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

subject to adjustment as provided in the 2001 Sequoia Warrant and the related registration rights agreement. Previously, the exercise price was $3.00 per share, subject to adjustment.

Loan Agreement:

On August 26, 2008, the Company entered into a new loan agreement with Sequoia (the “Loan Agreement”). The Loan Agreement provides for a $3 million term loan (the “Term Loan”) to the Company. The Term Loan accrues interest from the funding date at LIBOR plus 5.30%, resetting on the first calendar day of each month. The Company is required to make regular monthly payments of interest, and to cause the principal amount to be reduced to $2 million no later than August 26, 2009. All outstanding principal and interest will be due on the maturity date of August 26, 2011, unless due earlier pursuant to the terms of the Loan Agreement upon a change of control of the Company or an event of default.

The Loan Agreement requires the Company to refrain from further borrowings under the Note Purchase Agreement and contains restrictions on incurring indebtedness on par with, or senior to, the Term Loan. The Loan Agreement also contains a covenant that limits the amount of indebtedness that the Company may have outstanding in relation to tangible net worth, in addition to other standard covenants and events of default.

The Term Loan is senior to all other indebtedness of the Company, except indebtedness pursuant to notes under the Note Purchase Agreement and certain permitted indebtedness identified in the Loan Agreement. Upon repayment of the notes under the Note Purchase Agreement, the Term Loan will be senior to all other indebtedness of the Company, except such permitted indebtedness.

In connection with the Loan Agreement and the Amendment, on August 26, 2008, we issued to Sequoia a warrant (the “2008 Sequoia Warrant”) to purchase 1,667,000 shares of common stock of the Company at an exercise price of $2.00 per share, which represented a premium of $0.25, or approximately 14%, over the $1.75 closing price of the Company’s common stock on such date.

Letter of Credit:

In addition, we entered into a Credit Agreement with Bank of the West on November 4, 2005. The agreement provides for a $750,000 letter of credit facility that expires on October 15, 2008. The letter of credit facility is secured by a deposit account at Bank of the West. As of June 25, 2008, this deposit account had a balance of $623,000, which is shown as restricted cash on the consolidated balance sheets. As of June 25, 2008, $472,000 of letters of credit was outstanding under the letter of credit facility. The agreement contains covenants that, among other matters, require us to submit financial statements to the bank within specified time periods. As of June 25, 2008, the Company was in compliance with all Bank of the West agreement covenants.

9.    Commitments and Contingencies

Lease Commitments

As of June 25, 2008, the Company leases warehouse and office space in Irvine, California, and Castroville, California, as well as 5 retail locations. The leases expire at various dates through December 2020. Certain of the coffeehouse leases require the payment of property taxes, normal maintenance and insurance on the properties and additional rents based on percentages of sales in excess of various specified retail sales levels. Contingent rent expense was insignificant for all periods presented. In addition, the company leases equipment with various expiration dates through April 2010.

F-20

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Future minimum lease payments under non-cancelable operating leases, franchise-system operating leases, and minimum future sublease rentals expected to be received as of June 25, 2008, are as follows:

Year Ending June	Non-Cancelable Operating Leases (D)
	Total		Company operated retail locations and other (A)		Franchise operated retail locations (B)		Other locations (C)
2009	$	4,910,000	$	1,850,000	$	2,666,000	$	394,000
2010		3,995,000		1,397,000		2,365,000		233,000
2011		2,931,000		724,000		2,059,000		148,000
2012		2,425,000		479,000		1,805,000		141,000
2013		2,143,000		496,000		1,504,000		143,000
Thereafter		4,367,000		1,093,000		2,961,000		313,000
	$	20,771,000	$	6,039,000	$	13,360,000	$	1,372,000

(A) Includes Irvine and Castroville office and warehouse space and company-operated retail locations.

(B) The Company is liable on the master leases for 45 franchise locations. Under the Company’s historical franchising business model, the Company executed the master leases for these locations, and entered into subleases on the same terms with its franchisees, which typically pay their rent directly to the landlords. Should any of these franchisees default on their subleases, the Company would be responsible for making payments under the master lease. The Company’s maximum theoretical future exposure at June 25, 2008, computed as the sum of all remaining lease payments through the expiration dates of the respective leases, was $13,360,000. This amount does not take into consideration any mitigating measures that the Company 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 less than the sum of all remaining future rents and other amounts payable.

(C) The Company has leased and subleased land and buildings to others. Many of these leases provide for fixed payments with contingent rents when sales exceed certain levels, while others provide for monthly rentals based on a percentage of sales. The Company directly pays the rents on these master leases, and collects associated rent amounts directly from its sublessees.

(D) Some leases contain increases for CPI in which case the Company has taken the CPI currently in effect into account for purposes of computing minimum lease payments which are recognized on a straight-line basis over the minimum lease term.

Rent expense under operating leases approximated $1,883,000 and $3,677,000, for the years ended June 25, 2008 and June 27, 2007, respectively. These amounts are net of sublease rental income of $1,409,000 and $1,776,000, for the years ended June 25, 2008 and June 27, 2007, respectively.

Rent expense under equipment leases approximated $866,000 and $480,000, for the years ended June 25, 2008 and June 27, 2007, respectively.

F-21

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Purchase Commitments

At June 25, 2008 the Company had commitments to purchase coffee through fiscal year 2009, totaling $2,600,000 for 1,569,000 pounds of green coffee, the majority of which were fixed as to price. Such contracts are generally short-term in nature, and the Company believes that their cost approximates fair market value.

Capital Commitments

At June 25, 2008, the Company had capital commitments of $542,000 comprised of $210,000 for our roasting facility and $332,000 for corporate.

Guarantees and Indemnifications

The Company guarantees the performance of its subsidiary franchisor obligations and also indemnifies franchisees for costs incurred in defending the Company’s trademarks and tradenames.

The Company agrees to provide for the indemnification of and the advancement of certain costs, judgments, penalties, fines, liabilities, expenses incurred and amounts paid in settlement to the fullest extent permitted by the Company’s charter, bylaws and applicable law to each of the Company’s directors and executive officers that become a party to the Indemnification Agreement.

Contingencies

In the ordinary course of business, the Company may become involved in legal proceedings from time to time. Material pending legal proceedings to the business, to which the Company became or were a party during the current fiscal year or subsequent thereto, but before the filing of this report, are summarized below:

On September 21, 2006, a purported class action complaint entitled Jason Reid; Kimberly Cornia, et al. v. Diedrich Coffee., et al. was filed against the Company in United States District Court Central District of California by two former employees, who worked in the positions of team member and shift manager. A second similar purported class action complaint entitled Deborah Willems, et al. v. Diedrich Coffee., et al. was filed in Orange County, California Superior Court on February 2, 2007, on behalf of another former employee who worked in the position of general manager. These cases currently involve the issue of whether employees and former employees who worked in California stores during specified time periods were deprived of overtime pay, missed meal and rest breaks. In addition to unpaid overtime, these cases seek to recover waiting time penalties, interest, attorneys’ fees and other types of relief on behalf of the current and former employees in the purported class.

The Company has entered into a settlement with the plaintiffs in the Reid v. Diedrich lawsuit. This settlement is subject to court approval. As of June 25, 2008, the Company estimated that the required amount to settle this claim is $693,000 and has recorded an accrual for this amount included in general and administrative expenses in the accompanying consolidated statement of operations.

The Company has entered into a settlement with the plaintiffs in the Willems v. Diedrich lawsuit. This settlement is subject to court approval. As of June 25, 2008, the Company estimated that the required amount to settle this claim is $251,000 and has recorded an accrual for this amount included in general and administrative expenses in the accompanying consolidated statement of operations.

Based on the Company’s examination of these matters and its experience to date, the Company has recorded its best estimate of liability with respect to these matters. However, the ultimate liability cannot be determined with certainty.

F-22

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.    Stockholders’ Equity

Stock Options

On October 20, 2000, the Company’s board of directors authorized the adoption of the Diedrich Coffee, Inc. 2000 Equity Incentive Plan (the “2000 Equity Incentive Plan”) and the concurrent discontinuation of the option grants under the Diedrich Coffee, Inc. Amended and Restated 1996 Stock Incentive Plan and the Diedrich Coffee, Inc. 1996 Non-Employee Directors Stock Option Plan. The Company’s stockholders approved the 2000 Equity Incentive Plan on October 16, 2000. A total of 1,087,500 shares of the Company’s common stock may be issued under the 2000 Equity Incentive Plan, as amended. The board of directors determines the number of shares, terms and exercise periods for awards under the 2000 Equity Incentive Plan on a case by case basis, except for automatic annual grants of options to non-employee directors. Options generally vest ratably over three years and expire ten years from the date of grant. The exercise price of options is generally equivalent to the fair market value of the Company’s common stock on the date of grant.

Information regarding the Company’s stock options is summarized below:

	Options			Weighted Average Exercise Price
Number of options authorized for future grant at June 25, 2008		469,200
Outstanding at June 28, 2006		941,333		$	4.94
Granted		125,000		$	3.70
Exercised (A)		(259,038	)	$	3.42
Forfeited		(252,620	)	$	5.69
Outstanding at June 27, 2007		554,675		$	4.76
Granted		342,500		$	3.30
Exercised		(20,000	)	$	2.84
Forfeited		(258,875	)	$	5.27
Outstanding at June 25, 2008		618,300		$	3.80
Weighted-average fair value of options granted:
Year ended June 27, 2007	$	1.71
Year ended June 25, 2008	$	1.60
Options exercisable:
At June 27, 2007		403,008
At June 25, 2008		239,966

(A) Includes 150,000 options that were a cashless exercise transaction that resulted in 31,513 shares of common stock.

F-23

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes information about stock options outstanding at June 25, 2008:

	Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding At June 25, 2008	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price		Number Exercisable At June 25, 2008 (1)	Weighted Average Exercise Price
$ 2.16	7,500	4.13	$	2.16	7,500	$	2.16
$ 3.23	275,000	9.62		3.23	—		—
$ 3.58 - $ 3.69	132,500	8.56		3.60	67,500		3.62
$ 3.74 - $ 4.64	158,500	4.94		4.16	122,666		4.23
$ 4.65 - $28.00	44,800	6.15		6.93	42,300		7.02
$ 2.16 - $28.00	618,300	7.88	$	3.80	239,966	$	4.48

(1) The weighted average remaining life for the options exercisable at June 25 2008 was 5.9 years. Stock option-based compensation expense included in the statement of operations for the fiscal years ended June 25, 2008 and June 27, 2007 was $280,000 and $284,000, respectively. As of June 25, 2008, there was approximately $367,000 of total unrecognized stock option-based compensation cost related to options granted under our plans that will be recognized over a weighted average period of 1.3 years. The total intrinsic value of options exercised during the years ended June 25, 2008 and June 27, 2007 was approximately $375,000 and $130,000, respectively.

Stock Purchase Warrants

On May 8, 2001, in connection with the sale of 2,000,000 shares of Company common stock, the Company issued warrants to Sequoia Enterprises, L.P., of which the Company’s chairman, Paul C. Heeschen, is the general partner, to purchase 250,000 shares of the Company’s common stock at a price of $4.80 per share (“2001 Sequoia Warrant”). Other investors also received warrants to purchase an additional 250,000 shares at a price of $4.80 per share. The warrants were exercisable immediately upon issuance and expire on May 8, 2011. At June 25, 2008, all 500,000 warrants were outstanding.

On August 26, 2008, the Company entered into an Amendment No. 1 to the 2001 Sequoia Warrant, Amendment No. 4 to the Note Purchase Agreement and Cancellation of Note Purchase Warrant (collectively, the “Amendment”). The Amendment, among other items relating to the Note Purchase agreement (see Note 8), changed the exercise price of the 250,000 shares of the 2001 Sequoia Warrant, to $2.00 per share, subject to adjustment as provided in the 2001 Sequoia Warrant and the related registration rights agreement. Previously, the exercise price was $3.00 per share, subject to adjustment.

Pursuant to the original terms of the Note Purchase Agreement, as amended, the Company issued 4,219 warrants to Sequoia, which were outstanding as of June 25, 2008, and a total of 1,270,738 warrants were issuable to Sequoia upon a change in control for previous debt repayments under this facility. On August 26, 2008, these warrants were cancelled in connection with the entry into the Loan Agreement (see Note 8) and the issuance of the 2008 Sequoia Warrant (see below), and no further warrants shall be issued to Sequoia under the Note Purchase Agreement.

In connection with the Loan Agreement and the Amendment, after the close of the Nasdaq Stock Market on August 26, 2008, the Company issued to Sequoia a warrant (the “2008 Sequoia Warrant”) for the right to purchase 1,667,000 shares of common stock of the Company at an exercise price of $2.00 per share, which represents a premium of $0.25, or approximately 14%, over the $1.75 closing price of the Company’s common

F-24

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

stock on such date. The 2008 Sequoia Warrant is exercisable by Sequoia, in whole or in part, at any time or from time to time, prior to August 26, 2013. The 2008 Sequoia Warrant is not eligible for cashless exercise, but the Company is obligated to cause the common stock issued upon exercise of the 2008 Sequoia Warrant to be registered with the SEC and applicable state governmental authorities and to be listed on the stock exchange on which the Company’s stock is traded at the time of exercise, in each case at the Company’s expense.

11.    Income Taxes

The components of income tax benefit from continuing operations are as follows:

	Year Ended June 25, 2008			Year Ended June 27, 2007
Current:
Federal	$	(71,000	)	$	(17,000	)
State		37,000			22,000
Current tax (benefit) provision		(34,000	)		5,000
Deferred:
Federal		(397,000	)		(1,676,000	)
State		(106,000	)		(449,000	)
Deferred tax benefit		(503,000	)		(2,125,000	)
Total tax benefit from continuing operations	$	(537,000	)	$	(2,120,000	)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The significant components of deferred tax assets and liabilities are as follows:

	June 25, 2008			June 27, 2007
Deferred tax assets:
Net operating loss carryforwards	$	5,867,000		$	3,436,000
Intangible assets		8,000			141,000
Property and equipment		573,000			1,179,000
Accrued expenses		742,000			1,126,000
Other, net		1,358,000			1,169,000
Total gross deferred tax assets		8,548,000			7,051,000
Less: valuation allowance		(7,215,000	)		(5,601,000	)
Deferred tax liabilities:
Installment gain and other		(1,333,000	)		(1,450,000	)
Net deferred tax assets	$	—		$	—

F-25

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A reconciliation of the statutory federal income tax rate with the Company’s effective income tax provision (benefit) rate for continuing operations is as follows:

	Year Ended June 25, 2008		Year Ended June 27, 2007
Federal statutory rate	(34.0	)%	(34.0	)%
State income taxes, net of Federal benefit	(2.9	)	(5.1	)
Goodwill and other non-deductible costs	15.7		0.8
Valuation allowance	10.7		8.6
Other	6.9		(6.4	)
	(3.6	)%	(36.1	)%

As of June 25, 2008, net operating loss carryforwards of $14,273,000 and $13,731,000 for federal and state income tax purposes, respectively are available to be utilized against future taxable income for years through fiscal 2027, subject to possible annual limitation pertaining to change in ownership rules under the Internal Revenue Code.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is not more likely than not that the Company will not realize the benefits of these deductible differences, and thus has recorded a valuation allowance against the entire deferred tax asset balance. As of June 25, 2008 and June 27, 2007, the valuation allowance was $7,215,000 and $5,601,000, respectively. The change in the valuation allowance during 2008 was an increase of $1,614,000.

Included in the net operating loss carryforwards is $247,000 related to excess stock compensation the benefit of which will be recorded as additional paid-in-capital if and when realized.

On June 28, 2007, the Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). The Company recorded a cumulative effect adjustment of $245,000 including interest and penalties, which was accounted for as an increase to the June 28, 2007 balance of accumulated deficit on the consolidated balance sheet. A tabular reconciliation of the total amounts (in absolute values) of unrecognized tax benefits at the beginning and end of the periods is as follows:

	Year Ended June 25, 2008
Unrecognized tax benefits at June 28, 2007	$	245,000
Additions for tax positions of prior years		16,000
Unrecognized tax benefits at June 25, 2008	$	261,000

The unrecognized tax liabilities of $261,000 at June 25, 2008, if recognized, would affect the effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.

F-26

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company files income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. The Company is no longer subject to U.S. income tax examinations for the fiscal years prior to 2004 and is no longer subject to state income tax examinations for years prior to 2000. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. There was $61,000 interest and penalties associated with uncertain tax positions as of June 25, 2008.

12.    Impairment and Restructuring Charges

The Company recorded impairment charges of $7,161,000 and $1,073,000 for fiscal 2008 and 2007, respectively. The Company recorded an impairment charge in fiscal 2008 to fully impair goodwill associated with the wholesale and franchise operations of $6,311,000 and 521,000, respectively, (see Note 7). In addition, the Company recorded an asset impairment charge of $329,000 to reduce the carrying value associated with four of its Gloria Jean’s coffeehouses. The impairment charge of $1,073,000 during 2007 related to an asset impairment to reduce the carrying value associated with four of its Gloria Jean’s coffeehouses and three Diedrich coffeehouses.

13.    Earnings Per Share

The following table sets forth the computation of basic and diluted net income per share from continuing operations:

	Year Ended June 25, 2008			Year Ended June 27, 2007
Numerator:
Net loss from continuing operations	$	(14,547,000	)	$	(3,749,000	)
Denominator:
Basic weighted average shares outstanding		5,459,000			5,391,000
Effect of dilutive securities		—			—
Diluted adjusted weighted average shares		5,459,000			5,391,000
Basic and diluted net loss per share from continuing operations	$	(2.66	)	$	(0.70	)

For the years ended June 25, 2008, and June 27, 2007, employee stock options of approximately 618,000, and 555,000, respectively, and warrants of 500,000 for each year (as described in Note 10), were excluded from the computation of diluted earnings per share as their impact would have been anti-dilutive. Approximately 1,275,000 stock purchase warrants outstanding in 2008 and 2007, pursuant to terms of the Note Purchase Agreement were excluded from the computation of diluted earnings per share for the fiscal years ended June 25, 2008, and June 27, 2007 as their impact would have been anti-dilutive. The weighted average strike price of anti-dilutive securities for the years ended June 25, 2008 and June 27, 2007, was $4.48 and $5.05, respectively.

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

	Year Ended June 25, 2008			Year Ended June 27, 2007
Numerator:
Net loss	$	(13,776,000	)	$	(1,765,000	)
Denominator:
Basic and diluted weighted average shares outstanding		5,459,000			5,391,000
Basic and diluted net loss per share	$	(2.52	)	$	(0.33	)

F-27

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.    Segment Information

The Company has three reportable segments, wholesale operations, franchise operations and retail operations. The Company evaluates performance of its operating segments based on income before provision for asset impairment and restructuring costs, income taxes, interest expense, depreciation and amortization, and general and administrative expenses.

The wholesale operations segment sells coffee products to third parties, franchisees, and company stores. Reported revenues for the wholesale segment include sales to third parties and franchisees, but sales to company-operated retail units are eliminated in consolidation. Wholesale segment loss before tax includes a manufacturing profit on all sales, including those to company-operated retail units, but inter-company profit in retail unit inventories is eliminated at each period end. Wholesale segment loss before tax also is net of specifically identified selling, general and administrative expenses, costs of the Company’s coffee roasting facility and a goodwill impairment charge.

The franchise operations segment revenues include franchise store opening fees, franchise renewal and various service fees, roasting fees and royalty fees. Franchise segment loss before tax is net of specifically identified operating, general and administrative expenses.

The retail operations segment includes only company-operated retail units. Revenues are derived from sales of products and services by the units. Retail segment profit before tax is net of cost of goods sold and related occupancy costs, retail-operating expenses and gain on asset disposals.

Summarized financial information of continuing operations of 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, corporate property, plant and equipment, income tax refund, and cash surrender value of life insurance policy. The other component of segment loss before tax includes corporate general and administrative expenses, depreciation and amortization expense, and interest expense.

	Wholesale Operations			Franchise Operations			Retail Operations			Other			Total
	(in thousands)
Year ended June 25, 2008
Total revenue	$	39,103		$	2,843		$	4,394		$	—		$	46,340
Interest expense		—			—			—			136			136
Depreciation and amortization		805			4			163			309			1,281
Segment loss before tax		(4,693	)		(1,587	)		(59	)		(8,745	)		(15,084	)
Total assets as of June 25, 2008	$	15,008		$	1,084		$	170		$	6,474		$	22,736
Year ended June 27, 2007
Total revenue	$	28,145		$	3,514		$	4,948		$	—		$	36,607
Interest expense		—			—			—			230			230
Depreciation and amortization		533			4			253			269			1,059
Segment profit (loss) before tax		2,679			(644	)		(1,167	)		(6,737	)		(5,869	)
Total assets as of June 27, 2007	$	17,021		$	1,822		$	418		$	14,072		$	33,333

Intercompany sales from wholesale operations to retail operations of $404,000 for fiscal year 2008, and $1,710,000 for fiscal year 2007 have been eliminated.

F-28

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15.    Selected Quarterly Financial Data (Unaudited)

The quarterly results of operations for the years ended June 25, 2008 and June 27, 2007 were as follows:

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(in thousands, except per share data)
Fiscal 2008
Total revenue	$	8,160		$	12,448		$	11,322		$	14,410
Operating loss from continuing operations		(1,750	)		(1,228	)		(2,161	)		(10,251	)
Loss from continuing operations before tax		(1,577	)		(1,159	)		(2,084	)		(10,264	)
Income from discontinued operations before tax		1,274			—			—			—
Net loss		(270	)		(1,159	)		(2,153	)		(10,194	)
Basic and diluted loss per share		(0.05	)		(0.21	)		(0.39	)		(1.86	)
Fiscal 2007
Total revenue	$	6,832		$	9,585		$	8,975		$	11,215
Operating loss from continuing operations		(1,287	)		(1,192	)		(1,126	)		(2,470	)
Loss from continuing operations		(1,222	)		(1,162	)		(1,162	)		(2,323	)
Income (loss) from discontinued operations before tax		(424	)		(967	)		5,516			(16	)
Net income (loss)		(1,646	)		(2,129	)		4,354			(2,344	)
Basic income (loss) per share		(0.31	)		(0.40	)		0.80			(0.42	)
Diluted income (loss) per share		(0.31	)		(0.40	)		0.79			(0.42	)

Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including the seasonal nature of the Company’s business, which may affect sales volume and food costs. All quarters have 12-week accounting periods, except the fourth quarter, which has a 16-week accounting period.

During the fourth fiscal quarter of 2008, the Company recorded net loss of $10,194,000 which reflects a charge to goodwill and asset impairment of $7,161,000 relating to the wholesale and franchise operations.

During the first fiscal quarter of 2008, the Company recorded income from discontinued operations of $1,274,000 before income taxes of $503,000 in connection with the Starbucks transaction.

Between January 2007 and April 2007, the Company sold or closed 39 Diedrich Coffee and Coffee People leaseholds and related assets. The sale resulted in a gain on disposal of discontinued operations of $3,580,000, net of $3,835,000 in taxes (see Note 1). The tax expense associated with the discontinued operations differed from the statutory federal effective tax rate primarily due to changes in the valuation allowance and permanently nondeductible goodwill associated with the discontinued operations.

16.    Employee Benefit Plans

401(k) Plan

The Company has a 401(k) Plan that covers eligible employees. The Company contributions to this plan were $42,000 and $47,000 for the fiscal years 2008 and 2007, respectively.

F-29

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred Compensation Plan

Effective December 15, 2005, the Company amended its non-qualified deferred compensation plan. Under the amended plan, participants may elect to defer, on a pre-tax basis, a portion (from 0% to 100%) of their base salary, service bonus, and performance-based compensation. Any amounts deferred by a participant will be credited to the participant’s deferred compensation account. The plan further provides that the Company may make discretionary contributions to a plan participant’s deferred compensation account. Each plan participant will be vested in the amounts held in the plan participant’s deferred compensation account as follows: (i) one hundred percent (100%) vested at all times with respect to all amounts of deferred compensation; and (ii) one hundred percent (100%) vested at all times with respect to all employer discretionary contributions. The Company made no discretionary contributions to plan participants’ accounts during fiscal year 2008 and fiscal year 2007.

The plan also provides that any amounts deferred under the plan may not be distributed to a plan participant until the earlier of: (i) the plan participant’s separation from service with the Company; (ii) the Plan participant’s retirement from the Company; (iii) the plan participant’s disability; (iv) the plan participant’s death; (v) the occurrence of a change in control of the Company; (vi) the occurrence of an unforeseeable emergency, as defined in the plan; or (vii) such other date as set forth in the plan participant’s deferral election, including a date that occurs prior to the plan participant’s separation from service with the Company. Any amounts distributed to a plan participant will be paid in a form specified by the plan participant, or in the form of either a lump sum payment in an amount equal to the plan participant’s deferred compensation account balance or equal annual installments of the plan participant’s deferred compensation account balance over a period not to exceed (i) 20 years in the case of a distribution due to separation from service, death or disability or (ii) five years in the case of a distribution for educational expenses.

