10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 16, 2009

OR

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

For the transition period from              to             

Commission File Number 0-21203

DIEDRICH COFFEE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	33-0086628
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

28 Executive Park

Irvine, California 92614

(Address of Principal Executive Offices, Zip Code)

(949) 260-1600

(Registrant’s Telephone Number, including Area Code)

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

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

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

Large Accelerated Filer    ¨	Accelerated Filer    ¨
Non-Accelerated Filer    ¨	Smaller Reporting Company    x
(Do not check if a smaller reporting company)

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

As of October 23, 2009, there were 5,726,813 shares of common stock of the registrant outstanding.

TABLE OF CONTENTS

	Page Number
PART I—FINANCIAL INFORMATION	1
Item 1. Financial Statements	1
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)	1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)	2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)	3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative And Qualitative Disclosures About Market Risk	19
Item 4. Controls and Procedures	19
PART II—OTHER INFORMATION	19
Item 1. Legal Proceedings	19
Item 1A. Risk Factors	19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3. Defaults upon Senior Securities	19
Item 4. Submission of Matters to a Vote of Security Holders	19
Item 5. Other Information	19
Item 6. Exhibits	20
SIGNATURES	21

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

DIEDRICH COFFEE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	September 16, 2009			June 24, 2009
Assets
Current assets:
Cash	$	3,082,000		$	3,572,000
Restricted cash and short term investments		623,000			623,000
Accounts receivable, less allowance for doubtful accounts of $132,000 at September 16, 2009 and $266,000 at June 24, 2009		6,321,000			6,335,000
Inventories		5,601,000			5,510,000
Income tax refund receivable		40,000			40,000
Current portion of notes receivable, less allowance of $99,000 at September 16, 2009 and $75,000 at June 24, 2009		2,634,000			3,604,000
Prepaid expenses		566,000			293,000
Total current assets		18,867,000			19,977,000
Property and equipment, net		5,268,000			5,416,000
Notes receivable, less allowance of $0 at September 16, 2009 and June 24, 2009		863,000			812,000
Other assets		1,024,000			723,000
Total assets	$	26,022,000		$	26,928,000
Liabilities and Stockholders’ Equity
Current liabilities:
Note payable, net of discount	$	2,000,000		$	2,687,000
Accounts payable		4,635,000			5,228,000
Accrued compensation		1,935,000			1,816,000
Accrued expenses		1,256,000			1,418,000
Total current liabilities		9,826,000			11,149,000
Long term note payable, net of discount		1,374,000			1,594,000
Income tax liability		33,000			33,000
Deferred rent		125,000			133,000
Other liabilities		245,000			245,000
Total liabilities		11,603,000			13,154,000
Commitments and contingencies (Notes 9 and 10)
Stockholders’ equity:
Preferred stock, $0.01 par value, authorized 3,000,000 shares; issued and outstanding 0 shares at September 16, 2009 and June 24, 2009		—			—
Common stock, $0.01 par value; authorized 17,500,000 shares; issued and outstanding 5,727,000 shares at September 16, 2009 and June 24, 2009		57,000			57,000
Additional paid-in capital		63,363,000			63,289,000
Accumulated deficit		(49,001,000	)		(49,572,000	)
Total stockholders’ equity		14,419,000			13,774,000
Total liabilities and stockholders’ equity	$	26,022,000		$	26,928,000

See accompanying notes to unaudited condensed consolidated financial statements.

1

DIEDRICH COFFEE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Twelve Weeks Ended September 16, 2009			Twelve Weeks Ended September 17, 2008
Net revenue:
Wholesale	$	15,642,000		$	10,347,000
Retail and other		131,000			61,000
Total revenue		15,773,000			10,408,000
Costs and expenses:
Cost of sales (exclusive of depreciation shown separately below)		11,712,000			8,274,000
Operating expenses		1,187,000			1,213,000
Depreciation and amortization		355,000			332,000
General and administrative expenses		1,797,000			1,819,000
Gain on asset disposals		—			(6,000	)
Total costs and expenses		15,051,000			11,632,000
Operating income (loss) from continuing operations		722,000			(1,224,000	)
Interest expense		(176,000	)		(310,000	)
Interest and other income, net		87,000			67,000
Income (loss) from continuing operations before income tax		633,000			(1,467,000	)
Income tax provision		(62,000	)		—
Income (loss) from continuing operations		571,000			(1,467,000	)
Discontinued operations:
Loss from discontinued operations, net of tax expense of $0		—			(316,000	)
Net income (loss)	$	571,000		$	(1,783,000	)
Basic net income (loss) per share:
Income (loss) from continuing operations	$	0.10		$	(0.27	)
Loss from discontinued operations, net		—			(0.06	)
Net income (loss)	$	0.10		$	(0.33	)
Diluted net income (loss) per share:
Income (loss) from continuing operations	$	0.07		$	(0.27	)
Loss from discontinued operations, net		—			(0.06	)
Net Income (loss)	$	0.07		$	(0.33	)
Weighted average and equivalent shares outstanding:
Basic		5,727,000			5,468,000
Diluted		8,161,000			5,468,000

See accompanying notes to unaudited condensed consolidated financial statements.

2

DIEDRICH COFFEE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Twelve Weeks Ended September 16, 2009			Twelve Weeks Ended September 17, 2008
Cash flows from operating activities:
Net Income (loss)	$	571,000		$	(1,783,000	)
Loss on discontinued operations, net		—			316,000
Income (loss) from continuing operations:		571,000			(1,467,000	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		355,000			332,000
Amortization and write off of loan fees		2,000			1,000
Amortization of note payable discount		93,000			245,000
Provision for (recovery of) bad debt		(30,000	)		54,000
Provision for (recovery of) inventory obsolescence		(44,000	)		4,000
Stock compensation expense		75,000			75,000
Gain on disposal of assets		—			(6,000	)
Changes in operating assets and liabilities:
Accounts receivable		44,000			(1,248,000	)
Inventories		(47,000	)		(2,424,000	)
Prepaid expenses		(273,000	)		(62,000	)
Notes Receivable		(81,000	)		(97,000	)
Other assets		(305,000	)		(6,000	)
Accounts payable		(593,000	)		3,035,000
Accrued compensation		119,000			29,000
Accrued expenses		(162,000	)		33,000
Deferred rent		(8,000	)		(4,000	)
Net cash used in continuing operations		(284,000	)		(1,506,000	)
Net cash used in discontinued operations		—			(629,000	)
Net cash used in operating activities		(284,000	)		(2,135,000	)
Cash flows from investing activities:
Capital expenditures for property and equipment		(206,000	)		(244,000	)
Proceeds from disposal of property and equipment		—			6,000
Payments received on notes receivable		1,000,000			533,000
Net cash provided by investing activities of continuing operations		794,000			295,000
Cash flows from financing activities:
Borrowings under credit agreement		—			3,000,000
Payments made on long term debt		(1,000,000	)		—
Net cash (used in) provided by financing activities		(1,000,000	)		3,000,000
Net (decrease) increase in cash		(490,000	)		1,160,000
Cash at beginning of year		3,572,000			670,000
Cash at end of period	$	3,082,000		$	1,830,000
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	92,000		$	56,000
Income taxes	$	—		$	5,000
Non-cash transactions:
Issuance of notes receivable	$	29,000		$	77,000

See accompanying notes to unaudited condensed consolidated financial statements.

3

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 16, 2009

(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Diedrich Coffee, Inc. (the “Company”) is a specialty coffee roaster and wholesaler whose brands include Diedrich Coffee, Gloria Jean’s, and Coffee People. The Company has wholesale accounts with businesses and restaurant chains. In addition, the Company operates a coffee roasting facility and a distribution facility in central California that supplies roasted coffee in a variety of packaging formats to its wholesale customers.

Basis of Presentation

The unaudited condensed consolidated financial statements of Diedrich Coffee, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America, as well as the instructions to Form 10-Q and Article 8 of Regulation S-X. These statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended June 24, 2009.

The Company evaluated all subsequent events that occurred after the balance sheet date through the date the condensed consolidated financial statements were issued on November 2, 2009. In the opinion of management, all adjustments (consisting of normal, recurring adjustments and accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results expected for a full year.

Discontinued Operations

During the year ended June 24, 2009, the Company sold the Gloria Jean’s U.S. franchise and retail operations to Praise International North America, Inc. (the “Transaction”).