The Company has purchased a company-owned life insurance (“COLI”) contract insuring two of the participants in the deferred compensation plan. The policy is held in a trust to provide additional benefit security for the deferred compensation plan. The assets in the trust are owned by the Company and are subject to claims of its creditors. The gross cash surrender value of these contracts as of June 25, 2008 was $162,000 as shown in the accompanying consolidated balance sheets. Total life insurance policy death benefits payable were $14,607,000 at June 25, 2008. Management intends to use the future death benefits from these insurance contracts to fund the deferred compensation arrangements; however, there may not be a direct correlation between the timing of the future cash receipts and disbursements under these arrangements.

F-30

DIEDRICH COFFEE, INC. AND SUBSIDIARIES

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

	Balance at Beginning of Period		Provisions (Recoveries)		Additional Provisions Obtained in Acquisitions		Accounts Written Off			Balance at End of Period
Allowance for Bad Debt:
Year ended June 27, 2007	$	1,863,000	$	161,000	$	—	$	(1,861,000	)	$	163,000
Year ended June 25, 2008	$	163,000	$	978,000	$	—	$	(633,000	)	$	508,000

F-31

DIEDRICH COFFEE, INC.

INDEX TO EXHIBITS

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	Amended and Restated Bylaws of Diedrich Coffee, Inc.(31)
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	Form of Warrant, dated May 8, 2001(2)
4.6	Registration Rights Agreement, dated May 8, 2001(2)
4.7	Form of Common Stock and Option Purchase Agreement with Franchise Mortgage Acceptance Company, dated as of April 3, 1998(6)
4.8	Amendment No. 1 to 2001 Warrant, dated August 26, 2008(33)
10.1	Form of Diedrich Coffee, Inc. Indemnification Agreement*(31)
10.2	Diedrich Coffee, Inc. 2000 Equity Incentive Plan(19)*
10.3	Diedrich Coffee, Inc. 2000 Non-Employee Directors Stock Option Plan(8)*
10.4	Amended and Restated Diedrich Coffee, Inc. 1996 Stock Incentive Plan(9)*
10.5	Diedrich Coffee, Inc. 1996 Non-Employee Directors Stock Option Plan(10)*
10.6	Reserved.
10.7	Form of Diedrich Coffee Franchise Agreement(18)
10.8	Form of Gloria Jean’s Franchise Agreement(18)
10.9	Form of Area Development Agreement(18)
10.10	Employment Agreement with Roger M. Laverty, dated April 24, 2003(13)*

S-1

10.11	Stock Option Plan and Agreement with Roger M. Laverty, dated April 24, 2003(13)*
10.12	Employment Agreement with Martin A. Lynch, dated March 26, 2004(7)*
10.13	Employment Agreement with Matthew McGuinness, effective March 13, 2000(16)*
10.14	Employment Letter regarding the employment of Pamela Britton, dated February 6, 2001(18)*
10.15	Employment Letter regarding the employment of Carl Mount dated October 29, 1999(17)*
10.16	Separation Agreement by and between Diedrich Coffee, Inc. and Philip G. Hirsch dated January 3, 2003(13)*
10.17	Contingent Convertible Note Purchase Agreement, dated May 10, 2004 (includes form of convertible promissory note and form of warrant)(24)
10.18	Standard Industrial/Commercial Multi-Tenant Lease Agreement by and between The Westphal Family Trust and Diedrich Coffee, Inc., dated September 10, 2003(14)
10.19	Office Space Lease Agreement by and between The Irvine Company and Diedrich Coffee, Inc., dated August 1, 2003(14)
10.20	Amendment No. 1 to Contingent Convertible Note Purchase Agreement dated June 30, 2004(28)
10.21	Amendment No. 2 to Contingent Convertible Note Purchase Agreement dated March 31, 2006(22)
10.22	Mutual Release Agreement by and between Diedrich Coffee, Inc. and Roger M. Laverty, dated December 13, 2005(20)*
10.23	Engagement Agreement by and between Diedrich Coffee, Inc. and Stephen V. Coffey, dated December 14, 2005(20)*
10.24	Letter Agreement with Sean M. McCarthy, effective January 1, 2006(21)*
10.25	Agreement of Purchase and Sale of Assets by and between Starbucks Corporation, Diedrich Coffee, Inc. and Coffee People, Inc.(26)
10.26	Form of Separation Agreement and Release with Martin Diedrich, effective October 28, 2004(23)*
10.27	Credit Agreement with Bank of the West dated November 4, 2005(25)
10.28	Amendment No. 3 to Contingent Convertible Note Purchase Agreement dated September 22, 2006(27)
10.29	Severance and Consultant Agreement and General Release dated as of July 10, 2007 by and between Diedrich Coffee, Inc. and Matthew C. McGuinness*(28)
10.30	Severance and Consultant Agreement and General Release dated as of November 21, 2007 by and between Diedrich Coffee, Inc. and Pamela J. Britton*(29)
10.31	Chief Executive Officer Employment Agreement between J. Russell Phillips and Diedrich Coffee, Inc., effective as of February 7, 2008*(30)

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10.32	Stock Option Agreement between Diedrich Coffee, Inc. and J. Russell Phillips, effective as of February 7, 2008*(30)
10.33	Amending Agreement by and between Diedrich Coffee, Inc. and Sequoia Enterprises, L.P., dated June 19, 2008(32)
10.34	Amendment No. 4 to Contingent Convertible Note Purchase Agreement dated August 26, 2008 (includes removal of conversion feature of notes, no further warrant issuances)(33)
10.35	Loan Agreement by and between Diedrich Coffee, Inc. and Sequoia Enterprises, L.P., dated August 26, 2008(33)
10.36	Warrant to Purchase Common Stock with Sequoia Enterprises, L.P., dated August 26, 2008(33)
10.37	License and Distribution Agreement between Keurig, Incorporated and Diedrich Coffee, Inc., dated July 29, 2003**
10.38	Licensed Roaster K-Cup Sales Agreement between Keurig, Incorporated and Diedrich Coffee, Inc., dated October 22, 2004**
10.39	Amendment to License and Distribution Agreement, dated August 31, 2005**
10.40	Amendment to License and Distribution Agreement, dated August 31, 2005**
10.41	Amendment to Licensed Roaster K-Cup sales Agreement, dated September 30, 2006**
10.42	Royalty Alteration notice relating to License and Distribution Agreement, dated July 30, 2007**
10.43	Waiver and Amendment to License and Distribution Agreement, dated July 2, 2008
21.1	List of Subsidiaries(16)
23.1	Consent of Independent Registered Public Accounting Firm – BDO Seidman, LLP
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

** Confidential treatment has been requested for portions of this document. The omitted portions of this document have been filed with the Securities and Exchange Commission.

(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.

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(3) Previously filed as an exhibit to Diedrich Coffee’s Registration Statement on From 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.

(6) 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.

(7) Previously filed as an exhibit to Diedrich Coffee’s Quarterly Report on Form 10-Q for the period ended March 10, 2004, filed with the Securities and Exchange Commission on April 26, 2004.

(8) 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.

(9) 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.

(10) 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.

(11) 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.

(12) 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.

(13) 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.

(14) 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.

(15) 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.

(16) 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.

(17) 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.

(18) Previously filed as an exhibit to Diedrich Coffee’s Quarterly Report on Form 10-Q for the period ended September 24, 2003, filed with the Securities and Exchange Commission on November 7, 2003.

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(19) Previously filed as an exhibit to Diedrich Coffee’s Quarterly Report on Form 10-Q for the period ended December 17, 2003, filed with the Securities and Exchange Commission on January 30, 2004.

(20) Previously filed as an exhibit to Diedrich Coffee’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 16, 2005.

(21) Previously filed as an exhibit to Diedrich Coffee’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 5, 2006.

(22) Previously filed as an exhibit to Diedrich Coffee’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 31, 2006.

(23) Previously filed as an exhibit to Diedrich Coffee’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 3, 2004.

(24) Previously filed as an exhibit to Diedrich Coffee’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, filed with the Securities and Exchange Commission on September 28, 2004.

(25) Previously filed as an exhibit to Diedrich Coffee’s Quarterly Report on Form 10-Q for the period ended March 8, 2006, filed with the Securities and Exchange Commission on April 21, 2006.

(26) Previously filed as an exhibit to Diedrich Coffee’s Annual Report on Form 10-K for the fiscal ended June 28, 2007, filed with the Securities and Exchange Commission on September 26, 2006.

(27) Previously filed as an exhibit to Diedrich Coffee’s Annual Report on Form 10-K for the fiscal year ended June 28, 2006, filed with the Securities and Exchange Commission on September 26, 2006.

(28) Previously filed as an exhibit to Diedrich Coffee’s Quarterly Report on Form 10-Q for the period ended September 19, 2007, filed with the Securities and Exchange Commission on November 5, 2007.

(29) Previously filed as an exhibit to Diedrich Coffee’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 14, 2007.

(30) Previously filed as an exhibit to Diedrich Coffee’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 8, 2008.

(31) Previously filed as an exhibit to Diedrich Coffee’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 3, 2008.

(32) Previously filed as an exhibit to Diedrich Coffee’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 25, 2008.

(33) Previously filed as an exhibit to Diedrich Coffee’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 28, 2008.

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EXHIBIT INDEX

Exhibit No.	Description
10.37	License and Distribution Agreement between Keurig, Incorporated and Diedrich Coffee, Inc., dated July 29, 2003**
10.38	Licensed Roaster K-Cup Sales Agreement between Keurig, Incorporated and Diedrich Coffee, Inc., dated October 22, 2004**
10.39	Amendment to License and Distribution Agreement, dated August 31, 2005**
10.40	Amendment to License and Distribution Agreement, dated August 31, 2005**
10.41	Amendment to Licensed Roaster K-Cup sales Agreement, dated September 30, 2006**
10.42	Royalty Alteration notice relating to License and Distribution Agreement, dated July 30, 2007**
10.43	Waiver and Amendment to License and Distribution Agreement, dated July 2, 2008
23.1	Consent of Independent Registered Public Accounting Firm – BDO Seidman, LLP
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

** Confidential treatment has been requested for portions of this document. The omitted portions of this document have been filed with the Securities and Exchange Commission.

EX-10.37

Exhibit 10.37

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

License and Distribution Agreement

between

Keurig, Incorporated and Diedrich Coffee, Inc.

This License and Distribution Agreement (this “Agreement”) made as of the 29th day of July, 2003 by and between Keurig, Incorporated, a Delaware corporation with its principal executive offices located at 101 Edgewater Drive, Wakefield, Massachusetts 01880 (“Keurig”), and Diedrich Coffee, Inc., a Delaware corporation with its principal executive offices located at 2144 Michelson Drive, Irvine, CA 92612 (“Diedrich”) Diedrich amends and restates the License Agreement between Keurig and Diedrich dated as of March 13, 2000.

Whereas, Keurig has designed, developed and patented a single-cup portion-pack hot beverage brewing process and is intending to focus on the engineering and the sales and marketing of Keurig Brewing Systems; and

Whereas, Keurig has a specific intention to manufacture and distribute Keurig single-cup portion-pack hot beverage brewing equipment through the Away From Home and At Home channels of distribution in the Territory; and

Whereas, Keurig seeks to license the manufacture and sale of K-Cups, its single-cup portion-pack hot beverage cartridges, to coffee roasters and other hot beverage base producers in order to provide the freshest possible high quality specialty coffees and other hot beverage products together with excellent order fulfillment and customer value; and

Whereas, Diedrich is recognized as a leading specialty coffee roaster with an excellent reputation for specialty coffee and customer service and desires to manufacture K-Cups for distribution in the Away From Home and At Home channels of distribution in the Territory; and

Whereas, Keurig desires to appoint Diedrich, and Diedrich desires to accept appointment, as a non-exclusive distributor of Keurig Products for the Away From Home and At Home channels of distribution in the Territory; and

Now, for good consideration, the value and sufficiency of which is acknowledged, the Parties agree as follows:

1. Definitions.

1.1 Acceptable K-Cups to Standard: Acceptable K-Cups to Standard as applicable to Packaging Line acceptance tests and shipment of Diedrich K-Cups to Diedrich’s customers shall mean K-Cups that meet the manufacturing and quality standards set forth in Section 5 of this Agreement.

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Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

1.2 Affiliates: Any OCS Distributor or FS Distributor that is under the control of a Licensed Roaster, or is under the common control of a Licensed Roaster and a third party. “Control” of a particular person or corporation as used in this definition shall mean the possession of power to direct or cause the direction of management policies of the corporation, whether through the ownership of voting stock, by contract, by appointment as an executive officer or otherwise. Those OCS Distributors or FS Distributors associated with a Party as a joint venturer or a franchisee shall be deemed to be Affiliates of such Party under this Agreement.

1.3 Agreement: This Agreement together with all attached exhibits and schedules.

1.4 At Home (AH): A descriptor to define coffee and other non-coffee soluble hot beverages and related products that are marketed and sold for the consumer’s use or consumption at Home. “Home” is heretofore and hereinafter defined to be the residence of a consumer.

1.5 AH Launch: The time at which Keurig has commenced its direct sales of both Keurig AH Brewers and K-Cups to AH consumers in the Territory for the purposes of such AH consumers’ personal use.

1.6 Away From Home (AFH): A descriptor to define coffee and other non-coffee soluble hot beverages and related products that are marketed and sold for use at a place other than at Home.

1.7 Food Service and Retail Distributor (FS Distributor): A company that distributes hot beverage products to Food Service and Retail Locations within the Territory.

1.8 Food Service and Retail Location(s): Establishments such as convenience stores, restaurants, supermarkets, hospitals, motels, sandwich shops, delicatessens, bars, bakery shops and other similar retail outlets that purchase Keurig AFH Products from Licensed Roasters or Keurig for the exclusive purpose of on premises use and Keurig AH Products and K-Cups from Licensed Roasters or Keurig for the exclusive purposes of on premises use or consumption or direct resale to AH consumers within the Territory. The term Food Service and Retail Locations excludes the wholesale club channel, including but not limited to Costco, Sam’s Club and BJ’s, and the office product superstore channel, including but not limited to Staples and Office Max (“Wholesale Clubs”), unless and until Keurig sells K-Cups to such respective channel or permits any other Licensed Roaster to sell K-Cups to such respective channel, and further excludes grocery stores in Canada until the second anniversary of the AH Launch, unless and until Keurig sells K-Cups to such channel or permits any Licensed Roaster other than Van Houtte, Inc. to sell K-Cups to such channel.

1.9 Diedrich K-Cup(s): A K-Cup that contains coffee or other non-coffee soluble hot beverage base prepared and packaged by Diedrich and labeled “Diedrich Coffee”, “Gloria Jean’s”, “Coffee People” or such other brand name as permitted by this Agreement. “Diedrich Coffee”, “Gloria Jean’s”, and “Coffee People” are registered trademarks of Diedrich.

1.10 Diedrich Marks: The trade name, service marks, trademarks, and logos now or in the future owned by or licensed to Diedrich.

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Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

1.11 K-Cup(s): A substantially impermeable, hermetically sealed, disposable portion-pack cartridge made under a license from Keurig which: (1) contains a single-cup portion of ground coffee or other non-coffee soluble hot beverage base (tea, concentrate or mix) in a brewing chamber at least partially defined by an internally arranged permeable filter; (2) is adapted to be pierced during the brewing cycle of a pressurized hot water brewer, which causes hot water at pressures below 30 p.s.i. to be injected into the brewing chamber for infusion with ground coffee or other non-coffee soluble hot beverage base, and to exit the brewing chamber via the filter as brewed coffee or other non-coffee hot beverage, with the filter serving to prevent coffee grounds or other non-coffee non-soluble hot beverage base from being entrained in the exiting brewed coffee or other non-coffee hot beverage; and (3) the brewing process takes place inside the sealed disposable cartridge. The definition of K-Cup(s) shall also include K-Pod(s). “K-Cup” is a registered trademark of Keurig.

1.11.1  K-Pod(s): A disposable portion-pack cartridge made under a license from Keurig which: (1) contains a single-cup portion of ground coffee or other non-coffee soluble hot beverage base (tea, concentrate or mix) in a brewing chamber at least partially defined by a pierceable lid and a permeable filter; (2) is adapted to be pierced through the lid during the brewing cycle of a pressurized hot water brewer, which causes hot water at pressures below 30 p.s.i. to be injected into the brewing chamber for infusion with ground coffee or other non-coffee soluble hot beverage base, and to exit the brewing chamber via the filter as brewed coffee or other non-coffee hot beverage, with the filter serving to prevent coffee grounds or other non-coffee non-soluble hot beverage base from being entrained in the exiting brewed coffee or other non-coffee hot beverage; and (3) the brewing process takes place inside the disposable cartridge.

1.12 Keurig Authorized Distributor(s) (KAD(s)): A company that has an effective distribution agreement with Keurig that specifies a geographical territory and channels of distribution. These companies purchase Keurig Products from Keurig and K-Cups from Licensed Roasters, KARDs, or Keurig for resale. Any Affiliate of a Licensed Roaster and any Roaster Distributor shall be considered a KAD. Companies whose distribution agreements with Keurig have been terminated are not considered KADs, even if Keurig allows them to continue to purchase repair parts and K-Cups to service their installed base of Keurig Products under their terminated agreement.

1.13 Keurig Authorized Re-Distributor(s) (KARD(s)): A company that has an effective distribution agreement with Keurig that specifies a geographical territory and channels of distribution. These companies purchase Keurig Products from Keurig and K-Cups from Licensed Roasters or Keurig in bulk quantities for resale in accordance with the limitations set forth in their distribution agreements with Keurig. Companies whose distribution agreements with Keurig have been terminated are not considered KARDs.

1.14 Keurig Reseller(s): A company that purchases Keurig AH Products from Licensed Roasters or Keurig and K-Cups from Licensed Roasters or Keurig for the exclusive purpose of direct resale to AH consumers within the Territory. The term “Keurig Reseller” excludes Wholesale Clubs,

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unless and until Keurig sells K-Cups to such respective channel or permits any other Licensed Roaster to sell K-Cups to such respective channel, and further excludes grocery stores in Canada until the second anniversary of the AH Launch, unless and until Keurig sells K-Cups to such channel or permits any Licensed Roaster other than Van Houtte, Inc. to sell K-Cups to such channel.

1.15 Keurig Brewer(s): The specialized pressurized hot water brewing equipment designed, developed and marketed by Keurig to be used in conjunction with the K-Cup.

1.15.1  Keurig AFH Brewer(s): Keurig Brewers that are designed primarily for use in the AFH market. Examples include but are not limited to Keurig Brewer Models B2000, B2003 and B1000.

1.15.2  Keurig AH Brewer(s): Keurig Brewers that are designed primarily for use in the AH market. An example includes but is not limited to Keurig Brewer Model B100.

1.16 Keurig Brewing System: A single-cup portion-pack hot beverage brewing system using the Keurig Brewer to brew coffee and other non-coffee soluble hot beverages contained in K-Cups by using pressurized hot water that is injected into the K-Cup.

1.17 Keurig Marks: The trade name, service marks, trademarks, and logos now or in the future owned by or licensed to Keurig.

1.18 Keurig Product(s): All products, excluding K-Cups and Packaging Lines, sold by Keurig.

1.18.1  Keurig AFH Product(s): Keurig Products that are designed primarily for use in the AFH market. Examples include but are not limited to Keurig AFH Brewer Models B2000, B2003 and B1000.

1.18.2  Keurig AH Product(s): Keurig Products that are designed primarily for use in the AH market. An example includes but is not limited to Keurig AH Brewer Model B100

1.19 Licensed Roaster(s): A coffee roaster, tea packer or other soluble hot beverage company that Keurig licenses to manufacture, package, inventory and sell K-Cups and related products to a territory and channel.

1.20 Office Coffee Service Distributor (OCS Distributor): A company that distributes products, including hot beverages, to Office customers within the Territory primarily for use or consumption in the Office.

1.21 Office(s): An establishment where business, professional, manufacturing, clerical or other commercial activities are conducted and from which brewed hot beverages are brewed on a complimentary or vended basis for immediate consumption by employees or for hospitality in connection with the business activities of the customer and not for the business objective of making a profit.

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Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

1.22 Packaging Line(s): Equipment designed specifically to manufacture Acceptable K-Cups to Standard.

1.23 Parties: Keurig and Diedrich.

1.24 Roaster Distributor: A Licensed Roaster that has also been granted limited rights to distribute Keurig Products.

1.25 Roaster Nominated Keurig Authorized Distributor(s) (RNKAD(s)): A company that was nominated by a Licensed Roaster and has an effective distribution agreement with Keurig that specifies a geographical territory and channels of distribution. These companies purchase Keurig Products from Keurig and exclusively the nominating Licensed Roaster’s K-Cups from the nominating Licensed Roaster, KARDs, or Keurig for resale. Companies whose distribution agreements with Keurig have been terminated are not considered RNKADs, even if Keurig allows them to continue to purchase repair parts and K-Cups to service their installed base of Keurig Products under their terminated agreement.

1.26 Territory: The United States and Canada; provided, however, Keurig will consider other regions proposed by Diedrich on a case-by-case basis and in Keurig’s sole discretion.

2. Appointment as Non-Exclusive K-Cup Manufacturer.

2.1 Grant of Licenses.

2.1.1 Away From Home License. Keurig hereby grants, and Diedrich accepts, a non-exclusive license to use, subject to the terms and conditions of this Agreement, Keurig’s patents and patent applications, trademarks, copyrights, and know-how related to the Packaging Lines, K-Cups and Operating Manual to manufacture, use, produce, distribute and sell Diedrich K-Cups to and only to the following types of customers in the Territory, provided that Diedrich shall not be permitted to sublicense its rights (the “AFH License”):

2.1.1.1  Food Service and Retail Locations, Keurig, Diedrich Affiliates, and Offices;

2.1.1.2  KADs, KARDs and RNKADs, it being acknowledged that Diedrich K-Cup sales to KADs, KARDs and RNKADs shall be at Diedrich’s sole discretion.

2.1.2 At Home License. Keurig hereby grants, and Diedrich accepts, a non-exclusive license to use, subject to the terms and conditions of this Agreement, Keurig’s patents and patent applications, trademarks, copyrights, and know-how related to the Packaging Lines, K-Cups and Operating Manual to manufacture, use, produce, distribute and sell Diedrich K-Cups to and only to the following types of customers in the Territory, provided that Diedrich shall not be permitted to sublicense its rights (the “AH License”):

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2.1.2.1  AH consumers, Keurig Resellers, Food Service and Retail Locations, Keurig, and Diedrich Affiliates;

2.1.2.2  KADs, KARDs and RNKADs, it being acknowledged that Diedrich K-Cup sales to KADs, KARDs and RNKADs shall be at Diedrich’s sole discretion;

2.1.2.3  Notwithstanding anything contained hereinabove, Diedrich’s AH License shall not include the right to sell Diedrich K-Cups to Wholesale Clubs, unless and until Keurig sells K-Cups to such respective channel or permits any other Licensed Roaster to sell K-Cups to such respective channel; nor shall Diedrich’s AH License to sell Diedrich K-Cups to customers that are grocery stores in Canada commence until the second anniversary of the AH Launch, unless and until Keurig sells K-Cups to such channel or permits any Licensed Roaster other than Van Houtte, Inc. to sell K-Cups to such channel.

2.1.3 Subject to Diedrich’s rights to the Packaging Lines and Section 14, below, Keurig expressly reserves the right to appoint other entities as Licensed Roasters without restriction upon the manufacture and sales of K-Cups by another entity. Keurig expressly reserves to itself the right to manufacture and sell K-Cups to any AFH or AH customer account inside or outside the Territory, provided, however, that Keurig will not knowingly solicit Diedrich’s or Diedrich Affiliate’s AFH customers for K-Cup sales. Except as provided in Section 2.3, in no event shall Diedrich be required to produce any minimum number of K-Cups or particular flavor or variety of K-Cup.

2.1.4 Keurig represents and warrants that it is the lawful owner of the intellectual property, including patent, trademark and copyright rights and proprietary interests licensed pursuant to this Agreement, and that the manufacture and sale of K-Cups by Diedrich in accordance with the terms of this Agreement will not infringe on the rights of third parties.

2.1.5 Diedrich hereby grants Keurig a non-exclusive perpetual royalty-free worldwide license, including the right to sublicense, for any ideas, discoveries, inventions, changes, improvements, and developments within the scope of the design, development, and manufacture of Packaging Lines that Diedrich may develop derived from Keurig’s Packaging Line patents, patent applications, or utilizing Keurig’s trademarks, copyrights and confidential know-how, which excludes generally available industrial design practice (the “Proprietary Information”) during the term of this Agreement. Diedrich hereby grants Keurig a non-exclusive perpetual royalty-free license, including the right to sublicense, for use outside of the Territory for any ideas, discoveries, inventions, changes, improvements, and developments useful to the design, development, and manufacture of Packaging Lines that Diedrich may develop independent of Keurig’s Proprietary Information during the term of this Agreement. Unless otherwise agreed by the Parties, any such discoveries, inventions, changes, improvements, and developments that are jointly developed by Diedrich and Keurig shall be co-owned with no duty by either Party to account to the other.

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2.1.6 Diedrich hereby grants Keurig an exclusive perpetual royalty-free license, including the right to sublicense, for any ideas, discoveries, inventions, changes, improvements, and developments within the scope of the design, development, and manufacture of Keurig Products and K-Cups, except for as it relates to the soluble hot beverage bases Diedrich packages within K-Cups, that Diedrich may develop during the term of this Agreement.

2.1.7 Diedrich shall use commercially reasonable efforts at ensuring that Keurig Resellers and Food Service and Retail Locations sell Diedrich K-Cups only to end-user consumers located within the Territory.

2.2 Private Label K-Cup Production.

As provided in Section 14, Diedrich may use the Packaging Lines for private label K-Cup production, provided that such K-Cups are sold in accordance with the provisions of Sections 2.1.1 and 2.1.2 and that the K-Cups meet all standards otherwise provided for in this Agreement, including that all labels for private label brands contain the appropriate Keurig Marks and instructions.

2.3 Diedrich K-Cup Product Line Offering.

Diedrich shall produce and sell Diedrich K-Cups in at least eight (8) varieties including blends, flavored and decaffeinated coffees, teas and other non-coffee soluble hot beverage bases for the AFH and AH market. Keurig shall have a right to purchase any of the varieties of Diedrich K-Cups made and sold by Diedrich under Section 2.1.1.

2.4 K-Cup Pricing.

2.4.1 Keurig shall be able to purchase its requirements for K-Cups from Diedrich under (i) Section 2.1.1.1 for the AFH market and (ii) Section 2.1.2.1 for the AH market based on Diedrich’s standard credit and pricing policies at a price no greater than the lowest price (including without limitation all ongoing pricing rebates and discounts) offered to other Diedrich K-Cup AFH or AH wholesale customers other than wholly owned subsidiaries ordering like volumes of Diedrich K-Cups, provided that notwithstanding any provisions to the contrary, Keurig may resell Diedrich K-Cups without restrictions except as follows: (1) Keurig may not resell Diedrich K-Cups to other Licensed Roasters and their Affiliates and RNKADs; (2) Keurig may not resell Diedrich K-Cups to Wholesale Clubs without Diedrich’s prior written authorization until January 1, 2005; (3) after such date, Keurig may resell Diedrich K-Cups to, or through, Wholesale Clubs only as part of an assortment that includes more than two (2) brands. Notwithstanding the foregoing, if Keurig should desire any changes in the nature of packaging of Diedrich K-Cups that are different from Diedrich’s standard packaging of Diedrich K-Cups, Diedrich shall in its discretion decide whether to implement such changes, provided, however, that if such changes are implemented, Diedrich shall charge Keurig for actual additional costs or credit Keurig for actual cost savings resulting from such changes.

2.4.2 All sales of Diedrich K-Cups to Keurig shall be subject to the royalty payments as otherwise provided in this Agreement.

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2.5 Approved Contract Manufacturers

2.5.1 Keurig may, in its sole discretion, authorize Approved Contract Manufacturers (“ACM”) for the manufacture of K-Cups by Diedrich where either Keurig or the ACM may own the Packaging Lines. In such case, Diedrich may negotiate and contract with ACM or Keurig, as appropriate, for the production of Diedrich K-Cups at such ACM.

2.5.2 All sales by Diedrich of Diedrich K-Cups manufactured by an ACM shall be subject to royalty payments as provided in this Agreement in respect of Diedrich K-Cups shipped by Diedrich.

2.6 Agreement to Co-operate

All KADs and KARDs shall be authorized by Keurig to purchase Diedrich K-Cups.

3. Packaging Lines.

3.1 Packaging Lines for Diedrich K-Cups.

3.1.1 Design, Installation and Warranty.

Upon request from Diedrich and in accordance with the terms of this Agreement, Keurig shall design, deliver, install and support Packaging Lines at a Diedrich site or Diedrich designated third party site located in the Territory, provided that if such designated site is operated by a contract manufacturer for Diedrich and Keurig owns the Packaging Lines, such contract manufacturer and designated site is subject to approval by Keurig, in Keurig’s sole discretion. Diedrich shall commence use of each of the Packaging Lines in accordance with its obligations pursuant to this Agreement upon successful completion of the acceptance test procedures below. Upon acceptance, Keurig warrants that during such time as Keurig is the owner of any Packaging Line, and for a period of six (6) months from purchase by Diedrich of any Packaging Line, the Packaging Line shall be free of defects in design, material and workmanship, shall operate in conformity with the specifications and standards provided in this Agreement, the Packaging Line specifications and Operating Manual and will produce Acceptable K-Cups to Standard, provided however, that such warranty shall not apply should the use by Diedrich materially differ from that which is in accordance with the Operating Manual and specifications developed by Keurig, or due to accident, neglect, misuse or abuse or the negligence and malfeasance of Diedrich. If any Packaging Line has been in use less than six (6) months prior to purchase, the warranty shall be increased by the number of months less than six, but in no case shall the total warranty period on any Diedrich purchased Packaging Line exceed twelve (12) months.

Keurig further warrants that all times during the term of this Agreement, Keurig shall manufacture and support Keurig Brewing Systems for the AFH and AH markets using the Diedrich K-Cups produced on Packaging Lines, or Keurig shall update such Keurig-owned Packaging Lines at its expense and update such Diedrich-owned Packaging Lines at Diedrich’s expense, subject to Diedrich’s acceptance. Keurig shall further provide

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Diedrich with access to any new Keurig Packaging Line designs for the AFH and AH markets in accordance with the terms and conditions of Section 3.3.5.

3.1.2 Ownership of Packaging Lines.

So long as Keurig retains ownership of the Packaging Lines, (i) Keurig shall retain all rights to mortgage or create a security interest, including sale/leaseback, of the Packaging Lines, (ii) Diedrich will not mortgage or create a security interest in any of the Packaging Lines so long as Keurig retains ownership thereof, (iii) this Agreement is subject and subordinate to any loan or security agreement or master lease agreement between Keurig and its lender or lessor, as the case may be, and Diedrich agrees to execute and deliver such instruments or documents as may be reasonably requested by such lender or lessor (at no compensation, but no expense to Diedrich) acknowledging the foregoing, including the right of such lender or lessor, in the event of default of Keurig, to access the premises of Diedrich on reasonable notice without undue disruption of Diedrich’s other business activities to remove the Packaging Lines, and (iv) Keurig agrees to use commercially reasonable efforts to obtain any lender’s or lessor’s agreement to recognize Diedrich’s rights in this Agreement and to give Diedrich a right of negotiation to purchase the Packaging Lines and/or assume any underlying lease in the event of Keurig’s default under any loan or lease agreement.

3.1.3 Production Capacity.

Keurig warrants that during the warranty period provided for in Section 3.1.1, the Packaging Lines shall be capable of yielding Acceptable K-Cups to Standard at a minimum production rate capacity of 100 K-Cups per minute of run time, with a commercial tolerance of total rejects of less than 5% per production run provided the Packaging Lines are operated in accordance with the Operating Manual. Production run capacity shall be determined by analysis of no less than one (1) month’s data collected as per the form attached as Schedule 3.1.3 during a period when a Packaging Line was available for production, and labor, raw materials and utilities were available. In the event that Diedrich’s analysis of production capacity discloses a substandard performance rate or yield of Acceptable K-Cups to Standard, Diedrich shall notify Keurig that it is exercising its rights pursuant to Section 3.1.6 below. During the warranty period provided for in Section 3.1.1 Diedrich shall generate and maintain for one (1) year Packaging Line production records and make them available for review by Keurig on reasonable notice during normal business hours.

3.1.4 Delivery and Acceptance Testing.

Keurig is responsible for the delivery and installation of Packaging Lines owned or produced by Keurig at Diedrich. As soon as practical after Keurig’s installation of a Packaging Line, Keurig will notify Diedrich that the Packaging Line is ready for K-Cup production by Diedrich staff. Within 10 business days of Keurig’s notice, Diedrich shall commence a 5-day test period (consisting of two (2) eight-hour shifts per day) in order to evaluate K-Cup manufacturing rate and yield. When the Packaging Line shall have performed for a 5-day period (consisting of two (2) eight-hour shifts per day) with a speed no less than 100 K-Cups per minute of run time and total rejects less than 5% of

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the test production run, as reflected in production run forms substantially in the form as provided in Schedule 3.1.3, the Packaging Line shall be deemed accepted by Diedrich. Diedrich shall confirm such acceptance in writing to Keurig without unreasonable delay.

Prior to acceptance of the Packaging Line by Diedrich, and during any repair period under Section 3.1.6 or Section 3.2.4, Keurig shall be responsible for all direct Diedrich labor and raw materials costs and expenses, including the cost of utilities and nitrogen. Labor and component materials (cups, lids, filters, coffee, cartons and boxes) used in the testing of any Packaging Line will be charged to Keurig at Diedrich’s actual cost. Usable materials will be returned to Diedrich, and Diedrich will credit Keurig for returned materials at the amount of returned materials times unit cost charged. Finished Diedrich K-Cups will be credited to Keurig at “transferred quantity” from the applicable “PL Production Report” times the sum of the component materials’ standard cost, labor and overhead rates (the total cost credited to Keurig should equal the then-current standard cost reflected in Diedrich’s inventory valuation for Diedrich K-Cups). Keurig will pay to Diedrich within thirty (30) days of invoice therefore all costs provided under this Section 3.1.4, and Diedrich shall apply appropriate credits to Keurig within thirty (30) days of acceptance or completion of warranty repair, as applicable.

The Parties agree that the two Packaging Lines currently installed at Diedrich (Castroville Plant Packaging Lines commonly referred to as PL’s #6 and #7) have been accepted by Diedrich in accordance with this Section 3.1.4.

3.1.5 Diedrich Responsibilities for Space and Utilities.

Keurig will advise Diedrich as to space and utility requirements (including power, air, nitrogen and foundations) for the Packaging Lines. At its cost, Diedrich will have the Diedrich site prepared to Keurig’s installation specifications. Installation of Packaging Lines will be provided by Keurig with component parts assembled, electrically wired, software loaded, nitrogen connected and operationally prepared for acceptance testing as provided for in Section 3.1.4.

3.1.6 Repair or Removal of Accepted Packaging Lines.

In the event of notice from Diedrich that, during the warranty period provided for in Section 3.1.1, the performance rates or yields of Acceptable K-Cups to Standard for any accepted Packaging Line is not in conformity with the representations and warranties of Keurig per this Agreement, Keurig shall attempt to repair the Packaging Line in accordance with Section 3.2.4. In the event that the Packaging Lines cannot be repaired by Keurig within forty-five (45) days of notice to produce Acceptable K-Cups to Standard at the performance rate and yield as warranted by Keurig, Keurig shall replace such Packaging Lines with conforming Packaging Lines, time being of the essence. Furthermore, if any Keurig owned Packaging Line fails to meet performance rates or yields in accordance with Section 3.1.3 more than three (3) times in any twelve month period when operated in conformity with the Operating Manual and non-conformities are outside the scope of resolution by Diedrich’s certified Packaging Line maintenance staff, Keurig shall replace that Packaging Line, time being of the essence. Diedrich shall have

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highest priority on installation of new Packaging Lines necessitated by repeated failures as provided in this Section 3.1.6.

3.2 Maintenance.

During such time as Keurig shall be the owner of any Packaging Line, and for the warranty period as otherwise provided in this Agreement following purchase by Diedrich of any Packaging Line, Keurig shall maintain the Packaging Line consistent with its obligations as the Packaging Line owner as follows:

3.2.1 Manual.

Keurig shall provide a Packaging Line Operating Manual (heretofore and hereinafter “Operating Manual”) outlining, among other things, machine operating capabilities and limitations, as well as appropriate servicing and operating instructions for the training of and use by Diedrich Packaging Line operators, inspectors and maintenance personnel, which machine capabilities shall be consistent with the standards and specifications as provided herein. The Operating Manual shall include trouble-shooting and repair procedures as well as instructions specifying when Keurig maintenance personnel must be used. The Operating Manual will also delineate basic skills necessary for maintenance technician certification. Regardless of whether Keurig or Diedrich owns the Packaging Lines, Diedrich will use commercially reasonable efforts to operate such Packaging Lines in conformity with such Operating Manual, and shall notify Keurig as soon as possible of any non-conformity to performance rates or yields of Acceptable K-Cup to Standards resulting from defects in the Packaging Line and system failures, and Keurig shall promptly correct the same, time being of the essence. Keurig agrees to update the Operations Manual from time to time as required to keep the information current and relevant to the installed Packaging Lines. Included in the Operating Manual will be phone and/or beeper numbers with 24 hour per day coverage by Keurig.

3.2.2 Training and Certification of Diedrich Packaging Line Operators, Quality Control Inspectors and Maintenance Staff.

Keurig’s engineering staff will provide training to and certification of Diedrich trainers at no cost to Diedrich for an appropriate number of trainers given the number of Packaging Lines operational at Diedrich and the number of operating shifts required to meet Diedrich K-Cup production demands. Keurig will certify or de-certify Diedrich trainers who respectively meet or fail Keurig certification criteria and processes (the “Certification Criteria”), as established in Operating Manual. Keurig will certify all Diedrich trainers who Keurig, in its reasonable business judgment, determines to have become knowledgeable to train others. Certified Diedrich trainers will be responsible for training and certifying all operators, quality control inspectors and maintenance employees of Diedrich. Regardless of whether Keurig or Diedrich owns the Packaging Lines, Diedrich agrees to operate and maintain the Packaging Lines with certified operators, maintenance workers and quality control inspectors.

3.2.3 Routine and Scheduled Maintenance; Non-routine Maintenance.

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Diedrich will develop and implement routine and scheduled maintenance programs for the Packaging Lines. As defined in the Operating Manual, non-routine maintenance and repair will be performed by Keurig or its agents under Keurig’s direction and at Keurig’s expense. Keurig shall also repair or replace any component of the Packaging Lines that cannot be repaired by certified Diedrich maintenance personnel after commercially reasonable efforts. Diedrich agrees to provide storage and protection from pilferage for Keurig-owned spare parts required for support of the Packaging Lines. During the warranty period provided for in Section 3.1.1, Diedrich will generate and maintain for one (1) year Packaging Line maintenance records and make them available for review by Keurig on reasonable notice during normal business hours.

3.2.4 Keurig Resolution of Packaging Line Failures.

Keurig shall respond on-site to Packaging Line failures that are outside the scope of resolution by Diedrich’s certified Packaging Line maintenance staff by the end of the next business day following Diedrich’s notice to Keurig of an operational problem. Business day shall be defined as a day in which Diedrich would normally be operating its manufacturing facility to package Diedrich K-Cups.

Notwithstanding the foregoing, in the event that the failure occurs outside of the warranty period or is the result of improper, negligent, or malicious interference or operation, including but not limited to improper maintenance, failure to comply with procedures as provided for in the Operating Manual or other Diedrich negligence, Diedrich will reimburse Keurig for its actual costs to resolve the failure in accordance with Schedule 3.2.4.

The Parties agree that in the event they cannot after good faith negotiation agree as to responsibility for any system failure, in lieu of either Party asserting a right to terminate for breach, the question shall be submitted for resolution to arbitration as otherwise provided in this Agreement.

3.3 Determination of Packaging Line Requirements; Upgrades to Packaging Lines.

3.3.1 Determination of Packaging Line Requirements.

As long as Keurig owns the Packaging Lines, Keurig shall deliver, install and support, in accordance with the terms of this Agreement additional Packaging Lines as follows:

3.3.1.1  The Parties agree to co-operate in forecasting Diedrich K-Cup demand and production requirements each quarter on a rolling twelve-month forward-looking basis. Upon request Keurig shall provide Diedrich with an estimate of planned Keurig Brewer shipments in the Territory, as well as its estimates of cumulative Keurig Brewer shipments during that period on a monthly basis. Upon request Keurig shall also provide an estimate of total K-Cup shipments during each period as well as a forecast of Diedrich K-Cups during each period. Using this data, Diedrich shall make its estimate of Diedrich K-Cup shipments for the forecasted period(s) and provide its forecast of Diedrich K-Cup shipments to Keurig. The Parties shall then

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make a best effort at determining a mutually acceptable Diedrich K-Cup forecast for the period(s). In the event of any disagreement as to the results of the forecast process that cannot be resolved by the Parties negotiating in good faith, the Parties agree to submit the question to arbitration as otherwise provided in this Agreement.

3.3.1.2  Once the Parties have agreed to a twelve month forward-looking Diedrich K-Cup forecast of demand in accordance with this section, the number of Packaging Lines required to meet demand shall be calculated as follows: (a) each Packaging Line shall be assumed to have a production capacity of 2,000,000 K-Cups per Packaging Line per calendar month; and, (b) the monthly demand divided by 2,000,000 shall be the number of Packaging Lines required to meet demand requirements for each month during the forecast period. Fractions of Packaging Lines above four-tenths (.4) shall be rounded up to one (1); otherwise fractions shall be reduced to zero (0).

3.3.1.3  If during any month of the forecast period Diedrich has fewer Packaging Lines installed than the calculated number of Packaging Lines required to support demand, Keurig shall within thirty (30) days initiate steps to procure one or more Packaging Lines to satisfy Diedrich’s monthly needs on a timely basis. Notwithstanding the foregoing, if Diedrich’s actual demand is less than total production capacity as calculated above, Keurig shall not be required to install additional Packaging Lines at Diedrich. If, during any five (5) of six (6) consecutive months of the forecast period Diedrich has more Packaging Lines installed than the calculated number of Packaging Lines to be provided by Keurig, Keurig shall upon thirty (30) days’ written notice have the right to remove the number of excess Packaging Lines at Keurig’s expense, which following removal may be used at another Licensed Roaster’s facility.

3.3.1.4  The Parties agree to discuss in good faith the most appropriate Packaging Line model for installation with regard to Diedrich’s then current and projected volumes and Keurig’s then current technology and tooling specifications. However, Keurig shall not be required to remove existing Packaging Lines unless the Keurig Brewing System changes or the Packaging Lines are defective as determined pursuant to Section 3.1.6.

3.3.2 Nothing in this Agreement precludes Keurig from selling to, leasing to or installing Packaging Lines at other Keurig customers, manufacturers or licensees, or for operation directly or indirectly by Keurig.

3.3.3 Nothing in this section shall preclude Diedrich from ordering, purchasing, and installing additional Packaging Lines in its sole discretion, and Keurig shall sell Diedrich such additional Packaging Lines, in accordance with the terms of Section 4 following purchase of Packaging Lines already installed by Keurig for use by Diedrich in accordance with the terms of Section 4.

3.3.4 Order and Delivery Lead Times.

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The Parties understand that procurement and installation of subsequent Packaging Lines may take 8 to 10 months, provided that Diedrich shall have rights to upgrades and replacements on an expedited schedule where otherwise specifically provided in this Agreement.

3.3.5 Packaging Line Upgrades.

Keurig agrees to inform Diedrich of Packaging Line upgrades and design improvements made by Keurig that have a material impact on machine speed, uptime and yield. The Parties agree to evaluate in good faith the desirability and feasibility of upgrading installed Packaging Lines or installing improved Packaging Lines from time to time, provided that Keurig agrees that Diedrich shall have access to such upgrades and improvements on a basis no less favorable than those offered to other Licensed Roasters selling like K-Cup volumes in the AFH or AH market. Any Packaging Line upgrades or design improvements shall be at Keurig’s expense and at Keurig’s discretion while it owns the Packaging Lines and at Diedrich’s expense and at Diedrich’s discretion if Diedrich owns the Packaging Lines.

3.4 OSHA Compliance.

Keurig shall comply with all OSHA and, depending on the state in which the PL is operated, the state equivalent safety regulations pertaining to the product and system designed and constructed by it, or its consultants, sub-contractors and agents, and the installation thereof, and warrants that the operating instructions provided in the Operating Manual shall be in compliance with such regulations. Diedrich shall make its best efforts to support Keurig’s compliance with OSHA and state regulations as set forth in the preceding sentence.

4. Option to Purchase or Manufacture Packaging Lines; Future Products.

4.1 Option to Purchase Installed Packaging Line(s).

Keurig grants Diedrich the option to purchase all, and not less than all, Packaging Lines (including at Diedrich’s option any Keurig-owned Packaging Line related assets) installed by Keurig for use by Diedrich at a price calculated as follows: Keurig’s actual original equipment purchase price as reflected in vendor invoices multiplied by [* * *]% and, using a residual value after [* * *] months of [* * *]% of this calculated value, less depreciation of the net amount calculated on a straight line basis over [* * *] months following acceptance of the Packaging Line by Diedrich, or if a used Packaging Line, acceptance of the Packaging Line by another Licensed Roaster. Such pricing includes the Packaging Line, freight-in, installation, staff training, technical support through the passage of the acceptance test and the warranty provided for in Section 3.1.1. Terms of sale for new Packaging Lines shall be in accordance with Schedule 4.1. Upon purchase of all Packaging Lines by Diedrich, any additional Packaging Lines provided by Keurig shall also be sold to Diedrich under the provisions of this section. The option to purchase Keurig-owned Packaging Line related assets expires one day after the initial purchase of the Packaging Lines. Keurig shall remove any Keurig-owned Packaging Line related assets not so purchased within 45 days after the purchase of the Packaging Lines.

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While Diedrich can buy spare parts from Keurig at cost plus [* * *]%, Keurig will permit Diedrich to purchase parts directly from Keurig approved manufacturers including the Packaging Line manufacturers at a price determined by such manufacturer. Keurig’s spare parts program is intended to be a convenience to its Licensed Roasters.

Packaging Line purchase by Diedrich shall include a grant of a non-transferable and non-exclusive license to use in connection with the purchased Packaging Lines, Keurig’s Proprietary Information related to the purchased Packaging Lines and K-Cups produced thereon, as well as access to its manufacturer’s for replacement parts, in accordance with the terms of this Agreement. Diedrich understands that it has no right to manufacture or sell K-Cups designed for use in Keurig Brewers after the termination of this Agreement, except as provided for in Section 15.3.2.

Diedrich may sell or transfer purchased Packaging Lines to a third party (“Transferee”), provided, however, that if such Transferee is not a Licensed Roaster, as an express condition of the effectiveness of such sale or transfer Diedrich shall obtain and deliver to Keurig written representation from the Transferee acknowledging that only Licensed Roasters are authorized to manufacture K-Cups and unauthorized manufacture of K-Cups would be in violation of Keurig’s patents and other proprietary rights entitling Keurig to injunctive relief in addition to any other rights and remedies. Diedrich shall provide Keurig with the contact information and intended use of the Packaging Lines for any such Transferee.

Notwithstanding the other provisions of Section 4, the Parties hereby acknowledge that Diedrich has already purchased the two (2) Packaging Lines installed by Keurig for use by Diedrich (commonly referred to as Packaging Lines #6 and 7) in accordance with the Equipment Purchase Agreement between the Parties dated April 11, 2003.

4.2 Diedrich Option to Design and Develop Packaging Lines.

Subsequent to the purchase of installed Packaging Lines by Diedrich as set forth in Section 4.1, Keurig grants Diedrich the option to independently design and develop its own Packaging Lines that will not be subject to the provisions of Section 3 of this Agreement. All K-Cups produced on these Packaging Lines will be subject to the same quality standards as set forth in Section 5 and the same royalty rate schedule as set forth in Section 6 of this Agreement.

4.2.1 Collaborative Packaging Line Development Activity.

Upon Diedrich’s request, Keurig agrees to enter into good faith discussions relating to establishing a collaborative activity to support Diedrich’s interest in designing and developing its own Packaging Lines. Both Parties agree that any such collaborative activity will be defined in a separate written agreement that sets forth the scope of development activity and ownership of intellectual property (including inventions, patentable or not) that directly results from activity.

4.2.2 Non-Exclusive Licensing of Keurig’s Intellectual Property.

Upon Diedrich’s request, Keurig agrees to enter into good faith discussions to provide Diedrich with a non-exclusive license to the Proprietary Information associated with the

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manufacture of Packaging Lines including shop drawings and access to its current and past Packaging Line manufacturers that are otherwise prohibited from manufacturing Packaging Lines for customers other than Keurig. Diedrich agrees that all Packaging Lines manufactured by Diedrich or its agents using Keurig’s Proprietary Information shall be used exclusively in its or its contract manufacturer’s facilities and not sold to others during the term of this Agreement. Any time and materials used by Keurig to support Packaging Line design, development and installation shall be paid for by Diedrich on a time and materials basis in accordance with a separate written agreement that sets forth the scope of support activity required.

5. Acceptable K-Cups to Standard.

Diedrich shall only sell K-Cups produced in conformity with the criteria set forth in this Section. Nothing in this Section 5 shall be construed to relieve Keurig of its obligation to provide Packaging Lines capable of producing Acceptable K-Cups to Standard.