Praise is an affiliate of Gloria Jean’s Coffees International Pty. Ltd., which was a party to the purchase of the Company’s international franchise operations in February 2005.

Also during the fiscal year ended June 24, 2009, the Company closed the one remaining Diedrich Coffee Inc. retail location due to expiration of the lease relating to that retail location.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) topic 360, Property, Plant & Equipment (“ASC 360”) the financial results of the Gloria Jean’s franchise operations, retail operations and the one Diedrich Coffee retail location are reported as discontinued operations for all periods presented. Wholesale sales to former franchisees are included in continuing operations for all periods since the Company will continue to provide coffee roasting services to Praise.

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

• Franchise revenues for Gloria Jean’s Gourmet Coffees Franchising Corp.

• Retail revenues for Gloria Jean’s Gourmet Coffees Corp. and Diedrich Coffee Inc.

• Cost of sales and related occupancy costs

• Operating expenses

• Depreciation and amortization

• General and administrative expenses

• Provision for taxes

• Impairment of assets

4

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 16, 2009

(UNAUDITED)

Recently Adopted Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FAS No. 162, as codified in FASB ASC topic 105, Generally Accepted Accounting Principles (“ASC 105”). ASC 105 establishes that the FASB Accounting Standards Codification (“Codification”) will become the authoritative source of U.S. GAAP and that rules and interpretive releases of the SEC will also be sources of authoritative GAAP for SEC registrants. Following ASC 105, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The Company adopted ASC 105 effective for our first quarter of fiscal year 2010.

In June 2008, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus regarding EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5), as codified in FASB ASC topic 815, Derivatives & Hedging (“ASC 815”). ASC 815 outlines a two-step approach to evaluate the instrument’s contingent exercise provisions, if any, and to evaluate the instrument’s settlement provisions when determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. ASC 815 is effective for fiscal years beginning after December 15, 2008 and must be applied to outstanding instruments as of the beginning of the fiscal year of adoption as a cumulative-effect adjustment to the opening balance of retained earnings. Early adoption is not permitted. The cumulative effect of applying ASC 815 will be reported as an adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted ASC 815 on June 25, 2009 and there was no impact on the Company’s unaudited condensed consolidated financial statements.

Significant Accounting Policies

There have been no significant changes to the Company’s significant accounting policies during the twelve weeks ended September 16, 2009. See Footnote 1 of the Company’s consolidated financial statements included in the Company’s 2009 Annual Report on Form 10-K for a comprehensive description of the Company’s significant accounting policies.

Use of Estimates

The preparation of unaudited condensed 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.

Stock-Based Compensation

The Company applies the provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), as codified in FASB ASC topic 718—Compensation — Stock Compensation (“ASC 718”), 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.

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. No stock options were granted during the twelve weeks ended September 16, 2009. The fair values of the options were estimated using the Black-Scholes option-pricing model based on the following weighted average assumptions:

	Twelve Weeks Ended September 16, 2009		Twelve Weeks Ended September 17, 2008
Risk free interest rate	n/a		3.11	%
Expected life	n/a		3 years
Expected volatility	n/a		56	%
Expected dividend yield	n/a		0	%
Forfeiture rate	6.90	%	5.58	%

5

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 16, 2009

(UNAUDITED)

A summary of option activity under our stock option plans for the twelve weeks ended September 16, 2009 is as follows:

	Number of options		Weighted average exercise price ($)		Weighted average remaining contractual term (years)	Aggregate intrinsic Value ($)
Options outstanding at June 24, 2009	750,300		$	3.36
Plus options granted	—			—
Less:
Options canceled or expired	(1,300	)		27.77
Options outstanding at September 16, 2009	749,000		$	3.32	8.1	$	12,976,000
Options exercisable at September 16, 2009	333,000		$	3.85	7.0	$	5,594,000

Stock-based compensation expense included in the statements of operations was $75,000 for each of the twelve weeks ended September 16, 2009 and September 17, 2008. As of September 16, 2009, there was approximately $282,000 of total unrecognized stock-based compensation cost related to options granted under our plans that will be recognized over a weighted average period of 1.6 years. No options vested during the twelve weeks ended September 16, 2009. Aggregate intrinsic value at September 16, 2009 was based on a closing price of $20.64 per share.

Concentrations

The Company generated 92.3% and 84.1% of total revenues from the sale of K-Cups^® for twelve weeks ended September 16, 2009 and September 17, 2008, respectively. The manufacturing and distribution of K-Cups^® is licensed from a single licensor, Keurig Incorporated, on a non-exclusive basis. During the twelve weeks ended September 16, 2009 and September 17, 2008, the Company had sales to the licensor that represented approximately $7,237,000 or 46.3% and $2,937,000 or 28.4% of wholesale sales, respectively.

The current agreement with the licensor expires in July 2013. The agreement provides for automatic five-year renewals if certain volume thresholds are met, which the Company is currently exceeding. In its fiscal year 2008 Form 10-K, Green Mountain Coffee Roasters, Inc. (NASDAQ: GMCR), which owns Keurig Incorporated, states that the two principal patents associated with the current generation K-Cup portion packs, will expire in 2012 pending patent applications associated with this technology which, if ultimately issued as patents, would have expiration dates in 2023. Any major disruptions in this relationship could cause a material adverse effect on the Company’s business and operations.

Reclassifications

Certain reclassifications have been made to the September 17, 2008 unaudited condensed consolidated financial statements to conform to the September 16, 2009 presentation.

2. LIQUIDITY AND MANAGEMENT PLANS

For the quarter ended September 16, 2009, the Company reported net income of $571,000 which was net of income tax of $62,000. The Company had a cash balance of $3,082,000 and no access to additional borrowings under the current credit facility as of September 16, 2009.

The Contingent Convertible Note Purchase Agreement with Sequoia Enterprises, L.P. (“Sequoia”), a limited partnership whose sole general partner is a significant shareholder of the Company and also serves as the Chairman of the Company’s board of directors (the “Note Purchase Agreement”), expires on March 31, 2010 and the $2,000,000 balance on the outstanding note is due in full on that date. In addition, the Company obtained a $3,000,000 Term Loan (as defined below) from Sequoia on August 26, 2008. See Note 10. The Company is required to make regular monthly payments of interest on the Term Loan. In addition, as per the terms of the Term Loan Agreement (as defined below), the Company paid $1,000,000 due to Sequoia on July 29, 2009. All outstanding principal

6

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 16, 2009

(UNAUDITED)

and interest will be due on the maturity date of August 26, 2011, unless due earlier pursuant to the terms of the Term Loan Agreement upon a change of control of the Company or an event of default. As of September 16, 2009, the Company had $2,000,000 outstanding under the Term Loan Agreement.

The Company believes that cash flow from operations and payments from notes receivable due from Praise and Gloria Jean’s Coffees International Pty. Ltd issued in connection with the sale of the Gloria Jean’s U.S. and international franchise operations will be sufficient to satisfy working capital needs at the anticipated operating levels and debt service requirements for at least the next twelve months.

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

3. ACCOUNTS RECEIVABLE

During the twelve weeks ended September 16, 2009, the Company wrote off $85,000 of accounts receivable balances and received a net of $49,000 in recoveries on accounts previously written off.

The following table details the components of net accounts receivable:

	September 16, 2009			June 24, 2009
Wholesale receivables	$	6,381,000		$	6,496,000
Allowance for wholesale receivables		(82,000	)		(180,000	)
		6,299,000			6,316,000
Franchise and other receivables		72,000			105,000
Allowance for franchise and other receivables		(50,000	)		(86,000	)
		22,000			19,000
Total accounts receivable, net	$	6,321,000		$	6,335,000

4. INVENTORIES

Inventories consist of the following:

	September 16, 2009		June 24, 2009
Unroasted coffee	$	1,033,000	$	422,000
Roasted coffee		1,997,000		2,404,000
Accessory and specialty items		119,000		49,000
Other food, beverage and supplies		2,452,000		2,635,000
Total inventory	$	5,601,000	$	5,510,000

7

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 16, 2009

(UNAUDITED)

5. NOTES RECEIVABLE

Notes receivable consist of the following:

	September 16, 2009			June 24, 2009
Notes receivable due on March 1, 2010. Notes are secured by the assets sold under the asset purchase and sale agreements or general security agreement. Amounts are net of a $99,000 allowance as of September 16, 2009 and $75,000 as of June 24, 2009, respectively	$	4,000		$	—
Notes receivable from a corporation discounted at an annual rate of 8.0%, payable annually in installments, due January 31, 2011		1,863,000			2,816,000
Notes receivable from a corporation, interest due at an annual rate of 7.0%, payable in two equal installments on December 12, 2009 and June 12, 2010		1,630,000			1,600,000
		3,497,000			4,416,000
Less: current portion of notes receivable		(2,634,000	)		(3,604,000	)
Long-term portion of notes receivable	$	863,000		$	812,000

6. NOTE PAYABLE

	September 16, 2009			June 24, 2009
Note payable amount bearing interest at a rate of three-month LIBOR plus 6.30% (6.9% as of September 16, 2009) is due and payable on March 31, 2010. Note is unsecured	$	2,000,000		$	2,000,000
Note payable amount bearing interest at a rate of one-month LIBOR plus 6.30% (6.56% as of September 16, 2009). Note is unsecured		2,000,000			3,000,000
Discount on note payable		(626,000	)		(719,000	)
		3,374,000			4,281,000
Less: current portion of notes payable, net of discount		(2,000,000	)		(2,687,000	)
Long-term portion of notes payable, net of discount	$	1,374,000		$	1,594,000

7. EARNINGS PER SHARE

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

	Twelve Weeks Ended September 16, 2009		Twelve Weeks Ended September 17, 2008
Numerator:
Income (loss) from continuing operations	$	571,000	$	(1,467,000	)
Denominator:
Basic weighted average shares outstanding		5,727,000		5,468,000
Effect of dilutive securities		2,434,000		—
Diluted weighted average shares outstanding		8,161,000		5,468,000
Basic net income (loss) per share from continuing operations	$	0.10	$	(0.27	)
Diluted net income (loss) per share from continuing operations	$	0.07	$	(0.27	)

8

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 16, 2009

(UNAUDITED)

For the quarter ended September 16, 2009, employee stock options of 1,500 shares were excluded from the computation of dilutive earnings per share as their impact would have been anti-dilutive. For the prior quarter ended September 17, 2008, employee stock options of approximately 608,000 shares and warrants of 2,167,000 shares were excluded from the computation of diluted earnings per share as their impact would have been anti-dilutive.

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

	Twelve Weeks Ended September 16, 2009		Twelve Weeks Ended September 17, 2008
Numerator:
Net Income (loss)	$	571,000	$	(1,783,000	)
Denominator:
Basic weighted average shares outstanding		5,727,000		5,468,000
Effect of dilutive securities		2,434,000		—
Diluted adjusted weighted average shares		8,161,000		5,468,000
Basic net income (loss) per share	$	0.10	$	(0.33	)
Diluted net income (loss) per share	$	0.07	$	(0.33	)

8. SEGMENT AND RELATED INFORMATION

Subsequent to the sale of Gloria Jean’s U.S. franchise and retail operations (see Note 1), the Company has two reportable segments, wholesale operations and retail and other. Retail and other includes ecommerce retail operations and franchise operations. Ecommerce revenues are derived from sales of products through the Company’s three websites, www.diedrich.com, www.coffeepeople.com and www.coffeeteastore.com. 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.

9

DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 16, 2009

(UNAUDITED)

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, and corporate property, plant and equipment. The other component of segment income (loss) before tax includes corporate general and administrative expenses, depreciation and amortization expense, and interest expense.

	TWELVE WEEKS ENDED
	September 16, 2009			September 17, 2008
Net revenue:
Wholesale	$	15,642,000		$	10,347,000
Retail and other		131,000			61,000
Total net revenue	$	15,773,000		$	10,408,000
Interest expense:
Wholesale	$	—		$	—
Corporate		176,000			310,000
Total interest expense	$	176,000		$	310,000
Depreciation and amortization:
Wholesale	$	287,000		$	261,000
Retail and other		13,000			4,000
Corporate		55,000			67,000
Total depreciation and amortization	$	355,000		$	332,000
Segment income (loss) from continuing operations before income tax benefit:
Wholesale	$	2,565,000		$	727,000
Retail and other		9,000			(71,000	)
Corporate		(1,941,000	)		(2,123,000	)
Total segment income (loss) from continuing operations before income tax benefit	$	633,000		$	(1,467,000	)
	September 16, 2009			June 24, 2009
Identifiable assets:
Wholesale	$	16,308,000		$	15,995,000
Retail and other		292,000			226,000
Corporate		9,422,000			10,707,000
Total assets	$	26,022,000		$	26,928,000

9. COMMITMENTS AND CONTINGENCIES

There have been no material changes to the Company’s significant commitments and contingencies during the twelve weeks ended September 16, 2009. See Footnote 9 of the Company’s consolidated financial statements included in the Company’s 2009 Annual Report on Form 10-K for a comprehensive description of the Company’s significant commitments and contingencies.

10. OUTSTANDING DEBT, FINANCING ARRANGEMENTS AND RESTRICTED CASH

Note Purchase Agreement:

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 is a significant shareholder of the Company and 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

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DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 16, 2009

(UNAUDITED)

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, 2010, the Company is only required to make monthly payments of interest and the monthly commitment fee, but not principal, until such date. Interest is payable at three-month LIBOR plus 9.30% for any period during which the ratio of Indebtedness (as defined in the Note Purchase Agreement) on a consolidated basis to Effective Tangible Net Worth (as defined in the Note Purchase Agreement) is greater than 1.75:1.00 or the three-month LIBOR plus 6.30% for any other period, in each case reset on a periodic basis as provided in the Note Purchase Agreement. 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 September 16, 2009, the Company had $2,000,000 of issued notes outstanding under the Note Purchase Agreement. As of September 16, 2009, the Company was in compliance with all covenants contained in the Note Purchase Agreement.

Loan Agreement:

On August 26, 2008, the Company entered into a loan agreement with Sequoia (the “Term Loan Agreement”). The Term Loan Agreement provides for a $3,000,000 term loan (the “Term Loan”). As amended, interest is payable at one-month LIBOR plus 9.30% for any period during which the ratio of Indebtedness (as defined in the Term Loan Agreement) on a consolidated basis to Effective Tangible Net Worth (as defined in the Term Loan Agreement) is greater than 1.75:1.00 or the one-month LIBOR plus 6.30% for any other period, in each case reset on a periodic basis as provided in the Term Loan Agreement. The Company is required to make regular monthly payments of interest on the Term Loan with Sequoia. In addition, as per the terms of the Term Loan Agreement, the Company paid $1,000,000 due to Sequoia on July 29, 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 Term Loan Agreement upon a change of control of the Company or an event of default. As of September 16, 2009, the Company had $2,000,000 outstanding under the Term Loan Agreement.

The Term 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 Agreement. The Term 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. As of September 16, 2009, the Company was in compliance with all covenants contained in the Term Loan Agreement.

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 Term 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.

Letter of Credit:

In addition, the Company entered into a Credit Agreement with Bank of the West on November 4, 2005. The current agreement provides for a $500,000 letter of credit facility that expires on October 31, 2010. The letter of credit facility is secured by a deposit account at Bank of the West. As of September 16, 2009, this deposit account had a balance of $623,000, which is shown as restricted cash on the consolidated balance sheets. As of September 16, 2009, $472,000 of letters of credit was outstanding under the letter of credit facility. The agreement contains covenants that, among other matters, require the Company to submit financial statements to the bank within specified time periods. As of September 16, 2009, the Company was in compliance with all Bank of the West agreement covenants.

11. WARRANTS

2001 Sequoia Warrant:

On May 8, 2001, in connection with the sale of 2,000,000 shares of Company common stock, the Company issued warrants to Sequoia 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.

During the fiscal year ending June 24, 2009, the other investors exercised their warrants at an exercise price of $4.80 per share. The Company received cash proceeds of $1.2 million in connection with the warrant exercises.

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DIEDRICH COFFEE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 16, 2009

(UNAUDITED)

On November 10, 2008, the Company entered into a waiver agreement whereby the exercise price of the 2001 Sequoia Warrant was decreased to $1.65 per share. The fair value of these amended warrants was approximately $53,000 which was recorded as a debt discount. At September 16, 2009, all 2001 Sequoia Warrants were outstanding with an expiration date of June 30, 2014.

2008 Sequoia Warrant:

In connection with the Term Loan Agreement and an amendment to the Note Purchase Agreement, 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. On November 10, 2008, the Company entered into a waiver agreement whereby the exercise price was decreased to $1.65 per share. The fair value of these amended warrants was approximately $300,000 which was recorded as a debt discount. At September 16, 2009, all 2008 Sequoia Warrants were outstanding with an expiration date of August 26, 2013. The 2008 Warrant is not eligible for cashless exercise, but the Company is obligated to cause the common stock issued upon exercise of the 2008 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.