5.1 Freshness and Quality of Coffee, Tea and Other Soluble Hot Beverage Products.

5.1.1 Coffee: Diedrich will develop testing procedures to assure quality control over the production process. Among other tests, Diedrich shall have its coffee taste testers compare the same type of coffee brewed in Diedrich K-Cups and Keurig Brewers versus conventional drip brewing systems with the objective of providing equal or superior taste quality levels via the Keurig Brewing System as judged by Diedrich. Keurig may neither use nor disclose Diedrich’s proprietary testing procedures with or to another Licensed Roaster without Diedrich’s prior written approval, which approval may be withheld in the sole discretion of Diedrich.

5.1.2 Tea: Diedrich will develop testing procedures to assure quality control over the production process. Among other tests, Diedrich shall have its tea taste testers compare the same type of tea brewed in Diedrich K-Cups and Keurig Brewers versus conventional tea brewing techniques with the objective of providing equal or superior taste quality levels via the Keurig Brewing System as judged by Diedrich. Keurig may neither use nor disclose Diedrich’s proprietary testing procedures with or to another Licensed Roaster without Diedrich’s prior written approval, which approval may be withheld in the sole discretion of Diedrich.

5.1.3 Other Soluble Hot Beverage Products: Diedrich will develop testing procedures to assure quality control over the production process. Among other tests, Diedrich shall have its taste testers compare the same type of soluble hot beverages brewed other than coffee or tea (including herbal teas) (“Other Soluble Hot Beverage Products”) in Diedrich K-Cups and Keurig Brewers versus conventional beverage preparation techniques with the objective of providing equal or superior taste quality levels via the Keurig Brewing System as judged by Diedrich. Keurig may neither use nor disclose Diedrich’s proprietary testing procedures with or to another Licensed Roaster without Diedrich’s prior written approval, which approval may be withheld in the sole discretion of Diedrich.

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5.2 Amount of Coffee, Tea or Other Soluble Hot Beverage Products Packaged in K-Cup.

5.2.1 Coffee: For Diedrich K-Cups filled with coffee, such K-Cups are filled with the standard amount of ground coffee for each type of coffee, provided that the standard amount and grind shall be set by and on occasion adjusted by Diedrich subject to bean type, flavor and optimal roasting guidelines as determined by Diedrich’s professional taste testers to provide optimal taste consistent with the requirements of Section 5.1.1. Diedrich in its discretion shall establish the high/low range around the standard amount. In no case may Diedrich pack less than 7.0 grams of coffee in a Diedrich K-Cup without express approval of Keurig.

5.2.2 Tea: For Diedrich K-Cups filled with tea, such K-Cups are filled with such quantity of tea to provide a flavor profile consistent with the requirements of Section 5.1.2. Diedrich in its discretion shall establish the high/low range around the standard amount. In no case may Diedrich pack less than 4.0 grams of tea in a Diedrich K-Cup without express approval of Keurig.

5.2.2.1 If Diedrich uses certain approved lid and cup raw materials as specified by Keurig, such minimum fill weight shall be reduced from 4.0 grams of tea to 2.7 grams of tea. Currently, Keurig has specified such approved raw materials as set forth in Schedule 5.6.

5.2.3 Other Soluble Hot Beverage Products: For Diedrich K-Cups filled with Other Soluble Hot Beverage bases, such K-Cups are filled with such quantity of Other Soluble Hot Beverage base to provide a flavor profile consistent with the requirements of Section 5.1.3. Diedrich in its discretion shall establish the high/low range around the standard amount. In no case may Diedrich pack less than a specified minimum of Other Soluble Hot Beverage base as determined by Keurig in its sole discretion on a beverage-by-beverage basis.

5.3 Filter Weld Integrity.

Diedrich will operate and maintain the Packaging Lines so as to produce Diedrich K-Cups that do not experience filter paper to filter paper seam or filter paper to cup rim weld tears or breaks when used as part of the Keurig Brewing System. Filter weld integrity shall be evaluated in accordance with the QCS testing set forth in Section 5.7 and Schedule 5.7.4. A failure of the Diedrich K-Cup filter weld integrity shall be defined as when the K-Cup brewing process results in more than three coffee or tealeaf grounds being present in the brewed coffee or tea.

5.4 Dating, Shelf Life and Oxygen Impermeability for Coffee, Tea and Other Soluble Hot Water Beverages.

5.4.1 All Diedrich K-Cups filled with coffee will contain a consumer readable Best Used By Date (“BUBD”) label that shall not be longer than [* * *] during which the Diedrich K-Cup is manufactured, unless specific approval is granted by Keurig based on testing

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results provided by Diedrich. Diedrich K-Cups filled with coffee shall contain less than 3% oxygen.

5.4.2 All Diedrich K-Cups filled with tea (including herbal tea) will contain a consumer readable BUBD label that shall not be longer than [* * *] during which the Diedrich K-Cup is manufactured, unless specific approval is granted by Keurig based on testing results provided by Diedrich. Diedrich K-Cups filled with tea (including herbal tea) are not subject to an oxygen content limitation.

5.4.3 For all Diedrich K-Cups filled with Other Soluble Hot Beverage bases, Keurig in its sole discretion shall establish an appropriate BUBD and oxygen content specification that corresponds to at least a [* * *].

5.5 Lid Seal Integrity.

Diedrich will operate and maintain the Packaging Lines so as to produce Diedrich K-Cups that do not experience lid stock to cup seal weld tears or breaks when used as part of the Keurig Brewing System. Diedrich K-Cups shall be able to withstand a vacuum pressure of 18 to 21 inches of mercury for 30 seconds without having a failure of the lid stock to cup seal integrity.

5.6 K-Cup Raw Material Vendor Selection.

Diedrich shall require that all raw material suppliers conform to specifications as provided by Keurig for cups, lid stock, filter paper and filter paper conversion, and other raw material that Keurig deems critical to producing Acceptable K-Cups to Standard. Keurig may reasonably establish different raw material standards and specifications for packaging coffee, tea and other soluble hot beverages in K-Cups. Keurig shall supply Diedrich with any updated specifications and standards for optimal operating efficiency of the Packaging Lines. Diedrich shall only use K-Cup raw materials from Keurig qualified sources to manufacture Diedrich K-Cups. Schedule 5.6 shows approved vendors as of the date of this Agreement for each raw material required for packaging coffee and tea.

5.7 K-Cup Functionality.

Diedrich shall be responsible for ensuring that final assembled Diedrich K-Cups properly brew and function when operated with all Keurig Brewers for which the Diedrich K-Cup is intended to be used. Proper functionality of final assembled Diedrich

K-Cups includes but is not limited to K-Cup lid and bottom puncturability, and if a feature of a Keurig Brewer, proper K-Cup ejection.

5.7.1 For each variety of coffee to be packaged in K-Cups, proper functionality shall be defined as meeting the Quality Control System (“QCS”) set forth in Section 5.7.4 during each production run.

5.7.2 In addition to the QCS set forth in Section 5.7.4, for each variety of tea (including herbal tea) to be packaged in K-Cups, proper functionality shall be defined to also include having failure rates below 1 per 200 for K-Cups not ejecting from the K-Cup holder in

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Keurig Brewers designed to automatically eject K-Cups and 1 per 1,000 for K-Cups sticking to the inlet needle after the brewing process is completed of any Keurig Brewer. Keurig’s approval of K-Cups packaged with tea (including herbal tea) shall be based on satisfaction of the packaging and testing procedures as described in Schedule 5.7.2.

5.7.3 In addition to the QCS set forth in Section 5.7.4, for each variety of Other Soluble Hot Beverage bases to be packaged in K-Cups, Keurig in its sole discretion will establish K-Cup functionality criteria by Keurig Brewer model.

5.7.4 Quality Control System

5.7.4.1  Diedrich is responsible for making a best effort to implement the QCS related to the production and sale of Diedrich K-Cups.

5.7.4.2  A Certified Quality Control Inspector (“CQCI”) will implement QCS during every production run of Diedrich K-Cups. Diedrich agrees to use a CQCI, in accordance with Section 3.2, regardless of whether Keurig or Diedrich owns the Packaging Lines.

5.7.4.3  CQCIs will perform the following QCS testing during the production run by removing sample test K-Cups from each lane of the Packaging Line on a regular and systematic basis in compliance with the Keurig QCS requirements set forth below and further described in Schedule 5.7.4:

5.7.4.3.1  Visual inspection of test K-Cups for defects in BUBD legibility, lid seal integrity and any other obvious visual defect to ensure compliance with Sections 5.4 and 5.5.

5.7.4.3.2  Vacuum testing to ensure lid seal integrity is in compliance with Section 5.5.

5.7.4.3.3  Oxygen content testing, if applicable, to ensure residual oxygen content after packaging is in compliance with Section 5.4.

5.7.4.3.4  Brew testing to ensure K-Cup lid and bottom puncturability and internal filter weld integrity is in compliance with Section 5.3.

5.7.4.4  Diedrich agrees to develop and implement procedures within 120 days of the effective date of this Agreement that enable the CQCI to halt production and segregate and test inventory if Diedrich K-Cups do not meet QCS requirements as specified in this Section and Schedule 5.7.4. Such procedures shall be submitted to Keurig for approval, such approval not to be unreasonably withheld. The Parties acknowledge that the objective of these procedures is to minimize the number of Brew Failures (as defined in Schedule 5.7.4) experienced by consumers when using the Keurig Brewing System in either AFH or AH applications.

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5.8 K-Pods.

Keurig may develop separate K-Pod functionality standards prior to the introduction of K-Pods to the marketplace.

5.9 Out-gas Protocol.

Diedrich shall not package coffee in Diedrich K-Cups sooner than twelve (12) hours after grinding, unless specific approval is granted by Keurig based on testing results provided by Diedrich.

6. Royalties.

6.1 Calculation of Royalty.

6.1.1 Diedrich shall pay Keurig a royalty based on the number of Diedrich K-Cups shipped per Diedrich fiscal period (thirteen 4-week periods per year). The royalty payment shall be the Diedrich K-Cup unit shipments, less the number of Diedrich K-Cups returned by Diedrich customers within the Diedrich K-Cup BUBD, times the combined total of the Base Royalty Rate plus any applicable Rental Royalty Rate as set forth in Section 6.1.2. Diedrich agrees to provide Keurig a detailed report that separately specifies Diedrich K-Cup unit shipments by variety on a weekly basis for the prior week and use this as the base for the fiscal period royalty calculation and payment.

The “Base Royalty Rate” of [* * *] cents shall be reduced by a Volume Incentive in accordance with the “Royalty Rate Schedule” as set forth below and shall be calculated at the beginning of each Diedrich fiscal quarter based on the Diedrich K-Cup unit shipment volume of the immediately preceding three calendar months, net of returns made within the Diedrich K-Cup BUBD. Such Base Royalty Rate may increase or decrease based on the prior three calendar month’s shipments in accordance with the Royalty Rate Schedule below.

[* * *]			[* * *]			[* * *]
[* * *]			[* * *]	$	0.	[* * *]
[* * *]	- $	0.	[* * *]	$	0.	[* * *]
[* * *]	- $	0.	[* * *]	$	0.	[* * *]
[* * *]	- $	0.	[* * *]	$	0.	[* * *]
[* * *]	- $	0.	[* * *]	$	0.	[* * *]
[* * *]	- $	0.	[* * *]	$	0.	[* * *]

No minimum royalty payments shall be payable to Keurig, provided however, that Keurig shall not be required to install subsequent Packaging Lines not justified by

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forecasts as provided in Section 3.3.1 (unless necessitated by defects as provided in Section 3.1.6) unless the Parties have agreed to minimum royalties.

6.1.2 The Rental Royalty Rate of [* * *] cents per Diedrich K-Cup shipped shall be additive to the Base Royalty Rate unless and until Diedrich purchases the Packaging Lines in accordance with Section 4. Notwithstanding the foregoing, should Diedrich procure Diedrich K-Cups from an ACM as set forth in Section 2.5 and, if that ACM uses Keurig owned Packaging Lines to produce such Diedrich K-Cups, then Diedrich shall pay to Keurig the Rental Royalty Rate on such Diedrich K-Cups shipped by the ACM to Diedrich or Diedrich’s customers.

6.2 Payments.

Diedrich shall pay all royalties due hereunder within thirty (30) days after the date of the end of the Diedrich 4-week fiscal period for which royalties are due.

6.3 Review of Books and Records.

Keurig or its accountants shall have the right to review the records and calculations prepared by Diedrich relating to royalty payments due Keurig and to ensure compliance with Section 2.4.1. Such review shall take place on reasonable written notice during regular business hours within one year of the periods then being reviewed.

6.4 Most Favored Nation.

6.4.1 Royalty Parity.

Keurig agrees that during the term of this Agreement the volume-based incentive royalty rate schedule set forth in Section 6.1.1 or the Rental Royalty Rate set forth in Section 6.1.2 [* * *]. Notwithstanding the provisions in Section 6.1 relating to the calculation of the royalty payment, if Keurig should either (i) [* * *] of a current Licensed Roaster in the Territory or (ii) [* * *] for the manufacture and sale of K-Cups in the Territory and, in either case, provide for [* * *] than set forth in Sections 6.1.1 or 6.1.2, respectively, or in effect at the time based on terms and conditions [* * *], then within fifteen (15) days of such action, Keurig will notify Diedrich of such [* * *], either of which shall, at Diedrich’s sole discretion, automatically be deemed to apply to this Agreement effective as of the date of the adjustment under clause (i) or [* * *] under clause (ii) above, as applicable, or such later date as shall be requested by Diedrich. Keurig agrees to provide a certification attested to by an Officer of Keurig as to such royalty rate schedule upon the request of Diedrich, but not more than once every three months. If Keurig [* * *] for the manufacture and sale of K-Cups in the Territory and provides [* * *] than set forth in Sections 6.1.1 or 6.1.2, respectively, or in effect at the time based on terms and conditions [* * *], then within fifteen (15) days of such action, Keurig will [* * *] and the associated Royalty Rate Schedule and

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Rental Royalty Rate. Diedrich shall have thirty (30) days after receiving such offer to either accept or reject such offer in its entirety.

6.4.2 Royalty Alteration.

Diedrich agrees that Keurig has the discretionary right to alter the Royalty Rate Schedule and Rental Royalty Rate (“Royalty Alteration”) on Diedrich K-Cups [* * *] and (5) Diedrich agrees to accept the Royalty Alteration within sixty (60) days of receiving written notice of the Royalty Alteration. In no event shall the Royalty Alteration increase [* * *]. Should all of the foregoing conditions be met except that Diedrich does not agree to accept the Royalty Alteration within sixty (60) days of receiving written notice of the Royalty Alteration, the then-current Royalty Rate Schedule and Rental Royalty Rate shall remain in force for two years from receiving written notice of the Royalty Alteration at which time the Agreement shall terminate, notwithstanding the provisions of Section 15.

6.4.3 Review of Books and Records.

Once each calendar year, Diedrich may, at its expense, have an independent auditor audit such books and records of Keurig as are necessary or appropriate to verify Keurig’s compliance with Section 6.4.1. Such independent auditor shall agree in writing to maintain the confidentiality of all of Keurig’s records and shall be allowed only to certify to Diedrich whether or not Keurig has complied with Section 6.4.1. Such review shall take place upon reasonable written notice at a mutually agreed time during regular business hours.

7. Appointment as Non-Exclusive Roaster Distributor.

7.1 Away From Home.

7.1.1 K-Cups. Keurig appoints Diedrich and Diedrich accepts appointment as a non-exclusive Roaster Distributor to purchase, inventory, promote, distribute and sell K-Cups to and only to the customers in the Territory set forth in Section 2.1.1.

7.1.2 Keurig AFH Products. Keurig appoints Diedrich and Diedrich accepts appointment as a non-exclusive Roaster Distributor to purchase, inventory, promote, distribute, sell, lease, loan and service Keurig AFH Products to and only to Diedrich Affiliates, Offices and Food Service and Retail Locations in the Territory.

7.1.3 Diedrich shall not knowingly sell K-Cups or distribute, sell, lease, loan and service Keurig AFH Products to customers located outside of the Territory or for use outside the Territory. Diedrich shall not solicit or accept orders for any K-Cups and Keurig AFH Products from any prospective customers that are not specified in Sections 7.1.1 and 7.1.2, respectively. If Diedrich receives an order for any K-Cups or Keurig AFH Products from a prospective customer that Diedrich is not authorized to sell to under this Section 7.1, then Diedrich shall not accept it and may, at its discretion, refer the order to Keurig. Diedrich and Diedrich Affiliates shall also be prohibited from selling, leasing or loaning or offering to sell, lease or loan Keurig AFH Products on the Internet, including but not

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limited to showing pricing for Keurig AFH Products. Notwithstanding the foregoing restriction relative to Internet sales, Diedrich and its Affiliates may show Keurig AFH Products on their websites for the sole purpose of generating leads for AFH market development within the Territory.

7.1.4 Keurig agrees to accept as a Diedrich RNKAD any Diedrich nominated distributor in the Territory pledging to order at least the minimum number of Keurig AFH Brewers specified in Keurig’s then current Roaster Nominated Distributorship Agreement but in no case shall such minimum be more than [* * *] Keurig Model B2003 Brewers (or their equivalent as determined by Keurig) per annum per sales office, provided such distributors execute Keurig’s then current standard RNKAD agreement and meet Keurig’s credit terms. Keurig agrees that it will not actively solicit Diedrich RNKADs to distribute K-Cups produced by other Licensed Roasters through sales introductions.

7.1.5 In the event that Keurig appoints another Licensed Roaster or modifies the distribution agreement terms of another Licensed Roaster to sell Keurig AFH Products to KADs, KARDs, RNKADs, or OCS Distributors on a more favorable basis than set forth herein, Keurig shall offer Diedrich the same terms, provided that Diedrich shall have 90 days to accept or reject such other terms only in their entirety.

7.2 At Home.

7.2.1 K-Cups. Keurig appoints Diedrich and Diedrich accepts appointment as a non-exclusive Roaster Distributor to purchase, inventory, promote, distribute and sell K-Cups to and only to the customers in the Territory set forth in Section 2.1.2.

7.2.2 Keurig AH Products. Keurig also appoints Diedrich and Diedrich accepts appointment as a non-exclusive Roaster Distributor to purchase, inventory, promote, distribute and sell Keurig AH Products to and only to AH consumers, Keurig Resellers, Food Service and Retail Locations, Diedrich Affiliates, and Offices in the Territory.

7.2.3 Diedrich shall use commercially reasonable efforts at ensuring that neither it, Diedrich Affiliates, Keurig Resellers, nor Food Service and Retail Locations sell Keurig AH Products to KADs, KARDs, RNKADs, or OCS Distributors without the express written permission of Keurig. Diedrich shall not knowingly sell K-Cups and Keurig AH Products to customers for resale or use outside of the Territory. Diedrich shall not solicit or accept orders for any K-Cups and Keurig AH Products from any prospective customers that are not specified in Sections 7.2.1 and 7.2.2, respectively. If Diedrich receives an order for any K-Cups or Keurig AH Products from a prospective customer that Diedrich is not authorized to sell to under this Section 7.2, then Diedrich shall not accept the order and may, at its discretion, refer the order to Keurig.

7.2.4 AH Launch. Diedrich may commence sales of K-Cups and Keurig AH Products (“Diedrich AH Launch”) no earlier than the date of the AH Launch. Keurig reserves its

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rights to allocate sales of Keurig AH Products subject to availability and to delay the Diedrich AH Launch until thirty (30) days subsequent to the AH Launch. The AH Launch is currently intended to occur on July 7, 2003. Notwithstanding the foregoing, Keurig reserves the right to test market Keurig AFH or AH Products and K-Cups to a select group of AH consumers in the Territory for the purposes of such AH consumers’ personal use prior to the AH Launch.

7.2.5 In the event that Keurig appoints another Licensed Roaster or modifies the distribution or license agreement of another Licensed Roaster to sell Keurig AH Products to KADs, KARDs, RNKADs or OCS Distributors, Keurig shall give Diedrich the same option on terms no less favorable than those offered to the other Licensed Roaster, provided that Diedrich shall have 90 days to accept or reject such other terms in their entirety.

7.3 Common Sales and Distribution Provisions.

7.3.1 Nothing in this Agreement will restrict Keurig from appointing other distributors in any geographic area or market segment.

7.3.2 Diedrich shall conduct its business in the sale of Keurig Products and manufacture and sale of K-Cups as a principal for its own account solely at its own risk and expense.

7.3.3 Diedrich’s pricing, credit and other terms of sale and distribution to Diedrich customers shall be at the sole discretion of Diedrich.

7.3.4 Diedrich shall pay sales, excise taxes and other governmental charges levied in respect of the resale of Keurig Products and Diedrich K-Cups by Diedrich, other than those on Keurig’s income therefrom.

7.3.5 Except as expressly provided in Sections 2, 7, or 14, nothing in this Agreement shall be construed to limit Diedrich from selling any other product to any entity.

8. Keurig Product Sales.

8.1 Keurig Best Efforts.

Keurig will use its best efforts to fill Diedrich orders promptly upon acceptance.

8.2 Keurig AFH Products.

The price of each Keurig AFH Product sold to Diedrich shall be [* * *] FOB Keurig’s designated facility. Keurig may adjust pricing on not less than thirty (30) days’ prior written notice, provided however, that at any time during the term of this Agreement, Keurig AFH Product prices to Diedrich shall be [* * *].

8.3 Keurig AH Products.

The price of each Keurig AH Product sold to Diedrich shall be [* * *] FOB Keurig’s designated facility. Keurig may adjust

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pricing on not less than thirty (30) days’ prior written notice, provided however, that at any time during the term of this Agreement, Keurig AH Product prices to Diedrich shall be [* * *].

8.4 Product Offering.

Subject to availability and the terms of this Agreement, Diedrich shall be able to purchase any Keurig Product that Keurig offers for sale to any third party unless such Keurig Product is specially manufactured for that third party. Notwithstanding the foregoing, Keurig reserves the right to allocate Keurig Products to its customers.

8.5 Terms of Sale.

Prices are subject to applicable state, local and federal taxes. All orders are subject to approval by Keurig at prices, terms and specifications prevailing at time of order. Merchandise, following receipt, must be unpacked and inspected to reveal concealed damage or shortage. Any shortage or damage should be reported to Keurig and to the transportation company within 10 days of receipt. All products are sold without return privileges, subject to the warranty provisions set forth in Section 9. Any merchandise returned for credit, exchange or repair must be returned in accordance with Section 9.4. Freight is FOB Keurig’s or its agent’s facility, at the discretion of Keurig. Title to goods passes to purchaser upon delivery from Keurig. Keurig reserves the right to split ship orders and cancel backorders less than $50. All backorders will be shipped in 60 days or cancelled.

8.6 Payments.

Except as otherwise specified in Section 6.2, payment of amounts due from Diedrich to Keurig shall be net thirty (30) days from date of invoice. All past due accounts are subject to a late charge of 1.5% per month on the unpaid overdue balance. All payments due under this Agreement shall be drawn on a Canadian or U.S. Bank and payable in United States dollars.

8.7 Guaranty of Sales to Affiliates.

At Diedrich’s discretion, Diedrich Affiliates may purchase Keurig Products and K-Cups directly from Keurig at Diedrich’s price as described in Section 8.2 and 8.3, and purchases by Diedrich Affiliates will be considered as purchased by Diedrich for the purposes of determining such price, provided, however, that Diedrich hereby guarantees to Keurig the full and punctual payment of the amounts invoiced Diedrich Affiliates when due and their performance of all other obligations to Keurig hereunder or in connection with such purchases (the “Guaranty”). This Guaranty is an absolute, unconditional and continuing guaranty of the full and punctual payment of all of the amounts invoiced and not of their collectibility only and, except as expressly provided below, is in no way conditioned upon any requirement that Keurig first attempt to collect any of the amounts invoiced from the Diedrich Affiliate or resort to any collateral security or other means of obtaining payment. Should the Diedrich Affiliate default in the payment of any of the amounts invoiced, default being defined as failure to pay the full invoiced amount within sixty (60) days of the invoice date unless contested in good faith (the “Default”), such amounts invoiced in default shall become due and payable to Keurig by Diedrich under this Guaranty within thirty (30) days following

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reception by Diedrich of a copy of the notice sent by Keurig to the defaulting Diedrich Affiliate indicating the amount that remains outstanding and for which it is in Default.

The obligations of Diedrich under this Guaranty shall continue in full force and effect until Keurig has received written notice of Diedrich’s intention to discontinue this Guaranty in full or to exclude from this Guaranty specific Diedrich Affiliates that Diedrich considers, in its sole discretion, not credit worthy:

• Notice to discontinue this Guaranty in full shall take effect immediately upon its reception by Keurig or such later date as Diedrich may specify in its notice. Upon receipt of such a notice, Keurig shall have the full and unrestricted right to cancel any outstanding purchase orders for Keurig Products from any Diedrich Affiliates and to refrain from accepting any further purchase orders from such Affiliates without liability to Diedrich or such Affiliates.

• Notice to exclude from this Guaranty specific Diedrich Affiliates shall take effect immediately upon its reception by Keurig. Upon receipt of such a notice, Keurig shall have the full and unrestricted right to cancel any outstanding purchase orders for Keurig Products from such specific Diedrich Affiliate and to refrain from accepting any further purchase orders from such specific Diedrich Affiliate without liability to Diedrich or such Affiliates.

In addition, no such notices shall affect the validity and effectiveness of this Guaranty with respect to amounts invoiced by Keurig before their respective effective dates.

In the event that Keurig receives any payments from Diedrich on account of its liability under this Guaranty, Diedrich shall have all rights to claim repayment from and against the defaulting Diedrich Affiliate and shall be subrogated to any and all rights of Keurig with respect to that specific instance of default.

Any restrictions or other limitations on Diedrich’s right to purchase or sell Keurig Products and K-Cups set forth in this agreement shall be binding and have the same effect on Diedrich Affiliates.

8.8 No Restrictions.

Keurig maintains its own sales force to promote Keurig Products and K-Cups to customers. Nothing in this Agreement shall be construed to restrict Keurig in the resale, pricing or other terms of sale of any Keurig Product or K-Cups to any customer inside or outside of the Territory.

9. Keurig Warranty.

SUBJECT TO SECTION 18, THE KEURIG PRODUCTS WARRANTY PROVISIONS SET FORTH IN THIS SECTION SET FORTH KEURIG’S SOLE LIABILITY FOR CLAIMS BASED UPON DEFECTS IN, OR FAILURE OF ANY KEURIG PRODUCTS PROVIDED HEREUNDER. SUBJECT TO SECTION 18, THESE PROVISIONS ARE DIEDRICH’S EXCLUSIVE

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REMEDIES FOR CLAIMS BASED UPON DEFECTS IN, OR FAILURE OF ANY KEURIG PRODUCTS PROVIDED HEREUNDER. KEURIG HEREBY SPECIFICALLY DISCLAIMS ALL OTHER WARRANTIES WITH RESPECT TO KEURIG PRODUCTS SUPPLIED HEREUNDER BY KEURIG INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE.

9.1 Away From Home Brewers.

Keurig shall provide Diedrich with a limited one-year warranty on each Keurig AFH Brewer from the date of shipment to Diedrich (the “Keurig AFH Warranty”). Keurig warrants that Keurig AFH Brewers will be free of design, material and workmanship defects and fit for their intended use. Keurig will repair or replace Keurig AFH Brewers for a period of one (1) year from date of shipment to Diedrich any defective Keurig AFH Brewer. If a Keurig AFH Brewer is found to be defective within 30 days of shipment, Keurig shall first attempt to effect the repair such brewer. If Keurig determines that it will not be able to effect the repair of a Keurig AFH Brewer found to be defective within 30 days of shipment, Keurig will replace such brewer with a new brewer. If a Keurig AFH Brewer is found to be defective more than 30 days after shipment, Keurig in its sole discretion shall repair such brewer or replace such brewer with a refurbished brewer in like new condition.

9.2 At Home Brewers.

Keurig shall provide Diedrich with a limited one-year warranty on each Keurig AH Brewer from the date of the original end-user’s purchase from Diedrich (the “Keurig AH Warranty”). Keurig warrants that Keurig AH Brewers will be free of design, material and workmanship defects and fit for their intended use. Keurig will repair or replace any defective Keurig AH Brewer for a period of one (1) year from date of the original end-user’s purchase, subject to proof of purchase by end-user or proof of sale by Diedrich. If a Keurig AH Brewer is found to be defective within 30 days of such purchase, Keurig shall replace such brewer with a new brewer. If a Keurig AH Brewer is found to be defective more than 30 days after such purchase, Keurig in its sole discretion shall repair such brewer or replace such brewer with a refurbished brewer in like new condition. Keurig will not use any warranty registration process to intentionally solicit consumers that purchased the Keurig AH Brewer from Diedrich.

9.2.1 Keurig shall provide Diedrich’s end-user customers with a limited one-year warranty on each Keurig AH Brewer from the date of the original end-user’s purchase from Diedrich (the “Keurig AH Customer Warranty”). Keurig warrants that Keurig AH Brewers will be free of design, material and workmanship defects and fit for their intended use. Keurig will repair or replace any defective Keurig AH Brewer for a period of one (1) year from date of the original end-user’s purchase, subject to proof of purchase.

9.2.2 Notwithstanding Section 9.2, the warranty for Keurig Brewers purchased by Diedrich for the purposes of AH test marketing as set forth in Section 7.2.5 shall be limited to the specific terms and conditions agreed to by the Parties for each purchase of such Keurig Brewers by Diedrich as set forth in Schedule 7.2.5.

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9.2.3 Notwithstanding this Section 9.2, should AH Brewers be used or sold by Diedrich as AFH Brewers, the warranty terms for such Brewers shall be as set forth in Section 9.1.

9.3 Common Warranty Provisions.

Keurig will perform warranty service at Keurig’s designated facility, provided Diedrich returns the Keurig Brewer in accordance with Keurig’s shipping instructions. Keurig’s sole responsibility under this warranty shall be, to either repair or replace the Keurig Brewer. Keurig shall only be responsible for its own costs of materials and its own labor in connection with warranty claims. For all replacement parts not manufactured by Keurig, Keurig shall make commercially reasonable efforts to pass through warranty coverage from its suppliers to Diedrich. All defective Keurig Brewers, or defective components thereof, returned under this warranty shall become Keurig property. If Keurig determines that the original Keurig Brewer did not contain a design, material or workmanship defect, Diedrich shall pay Keurig all costs of handling, transportation, and repairs at Keurig prevailing rates, which Keurig shall make available to Diedrich at Diedrich’s reasonable request. Diedrich shall not represent, neither explicitly nor implicitly, that it is offering, adopting or issuing the Keurig AFH Warranty or Keurig AH Customer Warranty; nor shall Diedrich affirm, promise or undertake any warranty obligation on behalf of Keurig with respect to any Keurig Brewers. The warranty is void under the following circumstances:

9.3.1 Diedrich repairs Keurig Brewers with replacement parts that have not been purchased from or approved by Keurig.

9.3.2 Negligent installation, repair, or operation of Keurig Brewers, including but not limited to, operation of Keurig Brewers without a Keurig approved water filtration system unless the brewer is not designed for a direct water line connection. Keurig approved water filtration systems include the Omnipure KQ8.

9.3.3 Abuse or neglect, including but not limited to, failure to periodically clean or remove mineral deposit accumulations from Keurig Brewers.

9.3.4 Keurig Brewers damaged in transit from Diedrich to Keurig due to improper packaging.

9.3.5 Keurig Brewers damaged after delivery from Keurig to Diedrich. Shipping damage claims should be submitted to the shipping company.

9.4 Keurig Brewer Return Procedure.

Any Keurig Brewers returned must have an Authorization To Return (ATR) number, which can only be issued by Keurig’s Service Department at 1-888-CUP-BREW and which shall not be unreasonably withheld. All returns shall be returned at Keurig’s expense in cartons marked with the ATR number. Keurig Brewers must be packed in the appropriate standard Keurig Brewer carton. Keurig reserves the right to not accept delivery of Keurig Brewers returned in cartons other than the appropriate standard Keurig Brewer cartons or cartons that are not labeled with the ATR number.

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10. Training.

For as long as Diedrich is a distributor of Keurig Products, Keurig agrees to provide periodic free training on a reasonable basis to technical and service representatives designated by Diedrich in all aspects of servicing and operation of Keurig Products, and will provide Diedrich with up to date service materials on Keurig Products.

11. Marketing Policies.

11.1 Cooperation and Cost Sharing.

Keurig and Diedrich agree to co-operate in promoting Keurig Products and Diedrich K-Cups. Diedrich will develop sales materials, merchandising materials and retail displays from time to time to market and sell Keurig Products. All Diedrich sales literature, fixtures or any other marketing or merchandising material used to promote Diedrich K-Cups and or Keurig Products not subject to cost sharing shall be available for sale to Keurig at prices established by Diedrich from time to time. The Parties will review cost sharing of trade show participation on a situation-by-situation basis, and discuss in good faith cooperation to maximize the exposure given to Keurig Products and Diedrich K-Cups at trade shows. Nothing herein shall obligate either Party to promote Keurig Products or Diedrich K-Cups at any trade show.

11.2 Diedrich Advertising of AH Products.

Diedrich shall be required to advertise the availability from Diedrich or Keurig of Keurig AH Product offerings (e.g., that Diedrich or Keurig offers an AH line of products using Keurig’s brewing technology) commencing 30 days prior to the AH Launch currently planned by Keurig for July 7, 2003. This shall include but not be limited to promoting Keurig AH Products in Diedrich’s company owned retail locations, website and catalogs, and, as practicable at Diedrich’s discretion, on packaging materials for Diedrich K-Cups (e.g. the front of the current 25-pack sleeve of Diedrich K-Cups). Notwithstanding the foregoing, Diedrich may first deplete its inventories of printed matter in its possession or under its control prior to the AH Launch before complying with the requirements of this Section, provided that such inventories are purchased in accordance with Diedrich’s normal course of business.

11.3 Diedrich on Keurig’s Website.

Keurig shall place on its website an Internet hyperlink to Diedrich’s website. Diedrich shall have the right to approve the form and content of any information about Diedrich on Keurig’s website, such approval not to be unreasonably withheld or delayed.

11.4 Sharing of Information.

Keurig and Diedrich agree to share all information related to design, packaging, performance and functionality of Keurig AH Products and the K-Cup. Upon request, Keurig will provide to Diedrich specific information on those AH customers that identify themselves as (i) having purchased a Keurig AH Product from Diedrich and (ii) having permitted Keurig to release that information back to Diedrich. All such shared information shall remain subject to the confidentiality provisions of this Agreement.

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11.5 Post-AH Launch Offering of AH Brewers.

Subject to minimum order requirements and subsequent to the AH Launch, Keurig shall offer for sale to Diedrich Keurig AH Brewers that are not accompanied by any promotional materials or sample coffee that promotes the purchase of coffee from any other Licensed Roaster.

12. Marks.

12.1 Use of Keurig Marks on K-Cups and K-Cup Packaging.

Diedrich will label all Diedrich K-Cups with either (a) the then current Diedrich Marks appropriate to lid stock; or (b) such marks as may be licensed to Diedrich by its customers as otherwise permitted in this Agreement. Each Diedrich K-Cup label or lid shall also state: “For Keurig Brewers.” Instructions on Diedrich K-Cup packing cartons shall be intended to optimize the user’s understanding of how to use the complete Keurig Brewing System (K-Cup, Keurig Brewer and, if applicable, the K-Cup dispensing unit) including at least the specific reference “For Keurig Brewers.” The packing cartons used to pack and dispense Diedrich K-Cups shall also include copy that contains references to Keurig patents and patents pending, as well as Keurig’s logo and/or “Keurig Brewed” tag line or logo in a reasonable size relative to Diedrich’s logo and that is legible to a user from 6 feet. As soon as possible after new patents are granted and such information is provided to Diedrich, Diedrich shall update product labels and literature to reflect the new patents after depleting stocks of its current inventory. Diedrich may use Keurig Marks as provided by Keurig together with then current Diedrich Marks on any point-of-sale material, including standees, cups, napkins, dispensers, creamers, stirrers or brewers or advertising materials as permitted by the grant of license.

12.1.1  Use of Keurig Marks for AFH marketing.

Keurig shall work with Diedrich in good faith to develop prior to the AH Launch a set of mutually agreeable Keurig branding guidelines to be used in conjunction with Diedrich marketing of the AFH Keurig Brewing System. Such guidelines will include a requirement to refer to Diedrich’s K-Cup as a “K-Cup” unless otherwise specified by Keurig.

12.1.2  Use of Keurig Marks for AH marketing.

Keurig shall work with Diedrich in good faith to develop prior to the AH Launch a set of mutually agreeable Keurig branding guidelines to be used in conjunction with Diedrich marketing of the Keurig Brewing System for the AH market. Such guidelines will include but are not limited to branding on Diedrich’s K-Cup packaging, website, sales collateral, catalogs and advertising. The purpose of such guidelines is to ensure that Diedrich’s customers and ultimate consumers are aware of the unique Keurig brewing technology associated with the Keurig Brewing System for the AH market. Such guidelines will include requirements that include the following: to refer to Diedrich’s K-Cup as a “K-Cup,” to use the term “Keurig Brewed” in conjunction with Diedrich K-Cups, and the promotion of “Keurig Brewed” or “Keurig Brewed Single Cup” technology unless otherwise specified by Keurig.

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12.2 Rights in Marks.

Keurig acknowledges that all rights in and to Diedrich’s and its customers’ Marks, including the goodwill derived therefrom, are the sole and exclusive property of Diedrich and its customers. All uses of Diedrich’s or its customers’ Marks are subject to the prior written approval of Diedrich. Keurig acknowledges that Diedrich’s rights in and to its Marks are special and unique, and that notwithstanding the arbitration provisions of this Agreement, Diedrich shall be entitled to specific performance and injunctive relief to prevent a breach or threatened breach of its rights pursuant to this Section 12. Keurig shall promptly notify Diedrich of any infringements, imitations, illegal use or misuse of Diedrich Marks which come to Keurig’s attention.

Diedrich acknowledges that all rights in and to the Keurig Marks, including the goodwill derived therefrom, are the sole and exclusive property of Keurig. Subject to the grant of license and except as otherwise specifically permitted by this Agreement, all uses of Keurig Marks are subject to the prior written approval of Keurig. Diedrich is prohibited from modifying any of Keurig’s Products including covering or removing any Keurig labeling or logo without prior written permission from Keurig. Diedrich acknowledges that Keurig’s rights in and to its Marks are special and unique, and that notwithstanding the arbitration provisions of this Agreement, Keurig shall be entitled to specific performance and injunctive relief to prevent a breach or threatened breach of its rights pursuant to this Section 12. Diedrich shall not reference Keurig except in connection with Keurig Products and Diedrich K-Cups.

The provisions of this Section 12.2 shall survive termination of this Agreement with the exception that after termination of this Agreement either Party may deny approval for the use of their Marks to the other Party in its absolute discretion.

12.3 Display of Marks.

The Parties agree that any of their respective Marks that have been pre-approved under Section 12 and listed in Schedule 12.3 may be displayed in any media as part of a representation of the Keurig Brewing System for the purpose of sales literature without the further prior approval of the other Party. Diedrich agrees that its sales literature shall reference Keurig patents as above. Diedrich may use and display the “Keurig” Mark in any advertising or promotional material without prior written consent so long as the material includes reference to Keurig as the owner of the Mark.

12.4 Maintenance of Intellectual Property.

Keurig shall be responsible for maintaining the intellectual property licensed in this Agreement, including Keurig Marks and patents, in full force and effect throughout the term of this Agreement.

12.5 Notice of Infringement

Each Party shall advise the other promptly of any instances of infringements, imitations, illegal use or misuse, of any intellectual property licensed in this Agreement, including Keurig Marks and patents. Diedrich shall have the right to commence legal action for the enforcement of any such licensed intellectual property in the Territory, but prior to the commencement of any such

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action by Diedrich, Diedrich shall advise Keurig by notice in writing of its intention to do so. Keurig shall have the option to be exercised by delivery of notice in writing to Diedrich to assume the conduct of any such action and appoint counsel of its choice at any time during the action provided that Keurig reimburses Diedrich for all reasonable legal costs incurred by Diedrich from the date of commencement of the action. Keurig and Diedrich shall co-operate fully in the prosecution of any such action free of charge, and each agrees that it shall be joined as a Party plaintiff to the action and authorizes such joinder. Each shall have the right at its own expense to retain independent counsel who shall be kept fully informed of all issues in the action, who shall be advised in advance of each new step in the action, and who shall be entitled promptly to receive copies of all pleadings, documents and correspondence regarding the action. In the event that any such action is successfully prosecuted against an infringer, any damages, accounting of profits, award of legal costs or other recovery shall be applied first to reimburse the Party having the conduct of the action for its reasonable legal expenses, including any amounts paid by Keurig to Diedrich in assuming the conduct of the action, and any remaining amounts shall then be divided between Keurig and Diedrich in proportion to the damages suffered by Diedrich and the Royalties lost by Keurig with respect to the infringing conduct, subject to arbitration as hereinafter set out if the Parties are unable to agree upon such proportion. In the event that any such action is unsuccessful, the Party responsible for the conduct of the action shall be responsible for paying any legal costs that may be awarded to the successful defendant.

12.6 Infringement Action

Keurig shall at Keurig’s expense conduct the defense of any action on behalf of Diedrich commenced in the Territory against Diedrich for infringement of any intellectual property licensed in this Agreement, provided that such infringement is necessarily incidental to the exercise of the rights granted in this Agreement and provided that Diedrich promptly advises Keurig of any threatened action or claim against Diedrich and co-operates fully with Keurig in the defense of any action including providing such information and evidence regarding any alleged acts of infringement as may reasonably be required by Keurig. Keurig shall have the exclusive right to select counsel of its choice to defend any such action. Keurig may settle any such action or claim against Diedrich in such manner as Keurig in its absolute discretion sees fit provided that any such settlement shall not interfere with Diedrich’s right to exercise the rights granted in this Agreement and provided that Keurig bears all costs associated with the settlement including any compensation for past infringement and any royalties or other costs required to enable Diedrich to continue to exercise the rights granted in this Agreement. Keurig may settle any such action or claim on any other basis with the prior written consent of Diedrich.

12.7 License

In the event Keurig stops supplying any Keurig Products or K-Cups in the ordinary course of its business within the Territory, the Parties shall negotiate in good faith a non-exclusive license for Diedrich to manufacture, use and sell such Keurig Products or K-Cups within the Territory, and Diedrich shall pay to Keurig a reasonable royalty for such license.

13. Sales Policies.

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13.1 Diedrich’s Best Efforts.

Where appropriate and in accordance with their client’s needs and desires, Diedrich will use best efforts to promote vigorously and effectively the sale of Diedrich K-Cups and Keurig Products in the Territory, as provided for in this Agreement. Diedrich will accept orders for, pick, and ship Diedrich K-Cups and Keurig Products in accordance with the same policies, procedures, and performance standards it uses for its non-Keurig product offerings.

13.2 New Keurig Authorized Distributors.

Keurig agrees to inform Diedrich of all new Keurig Authorized Distributors within five (5) business days of their acceptance (but in any event, no later than any other roaster is informed), including requested credit and other reasonable commercial information.

14. Non-Compete.

14.1 Basic Terms of Non-Competition.

For the term of this Agreement, Diedrich agrees that it will not directly or indirectly: (a) install or solicit for installation, design or solicit for the design, develop or solicit the development of any manufacturing line or system to manufacture single-cup, portion-pack cartridges for use in a conjunction with a pressurized hot water system other than the Keurig Brewing System; and (b) design, develop, or manufacture, or contribute in any way thereto, any single-cup, portion-pack products, including any brewer designed for use with single-cup, portion pack cartridges other than the Keurig Brewer, in the case of both clauses (a) and (b) that contemplate all of the following concepts:

• Single serving of ground coffee, tea, hot chocolate or other non-coffee soluble hot beverage base contained in a brewing chamber;

• A brewing chamber designed to be pierced during the brewing process to allow hot water in and the brewed beverage out;

• A pressurized brewing process that takes place at pressures less than 30 psi inside the brewing chamber; and

• A brewing chamber requiring no human manipulation other than placing the brewing chamber in the brewing machine.

Examples of the above systems that would be competitive include single-cup portion-pack coffee systems such as those manufactured by Flavia and Kenco. Examples of systems that would not be competitive are hopper-based single-cup coffee systems such as those manufactured by Filterfresh and Brio and espresso pod-based systems such as Illy pod espresso machines, Café Espresso and 123spresso systems.

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This Non-Compete does not apply to single-cup, portion-packed hot beverage products or brewing systems that are not used to brew coffee or tea (including herbal tea) until the time that Keurig offers a single-cup, portion-pack product that produces the same type of non-coffee hot beverage and that Diedrich agrees to distribute such product.

14.2 Sale by Affiliates.

Section 14.1 shall not apply to the sale of any single-cup, portion-pack products described under Section 14.1, including any brewer designed for use with single-cup, portion pack cartridges, by Diedrich or a Diedrich Affiliate.

14.3 Private Label K-Cups.

Nothing in this Agreement shall be construed to prohibit Diedrich from contracting with any third party customer for the manufacture and sale by Diedrich of the customer’s private-label K-Cups; provided, however, that such private label K-Cups shall be deemed to be Diedrich K-Cups and as such, be subject to the provisions of this Agreement. Notwithstanding the foregoing, Diedrich agrees to provide Keurig with any proposed contract between Diedrich and any third party relating to private label K-Cup manufacture and sale prior to such contract’s execution, provided, however that Diedrich reserves the right to maintain the confidentiality of any information in such contract related to pricing between Diedrich and the third party. Keurig shall have the right to approve or disapprove any such contract based on such contract’s compliance with the terms and conditions of this Agreement. Keurig shall review and either approve or disapprove such contracts in a timely fashion. If Keurig disapproves any such contract, Keurig shall provide Diedrich with written notice describing how such contract is not in compliance with this Agreement so that such contract may be brought into compliance with this Agreement.

14.4 Termination of Non-Competition.

Notwithstanding Section 14.1, Diedrich’s obligations pursuant to this Section 14 shall terminate upon either Party providing one (1) year’s notice of non-renewal as provided for in Section 15.1, Keurig’s receipt of two (2) years’ written notice of termination from Diedrich as provided for in Section 15.3.1 or upon Diedrich’s receipt of two (2) years’ written notice of termination from Keurig as provided for in Section 15.4.1. Notwithstanding the arbitration provisions of this Agreement, Keurig shall be entitled to specific performance and injunctive relief to prevent a breach or threatened breach of its rights under this Section 14.

14.5 Most Favored Nation.

In the event that the non-competition obligations of any Licensed Roaster are more favorable to such Licensed Roaster than those contained herein, Keurig shall notify Diedrich, which shall then have the right to amend the non-competition obligations contained in this Section 14 to be the same or substantially the same as the license agreement of such Licensed Roaster.

15. Term and Termination of Agreement.

15.1 Term.

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This Agreement shall have a term of ten (10) years (the “Initial Term”) and shall automatically renew thereafter for successive terms of five-years (each a “Renewal Term”) unless Keurig notifies Diedrich in writing of its intent not to renew at least one (1) year prior to the expiration of the Initial Term or any Renewal Term or unless this Agreement is earlier terminated as provided for in this Section 15. Notwithstanding the foregoing, Keurig shall not have a right to terminate at the end of the Initial Term if Diedrich’s K-Cup sales for the twelve month period ending one (1) year prior to the end of the Initial Term are at least [* * *] units and Keurig shall not have a right to terminate at the end of any Renewal Term provided Diedrich’s K-Cup sales for the twelve month period ending one (1) year prior to the end of each Renewal Term are at least [* * *] units greater than Diedrich’s K-Cup sales for the twelve month period ending five (5) years earlier.

15.2 Termination for Cause.

15.2.1  Notwithstanding the foregoing, either Party may terminate this Agreement for Cause. “Cause” shall be understood as any of the following events: (1) material breach of this Agreement; (2) institution by or against a Party of bankruptcy, insolvency or receivership proceedings or an admission of a Party of its inability to pay its debts as they become due; or (3) commencement by a Party of any steps toward liquidation, dissolution or winding up of its affairs.

15.2.2  Prior to effecting termination under Section 15.2.1 clause 1, either Party shall provide prior written notice of breach to the defaulting Party and if such breach is not cured within thirty (30) business days of notice, the Party shall then attempt to resolve the matter in good faith through direct negotiations prior to calling on any remedies set forth in Section 19.13. If the Parties cannot resolve the matter within fifteen (15) days of their first meeting, the dispute shall be settled in accordance with Section 19.13 of this Agreement. If the judgment rendered as a result of the procedures required in Section 19.13 validates the terminating Party’s assertion that it is entitled to terminate pursuant to Section 15.2.1 clause 1, that Party may terminate this Agreement upon ninety (90) days’ prior written notice to the defaulting Party. Any termination under Section 15.2.1 clause 2 or 3 shall be effective immediately upon providing written notice to the defaulting Party.

15.3 Diedrich Termination Rights.

15.3.1  Diedrich may terminate this Agreement at any time and for any reason upon providing Keurig with two (2) years’ prior written notice.

15.3.2  Notwithstanding the termination of this Agreement, Diedrich, at its own option, may continue to sell and deliver Diedrich K-Cups remaining in its inventory in order to fulfill existing customer orders at prevailing Diedrich list prices for a six (6) month period after the termination of this Agreement, and Diedrich will continue to permit Keurig to resell Diedrich K-Cups that are in its inventory that contain the Diedrich Marks. Keurig shall have an option, exercisable within thirty (30) days of the termination of this Agreement,

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to purchase and take delivery of any or all of the remaining Diedrich K-Cups in Diedrich’s inventory (subject to any reserve in order to allow Diedrich to fulfill existing customer orders) at Diedrich’s then prevailing list prices in accordance with Section 2.4. If Keurig fails to exercise such option, Diedrich may sell any inventory remaining after fulfilling its own existing customer orders through customary distribution channels and at prevailing Diedrich list prices, subject to the royalty provisions of Section 6.