2009 Sequoia Warrant:

In connection with the extension of the Note Purchase Agreement, after the close of the Nasdaq Stock Market on April 29, 2009, the Company issued to Sequoia a warrant to purchase 70,000 shares of common stock of the Company at an exercise price of $7.40 per share (the “2009 Sequoia Warrant”), which was the closing price of the Company’s common stock on such date. The fair value of these warrants was approximately $440,000 which was immediately recorded as interest expense. The 2009 Sequoia Warrant is exercisable by Sequoia, in whole or in part, at any time or from time to time, prior to April 29, 2014. The 2009 Sequoia Warrant is not eligible for cashless exercise, but the Company is obligated to cause the common stock issued upon exercise of the 2009 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.

The following table summarizes information about warrant transactions from June 24, 2009 through September 16, 2009:

	Number of Shares	Weighted Average Exercise Price
Warrants outstanding, June 24, 2009	1,987,000	$	1.85
Granted	—		—
Exercised	—		—
Forfeited/cancelled	—		—
Warrants outstanding, September 16, 2009	1,987,000	$	1.85

12. LEGAL SETTLEMENT ACCRUAL

On February 2, 2007, a purported class action complaint entitled Deborah Willems, et al. v. Diedrich Coffee., et al. was filed in Orange County, California Superior Court on behalf of another former employee who worked in the position of general manager. This case currently involves 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, this case seeks 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. In October 2009, the Company paid approximately $384,000 to fully settle this lawsuit.

A lawsuit entitled Leader Bank v. Ajay Misra, et al v. Diedrich Coffee et al, is currently pending in the Middlesex Superior Court, Middlesex, Massachusetts. In that case the Plaintiff, Leader Bank, filed a complaint to collect on a defaulted promissory note it had with the franchisee, Defendant Amtek Group, LLC, on February 23, 2009. Ajay and Priya Misra were named defendants as well. On June 16, 2009, Defendants filed a third-party complaint against Diedrich Coffee alleging breach of contract, aiding and abetting Leader Bank in its takeover of the store and breach of privacy. In their complaint, third-party plaintiffs claim that they are entitled to $2,477,500. The Company is contesting the third-party complaint vigorously and has filed a motion to dismiss that was heard on

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October 9, 2009. The Company believes that liability is not probable and the potential settlement is not estimable under this lawsuit and has therefore not accrued any amounts related to the damages claimed under this lawsuit in the accompanying unaudited condensed consolidated financial statements.

13. DISCONTINUED OPERATIONS

During the fiscal year ended June 24, 2009, the Company sold the Gloria Jean’s U.S. franchise and retail operations to Praise International North America, Inc.

In addition, the Company entered into several ancillary agreements, including a roasting agreement whereby the Company agreed to provide coffee roasting services to Praise for a period of five years and a trademark license agreement whereby the Company granted to Praise a license to use the Company’s Gloria Jean’s Gourmet Coffees Corp. U.S. trademarks in the United States of America (including the Commonwealth of Puerto Rico) until these trademarks are transferred to Gloria Jean’s Coffees International Pty. Ltd.

Praise is an affiliate of Gloria Jean’s Coffees International Pty. Ltd., which was a party to the purchase of the Company’s international franchise operations in February 2005.

Also during the fiscal year ended June 24, 2009, the Company closed the one remaining Diedrich Coffee Inc. retail location due to expiration of the lease relating to that retail location.

In accordance with ASC 360, the financial results of the Gloria Jean’s franchise operations, retail operations and the one Diedrich Coffee retail location are reported as discontinued operations for all periods presented. Wholesale sales to former franchisees are included in continuing operations for all periods since the Company will continue to provide coffee roasting services to Praise.

The financial results included in discontinued operations were as follows:

	Twelve Weeks Ended
	September 17, 2008
Net retail revenue	$	877,000
Net franchise revenue		482,000
Net revenue from discontinued operations	$	1,359,000
Loss from discontinued operations, net of $0 tax	$	(316,000	)

14. INCOME TAXES

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 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 losses and limited earnings history, management cannot conclude that it is more likely than not that the Company will realize the benefits of these deductible differences, and thus has recorded a valuation allowance against the entire deferred tax asset balance.

The income tax provision of $62,000 for the twelve weeks ended September 16, 2009 primarily represents California state income taxes since the utilization of net operating loss carryforwards has been suspended by the state for the Company’s 2010 fiscal year end.

15. SUBSEQUENT EVENT

On November 2, 2009, the Company, Peet’s Coffee & Tea, Inc., a Washington corporation (“Peet’s”), and Marty Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Peet’s (“Acquisition Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). See Item 2 below under Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional details of the Merger Agreement.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

A WARNING ABOUT FORWARD LOOKING STATEMENTS.

We make forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include information about the proposed Merger with Peet’s, 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 quarterly report on Form 10-Q, along with the following possible events or factors:

• the risk that the Offer and the Merger will not close;

• the risk that Peet’s business and/or Diedrich’s business will be adversely impacted during the pendency of the Offer and the Merger;

• the risk that the operations of Peet’s and Diedrich will not be integrated successfully;

• 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;

• the impact of competition; and

• the availability of working capital.

Additional risks and uncertainties are described elsewhere in this report and in detail under the caption “Risk Factors Relating to Diedrich Coffee and Its Business” in our annual report on Form 10-K for the fiscal year ended June 24, 2009 and in other reports that we file with the Securities and Exchange Commission. 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 quarterly report on Form 10-Q. There can be no assurance that the proposed Merger will in fact be consummated. 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 otherwise indicated, “we,” “us,” and “our,” and similar terms refer to Diedrich Coffee, Inc., a Delaware corporation, and its predecessors and subsidiaries.

INTRODUCTION

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying unaudited condensed consolidated financial statements and footnotes to help provide an understanding of our financial condition, the changes in our financial condition and our 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 unaudited condensed consolidated statements of operations by comparing the results for the twelve weeks ended September 16, 2009 to the results for the twelve weeks ended September 17, 2008, respectively.

• Financial condition, liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our outstanding debt and commitments, both firm and contingent, that existed as of September 16, 2009. Included in the discussion of outstanding debt is a discussion of our financial capacity to fund our future commitments and a discussion of other financing arrangements.

• Critical accounting estimates. All of our significant accounting policies are summarized in Note 1 to the accompanying unaudited condensed consolidated financial statements.

OVERVIEW

Business

We are a specialty coffee roaster and wholesaler. Our brands include Diedrich Coffee, Coffee People and Gloria Jean’s. 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 distributors (“OCS”), chain and independent restaurants, coffeehouses, other hospitality operators and specialty retailers. We operate a roasting facility and a distribution facility in central California that supplies our coffee products to all of our customers.

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The Company’s costs of operations include cost of sales consisting of raw materials including green coffee beans, flavorings and packaging materials; royalty payments due to the licensor; equipment lease expense related to some of our packaging lines; a portion of our facility lease expense; the salaries and related expenses of production and distribution personnel; depreciation on production equipment; and freight and delivery expenses. Operating expenses include the salaries and related expenses for those employees directly supporting our wholesale distribution channels. In addition to salaries and associated costs, these expenses include marketing expenses; free product supplied for inclusion in brewer sample packs and in-store demonstrations; and a portion of our facility lease expense. General and administrative expenses consist of expenses incurred for corporate support and administration, including a portion of our facility lease expense and the salaries and related expenses for personnel not elsewhere categorized.

Recent Developments

Proposed Merger with Peet’s Coffee & Tea, Inc. On November 2, 2009, the Company, Peet’s Coffee & Tea, Inc., a Washington corporation (“Peet’s”), and Marty Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Peet’s (“Acquisition Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”).

The Merger Agreement provides that, on the terms and subject to the conditions thereof, Acquisition Sub shall make commercially reasonable efforts to commence within ten business days after the date of the Merger Agreement an exchange offer (the “Offer”) to acquire all of the issued and outstanding shares of our common stock, $0.01 par value (the “Shares”), whereby each Share will be exchanged for a combination of (i) $17.33 in cash (the “Cash Component”), and (ii) a fraction of a share of Peet’s common stock (the “Stock Component,” and together with the Cash Component, the “Consideration”) having a numerator equal to $8.67 and a denominator equal to the Parent Average Stock Price (as defined in the Merger Agreement); provided, however, that in no event will the Stock Component exceed 0.315 of a share of Peet’s common stock. No fractional shares of Peet’s common stock shall be issued in connection with the Offer. The board of directors of each of the Company, Peet’s and Acquisition Sub has unanimously approved the Merger Agreement and the transactions contemplated thereby.