15.4 Keurig Termination Rights.

In addition to those termination rights as contemplated in Section s 15.1 and 15.2, Keurig may also terminate this Agreement upon two years’ notice to Diedrich if Diedrich refuses a Royalty Alteration as contemplated in Section 6.4.2.

16. Obligations on Termination.

On termination of this Agreement, Diedrich shall cease to be a Roaster Distributor with rights to purchase Keurig Products from Keurig or K-Cups from Keurig and Licensed Roasters and to have any other rights hereunder (the “Terminated Roaster Distributor”), except as expressly set forth hereinbelow:

16.1 Except in the event of knowing and intentional submission by Diedrich to Keurig of false or fraudulent reports or statements (in which case all rights by the Terminated Roaster Distributor to purchase Keurig Products and K-Cups hereunder shall irrevocably cease), and subject to the other terms and conditions of this Section 16, the Terminated Roaster Distributor may continue to purchase K-Cups and other Keurig Products, but not Keurig Brewers, from Keurig [* * *] on Keurig’s [* * *] and K-Cups from Licensed Roaster(s), provided Diedrich and such Licensed Roaster(s) are able to agree on such arrangement, at prices and terms agreed between such Licensed Roaster(s) and Diedrich for the sole purpose of supplying the requirements of the Keurig Brewers owned by Diedrich so long as such Keurig Brewers remain within the Territory (“Installed Brewers”). Keurig hereby agrees to pass through to Diedrich any expressed or implied warranties of any Licensed Roaster in connection with such Licensed Roaster’s K-Cups purchased under this Agreement. Keurig reserves the right to establish separate credit terms or no credit terms for the Terminated Roaster Distributor, in its absolute discretion. Keurig may require, as a condition to Keurig’s obligations under this Section 16.1, that all amounts owed by the Terminated Roaster Distributor to Keurig, notwithstanding prior terms of sale, become immediately due and payable and any other faults or breaches under this Agreement be cured. If Keurig so requires, the Terminated Roaster Distributor’s rights under this Section 16.1 shall be tolled until all such amounts have been paid in full and/or such faults or breaches cured. Any termination of this Agreement shall not affect any other rights then accrued. Keurig’s obligations to continue to supply K-Cups and Keurig Products, but not Keurig Brewers, hereunder shall continue only so long as Keurig continues to provide the applicable Keurig Products or K-Cups in the ordinary course of its business within the Territory.

16.2 Diedrich shall not sell or use any K-Cups or Keurig Products supplied by Keurig or K-Cups supplied by Licensed Roasters under Section 16.1 for Keurig Brewers other than the Installed Brewers located within the Territory. Diedrich hereby agrees that, in addition to Keurig’s other

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remedies, Keurig shall be entitled to specific performance and injunctive relief to cease or prevent a breach of its rights under this Section 16.2.

16.3 With the specific exception of the K-Cup trademark, Diedrich shall limit its use of Marks to inventories existing at the time of termination of stationary, advertising matter and other printed matter in its possession or under its control. Diedrich shall immediately take all commercially reasonable steps to remove and cancel its listings in telephone books, and other directories, and public records, or elsewhere that contain Marks. Notwithstanding Section 19.8 herein, if Diedrich fails to obtain such removals or cancellations promptly, Diedrich hereby appoints Keurig as its attorney-in-fact for the limited purpose of making application for such removals or cancellations on behalf of Diedrich and in Diedrich’s name and in such event Diedrich will render reasonable assistance. Notwithstanding the arbitration provisions of this Agreement, Keurig shall be entitled to specific performance and injunctive relief to prevent a breach or threatened breach of its rights under this Section.

16.4 All unshipped orders for Keurig Brewers shall be cancelled without liability of either Party to the other.

16.5 Neither Party shall be liable to the other because of such termination for compensation, reimbursement, or damages on account of the loss of prospective profits or anticipated sales, or on account of expenditures, investments, lease or commitments in connection with the business or goodwill of Keurig or Diedrich. Nothing in this Subsection 16.5 nor a termination of this Agreement by either Party under Section 15 shall be deemed to relieve the other Party of any liability arising out of a breach of its obligations under this Agreement.

16.6 The Terminated Roaster Distributor’s rights to continue to purchase K-Cups and Keurig Products from Keurig or a Licensed Roaster under Section 16.1 shall terminate immediately and irrevocably upon notice in the event of the Terminated Roaster Distributor’s breach of any provision of this Section 16, or upon the Terminated Roaster Distributor’s failure to pay any amount owed when due, which failure is not cured within ten (10) days following written notice from Keurig. It is expressly understood and agreed that Keurig’s rights in the event of such breach or failure shall include the right to cause its Licensed Roasters to cease supplying K-Cups and Keurig Products to the Terminated Roaster Distributor pursuant to Keurig’s contractual arrangements with its Licensed Roasters.

17. Confidentiality of Customers; Confidentiality.

Diedrich hereby acknowledges Keurig’s intent to inform current and subsequent Licensed Roasters of all KADs and other entities that distribute K-Cups. Keurig hereby agrees during the term of this Agreement and for a period of ten (10) years from the termination of this Agreement not to inform other Licensed Roasters, and to treat as confidential, all Confidential Information, whether any such entities purchase Keurig Products and K-Cups from Diedrich, unless such information is publicly available.

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Each of the Parties acknowledges that, in the course of performing their respective obligations hereunder, a Party (“Receiving Party”) may receive information which is proprietary and confidential to the other Party and its Affiliates (“Disclosing Party”) and which the Disclosing Party wishes to protect from public disclosure (“Confidential Information”). Confidential Information includes nonpublic information that Disclosing Party designates as being confidential or which, under the circumstances surrounding disclosure, ought to be treated as confidential. Confidential Information includes, without limitation, all information disclosed at any time before, after or at the time of execution of this Agreement to the Receiving Party relating to the Disclosing Party’s businesses, customers, products, manufacturing techniques, marketing and sales forecasts, financial status, product development plans, strategies and the like. Excluded from the definition of Confidential Information is information:

• Already in public domain (except as specifically provided above);

• Which passes into the public domain through no fault of the Receiving Party;

• Released to third parties by the Disclosing Party without restriction; or

• That the Receiving Party is ordered to release by a court or agency of competent jurisdiction. In such event, the Receiving Party shall notify the Disclosing Party immediately of the subpoena. It will be the burden of Disclosing Party to move for a protection order or similar device upon notice, and to notify the Receiving Party within a seventy-two (72) hour period, or less if required by the subpoena, that it is doing so. Failure of a Disclosing Party to timely notify the Receiving Party will release the Receiving Party from its confidentiality obligations.

The Receiving Party shall, during the term of this Agreement and for a period of five (5) years from the date of termination of this Agreement:

• Ensure that the Confidential Information of the Disclosing Party is not revealed to anyone, in whole or in part, except to its employees and to third parties employed by it where it is essential that the Confidential Information be revealed in order to ensure the fulfillment of its obligations under this Agreement;

• Use the Confidential Information only to the extent where it is essential or desirable that it do so in order to ensure the fulfillment of its obligations under this Agreement;

• Take the necessary measures to inform each of its employees and third parties employed by it and to whom it discloses Confidential Information, of the nature of such information and its confidential character and to assure that each of its employees and such third parties respect all the obligations of the Receiving Party in accordance with this Agreement;

• Inform the Disclosing Party of any unauthorized disclosure or use of the Confidential Information of which it is aware; and

• Return to the Disclosing Party the Confidential Information, upon the Disclosing Party’s request, or at the latest, at the time of the termination of this Agreement, without the requirement of notice, all the Confidential Information that the latter has revealed to it.

Notwithstanding the arbitration provisions of this Agreement, either Party shall be entitled to specific performance and injunctive relief to prevent a breach or threatened breach of its rights under Section 17 of this Agreement.

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18. Indemnification.

18.1 Keurig Indemnification of Diedrich.

Keurig shall indemnify and hold harmless Diedrich, its officers, directors, employees, and agents from and against any loss, damage, cost or expense (including reasonable attorneys’ fees) arising out of: (1) default of Keurig under this Agreement; (2) breach of any Keurig warranty or representation under this Agreement; (3) any third party patent, trademark or copyright claim or action alleging infringement or violation of any other third party proprietary right as a result of Diedrich’s use of any Keurig patent, trademark, or other materials provided by Keurig for use by Diedrich; (4) any defect in the design of the Keurig Brewing System, K-Cups or any component thereof; (5) any manufacturing defect, including in material and workmanship, in the Packaging Lines or any Keurig Brewer or any component thereof, including but not limited to any actual or alleged injury damage, injury, death or consequent occurring to any person as a result, directly or indirectly, or the operation, maintenance or use of the Packaging Line(s) and/or consumption of coffee, tea or non-coffee soluble hot beverage via the K-Cup and/or Keurig Brewing System whether claimed by reason of breach of warranty, negligence, Keurig Product defect, Packaging Line defect or otherwise and regardless of the forum in which any such claim is made. Keurig shall maintain general and products liability insurance in an amount of not less than [* * *] dollars on an occurrence basis.

18.2 Diedrich Indemnification of Keurig.

Diedrich shall indemnify and hold harmless Keurig its officers, directors, employees, and agents from and against any loss, damage, cost or expense (including reasonable attorneys’ fees) arising out of: (1) default of Diedrich under this Agreement; (2) breach of any Diedrich warranty or representation under this Agreement; (3) any third party trademark or copyright claim concerning use by Keurig of any Diedrich Mark provided by Diedrich to Keurig pursuant to this Agreement; (4) any third party claim of damage, injury, death or consequence related to the coffee, tea or non-coffee soluble hot beverage base, or any other raw material used by Diedrich in the manufacture and/or sale of Diedrich K-Cups. Diedrich shall maintain general and products liability insurance in an amount of not less than [* * *] dollars on an occurrence basis.

19. General.

19.1 Scope of Agreement.

The Parties agree that the scope of this Agreement is limited to the AFH and AH markets. In no way do the terms of this Agreement affect the Parties’ rights in other markets or with other products or create any obligations or rights pertaining thereto.

19.2 Additional Agreements.

In the event of any conflict between any Diedrich purchase order and any term or condition in this Agreement, the terms and conditions of this Agreement shall control.

19.3 Force Majeure.

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Either Party shall be excused from delays in performing or from its failure to perform hereunder to the extent that such delays or failures result from a natural calamity, act of government or similar cause beyond the control of such Party, provided that, in order to be excused from delay or failure to perform, such Party must give written notice to the other containing reasonable particulars of such delay or failures in question and act diligently to remedy the cause of such delay or failure.

19.4 No Implied Waivers.

Failure to insist upon strict compliance with any of the terms, condition, covenants, and agreements of this Agreement in any particular instance shall not be deemed a waiver of such terms, conditions, covenants or agreement in any other instance.

19.5 Acknowledgments.

Each Party acknowledges that, except as set forth in this Agreement, no representation or statement, and no understanding or agreement, has been made, or exists, and that in entering into this Agreement each Party has not relied on anything done or said or on any presumption in fact or in law, (1) with respect to this Agreement, or to the duration, termination or renewal of this Agreement, or with respect to the relationship of the Parties, other than as expressly set forth in this Agreement; or (2) that in any way tends to change, modify the terms, or any of them, of this Agreement or to prevent this Agreement becoming effective; or (3) that in any way affects or relates to the subject matter hereof.

19.6 Final Agreement.

This Agreement and all the documents referred to herein or attached hereto, represent the entire understanding and agreement between the Parties as to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, all of which are hereby terminated. No prior, concurrent or subsequent agreement, representations or warranty, whether written or oral, shall be construed to change, amend, alter, repeal or invalidate this Agreement, unless this Agreement is specifically identified in and made subject to such other written agreement. This Agreement may be waived or modified only by an instrument in writing that is duly executed by both Parties.

19.7 Severability.

In the event that any provision of this Agreement shall be found to be invalid, the balance of the Agreement shall remain unaffected and deemed to be severable from the invalid portion.

19.8 Relationship of the Parties.

This Agreement does not imply any joint venture, partnership or other business arrangement between the Parties. Keurig and Diedrich are separate, independent business entities agreeing to work together in the manner set forth in this Agreement. Neither Keurig nor Diedrich shall have any right to enter into any contract or commitment in the name of, or on behalf of the other, or to bind the other in any respect whatsoever. Neither Party, nor its agents or employees shall, under no circumstances, be deemed employees, agents or representatives of the other Party.

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19.9 Waiver of Jury Trial.

The Parties waive all rights to trial by jury.

19.10  Headings; Counterparts.

Headings used in this Agreement are provided for convenience only and shall not be used to construe meaning or intent. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

19.11  Assignment.

This Agreement shall be binding upon the Parties and their respective permitted successors and assigns, provided that neither Party may assign nor transfer this agreement without the consent of the other Party except to a successor by reason of merger or sale of all or substantially all of its assets.

19.12  Notices.

All notices and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed given when delivered in hand or by confirmed facsimile, the following day when sent overnight by a reputable commercial courier or five (5) days from deposit in the U.S. or Canadian Mail, postage prepaid and addressed to the appropriate Party at the address noted below, return receipt requested, unless by such notice a difference address shall have been designated.

If to Keurig:

Keurig, Incorporated

101 Edgewater Drive

Wakefield, MA 01880

Attention: Nicholas Lazaris, President/CEO

With a copy to:

John H. Chu, Esq.

Chu, Ring & Hazel LLP

49 Melcher Street

Boston, MA 02210

If to Diedrich:

Diedrich Coffee, Inc.

2144 Michelson Drive

Irvine, CA

Attention: Roger Laverty, President and CEO

19.13  Arbitration.

Except as otherwise specifically provided herein, in the event of any dispute between the Parties relating to or arising out of this Agreement, the Parties shall first attempt to resolve the matter in good faith through direct negotiation. If the Parties cannot resolve the matter within

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fifteen (15) days of the first meeting called for such purpose, the dispute shall be settled by arbitration in the city of the Party defending the claim before a neutral arbitrator in accordance with the rules and regulations of the American Arbitration Association. If the Parties cannot agree on a single arbitrator, each Party shall appoint an arbitrator, and the two arbitrators shall agree to a third, neutral arbitrator. The Parties shall share the fees and expenses of arbitration, provided however, that the arbitrator(s) shall be empowered to award costs of arbitration and attorneys’ fees as part of any award subject to Section 18, above. The arbitrator(s)’ decision shall be final and legally binding on the Parties, and shall be rendered in a manner to permit enforcement of the award in any court of competent jurisdiction. Upon request from Diedrich, the language to be used in the arbitral proceedings shall be English and French.

19.14  Governing Law; Jurisdiction.

This Agreement is made in the Commonwealth of Massachusetts, and shall be governed by and construed in accordance with federal law to the extent applicable, and the internal substantive laws of the Commonwealth of Massachusetts without regard to any choice or conflict of law principles.

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ACKNOWLEDGEMENT OF ARBITRATION

THE PARTIES HERETO UNDERSTAND THAT THIS AGREEMENT CONTAINS AN AGREEMENT TO ARBITRATE. AFTER EXECUTING THIS DOCUMENT, EACH PARTY UNDERSTANDS THAT IT WILL NOT BE ABLE TO BRING A LAWSUIT CONCERNING ANY DISPUTE THAT MAY ARISE WHICH IS COVERED BY THE ARBITRATION AGREEMENT, UNLESS IT INVOLVES A QUESTION OF CONSTITUTIONAL OR CIVIL RIGHTS OR EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN. INSTEAD, EACH PARTY AGREES TO SUBMIT ANY SUCH DISPUTE TO AN IMPARTIAL ARBITRATOR.

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as a contract of the day and year first above written.

Keurig, Incorporated
By:	/s/ Nicholas Lazaris
	Nicholas Lazaris
	President/CEO
Diedrich Coffee, Inc.
By:	/s/ Roger Laverty
	Roger Laverty
	President and CEO

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Table of Contents

1.       Definitions		1
2.       Appointment as Non-Exclusive K-Cup Manufacturer		5
2.1	Grant of Licenses	5
2.2	Private Label K-Cup Production	7
2.3	Diedrich K-Cup Product Line Offering	7
2.4	K-Cup Pricing	7
2.5	Approved Contract Manufacturers	8
2.6	Agreement to Co-operate	8
3.       Packaging Lines		8
3.1	Packaging Lines for Diedrich K-Cups	8
3.2	Maintenance	11
3.3	Determination of Packaging Line Requirements; Upgrades to Packaging Lines	12
3.4	OSHA Compliance	14
4.       Option to Purchase or Manufacture Packaging Lines; Future Products		14
4.1	Option to Purchase Installed Packaging Line(s)	14
4.2	Diedrich Option to Design and Develop Packaging Lines	15
5.       Acceptable K-Cups to Standard		16
5.1	Freshness and Quality of Coffee, Tea and Other Soluble Hot Beverage Products	16
5.2	Amount of Coffee, Tea or Other Soluble Hot Beverage Products Packaged in K-Cup	17
5.3	Filter Weld Integrity	17
5.4	Dating, Shelf Life and Oxygen Impermeability for Coffee, Tea and Other Soluble Hot Water Beverages	17
5.5	Lid Seal Integrity	18
5.6	K-Cup Raw Material Vendor Selection	18
5.7	K-Cup Functionality	18
5.8	K-Pods	20
5.9	Out-gas Protocol	20
6.       Royalties		20
6.1	Calculation of Royalty	20
6.2	Payments	21
6.3	Review of Books and Records	21
6.4	Most Favored Nation	21
7.       Appointment as Non-Exclusive Roaster Distributor		22
7.1	Away From Home	22
7.2	At Home	23
7.3	Common Sales and Distribution Provisions	24
8.       Keurig Product Sales		24
8.1	Keurig Best Efforts	24
8.2	Keurig AFH Products	24
8.3	Keurig AH Products	24
8.4	Product Offering	25
8.5	Terms of Sale	25
8.6	Payments	25
8.7	Guaranty of Sales to Affiliates	25

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8.8	No Restrictions	26
9.       Keurig Warranty		26
9.1	Away From Home Brewers	27
9.2	At Home Brewers	27
9.3	Common Warranty Provisions	28
9.4	Keurig Brewer Return Procedure	28
10.     Training		29
11.     Marketing Policies		29
11.1	Cooperation and Cost Sharing	29
11.2	Diedrich Advertising of AH Products	29
11.3	Diedrich on Keurig’s Website	29
11.4	Sharing of Information	29
11.5	Post-AH Launch Offering of AH Brewers	30
12.     Marks		30
12.1	Use of Keurig Marks on K-Cups and K-Cup Packaging	30
12.2	Rights in Marks	31
12.3	Display of Marks	31
12.4	Maintenance of Intellectual Property	31
12.5	Notice of Infringement	31
12.6	Infringement Action	32
12.7	License	32
13.     Sales Policies		32
13.1	Diedrich's Best Efforts	33
13.2	New Keurig Authorized Distributors	33
14.     Non-Compete		33
14.1	Basic Terms of Non-Competition	33
14.2	Sale by Affiliates	34
14.3	Private Label K-Cups	34
14.4	Termination of Non-Competition	34
14.5	Most Favored Nation	34
15.     Term and Termination of Agreement		34
15.1	Term	34
15.2	Termination for Cause	35
15.3	Diedrich Termination Rights	35
15.4	Keurig Termination Rights	36
16.     Obligations on Termination		36
17.     Confidentiality of Customers; Confidentiality		37
18.     Indemnification		39
18.1	Keurig Indemnification of Diedrich	39
18.2	Diedrich Indemnification of Keurig	39

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19.     General		39
19.1	Scope of Agreement	39
19.2	Additional Agreements	39
19.3	Force Majeure	39
19.4	No Implied Waivers	40
19.5	Acknowledgments	40
19.6	Final Agreement	40
19.7	Severability	40
19.8	Relationship of the Parties	40
19.9	Waiver of Jury Trial	41
19.10	Headings; Counterparts	41
19.11	Assignment	41
19.12	Notices	41
19.13	Arbitration	41
19.14	Governing Law; Jurisdiction	42

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EX-10.38

Exhibit 10.38

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

LICENSED ROASTER K-CUP SALES AGREEMENT

This Licensed Roaster K-Cup Sales Agreement (this “Agreement”) is made as of the 22nd day of October, 2004 by and between Keurig, Incorporated, a Delaware corporation with its principal executive offices located at 101 Edgewater Drive, Wakefield, Massachusetts 01880 (“Keurig”), and Diedrich Coffee, Inc., a Delaware corporation with its principal executive offices located at 28 Executive Park, Suite 200, Irvine, California 92614 (“Roaster”).

Whereas, Keurig and Roaster are Parties to a certain License and Distribution Agreement dated July 29, 2003 (as amended from time to time, the “License Agreement”);

Whereas, the License Agreement provides for cooperation between the Parties in connection with the retail channel promotion of Keurig Products and Diedrich K-Cups and for Roaster’s sale of Diedrich K-Cups to Keurig for the support of the retail channel;

Whereas, Keurig intends to include one K-Cup variety pack (each a “Variety Pack”) with each of Keurig’s new model of AH Brewer, known as the B50 Brewer (the “B50 Brewer”), and future models of AH Brewers designed primarily for use by AH consumers (together with the B50 Brewer, collectively, “Keurig Retail Brewers”) that Keurig sells to Keurig Resellers and to AH consumers, which Variety Pack will include 18 K-Cups, or such other number of K-Cups as determined by Keurig from time to time, containing coffees, teas and other soluble hot beverage bases selected by Keurig from the K-Cups containing coffees, teas and other soluble hot beverage bases offered by Roaster and other Licensed Roasters;

Whereas, Keurig also intends to offer for sale to Keurig Resellers, separate from Keurig Retail Brewers, Diedrich K-Cups in boxes (each a “Display Pack”) containing 18 Diedrich K-Cups, or such other number of Diedrich K-Cups as determined by Keurig from time to time;

Whereas, Keurig intends to provide free demonstrations of Keurig Retail Brewers and K-Cups in various retail outlets of Keurig Resellers;

Whereas, Roaster desires to assist Keurig in such marketing efforts in order to promote Keurig Retail Brewers and thereby increase Roaster’s own revenue from the sale of Diedrich K-Cups.

Now, therefore, for good consideration, the value and sufficiency of which is acknowledged, the Parties agree as follows:

1. Definitions.

Any capitalized terms used herein without definition shall have the respective meanings ascribed to such terms in the License Agreement.

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2. Variety Packs.

2.1 Contributions to Variety Packs.

2.1.1 Roaster shall supply to Keurig for inclusion in Variety Packs such number and varieties of Diedrich K-Cups, subject to the limitations of Section 2.3 of the License Agreement, as are specified by Keurig from time to time in its sole discretion. In all cases, Keurig shall submit to Roaster a separate purchase order for Diedrich K-Cups to be supplied as provided in this Section 2.1, and each such purchase order shall clearly indicate that the Diedrich K-Cups covered thereby will be used only for inclusion in Variety Packs. Keurig shall, at its option, package up to 6 Diedrich K-Cups in each Variety Pack unless the Parties mutually agree to allow Keurig to package a greater number of Diedrich K-Cups in each Variety Pack.

2.1.2 Notwithstanding Section 2.4 of the License Agreement, but subject to Section 5 of this Agreement, all Diedrich K-Cups supplied to Keurig in accordance with Section 2.1.1 above (a) shall be provided by Roaster [* * *] to Keurig in respect thereof, and (b) shall be delivered freight prepaid by Roaster to Keurig’s designated repacking locations in the United States. Roaster shall package such Diedrich K-Cups in bulk or, at its discretion, in other standard count sleeves used by Roaster to package Diedrich K-Cups.

2.2 Packaging the Variety Pack.

2.2.1 Roaster may, in its discretion and at its own expense, provide to Keurig or to Keurig’s designated agent, as applicable, an Insert Card (as such term is defined below) for insertion into each Variety Pack that includes one or more Diedrich K-Cups (each a “Roaster Variety Pack”). As used herein, “Insert Card” shall mean a card of uniform size and weight specified by Keurig, which card may be printed on one or both sides, at Roaster’s discretion, and may describe Roaster or Roaster’s product line by listing thereon all or any portion of such product line and the URL for the home page of Roaster’s web site; provided, with respect to cards to be inserted into Roaster Variety Packs packaged with Keurig Retail Brewers, no such card shall directly or indirectly include or reference any pricing information, rebates, discounts or other promotional offers with respect to Keurig Products or Diedrich K-Cups; provided, further, with respect to cards to be inserted into Roaster Variety Packs packaged with Keurig Retail Brewers, the content of all such cards shall be subject to the approval of Keurig, which approval will not be unreasonably withheld or delayed.

2.2.2 [* * *] Keurig, itself or through its designated agent, will assemble all Roaster Variety Packs, including the insertion of an Insert Card, if provided by Roaster, in accordance with Section 2.2.1.

2.2.3 Prior to the end of each calendar month, Keurig will provide to Roaster Retail Brewer sales and Variety Pack composition documentation for the immediately preceding

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calendar month to substantiate the number of Diedrich K-Cups used in Variety Packs during such month.

3. Display Packs.

3.1 In accordance with Section 2.3 of the License Agreement and subject to the terms of this Section 3, Roaster shall sell to Keurig Diedrich K-Cups in Display Packs of such number and of such varieties as are specified by Keurig from time to time, in its sole discretion, to satisfy Keurig’s requirements therefor. In all cases, Keurig shall submit to Roaster a separate purchase order for Display Packs to be supplied as provided in this Section 3, and each such purchase order shall clearly indicate that it covers the purchase of Display Packs only.

3.2 Keurig shall only purchase Display Packs for resale to Keurig Resellers, which shall specifically exclude grocery stores unless mutually agreed to by the Parties. Roaster shall sell Display Packs to and only to Keurig and Keurig Resellers, specifically excluding KADs.

3.3 Notwithstanding Section 2.4.1 of the License Agreement, (a) the price of each Diedrich K-Cup included in a Display Pack shall not exceed [* * *] cents, freight prepaid to Keurig’s designated distribution locations in the United States, and (b) Keurig shall pay for Display Packs on a net 30-day basis from the date of invoice. All sales of Diedrich K-Cups included in Display Packs shall be subject to royalty payments as provided in the License Agreement and contemplated under Section 2.4.2 thereof.

3.4 Keurig shall provide to Roaster a Display Pack design template, which Roaster shall use to apply Roaster’s own design and artwork for Display Packs subject to general layout and size specifications determined by Keurig. Keurig shall also provide to Roaster a template for labels for use with master shipping cartons for Display Packs, each of which labels shall be completed, printed out and affixed by Roaster to each such master carton prior to shipping by Roaster. Keurig shall have the final approval of the positioning and size of Roaster design and artwork within the template for the Display Packs and reserves the right to alter the design template for Display Packs and master carton shipping labels from time to time in its reasonable discretion. Subject to the foregoing limitations, Roaster shall have design control of its Display Pack artwork.

3.5 Keurig shall supply to Roaster (a) preprinted Display Packs for each variety of Diedrich K-Cup selected by Keurig for purchase in Display Packs, each of which shall include the design and artwork contemplated therefor under Section 3.4 above, and (b) master shipping cartons as contemplated under Section 3.4 above. Keurig will assume the costs of producing and delivering to Roaster such Display Packs and master shipping cartons up to an amortized cost equal to [* * *] cents per Diedrich K-Cup included in Display Packs (the “Cost Target”). In the event Keurig anticipates that such costs will exceed the Cost Target, prior to placing an order for either such preprinted Display Packs or master shipping cartons, Keurig shall provide to Roaster notice of such anticipated excess cost, together with the amount thereof, and an opportunity to obtain such Display Packs and master shipping cartons at a lower amortized cost per Diedrich K-Cup included in Display Packs. In such event, Roaster shall

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have thirty (30) days from the date of its receipt of notice from Keurig to submit to Keurig firm written cost commitments from suppliers of such Display Packs and master shipping cartons, each of which must comply with the materials and other specifications established by Keurig therefore; and Keurig will obtain, or, at Keurig’s option, allow Roaster to obtain and receive reimbursement therefor, such Display Packs and master shipping cartons, in each case, from the lowest cost conforming supplier of each such packaging container, whether such supplier was sourced by Keurig or Roaster. If the amortized cost per Diedrich K-Cup included in Display Packs exceeds the Target Cost, Keurig and Roaster shall each assume [* * *]% of such excess cost; provided, however, in no event shall Roaster’s amortized cost-sharing liability hereunder be greater than [* * *] cents per Diedrich K-Cup included in Display Packs.

3.6 In addition to the foregoing requirements, Roaster shall prepare and package Display Packs produced and sold to Keurig under this Section 3 in accordance with the following requirements:

3.6.1 Roaster shall stamp or print a “Best Used By Date” (“BUBD”) on the bottom of each Display Pack, which BUBD shall in all cases be legible and in a font no less than 8 point;

3.6.2 Roaster will tape or glue the top flap of each Display Pack (Keurig will supply Roaster with tape for that purpose if needed); and

3.6.3 Roaster shall include 6 complete Display Packs in each master shipping carton.

4. Demonstration K-Cups.

4.1 Roaster shall supply to Keurig Diedrich K-Cups for use by Keurig in connection with in-store retail demonstration events held or supported by Keurig for Keurig Retail Brewers (each a “Demonstration”). The number and varieties of Diedrich K-Cups to be supplied by Roaster for each Demonstration shall be determined by Keurig based on the stated desire of the applicable Keurig Reseller or Keurig’s assessment of the appropriate number and varieties of Diedrich K-Cups for such Demonstration, as applicable; provided, however, Roaster shall only be obligated hereunder to supply Diedrich K-Cups of the same varieties as are included in Variety Packs at the time of the applicable Demonstration. In all cases, Keurig shall submit to Roaster a separate purchase order for Diedrich K-Cups to be supplied as provided in this Section 4, and each such purchase order shall clearly indicate that the Diedrich K-Cups covered thereby will be used only for Demonstrations.

4.2 Notwithstanding Section 2.4 of the License Agreement, but subject to Section 5 of this Agreement, all Diedrich K-Cups supplied to Keurig in accordance with Section 4.1 above (a) shall be provided by Roaster [* * *] to Keurig in respect thereof and (b) shall be delivered freight prepaid by Roaster to Keurig, to Keurig’s designated facility. Roaster shall package such Diedrich K-Cups in 25-count

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sleeves or, at its discretion, in other standard count sleeves used by Roaster to package not more than 25 Diedrich K-Cups.

4.3 Keurig will provide to Roaster a quarterly forecast of expected Diedrich K-Cup requirements in connection with Demonstrations and will make commercially reasonable efforts to provide to Roaster a quarterly schedule (including the Keurig Reseller locations if known to Keurig) of Demonstrations that included Diedrich K-Cups during the preceding quarter, together with documentation of the number of Diedrich K-Cups used during such Demonstrations.

5. Limit on Free Variety Pack and Demonstration K-Cups

5.1 Notwithstanding the requirements of Sections 2.1.1 and 4.1 above, the aggregate number of Diedrich K-Cups required to be provided by Roaster [* * *] under this Agreement in connection with Variety Packs and Demonstrations shall not exceed [* * *] during the first year of this Agreement, ending September 30, 2005, unless a greater number is mutually agreed to by the Parties, and in subsequent years, such number as is mutually agreed to by the Parties. In the absence of a mutual agreement covering such greater number for the year ended September 30, 2005 or an acceptable number for any subsequent year, as applicable, with respect to each Diedrich K-Cup provided in connection with a Variety Pack or Demonstration in excess of the applicable yearly limit or in the absence an agreement with respect to an acceptable yearly limit, as applicable, (a) the price of each such Diedrich K-Cup shall not exceed [* * *] cents, freight prepaid to Keurig, to Keurig’s designated location, (b) Keurig shall pay for such Diedrich K-Cups on a net 30-day basis from the date of invoice, (c) notwithstanding Section 2.4.2 of the License Agreement, all such sales of Diedrich K-Cups shall not be [* * *] provided in the License Agreement, and (d) in the absence of any agreement to the contrary, Roaster shall not [* * *] for any Diedrich K-Cups provided for use as contemplated in Sections 2.1.1 and 4.1 unless and until Roaster provides notice to Keurig that the applicable annual limit of such Diedrich K-Cups has been exceeded and that any orders by Keurig for such Diedrich K-Cups during the remainder of the applicable year must be purchased subject to the price and payment terms set forth in (a) and (b) above.

6. K-Cup Raw Material Requirements and Best Used By Dating.

6.1 Notwithstanding anything in the License Agreement to the contrary, Roaster shall manufacture all Diedrich K-Cups filled with coffee and supplied to Keurig for Display Packs and, at Keurig’s option, for Variety Packs using (a) only those K-Cup packaging lines that are equipped with oxygen monitoring equipment and nitrogen control improvements specified and approved by Keurig and (b) (1) plastic cups (“K-Cup Shells”) specified and approved by Keurig, which, in combination with such oxygen monitoring equipment and nitrogen control improvements, are expected by Keurig to allow for extended BUBD labeling of [* * *] months or longer, or (2) at Roaster’s option until April 30, 2005, but subject to the requirements of Section 6.2, Winpak C-150 cups, as presently designed and constructed, which, in combination with such oxygen monitoring equipment and nitrogen control improvements, are expected by Roaster to allow for extended BUBD labeling of [* * *]

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months. Such oxygen monitoring equipment and nitrogen control improvements shall be provided by Keurig at Keurig’s expense for one packaging line. Notwithstanding the foregoing, if Roaster wishes to use such oxygen monitoring equipment to package K-Cups other than those produced to meet the requirements of this Agreement, Roaster may purchase such oxygen monitoring equipment at Keurig’s cost.

6.2 Notwithstanding anything in Section 5.4 of the License Agreement to the contrary, Roaster shall label all Diedrich K-Cups filled with coffee and supplied to Keurig under the terms of this Agreement with a BUBD label stating a BUBD of not less than [* * *] months after the last date of the month in which such Diedrich K-Cups were produced and not to exceed Keurig’s BUBD specification [* * *] for the specific K-Cup Shell used in the manufacture of such Diedrich K-Cup, except in the case where Roaster exercises its option under Section 6.1(b)(2) to produce Diedrich K-Cups using the Winpak C-150 cup, which Diedrich K-Cups, when produced for inclusion in Display Packs (x) for resale by Keurig, or (y) at the option of Keurig, for inclusion in Variety Packs, but packaged, at Roaster’s option, in Display Packs or otherwise for convenience, shall state a BUBD of [* * *] months after the last date of the month in which such Diedrich K-Cups were produced. Each BUBD shall be legible and in a font no less than 8 point. All Diedrich K-Cups containing tea that are provided under this Agreement shall have a BUBD of no less than [* * *] months after the last date of the month in which such Diedrich K-Cups were produced.

6.3 In the event the K-Cup Shells specified and approved by Keurig as contemplated under Section 6.1(b)(1) are used by Roaster only for the manufacture of Diedrich K-Cups supplied to Keurig under the terms of this Agreement, for as long as such exclusive use of such K-Cup Shells continues, if requested by Roaster, Keurig will reimburse Roaster for any K-Cup Shell per unit out-of-pocket cost increase incurred by Roaster due to the use of such K-Cup Shell in lieu of the next highest priced K-Cup Shell otherwise used by Roaster for the manufacture of the same Diedrich K-Cup coffee varieties.

6.4 Notwithstanding Section 6.3, as long as Keurig maintains an inventory of the K-Cup Shells specified and approved by Keurig as contemplated under Section 6.1(b)(1) and Roaster (a) elects to use such K-Cup Shells prior to April 30, 2005 or (b) elects or is required, as applicable, to use such K-Cup Shells thereafter, Roaster shall only purchase K-Cup Shells used for Diedrich K-Cups supplied under this Agreement from Keurig, and Keurig shall charge Roaster $.[* * *] per K-Cup Shell, [* * *].

7. Term and Termination of Agreement.

7.1 Term.

This Agreement shall terminate upon the earlier of June 30, 2006 (the “Initial Term”) or the termination of the License Agreement in accordance with its terms; provided, however the termination of this Agreement shall have no impact on the term of the License Agreement or the obligations of the Parties thereunder, particularly, but without limitation, Roaster’s obligations under Sections 2.3 and 2.4 of thereof. This Agreement shall automatically renew

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for consecutive one (1) year terms (each a “Renewal Term”) unless and until either Party provides to the other Party a termination notice at least one hundred twenty (120) days prior to the end of the Initial Term or any subsequent Renewal Term, as applicable, with such termination to be effective at the end of Initial Term or then effective Renewal Term, as applicable.

7.2 Termination for Cause.

7.2.1 Notwithstanding the foregoing, either Party may terminate this Agreement for Cause. “Cause” shall be understood as any of the following events: (1) material breach of this Agreement; (2) institution by or against a Party of bankruptcy, insolvency or receivership proceedings or an admission of a Party of its inability to pay its debts as they become due; or (3) commencement by a Party of any steps toward liquidation, dissolution or winding up of its affairs.

7.2.2 Prior to effecting termination under Section 7.2.1(1), either Party shall provide prior written notice of breach to the defaulting Party and if such breach is not cured within thirty (30) business days of notice, the Party shall then attempt to resolve the matter in good faith through direct negotiations prior to calling on any remedies set forth in Section 19.13 of the License Agreement. If the Parties cannot resolve the matter within fifteen (15) days of their first meeting, the dispute shall be settled in accordance with Section 19.13 of the License Agreement as incorporated by reference to Section 8 hereof. If the judgment rendered as a result of the procedures required in Section 19.13 of the License Agreement validates the terminating Party’s assertion that it is entitled to terminate pursuant to Section 7.2.1(1), such Party may terminate this Agreement upon ninety (90) days’ prior written notice to the defaulting Party. Any termination under Section 7.2.1(2) or (3) shall be effective immediately upon providing written notice to the defaulting Party.

Upon the termination of this Agreement, Roaster will continue to permit Keurig to resell Diedrich K-Cups that were supplied under this Agreement and are in Keurig’s inventory at the time of such termination.

8. Construction of this Agreement; Incorporation by Reference of Terms of License Agreement.

The parties acknowledge and agree that this Agreement shall be construed as an amendment to the License Agreement, which amendment shall govern the Parties’ respective rights and obligations only with respect to matters specifically set forth herein. Except as amended hereby, all other terms and conditions of the License Agreement shall remain in full force and effect, and the Parties hereby acknowledge and agree that all such terms and conditions are hereby incorporated by reference and shall govern the Parties’ rights and obligations under this Agreement as though this Agreement was originally included in the License

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Agreement. In the event of conflict between terms of this Agreement and the terms of the License Agreement, the terms of this Agreement shall control.

9. General.

9.1 Entire Agreement.

This Agreement and the License Agreement, as incorporated by reference herein, represent the entire understanding and agreement between the Parties as to the subject matter hereof and supersede all prior agreements and understandings, oral or written, between the Parties as to the subject matter hereof.

9.2 Severability.

In the event that any provision of this Agreement shall be found to be invalid, the balance of this Agreement shall remain unaffected and deemed to be severable from the invalid portion.

9.3 Headings; Counterparts.

Headings used in this Agreement are provided for convenience only and shall not be used to construe meaning or intent. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

9.4 Governing Law; Jurisdiction.

This Agreement is made in the Commonwealth of Massachusetts, and shall be governed by and construed in accordance with federal law to the extent applicable, and the internal substantive laws of the Commonwealth of Massachusetts without regard to any choice or conflict of law principles.

The remainder of this page left intentionally blank.

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IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as a contract as of and effective the day and year first above written.

Keurig, Incorporated
By:	/s/ Nicholas Lazaris
	Nicholas Lazaris
	President/CEO

Diedrich Coffee, Inc.
By:	/s/ Steven Heyman
Name:	Steven Heyman
Title:	Vice President of Sales

Signature Page

Licensed Roaster K-Cup Sales Agreement

EX-10.39

Exhibit 10.39

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

AMENDMENT TO LICENSE AND DISTRIBUTION AGREEMENT

This Amendment to License and Distribution Agreement (this “Amendment”) is made and effective as of August 31, 2005 by and between Keurig, Incorporated, a Delaware corporation (“Keurig”), and Diedrich Coffee, Inc., a Delaware corporation (“Diedrich”). Capitalized terms used in this Amendment without definition shall have the respective meanings ascribed to such terms in that certain License and Distribution Agreement dated as of July 29, 2003 by and between Keurig and Diedrich, as amended (as so amended, the “License Agreement”).

RECITALS:

Keurig and Diedrich desire to modify certain terms of the License Agreement.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

A. Amendments to the License Agreement.

1. Section 1.8: Section 1.8 of the License Agreement is hereby deleted in its entirety and replaced with the following:

“1.8 Food Service and Retail Location(s): Establishments such as convenience stores, restaurants, supermarkets, hospitals, motels, sandwich shops, delicatessens, bars, bakery shops and other similar retail outlets that purchase Keurig AFH Products from Licensed Roasters or Keurig for the exclusive purpose of on premises use and Keurig AH Products and K-Cups from Licensed Roasters or Keurig for the exclusive purposes of on premises use or consumption or direct resale to AH consumers within the Territory. The term Food Service and Retail Locations excludes (1) wholesale clubs, including, but not limited to, Costco, Sam’s Club and BJ’s (“Wholesale Clubs”), unless and until Keurig sells K-Cups to Wholesale Clubs or permits any other Licensed Roaster to do so, (2) office product superstores, including, but not limited to, Staples and Office Max (“Office Superstores”), unless and until Keurig sells K-Cups to Office Superstores or permits any other Licensed Roaster to do so, and (3) grocery stores in Canada until October 1, 2005, unless and until Keurig sells K-Cups to such grocery stores or permits any Licensed Roaster other than Van Houtte, Inc. to sell K-Cups to such grocery stores.”

2. Section 1.14: Section 1.14 of the License Agreement is hereby deleted in its entirety and replaced with the following:

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

“1.14 Keurig Reseller(s): A company that purchases Keurig AH Products from Licensed Roasters or Keurig and K-Cups from Licensed Roasters or Keurig for the exclusive purpose of direct resale to AH consumers within the Territory. The term “Keurig Reseller” excludes (1) Wholesale Clubs, unless and until Keurig sells Keurig AH Products or K-Cups to Wholesale Clubs or permits any other Licensed Roaster to do so, (2) Office Superstores, unless and until Keurig sells Keurig AH Products or K-Cups to Office Superstores or permits any other Licensed Roaster to do so, and (3) grocery stores in Canada until October 1, 2005, unless and until Keurig sells Keurig AH Products or K-Cups to such grocery stores or permits any Licensed Roaster other than Van Houtte, Inc. to do so.”

3. Section 2.1.2.3: Section 2.1.2.3 of the License Agreement is hereby deleted in its entirety and replaced with the following:

“2.1.2.3 Notwithstanding anything contained hereinabove, Diedrich’s AH License shall not include the right to sell Diedrich K-Cups to Wholesale Clubs or Office Superstores, unless and until Keurig sells K-Cups to such respective channel or permits any other Licensed Roaster to sell K-Cups to such respective channel; nor shall Diedrich’s AH License to sell Diedrich K-Cups to customers that are grocery stores in Canada commence until October 1, 2005, unless and until Keurig sells K-Cups to such grocery stores or permits any Licensed Roaster other than Van Houtte, Inc. to sell K-Cups to such grocery stores.”

4. Section 2.4.1: Section 2.4.1 is hereby deleted in its entirety and replaced with the following:

“2.4.1 Keurig shall be able to purchase its requirements for K-Cups from Diedrich under (i) Section 2.1.1.1 for the AFH market and (ii) Section 2.1.2.1 for the AH market based on Diedrich’s standard credit and pricing policies at [* * *] offered to other Diedrich K-Cup AFH or AH wholesale customers, other than majority or wholly owned subsidiaries, [* * *] and with other such terms and conditions that are substantially the same. Notwithstanding any provisions to the contrary, Keurig may resell Diedrich K-Cups without restrictions except as follows: (1) Keurig may not resell Diedrich K-Cups to KADs, KARDs and RNKADs without Diedrich’s prior written authorization; (2) Keurig may resell Diedrich K-Cups to, or through, Wholesale Clubs and Office Superstores only as part of an assortment that includes more than two (2) brands; (3) in addition to the restrictions contained in Section 2.1.3, Keurig shall not knowingly solicit AFH customers for Diedrich K-Cup sales unless package marketed with Keurig AH Brewers; (4) Keurig shall use commercially reasonable efforts to ensure that sales by Keurig Resellers of Diedrich K-Cups purchased from and knowingly sold by Keurig are subject in all respects to the abovementioned terms and restrictions,

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provided, however that if Diedrich is also selling Diedrich K-Cups to such Keurig Resellers clause (3) shall not apply to such Keurig Resellers. [* * *]. “Retail Customers” are defined to be all end-user AH or AFH consumers to include Offices. Notwithstanding the foregoing, any Keurig sales of Diedrich K-Cups in accordance with such retail terms, pricing and conditions will not be considered a violation of any restriction of this section 2.4.1; Keurig may sell to any KAD whose agreement with Keurig has been terminated (a “Terminated KAD”) the brands of K-Cups that such Terminated KAD was purchasing at the time of its termination without restriction; and, subject to Diedrich’s approval, Keurig may sell Diedrich K-Cups to any OCS Distributor who is considering becoming a KAD (a “Prospect”). Notwithstanding the foregoing, if Keurig should desire any changes in the nature of packaging of Diedrich K-Cups that are different from Diedrich’s standard packaging of Diedrich K-Cups, Diedrich shall in its discretion decide whether to implement such changes, provided, however, that if such changes are implemented, Diedrich shall charge Keurig for actual additional costs or credit Keurig for actual cost savings resulting from such changes.”

B. Miscellaneous.

1. Except as amended hereby, all other terms and conditions of the License Agreement shall continue in full force and effect. In the event of conflict between the terms of this Agreement and the terms of the License Agreement, the terms of this Agreement shall control.

2. This Amendment and the License Agreement, as incorporated by reference herein, represent the entire understanding and agreement between the parties as to the subject matter hereof and supersede all prior agreements and understandings, oral or written, between the Parties as to the subject matter hereof.

3. This Amendment maybe executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart.

[Remainder of page left intentionally blank. Signature page follows.]

3

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

IN WITNESS WHEREOF, the parties have executed this Amendment as of and effective the date first above written.

KEURIG, INCORPORATED
/s/ Nicholas Lazaris
By:	Nicholas Lazaris
Title:	President and Chief Executive Officer

DIEDRICH COFFEE, INC.
/s/ Roger Laverty
By:	Roger Laverty
Title:	President and Chief Executive Officer

4

EX-10.40

Exhibit 10.40

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

AMENDMENT TO LICENSE AND DISTRIBUTION AGREEMENT

This Amendment to License and Distribution Agreement (this “Amendment”) is made and effective as of August 31, 2005 by and between Keurig, Incorporated, a Delaware corporation (“Keurig”), and Diedrich Coffee, Inc., a Delaware corporation (“Diedrich”). Capitalized terms used in this Amendment without definition shall have the respective meanings ascribed to such terms in that certain License and Distribution Agreement dated as of July 29, 2003 by and between Keurig and Diedrich, as amended (as so amended, the “License Agreement”).

RECITALS:

Keurig and Diedrich desire to modify certain terms of the License Agreement.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

A. Amendments to the License Agreement.

1. Section 2.1.3: Section 2.1.3 is hereby deleted in its entirety and replaced with the following:

“2.1.3 Subject to Diedrich’s rights to the Packaging Lines and Section 14, below, Keurig expressly reserves the right to appoint other entities as Licensed Roasters without restriction upon the manufacture and sales of K-Cups by another entity. Keurig expressly reserves to itself the right to manufacture and sell K-Cups to any AFH or AH customer account inside or outside the Territory, provided, however, that Keurig will not knowingly solicit Diedrich’s or Diedrich Affiliate’s AFH customers or Diedrich’s Affiliates for K-Cup sales. Except as provided in Section 2.3, in no event shall Diedrich be required to produce any minimum number of K-Cups or particular flavor or variety of K-Cup.”

2. Section 6.4.3: Section 6.4.3 is hereby deleted in its entirety and replaced with the following:

“6.4.3 Review of Books and Records.

Upon reasonable request, Diedrich may, at its expense, have an independent auditor audit such books and records of Keurig as are necessary or appropriate to verify Keurig’s compliance with Section 6.4.1, 7.1.5, 7.2.5, 8.2 and 8.3. Such independent auditor shall agree in writing to maintain the confidentiality of all of Keurig’s records and shall be allowed only to certify to Diedrich whether or not Keurig has complied with the applicable Section. Such review shall take place upon reasonable written notice at a mutually agreed time during regular business hours.”

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

3. Section 8.8: Section 8.8 is hereby deleted in its entirety and replaced with the following:

“8.8 No Restrictions.

Keurig maintains its own sales force to promote Keurig Products and K-Cups to customers. Subject to the other terms of this Agreement, nothing in this Agreement shall be construed to restrict Keurig in the resale, pricing or other terms of sale of any Keurig Product or K-Cups to any customer inside or outside of the Territory.”

4. Section 9.1: Section 9.1 (“Away From Home Brewers”) is hereby deleted in its entirety and replaced with the following:

“9.1 Away From Home Brewers.

Keurig shall provide Diedrich with a limited one-year warranty on each Keurig AFH Brewer from the date of shipment to Diedrich (the “Keurig AFH Warranty”). Keurig warrants that Keurig AFH Brewers will be free of design, material and workmanship defects and fit for their intended use. Keurig will repair or replace Keurig AFH Brewers for a period of one (1) year from date of shipment to Diedrich any defective Keurig AFH Brewer. If a Keurig AFH Brewer is found to be defective within 30 days of shipment, Keurig shall first attempt to effect the repair such brewer. If Keurig determines that it will not be able to effect the repair of a Keurig AFH Brewer found to be defective within 30 days of shipment, Keurig will replace such brewer with a new brewer. If a Keurig AFH Brewer is found to be defective more than 30 days after shipment, Keurig in its sole discretion shall repair such brewer or replace such brewer with a refurbished brewer in like new condition. Keurig will not use any warranty registration process to intentionally solicit consumers that purchased the Keurig AFH Brewer from Diedrich.”