After the satisfaction or waiver of the conditions to the Merger (as defined below), Acquisition Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Peet’s (the “Merger”). In the Merger, each outstanding Share that is not tendered and accepted pursuant to the Offer (other than Shares held by the Company or any of its wholly owned subsidiaries or held in its treasury, or owned by Peet’s or Acquisition Sub or any other wholly owned subsidiary of Peet’s, and other than Shares as to which appraisal rights have been perfected in accordance with applicable law) will be converted into the right to receive the Consideration.

Upon the first acceptance by Acquisition Sub of any Shares pursuant to the Offer (the “Acceptance Time”), each stock option to purchase shares of our common stock from the Company that is outstanding and unexercised immediately prior to the Acceptance Time shall automatically be cancelled and converted into the right to receive the following: (i) if the exercise price per share of such option is less than the Cash Component, then (A) an amount of cash determined by multiplying (1) the number of shares of our common stock that were subject to such option immediately prior to the Acceptance Time, times (2) the amount by which the Cash Component exceeds the exercise price per share of such option, and (B) a number of shares of Peet’s common stock determined by multiplying (1) the number of shares of our common stock that were subject to such option immediately prior to the Acceptance Time, times (2) the Stock Component; (ii) if the exercise price per share of such option is equal to the Cash Component, then (A) no cash and (B) a number of shares of Peet’s common stock determined by multiplying (1) the number of shares of our common stock that were subject to such option immediately prior to the Acceptance Time, times (2) the Stock Component; (iii) if the exercise price per share of such option is greater than the Cash Component but less than the Total Option Value (as defined in the Merger Agreement), then (A) no cash and (B) a number of shares of Peet’s common stock determined by multiplying (1) the number of shares of our common stock that were subject to such option immediately prior to the Acceptance Time, times (B) the Stock Component, times (C) the In-the-Money Option Percentage (as defined in the Merger Agreement); and (iv) if the exercise price per share of such option is greater than the Total Option Value, then (A) no cash and (B) no shares of Peet’s common stock. At the Acceptance Time, each Diedrich warrant that is outstanding immediately prior to the Acceptance Time shall automatically be cancelled and converted into the right to receive (i) an amount of cash determined by multiplying (A) the number of shares of Diedrich common stock that were subject to such Diedrich warrant immediately prior to the Acceptance Time, times (B) the Cash Component, times (C) the In-the-Money Warrant Percentage (as defined in the Merger Agreement), and (ii) a number of shares of Peet’s common stock determined by multiplying (A) the number of shares of our common stock that were subject to such Diedrich warrant immediately prior to the Acceptance Time, times (B) the Stock Component, times (C) the In-the-Money Warrant Percentage.

Consummation of the Offer is subject to customary conditions, including, but not limited to, (i) a number of Shares validly tendered and not withdrawn pursuant to the Offer that, together with any Shares owned by Peet’s, Acquisition Sub or any other subsidiary of Peet’s immediately prior to the acceptance pursuant to the Offer, representing more than 50% of the Adjusted Outstanding Share Number (as defined in the Merger Agreement), (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (iii) the absence of any Company Material Adverse Effect (as defined in the Merger Agreement) since the date of the Merger Agreement. The Offer is not subject to a financing condition.

The Offer will initially expire at midnight, Eastern Time, on the 20th business day following the commencement thereof. Subject to the parties’ respective termination rights pursuant to the Merger Agreement, if, at the time as of which the Offer is scheduled to expire, any condition to the Offer is not satisfied and has not been waived, then Acquisition Sub shall extend the Offer on one or more occasions, for additional successive periods of up to 20 business days per extension (with the length of such periods to be determined by Peet’s), until all conditions to the Offer are satisfied or validly waived in order to permit the Acceptance Time to occur; provided, however, that in no event shall Acquisition Sub be required to extend the Offer to a date later than March 31, 2010. If less than 90% of the Shares are accepted for exchange pursuant to the Offer, Acquisition Sub may, in its sole discretion, elect to provide for one or more subsequent offering periods of up to 20 business days in the aggregate. Peet’s shall also file with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-4 (the “Form S-4”) under the Securities Act of 1933, as amended (the “Securities Act”), to register the offer and sale of shares of its common stock pursuant to the Offer.

Consummation of the Merger is subject to customary conditions, including, but not limited to, consummation of the Offer, effectiveness of the Form S-4, and, if required under applicable law, approval of the Merger Agreement by our stockholders. The parties have agreed that, if Peet’s, Acquisition Sub or any other subsidiary of Peet’s owns in the aggregate at least 90% of the outstanding Shares, then the parties shall take all actions necessary and appropriate to cause Acquisition Sub to merge into the Company in a “short-form” merger as soon as practicable pursuant to the applicable provisions of Delaware law, which will not require the approval of our stockholders.

In the Merger Agreement, the Company has granted to Peet’s and Acquisition Sub an option (the “Top-Up Option”) to purchase an aggregate number of newly issued shares of Diedrich common stock equal to the lesser of (i) the number of shares of Diedrich common stock that, when added to the number of shares of Diedrich common stock owned by Peet’s, Acquisition Sub or any other subsidiary of Peet’s at the time the Top-Up Option is exercised, constitutes a percentage designated by Peet’s in its sole discretion that is greater than 90% but less than 91% of the number of shares of Diedrich common stock that would be outstanding immediately after the issuance of all shares of Diedrich common stock subject to the Top-Up Option, or (ii) the aggregate number of shares of Diedrich common stock that Diedrich is authorized to issue under its certificate of incorporation but that are not issued and outstanding (and not subscribed for or otherwise committed to be issued) at the time of the exercise of the Top-Up Option. The aggregate purchase price for the Top-Up Option is determined by multiplying the number of such shares by an amount equal to the sum of (i) the Cash Component, and (ii) the amount determined by multiplying (a) the Stock Component by (b) the Parent Average Stock Price (as defined in the Merger Agreement). Peet’s or Acquisition Sub may exercise, in whole or in part, the Top-Up Option at any time at or after the Acceptance Time but prior to the earlier of the Effective Time (as defined in the Merger Agreement) and the date on which the Merger Agreement is terminated.

In addition, pursuant to the terms of the Merger Agreement, effective upon the Acceptance Time and from time to time thereafter, Peet’s shall be entitled to designate, to serve on the Company’s board of directors, the number of directors, rounded up to the next whole number, determined by multiplying (i) the total number of directors on the Company’s board of directors (giving effect to any increase in the size of the Company’s board of directors effected pursuant to the Merger Agreement) by (ii) a fraction having (a) a numerator equal to the aggregate number of shares of Diedrich common stock then beneficially owned by Peet’s or Acquisition Sub or any other subsidiary of Peet’s (including all shares of Diedrich common stock accepted for exchange pursuant to the Offer) and (b) a denominator equal to the total number of shares of Diedrich common stock then issued and outstanding.

The Merger Agreement contains customary representations and warranties by Peet’s, Acquisition Sub and the Company. The Merger Agreement also contains customary covenants and agreements, including with respect to the operation of Diedrich’s business between the signing of the Merger Agreement and the earlier of the closing of the Merger or termination of the Merger Agreement, solicitation of alternative acquisition proposals by the Company, governmental filings and approvals, and other matters.

The Merger Agreement and the Offer may be terminated under certain customary circumstances by Peet’s or the Company, including if the Acceptance Time does not occur by March 31, 2010. The Merger Agreement provides for a termination fee payable by the Company to Peet’s if the Merger Agreement is terminated under certain circumstances. The amount payable by the Company to Peet’s pursuant to such termination fee provisions is three percent (3%) or four percent (4%) of the transaction value, depending on the circumstances under which the Merger Agreement is terminated. If the Company fails to pay when due any amounts payable under such termination fee provisions, then the Company shall (i) reimburse Peet’s for all reasonable costs and expenses (including fees and disbursements of legal counsel) actually incurred in connection with the collection of such overdue amount and the enforcement by Peet’s of its rights under the Merger Agreement, and (ii) pay to Peet’s interest on any amount that is overdue.

The Merger Agreement will be filed as an exhibit to a Current Report on Form 8-K relating to the Merger, which will provide additional information regarding the terms of the transactions described herein. The Merger Agreement is not intended to provide any other factual information or disclosure about Diedrich, Peet’s or Acquisition Sub. The representations, warranties and covenants contained in the Merger Agreement were made only for purposes of such agreement and as of a specific date, were solely for the benefit of the parties to such agreement (except as to certain indemnification obligations), are subject to limitations agreed upon by the contracting parties, including being qualified by disclosure schedules made for the purposes of allocating contractual risk between and among the parties thereto instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in Diedrich’s public disclosures. Investors are not third-party beneficiaries under the Merger Agreement and, in light of the foregoing reasons, should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of Diedrich, Peet’s or Acquisition Sub or any of their respective subsidiaries or affiliates.

In connection with the transactions contemplated by the Merger Agreement, certain directors and executive officers of the Company have entered into stockholder agreements with Peet’s (the “Stockholder Agreements”) whereby such directors and executive officers have agreed to tender Shares in the Offer, subject to certain terms and conditions. Pursuant to his Stockholder Agreement, Paul C. Heeschen, chairman of the Company’s board of directors, has agreed to tender 1,832,580 Shares in the Offer.

CEO Transition Plan. On October 22, 2009 the Company announced that it has initiated a transition plan with respect to the Company’s chief executive officer, J. Russell Phillips. Under the transition plan, Mr. Phillips will remain as the chief executive officer to assist in the recruitment of his successor and to effect an orderly transition. Mr. Phillips will continue as a member of the board of directors of the Company. A search is underway for Mr. Phillips replacement and the Company has retained Korn/Ferry International to lead the search.

Retail Outlets

Our strategy is to capitalize on the growth of the wholesale specialty coffee market and our strength as a premier roaster and distributor of the world’s finest coffees. In the Transaction with Praise, we sold the Gloria Jean’s U.S. franchise and retail operations which included the transfer of 12 company-operated and 90 franchised Gloria Jean’s retail coffeehouses. During the twelve weeks ended September 16, 2009, the two remaining Diedrich Coffee, Inc. franchise locations were closed. As of the twelve weeks ended September 16, 2009, we have four Coffee People, Inc. franchise locations. The Company currently has no plans to open any additional company-operated or franchised Diedrich Coffee or Coffee People coffeehouses.

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. Because of the seasonality of our business, results from any quarter may not be indicative of the results that may be achieved in any other quarter or the full fiscal year, especially for our first fiscal quarter which tends to be the weakest.

RESULTS OF OPERATIONS

Twelve weeks ended September 16, 2009 compared with the twelve weeks ended September 17, 2008

Total Revenue. Our revenue from continuing operations for the twelve weeks ended September 16, 2009 increased by $5,365,000 or 51.5%, to $15,773,000 from $10,408,000 for the twelve weeks ended September 17, 2008. Each component of total revenue is discussed below.

Wholesale Revenue. Our wholesale sales for the twelve weeks ended September 16, 2009 increased by $5,295,000, or 51.2%, to $15,642,000 from $10,347,000 for the twelve weeks ended September 17, 2008. Wholesale sales to OCS and other third party wholesale customers increased $5,324,000, or 55.7% to $14,879,000 from $9,555,000 led by strong growth in the Keurig “K-Cup” sales which increased by 66.3% or $5,808,000 from the prior year quarter. We generated 92.3% and 84.1% of our total revenues from the sale of K-Cups^® for the twelve weeks ended September 16, 2009 and September 17, 2008, respectively. We are one of only four roasters under a non-exclusive license to produce K-Cups^®. Sales to our licensor, Keurig Incorporated, represented approximately $7,237,000, or 46.3% of wholesale sales and $2,937,000, or 28.4% of wholesale sales for the twelve weeks ended September 16, 2009 and September 17, 2008, respectively. Roasted coffee sales to former franchisee locations that are now owned by Praise decreased $29,000 for the twelve weeks ended September 16, 2009. Wholesale sales to the former franchisees are included in continuing operations for all periods since the Company will continue to provide coffee roasting services to Praise.

Retail and other. Retail and other for the twelve weeks ended September 16, 2009 increased by $70,000, or 114.8%, to $131,000 from $61,000 for the twelve weeks ended September 17, 2008. Retail sales are related to our ecommerce business through our three web stores. Retail sales for the twelve weeks ended September 16, 2009 increased by a net $81,000, or 213.2%, to $119,000 from $38,000 for the twelve weeks ended September 17, 2008. Other revenue consists primarily of royalties received on sales at the four remaining Coffee People franchised locations. Our franchise revenue decreased by $11,000, or 47.8%, to $12,000 for the twelve weeks ended September 16, 2009 from $23,000 for the twelve weeks ended September 17, 2008.

15

Cost of Sales. As a percentage of total revenue, cost of sales decreased from 79.5% for the twelve weeks ended September 17, 2008 to 74.3% for the twelve weeks ended September 16, 2009, resulting primarily from higher machine utilization, lower temporary help and overtime, the reduction of scrap and waste due to improved inventory controls, lower outbound freight costs and the ability to leverage our fixed manufacturing costs over higher production volumes.

Operating Expenses. Total operating expenses for the twelve weeks ended September 16, 2009 decreased $26,000 to $1,187,000 from $1,213,000 for the twelve weeks ended September 17, 2008. This decrease resulted primarily from a reduction in allowance for doubtful accounts of $79,000 along with a decrease in equipment and other costs of $71,000 and was partially offset by an increase in marketing costs of $124,000.

Depreciation and Amortization. Depreciation and amortization increased $23,000, or 6.9% to $355,000 for the twelve weeks ended September 16, 2009 from $332,000 for the twelve weeks ended September 17, 2008.

General and Administrative Expenses. Our general and administrative expenses decreased by $22,000, or 1.2%, to $1,797,000 for the twelve weeks ended September 16, 2009 compared to $1,819,000 for the twelve weeks ended September 17, 2008. The decrease in general and administrative expenses was primarily due to decreases in legal, consulting and outside services of $209,000 and was partially offset by increases in compensation costs of $88,000 along with an increase in insurance, license and other costs of $99,000. As a percentage of total revenue, general and administrative expenses decreased from 17.5% for the twelve weeks ended September 17, 2008 to 11.4% for the twelve weeks ended September 16, 2009.

Interest Expense. Interest expense decreased by $134,000 from $310,000 for the twelve weeks ended September 17, 2008 to $176,000 for the twelve weeks ended September 16, 2009. The decrease in interest expense was primarily the result of higher interest expense associated with the extension of the Note Purchase Agreement during the prior year quarter.

Income Taxes. We had income from continuing operations of $633,000 for the twelve weeks ended September 16, 2009 and losses from continuing operations of $1,467,000 for the twelve weeks ended September 17, 2008, respectively. In accordance with ASC 740, “Income Taxes”, the income tax provision generated by the income from continuing operations was $62,000 for the twelve weeks ended September 16, 2009. As of September 16, 2009, net operating loss carryforwards of $10,521,000 and $11,370,000 for federal and state income tax purposes, respectively are available to be utilized against future taxable income for years through fiscal year 2028, subject to annual limitation pertaining to change in ownership rules under the Internal Revenue Code. Based upon the level of historical losses and limited earnings history, the Company’s management cannot conclude that it is more likely than not that the Company will 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. The Transaction with Praise, which closed on June 12, 2009, included the transfer of 12 company-operated and 90 franchised Gloria Jean’s locations to Praise. The financial results of the retail operations that were sold or closed and Gloria Jean’s franchised operations are reported as discontinued operations for all periods presented in accordance with ASC 360. For the twelve weeks ended September 17, 2008, loss from discontinued operations was $316,000 net of $0 in taxes. 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 associated with the discontinued operations.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Current Financial Condition. At September 16, 2009, we had working capital of $9,041,000, long term debt, deferred rent, income tax and other liabilities of $1,777,000 and $14,419,000 of stockholders’ equity, compared to working capital of $8,828,000, long term debt, deferred rent, income tax and other liabilities of $2,005,000 and $13,774,000 of stockholders’ equity at June 24, 2009.

As of September 16, 2009, the accounts receivable balance was $6,321,000 compared to $6,335,000 at June 24, 2009. The accounts payable balance of $4,635,000 as of September 16, 2009 is a decrease of $593,000 from the June 24, 2009 balance of $5,228,000.