5. Section 11.2: Section 11.2 is hereby deleted in its entirety and replaced with the following:

“11.2 Diedrich Advertising of AH Products.

Diedrich shall be required to advertise the availability from Diedrich or Keurig of Keurig AH Product offerings (e.g., that Diedrich or Keurig offers an AH line of products using Keurig’s brewing technology). This shall include but not be limited to promoting Keurig AH Products in Diedrich’s website and catalogs, and, as practicable at Diedrich’s discretion, in Diedrich’s company owned retail locations and on packaging materials for Diedrich K-Cups (e.g. the front of the current 25-pack sleeve of Diedrich K-Cups). Notwithstanding the foregoing, Diedrich may first deplete its inventories of printed matter in its possession or under its control prior to the AH Launch before complying with the requirements of this Section, provided that such inventories are purchased in accordance with Diedrich’s normal course of business.”

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6. Section 16.1: Section 16.1 is hereby deleted in its entirety and replaced with the following:

“16.1 Except in the event of knowing and intentional submission by Diedrich to Keurig of false or fraudulent reports or statements (in which case all rights by the Terminated Roaster Distributor to purchase Keurig Products and K-Cups hereunder shall irrevocably cease), and subject to the other terms and conditions of this Section 16, the Terminated Roaster Distributor may continue to purchase K-Cups and other Keurig Products, but not Keurig Brewers, from Keurig at Keurig’s [* * *] on [* * *] and K-Cups from Licensed Roaster(s), provided Diedrich and such Licensed Roaster(s) are able to agree on such arrangement, at prices and terms agreed between such Licensed Roaster(s) and Diedrich for the sole purpose of supplying the requirements of the Keurig Brewers owned by Diedrich and Diedrich’s Affiliates so long as such Keurig Brewers remain within the Territory (“Installed Brewers”). Keurig hereby agrees to pass through to Diedrich any expressed or implied warranties of any Licensed Roaster in connection with such Licensed Roaster’s K-Cups purchased under this Agreement. Keurig reserves the right to establish separate credit terms or no credit terms for the Terminated Roaster Distributor, in its absolute discretion. Keurig may require, as a condition to Keurig’s obligations under this Section 16.1, that all amounts owed by the Terminated Roaster Distributor to Keurig, notwithstanding prior terms of sale, become immediately due and payable and any other faults or breaches under this Agreement be cured. If Keurig so requires, the Terminated Roaster Distributor’s rights under this Section 16.1 shall be tolled until all such amounts have been paid in full and/or such faults or breaches cured. Any termination of this Agreement shall not affect any other rights then accrued. Keurig’s obligations to continue to supply K-Cups and Keurig Products, but not Keurig Brewers, hereunder shall continue only so long as Keurig continues to provide the applicable Keurig Products or K-Cups in the ordinary course of its business within the Territory.”

B. Miscellaneous.

1. Except as amended hereby, all other terms and conditions of the License Agreement shall continue in full force and effect. In the event of conflict between the terms of this Agreement and the terms of the License Agreement, the terms of this Agreement shall control.

2. This Amendment and the License Agreement, as incorporated by reference herein, represent the entire understanding and agreement between the parties as to the subject matter hereof and supersede all prior agreements and understandings, oral or written, between the Parties as to the subject matter hereof.

3

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

3. This Amendment maybe executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart.

IN WITNESS WHEREOF, the parties have executed this Amendment as of and effective the date first above written.

KEURIG, INCORPORATED
/s/ Nicholas Lazaris
By:	Nicholas Lazaris
Title:	President and Chief Executive Officer

DIEDRICH COFFEE, INC.
/s/ Roger Laverty
By:	Roger Laverty
Title:	President and Chief Executive Officer

4

EX-10.41

Exhibit 10.41

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

AMENDMENT TO LICENSED ROASTER K-CUP SALES AGREEMENT

This Amendment to Licensed Roaster K-Cup Sales Agreement (this “Amendment”) is made and effective as of the 30th day of September, 2006 by and between Keurig, Incorporated, a Delaware corporation with its principal executive offices located at 101 Edgewater Drive, Wakefield, Massachusetts 01880 (“Keurig”), and Diedrich Coffee, Inc., a Delaware corporation with its principal executive offices located at 2144 Michelson Drive, Irvine, CA 92612 (“Roaster”).

RECITALS

Keurig and Roaster are parties to a License and Distribution Agreement dated July 29, 2003 (as amended from time to time, the “License Agreement”) and a Licensed Roaster K-Cup Sales Agreement dated October 22, 2004, which, itself, was an amendment to the License Agreement (the “K-Cup Sales Agreement”).

Keurig’s retail success with its Elite B40 Brewer (the “B40 Brewer”), Ultra B50 Brewer (the “B50 Brewer”), Special Edition B60 Brewer (the “B60 Brewer”), and anticipated future launches of additional models of AH Brewers designed for home use by AH consumers (together with the B40 Brewer, the B50 Brewer and the B60 Brewer, collectively, “Keurig Retail Brewers”), has increased demand for K-Cups needed for Variety Packs and Demonstrations. In addition, [* * *] are [* * *] from Keurig for K-Cups purchased by Keurig from Roaster and resold to [* * *] at part of Keurig’s [* * *] program for Keurig Retail Brewers and K-Cups.

Keurig and Roaster believe it is in their mutual best interest to amend the K-Cup Sales Agreement to establish new parameters for [* * *] K-Cups included in Variety Packs and used in Demonstrations and to modify the price at which Keurig purchases K-Cups resold by Keurig to Keurig Resellers.

Now, therefore, for good valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1. Definitions.

Any capitalized terms used herein without definition shall have the respective meanings ascribed to such terms in the License Agreement, which includes by reference the K-Cup Sales Agreement.

2. Amendments to K-Cup Sales Agreement.

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2.1 Price and Credits for K-Cups Sold to Keurig Resellers. Section 3.3 of the K-Cup Sales Agreement is hereby amended and restated in its entirety to read as follows:

“3.3 Notwithstanding Section 2.4.1 of the License Agreement, (a) the price of each Roaster K-Cup included in a Display Pack to be resold by Keurig to Keurig Resellers shall not exceed (i) [* * *] cents if Roaster purchases and supplies the sleeves and master cartons into which such Roaster K-Cups are packaged, or (ii) [* * *] cents if Keurig purchases and supplies the sleeves and master cartons into which such Roaster K-Cups are packaged, in all cases covered by (i) and (ii), above, freight prepaid to Keurig’s designated distribution locations in the United States, and (b) Keurig shall pay for Display Packs on a net 30-day basis from the date of invoice. All sales of Roaster K-Cups included in Display Packs shall be [* * *] as provided in the License Agreement and contemplated under Section 2.4.2 thereof. In addition, with respect to each Roaster K-Cup included in a Display Pack that is resold by Keurig to [* * *] Keurig shall be entitled to [* * *] in the amount of (x) [* * *] cents if such K-Cup was produced on a Packaging Line owned by Roaster, or (y) [* * *] cents if such K-Cup was produced on a Packaging Line owned by Keurig, which [* * *] Keurig shall be entitled to take in each instance [* * *] for Display Packs, provided Keurig submits written evidence of such resale to [* * *] with the payment or credit notice submitted to Roaster in connection with the applicable invoice. The Parties recognize that Roaster may in the future package Roaster K-Cups containing special coffee varieties that are materially more expensive than the coffee varieties currently packaged in Roaster K-Cups and that warrant Roaster charging a higher per Roaster K-Cup price than provided above. In any such case, the Parties shall mutually agree to the per K-Cup price for such Roaster K-Cup prior to Keurig’s inclusion of any such special coffee variety in Keurig’s Display Pack offering.”

2.2 Supply of Packaging Material. Section 3.5 of the K-Cup Sales Agreement is hereby amended and restated in its entirety to read as follows:

“3.5 Generally, Roaster shall supply, at its own expense, (a) preprinted Display Packs for each variety of Roaster K-Cup selected by Keurig for purchase in Display Packs, each of which shall include the design and artwork contemplated therefor under Section 3.4 above, and (b) master shipping cartons as contemplated under Section 3.4 above, in all cases under (a) and (b) above in compliance with the materials and other specifications established by Keurig therefor. However, at Roaster’s option, exercisable in each case by delivery of a written request to Keurig, Roaster may require Keurig to supply to Roaster such preprinted Display Packs and master shipping cartons. In each case in which

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Roaster elects to exercise such option, Keurig will assume the costs of producing and delivering to Roaster such Display Packs and master shipping cartons up to an amortized cost equal to [* * *] cents per Roaster K-Cup included in such Display Packs (the “Target Cost”). If the amortized cost per Roaster K-Cup included in such Display Packs exceeds the Target Cost, Keurig and Roaster shall each assume 50% of such excess cost; provided, however, in no event shall Roaster’s amortized cost-sharing liability hereunder be greater than [* * *] cents per Roaster K-Cup included in such Display Packs.”

2.3 New Limit and Time Periods for Free Variety Pack and Demonstration K-Cups. Section 5.1 of the K-Cup Sales Agreement is hereby amended and restated in its entirety to read as follows:

“5.1 Notwithstanding the requirements of Sections 2.1.1 and 4.1 above, the aggregate number of Roaster K-Cups required to be provided by Roaster [* * *] under this Agreement in connection with Variety Packs and Demonstrations shall not exceed (a) [* * *] during 2006, unless a greater number is mutually agreed to by the Parties, and (b) in each subsequent year, unless a greater number is mutually agreed to by the Parties for such year, [* * *]% of the applicable prior year’s limit for such K-Cups. In the absence of a mutual agreement covering Roaster K-Cups provided in connection with a Variety Pack or Demonstration in excess of the applicable annual limit for such K-Cups, (w) the price of each such excess Roaster K-Cup shall not exceed [* * *] cents, freight prepaid to Keurig or to Keurig’s designated location, (x) Keurig shall pay for such excess Roaster K-Cups on a net 30-day basis from the date of invoice, (y) notwithstanding Section 2.4.2 of the License Agreement, all such sales of excess Roaster K-Cups shall not be [* * *] provided in the License Agreement, and (z) in the absence of any agreement to the contrary, Roaster shall not [* * *] for any such excess Roaster K-Cups provided for use as contemplated in Sections 2.1.1 and 4.1 unless and until Roaster provides notice to Keurig that the applicable annual limit of such Roaster K-Cups has been exceeded and that any orders by Keurig for such Roaster K-Cups during the remainder of the applicable year must be purchased subject to the price and payment terms set forth in (w) and (x) above. Notwithstanding the foregoing, in the event this Agreement is terminated prior to the end of a calendar year, the number of [* * *] K-Cups required of Roaster for the applicable year of termination shall be reduced to a number equal to the result obtained by multiplying (i) the number of such K-Cups that Roaster would have been required to supply for the applicable year, in accordance with the terms set forth above, if this Agreement was not so terminated by (ii) a fraction, the numerator of which is the number of months in such year which precede the effective

Page 3

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

date of such termination, including a deemed full month for the actual month during which such effective date occurs, and the denominator of which is twelve (12).”

2.4 New Term. Section 7.1 of the K-Cup Sales Agreement is hereby amended and restated in its entirety to read as follows:

“7.1 Term.

This Agreement shall terminate upon the earlier of December 31, 2007 (the “Amendment Term”) or the termination of the License Agreement in accordance with its terms; provided, however the termination of this Agreement shall have no impact on the term of the License Agreement or the obligations of the Parties thereunder, particularly, but without limitation, Roaster’s obligations under Sections 2.3 and 2.4 of thereof. After the Amendment Term, this Agreement shall automatically renew for consecutive one (1) year terms (each a “Renewal Term”) unless and until either Party provides to the other Party a termination notice at least one hundred twenty (120) days prior to the end of the Amendment Term or any subsequent Renewal Term, as applicable, with such termination to be effective at the end of Amendment Term or then effective Renewal Term, as applicable.”

3. General.

3.1 Entire Agreement.

This Amendment, the K-Cup Sales Agreement and the License Agreement, each as incorporated by reference herein, represent the entire understanding and agreement between the Parties as to the subject matter hereof and supersede all prior agreements and understandings, oral or written, between the Parties as to the subject matter hereof. Except as amended hereby, all other terms and conditions of the K-Cup Sales Agreement and the License Agreement shall remain in full force and effect. In the event of conflict between terms of this Amendment and the terms of the License Agreement, as previously amended by the K-Cup Sales Agreement, the terms of this Amendment shall control.

3.2 Severability.

In case any one or more of the provisions contained in this Amendment shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Amendment, the K-Cup Sales Agreement or the License Agreement and such invalid, illegal and unenforceable provision shall be reformed and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.

3.3 Headings; Counterparts.

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Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

Headings used in this Amendment are provided for convenience only and shall not be used to construe meaning or intent. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

3.4 Governing Law; Jurisdiction.

This Amendment is made in the Commonwealth of Massachusetts, and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts without regard to any choice or conflict of law principles. The United Nations Convention on the International Sale of Goods is expressly excluded from this Amendment, including without limitation the construction, interpretation and governance of this Amendment.

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Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

IN WITNESS WHEREOF, the Parties hereto have caused this Amendment to be executed as a contract as of and effective the day and year first above written.

Keurig, Incorporated
By:	/s/ Nicholas Lazaris
	Nicholas Lazaris
	President
Diedrich Coffee, Inc.
By:	/s/ Stephen V. Coffey
Name:	Stephen V. Coffey
Title:	CEO

Signature Page

Amendment to Licensed Roaster K-Cup Sales Agreement

EX-10.42

Exhibit 10.42

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

Keurig, Incorporated

101 Edgewater Drive

Wakefield, MA 01880

July 30, 2007

BY UPS – NEXT DAY

Diedrich Coffee, Inc.

28 Executive Park, Suite 200

Irvine, CA 92614

Attention: Stephen V. Coffey, CEO

Re: Royalty Alteration

Dear Steve:

This letter serves as notice by Keurig, Incorporated (“Keurig”) under Section 6.4.2 of the License and Distribution Agreement dated July 29, 2003, as amended (as so amended, the “Agreement”), between Keurig and Diedrich Coffee, Inc. (“Diedrich”).

Specifically, Keurig gives notice that:

[* * *]

(2) Keurig is exercising its right to alter the Base Royalty Rate and, thereby, the Royalty Rate Schedule (as those terms are defined in the Agreement).

This adjustment will be effective on August 1, 2008 for all Diedrich K-Cups (as defined in the Agreement) shipped from and after that date. The details of this royalty alteration are set forth in the attached Exhibit A which will replace the Royalty Rate Schedule set forth in Section 6.1.1 of the Agreement on the date of this notice.

If you agree to accept the royalty alteration, please sign the enclosed copy of this letter where indicated and return such signed copy to me at your earliest convenience. If you do not so sign and return the enclosed copy of this letter within 60 days, (a) the current Base Royalty Rate, to the extent reduced by the volume incentive specified in the Royalty Rate Schedule set forth in

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

Section 6.1.1 of the Agreement on the date of this notice, shall remain in force for two years from the date on which you receive this royalty alteration notice and (b) the Agreement shall automatically terminate at the end of such two years in accordance with the terms of Section 6.4.2 of the Agreement.

Except as amended by this royalty alteration notice, all other terms and conditions of the Agreement remain in full force and effect.

Very truly yours,

Keurig, Incorporated

/s/ Nicholas Lazaris

Nicholas Lazaris

President

Agreed to and Accepted:
Diedrich Coffee, Inc.
By:	/s/ Stephen V. Coffey
Name:	Stephen V. Coffey
Title:	CEO, duly authorized

2

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “[* * *]” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

Exhibit A

Royalty Alteration

Effective August 1, 2008, the “Base Royalty Rate” provided for under Section 6.1.1 of the Agreement shall (1) equal [* * *] cents ($0.[* * *]) and (2) be reduced by a Volume Incentive in accordance with the “Royalty Rate Schedule” set forth below; provided, however, in the case of the period from August 1, 2008 to the end of the Diedrich fiscal quarter in which such date falls, the Volume Incentive ([* * *]$0.[* * *] Base Royalty Rate in effect beginning August 1, 2008 will be reduced) applicable to Diedrich during such fiscal quarter shall be the same as the volume incentive applicable to Diedrich on July 31, 2008 in accordance with the terms of the Agreement prior to giving effect to the increase in the Base Royalty Rate set forth above. For all Diedrich fiscal quarters following the Diedrich fiscal quarter in which August 1, 2008 falls, the Volume Incentive and, therefore, the applicable Base Royalty Rate shall be calculated at the beginning of each Diedrich fiscal quarter based on the Diedrich K-Cup unit shipment volume of the immediately preceding three calendar months, net of returns made within the Diedrich K-Cup BUBD (as such term is defined in the Agreement).

[	* * *]			[* * *]			[* * *]
[	* * *]			[* * *]	$	0.	[* * *]
[	* * *]	- $	0.	[* * *]	$	0.	[* * *]
[	* * *]	- $	0.	[* * *]	$	0.	[* * *]
[	* * *]	- $	0.	[* * *]	$	0.	[* * *]
[	* * *]	- $	0.	[* * *]	$	0.	[* * *]
[	* * *]	- $	0.	[* * *]	$	0.	[* * *]

EX-10.43

Exhibit 10.43

WAIVER AND AMENDMENT TO LICENSE AND DISTRIBUTION AGREEMENT

This Waiver and Amendment to License and Distribution Agreement (this “Amendment”) is made and effective as of July 2, 2008 by and between Keurig, Incorporated, a Delaware corporation (“Keurig”), and Diedrich Coffee, Inc., a Delaware corporation (“Diedrich”). Capitalized terms used in this Amendment without definition shall have the respective meanings ascribed to such terms in that certain License and Distribution Agreement dated as of July 29, 2003 by and between Keurig and Diedrich, as amended (as so amended, the “License Agreement”).

RECITALS:

Diedrich desires to launch a hot cocoa K-Cup pursuant to its AFH License and AH License to satisfy consumer demand, but such K-Cup has generally not satisfied the residual fluid standards nor the K-Cup ejection standards established therefor by Keurig.

Diedrich has concluded that consumers do not view the presence of residual fluid in Diedrich’s hot cocoa K-Cups negatively and that any K-Cup non-ejection issues will not be significantly detrimental to Diedrich’s or the Keurig Brewing System’s reputation. Therefore, Diedrich has requested Keurig to waive the residual fluid standard and the K-Cup ejection standard for such hot cocoa K-Cup.

Based on such conclusions, as well as Keurig’s own sanitation and other testing of the hot cocoa K-Cup which Diedrich desires to launch, and subject to the terms and conditions of this Amendment, Keurig is willing to waive the residual fluid standard for such K-Cup.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

1.      Acknowledgement and Waiver of Residual Fluid Requirement and K-Cup Ejection Requirement for Diedrich Hot Cocoa K-Cup. The parties acknowledge that the hot cocoa product submitted by Diedrich to Keurig and for which the parties have conducted sanitation and other quality tests (the “Diedrich Hot Cocoa K-Cup”) is a Diedrich K-Cup containing an Other Soluble Hot Beverage Product. Therefore, the Diedrich Hot Cocoa K-Cup is subject to the Acceptable K-Cup to Standard requirements of Section 5 of the License Agreement, including, without limitation, the hot cocoa-specific testing protocol established by Keurig and previously provided to Diedrich. Notwithstanding such requirements, Keurig hereby waives the maximum residual fluid requirement applicable to the Diedrich Hot Cocoa K-Cup. In addition, Keurig hereby waives the K-Cup ejection requirements applicable to the Diedrich Hot Cocoa K-Cup; provided, however, such waiver may be revoked by Keurig in its sole discretion upon not less than sixty (60) days written notice if at any time Keurig determines that customer complaints associated with the failure of the Diedrich Hot Cocoa K-Cup to automatically eject from Keurig Model B2000 or B2003 brewers reach a level which Keurig determines to be detrimental to the

reputation of the Keurig Brewing System. Such waivers do not apply to any of the other requirements that must be satisfied for a Diedrich Hot Cocoa K-Cup to be considered an Acceptable K-Cup to Standard. Further, such waivers do not apply to any other soluble base product packaged for use with a Keurig Brewer, all of which products the parties acknowledge and agree will be, if launched by Diedrich, Diedrich K-Cups containing an Other Soluble Hot Beverage Product and, therefore, subject to the Acceptable K-Cup to Standard and other applicable requirements of the License Agreement unless otherwise agreed between the parties.

2.      Packaging Requirements. Diedrich shall package Diedrich Hot Cocoa K-Cups in K-Cup sleeves which clearly and conspicuously include (a) a warning statement to users concerning the possibility of hot residual fluid remaining in Diedrich Hot Cocoa K-Cups after use in a Keurig Brewer and (b) user instructions for proper use, removal and disposal of Diedrich Hot Cocoa K-Cups when used with a Keurig Brewer. Diedrich’s obligation under this paragraph shall be deemed an obligation of Diedrich under the License Agreement, and breach of such obligation shall be deemed a breach of the License Agreement.

3.      Additional Indemnification of Keurig. The License Agreement is hereby amended by adding a new Section 18.3 to read in its entirety as follows:

“18.3 Additional Diedrich Indemnification of Keurig.

In addition to the indemnification required by Diedrich under Section 18.2 and notwithstanding any provision of Section 18.1 to the contrary (except as to subparagraphs (4) and (5) in Section 18.1 relating to certain defects), Diedrich shall indemnify and hold harmless Keurig, its officers, directors, employees, and agents from and against any loss, damage, cost or expense (including reasonable attorneys’ fees) arising out of any third party claim of property damage arising from or related to the use of any Diedrich Hot Cocoa K-Cup (as defined in that certain Waiver and Amendment to this Agreement dated July 2, 2008). For the avoidance of doubt, Diedrich shall have no obligations under this Section 18.3 for any loss, damage, cost or expense arising out of any third party claim of property damage arising out of any defect in the design of the Keurig Brewing System, K-Cups or any component thereof or any manufacturing defect, including in material and workmanship, in the Packaging Lines or any Keurig Brewer or any component thereof. As provided in Section 18.2, Diedrich shall maintain general and products liability insurance in an amount of not less than two million dollars on an occurrence basis.”

4. Miscellaneous.

a. Except as amended hereby, all other terms and conditions of the License Agreement shall continue in full force and effect. In the event of conflict between the terms of this Amendment and the terms of the License Agreement, the terms of this Amendment shall control.

b. This Amendment and the License Agreement, as incorporated by reference herein, represent the entire understanding and agreement between the parties as to the subject matter hereof and supersede all prior agreements and understandings, oral or written, between the parties as to the subject matter hereof.

2

c. This Amendment is made in the Commonwealth of Massachusetts, and shall be governed by and construed in accordance with federal law to the extent applicable, and the internal substantive laws of the Commonwealth of Massachusetts without regard to any choice or conflict of law principles.

d. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart.

e. In case any one or more of the provisions contained in this Amendment shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Amendment and such invalid, illegal and unenforceable provision shall be reformed and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.

[Remainder of page left intentionally blank. Signature page follows.]

3

IN WITNESS WHEREOF, the parties have executed this Amendment as of and effective the date first above written.

KEURIG, INCORPORATED		DIEDRICH COFFEE, INC.
By:	/s/ Mark C. Wood	By:	/s/ James R. Phillips
Name:	Mark C. Wood	Name:	James R. Phillips
Title:	VP Business Development	Title:	President & CEO

4

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Diedrich Coffee, Inc.:

We hereby consent to the incorporation by reference in the registration statements (Nos. 333-111669, 333-66744, 333-74626, 333-52190, 333-61269, 333-50412, 333-61271, 333-50127, 333-50129) on Form S-8 and Form S-3 of our report dated October 8, 2008, relating to the consolidated financial statements and schedule of Diedrich Coffee, Inc. which appear in this Form 10-K for the year ended June 25, 2008.

/s/    BDO Seidman, LLP        

Costa Mesa, California

October 8, 2008

EX-31.1

Exhibit 31.1

Section 302 Certification

I, J. Russell Phillips, certify that:

1. I have reviewed this annual report on Form 10-K 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) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. 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

d. 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: October 8, 2008	/s/ J. Russell Phillips
	J. Russell Phillips
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Section 302 Certification

I, Sean M. McCarthy, certify that:

1. I have reviewed this annual report on Form 10-K 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) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. 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

d. 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: October 8, 2008	/s/ Sean M. McCarthy
	Sean M. McCarthy
	Vice President and Chief Financial Officer
	(Principal 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 Annual Report of the Company on Form 10-K for the period ended June 25, 2008 (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: October 8, 2008	/s/ J. Russell Phillips
	J. Russell Phillips
	President and Chief Executive Officer
	(Principal 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 Annual Report of the Company on Form 10-K for the period ended June 25, 2008 (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: October 8, 2008	/s/ Sean M. McCarthy
	Sean M. McCarthy
	Vice President and Chief Financial Officer
	(Principal 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.