Cash Flows. The Company had income from continuing operations of $571,000, for the twelve weeks ended September 16, 2009 and losses from continuing operations of $1,467,000 for the twelve weeks ended September 17, 2008, respectively. Net cash used in operating activities of continuing operations was $284,000 for the twelve weeks ended September 16, 2009 compared to net cash used in operating activities of continuing operations of $1,506,000 for the twelve weeks ended September 17, 2008. With an increase in wholesale sales of 51.2% for the twelve weeks ended September 16, 2009 along with a reduction in cost of goods sold, we improved gross margins and income from continuing operations for the twelve weeks ended September 16, 2009 compared to the

16

twelve weeks ended September 17, 2008. For the twelve weeks ended September 17, 2008, cash used in continuing operations was $1,506,000 and was primarily the result of operating losses and an increase in accounts receivable and inventories, offset by an increase in accounts payable, as our wholesale business grew over 60% for the twelve weeks ended September 17, 2008 over the prior fiscal 2008 quarter.

Cash flows provided by investing activities of continuing operations for the twelve weeks ended September 16, 2009 totaled $794,000. During the twelve weeks ended September 16, 2009, capital expenditures totaled $206,000 and was used to invest in property and equipment primarily related to our Castroville roasting facility. These expenditures were partially offset by $1,000,000 of payments received on notes receivable. Cash flows provided by investing activities of continuing operations for the twelve weeks ended September 17, 2008 totaled $295,000. During the twelve weeks ended September 17, 2008, a total of $244,000 was used to invest in property and equipment with $142,000, $2,000, and $100,000 spent on our roasting facility, wholesale business, and home office facility, respectively. These expenditures were primarily offset by $533,000 of payments received on notes receivable.

Net cash used by financing activities of continuing operations for the twelve weeks ended September 16, 2009 of $1,000,000 was the result of a payment on our credit facility. Net cash provided by financing activities of continuing operations for the twelve weeks ended September 17, 2008 of $3,000,000 was the result of borrowings under our credit facility.

Note Purchase Agreement:

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 is a significant shareholder of the Company and 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, 2010, and 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 in control of the Company or an event of default. Interest is payable at three-month LIBOR plus 9.30% for any period during which the ratio of Indebtedness (as defined in the Note Purchase Agreement) on a consolidated basis to Effective Tangible Net Worth (as defined in the Note Purchase Agreement) is greater than 1.75:1.00 or the three-month LIBOR plus 6.30% for any other period, in each case reset on a periodic basis as provided in the Note Purchase Agreement. 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 September 16, 2009, we had $2,000,000 of issued notes outstanding under the Note Purchase Agreement. As of September 16, 2009, we were in compliance with all covenants contained in the Note Purchase Agreement.

Loan Agreement:

On August 26, 2008, we entered into a loan agreement with Sequoia (the “Term Loan Agreement”). The Term Loan Agreement provides for a $3,000,000 term loan (the “Term Loan”). As amended, interest is payable at one-month LIBOR plus 9.30% for any period during which the ratio of Indebtedness (as defined in the Term Loan Agreement) on a consolidated basis to Effective Tangible Net Worth (as defined in the Term Loan Agreement) is greater than 1.75:1.00 or one-month LIBOR plus 6.30% for any other period, resetting on the first calendar day of each month. We are required to make regular monthly payments of interest on the term loan with Sequoia. In addition, as per the terms of the Term Loan Agreement, we paid $1,000,000 due to Sequoia on July 29, 2009 and had a remaining balance of $2,000,000 as of September 16, 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 Term Loan Agreement upon a change of control of the Company or an event of default. As of September 16, 2009, $2,000,000 was outstanding under the Term Loan Agreement.

The Term 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 Agreement. The Term 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. As of September 16, 2009, we were in compliance with all covenants contained in the Term Loan Agreement.

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 Term 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.

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Letter of Credit:

In addition, we entered into a Credit Agreement with Bank of the West on November 4, 2005. The current agreement provides for a $500,000 letter of credit facility that expires on October 31, 2010. The letter of credit facility is secured by a deposit account at Bank of the West. As of September 16, 2009, this deposit account had a balance of $623,000, which is shown as restricted cash on the consolidated balance sheets. As of September 16, 2009, $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 September 16, 2009, we were in compliance with all Bank of the West agreement covenants.

Liquidity and Management Plans:

For the quarter ended September 16, 2009, we reported net income of $571,000, which was net of income tax of $62,000. We had a cash balance of $3,082,000 and no access to additional borrowings under our current credit facility as of September 16, 2009.

The Note Purchase Agreement with Sequoia expires on March 31, 2010 and the $2,000,000 balance on the outstanding note is due in full on that date.

We are required to make regular monthly payments of interest on the Term Loan with Sequoia. In addition, as per the terms of the Term Loan Agreement, the Company paid $1,000,000 due to Sequoia on July 29, 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 Term Loan Agreement upon a change of control of the Company or an event of default. As of September 16, 2009, we had $2,000,000 outstanding under the Term Loan Agreement.

We believe that cash flow from operations and payments from notes receivable due from Praise and Gloria Jean’s Coffees International Pty. Ltd. issued in connection with the sale of the Gloria Jean’s U.S. and international franchise operations will be sufficient to satisfy working capital needs at the anticipated operating levels and debt service requirements 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 the business grows, if at all, with corresponding demands for working capital. We may be required to seek additional funding through debt financing, equity financing or a combination of funding methods to meet capital requirements and sustain operations. However, additional funds may not be available on terms acceptable to us, or at all.

Other Commitments. The following represents a comprehensive list of our contractual obligations and commitments as of September 16, 2009:

	Payments Due By Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In thousands)
Operating leases	$	6,263	$	2,576	$	2,032	$	1,061	$	594
Green coffee commitments		3,353		3,353		—		—		—
Note Payable		4,000		2,000		2,000		—		—
	$	13,616	$	7,929	$	4,032	$	1,061	$	594

As of September 16, 2009, we have 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 roasting facility and administrative offices. Lease terms are generally for up to 15 years with renewal options and generally require us to pay a proportionate share of real estate taxes, insurance, common area, and other operating costs.

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CRITICAL ACCOUNTING ESTIMATES

The Annual Report on Form 10-K for the year ended June 24, 2009 includes a detailed discussion of our critical accounting estimates. Pursuant to Form 10-Q, we only disclose those critical accounting estimates that are new or that have been materially amended since the time that we filed our most recent Form 10-K. Accordingly, this section should be read in conjunction with the critical accounting estimates and information disclosed in our Annual Report on Form 10-K for the year ended June 24, 2009.

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

(a) As of the end of the period covered by this quarterly report, 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”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 16, 2009.

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

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

In the ordinary course of our business, we may become involved in legal proceedings from time to time.

As of September 16, 2009, there are no material changes from the legal proceedings disclosure set forth in Part I, Item 3 of our annual report on Form 10-K for the fiscal year ended June 24, 2009. Please refer to the annual report on Form 10-K for the fiscal year ended June 24, 2009 for disclosure regarding legal proceedings.

Item 1A. Risk Factors.

The Annual Report on Form 10-K for the year ended June 24, 2009 includes a detailed discussion of our risk factors. Pursuant to Form 10-Q, we only provide those risk factors that are new or that have been materially amended since the time that we filed our most recent Form 10-K. Accordingly, this section should be read in conjunction with the risk factors and information disclosed in our Form 10-K for the year ended June 24, 2009.

The following risk factor supplements the risk factors disclosed in the Annual Report on Form 10-K for the year ended June 24, 2009.

RISKS RELATING TO THE PROPOSED MERGER

The pending Merger and/or the delay or failure to complete the Merger with Peet’s could materially and adversely affect our results of operations and our stock price.

On November 2, 2009, we entered into the Merger Agreement with Peet’s and Acquisition Sub. The Merger Agreement provides that Acquisition Sub will use commercially reasonable efforts to commence the Offer to purchase all of the outstanding shares of the Company’s common stock within ten business days after the date of the Merger Agreement. Consummation of the Offer is subject to customary conditions, including, but not limited to, (i) a number of Shares validly tendered and not withdrawn pursuant to the Offer that, together with any Shares owned by Peet’s, Acquisition Sub or any other subsidiary of Peet’s immediately prior to the acceptance pursuant to the Offer, representing more than 50% of the Adjusted Outstanding Share Number (as defined in the Merger Agreement), (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (iii) the absence of any Company Material Adverse Effect (as defined in the Merger Agreement) since the date of the Merger Agreement. Consummation of the Merger is subject to customary conditions, including, but not limited to, consummation of the Offer, effectiveness of the Form S-4 relating to the Offer, and, if required under applicable law, approval of the Merger Agreement by our stockholders. We cannot assure you that these conditions will be met or waived, that the necessary approvals will be obtained, or that we will be able to successfully consummate the Offer and the Merger as currently contemplated under the Merger Agreement or at all. As a result of the pending Merger:

• the attention of our management and our employees may be diverted from day-to-day operations as they focus on consummating the Merger;

• the Merger Agreement places a variety of restrictions and constraints on the conduct of our business prior to the closing of the Merger or the termination of the Merger Agreement; and

• our ability to attract new employees and retain our existing employees may be harmed by uncertainties associated with the Merger, and we may be required to incur substantial costs to recruit replacements for lost personnel.

A delay in the consummation of the Merger may exacerbate the occurrence of these events.

Furthermore, in the event that the Offer or Merger is not completed:

• our stockholders will not receive the Consideration that Peet’s has agreed to pay pursuant to the Merger Agreement, and our stock price may experience a decline;

• we will incur significant transaction costs, including legal, accounting, financial advisory and other costs relating to the Merger; and

• under some circumstances, we may have to pay a termination fee to Peet’s.

The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations and our stock price.

Item 2. Unregistered sales of Equity Securities and use of Proceeds.

None

Item 3. Defaults upon Senior Securities.

None

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

None

Item 5. Other Information.

None

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Item 6. Exhibits.

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

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated March 16, 1999, among Diedrich Coffee, Inc., CP Acquisition Corp., a wholly owned subsidiary of Diedrich Coffee, Inc., and Coffee People, Inc. (1)
3.1	Restated Certificate of Incorporation of Diedrich Coffee, Inc., dated May 11, 2001 (2)
3.2	Certificate of Amendment of Restated Certificate of Incorporation of Diedrich Coffee, Inc., dated January 26, 2009 (7)
3.3	Amended and Restated Bylaws of Diedrich Coffee, Inc. (5)
4.1	Specimen Stock Certificate (3)
4.2	Common Stock and Warrant Purchase Agreement, dated March 14, 2001 (4)
4.3	Form of Warrant, dated May 8, 2001(2)
4.4	Registration Rights Agreement, dated May 8, 2001 (2)
4.5	Amendment No. 1 to 2001 Warrant, dated August 26, 2008 (6)
4.6	Warrant, dated as of August 26, 2008, issued by Diedrich Coffee, Inc. to Sequoia Enterprises, L.P. (6)
4.7	Waiver, Agreement, Amendment No. 1 to 2008 Warrant and Amendment No. 2 to 2001 Warrant with Sequoia Enterprises, L.P., dated November 10, 2008 (8)
4.8	Warrant, dated as of April 29, 2009, issued by Diedrich Coffee, Inc. to Sequoia Enterprises, L.P. (9)
10.1	Letter Agreement with Sean M. McCarthy, dated May 1, 2008*
10.2	First Amendment to Credit Agreement with Bank of the West, dated October 19, 2006
10.3	Second Amendment to Credit Agreement with Bank of the West, dated October 28, 2007
10.4	Third Amendment to Credit Agreement with Bank of the West, dated October 29, 2008
10.5	Fourth Amendment to Credit Agreement with Bank of the West, dated October 23, 2009
10.6	Lease Agreement by and between Stecar Properties and Diedrich Coffee, Inc. effective January 1, 2006
10.7	First Amendment to Lease Agreement by and between Stecar Properties and Diedrich Coffee, Inc. dated May 10, 2006
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Management contract or compensatory plan or arrangement

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

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

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

(4) Previously filed as Annex B to Diedrich Coffee’s Definitive proxy Statement, filed with the Securities and Exchange Commission on April 12, 2001.

(5) 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.

(6) 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.

(7) Previously filed as an exhibit to Diedrich Coffee’s Quarterly Report on Form 10-Q for the period ended March 4, 2009, filed with the Securities and Exchange Commission on April 20, 2009.

(8) Previously filed as an exhibit to Diedrich Coffee’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 17, 2008.

(9) Previously filed as an exhibit to Diedrich Coffee’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 4, 2009.

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SIGNATURES

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

Dated: November 2, 2009	DIEDRICH COFFEE, INC.
	/s/ J. Russell Phillips
	J. Russell Phillips Chief Executive Officer (On behalf of the registrant)
	/s/ Sean M. McCarthy
	Sean M. McCarthy Vice President and Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX

Exhibit No.	Description
10.1	Letter Agreement with Sean M. McCarthy, dated May 1, 2008
10.2	First Amendment to Credit Agreement with Bank of the West, dated October 19, 2006
10.3	Second Amendment to Credit Agreement with Bank of the West, dated October 28, 2007
10.4	Third Amendment to Credit Agreement with Bank of the West, dated October 29, 2008
10.5	Fourth Amendment to Credit Agreement with Bank of the West, dated October 23, 2009
10.6	Lease Agreement by and between Stecar Properties and Diedrich Coffee, Inc. effective January 1, 2006
10.7	First Amendment to Lease Agreement by and between Stecar Properties and Diedrich Coffee, Inc. dated May 10, 2006
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-10.1

Exhibit 10.1

May 1, 2008

Sean M. McCarthy

Dear Sean:

We are pleased to confirm in writing this change of control, terms and conditions of your employment as well as an increase in your base compensation for the position of Chief Financial Officer of Diedrich Coffee, Inc.

The terms of this change is as follows:

• This is an exempt position and your base salary will increase to $8,653.85 per pay period (paid on a bi-weekly basis) which equates to $225,000.00 annually.

• Your participation in the bonus/incentive plan at the Vice President level will increase to 40% of your annual base salary which is paid based upon achievement of specific objective criteria as defined by the Chief Executive Officer of the Company.

• Change of Control – In the event of a Change of Control (as defined below), you will be entitled to a “Stock Appreciation Payment” (as defined below) upon consummation of the Change of Control transaction, provided that you execute a customary release agreement with the Company.

“Change of Control” shall mean a transaction that results in a non-affiliate of the company acquiring 90% of the Company’s outstanding common stock.

“Stock Appreciation Payment” shall be equal to the product of (i) the difference determined by subtracting $5.00 from the price per share at which at least 90% of the Company’s outstanding stock is acquired, multiplied by (ii) 100,000.

• Benefits – You will continue to be eligible for all other benefit plans at the Vice President level. These benefit programs may be modified from time to time.

• Severance – If you are terminated by the Company without cause, you will be eligible to receive a lump sum severance payment equal to nine (9) months of base salary provided that you execute a customary release agreement with the Company.

Sean M. McCarthy

May 1, 2008

Page 2

• This position reports directly to J. Russell Phillips, President and Chief Executive Officer.

• The effective date of this change of control, change in terms of employment and salary increase is retroactive to March 6, 2008.

Please confirm your acceptance of these new terms by signing and returning an executed copy to Human Resources.

Sincerely,

Jeanne Ortiz

Director, Human Resources

* * * * * * * *

In consideration of my employment, I agree to conform to the policies and practices of Diedrich Coffee, Inc. I understand and acknowledge that my employment with Diedrich Coffee, Inc. is “at will” and as such, the terms of my employment may be changed at any time, for any reason, with or without notice, with or without cause, at my discretion, or at the discretion of the company. My “at will” status includes but is not limited to: termination, demotion, promotion, transfer, compensation, benefits, training, duties, shifts, and location of work. There is no agreement express or implied between myself and the Company for continuing or long-term employment. While supervisors and managers have certain hiring authority, no supervisor or manager or representative of the Company has any authority to alter the “at-will relationship.”

Termination not for cause: Should your employment be terminated for reasons other than cause (cause meaning willful misconduct, repeated failure to perform duties, fraud or dishonesty, felonious or other criminal acts) and you execute a simple release of claims agreement, you will be entitled to bi-weekly payments equal to nine (9) months of your then current salary. These payments would not apply in the event of your death or inability to perform the job due to disability.

My signature below indicates acceptance of the offer of employment including its terms and conditions as outlined in this letter.

/s/ Sean M. McCarthy
Sean M. McCarthy	Date May 1, 2008

EX-10.2

Exhibit 10.2

FIRST AMENDMENT TO CREDIT AGREEMENT

This FIRST Amendment to Credit Agreement (the “Amendment”) is made and entered into as of October 19, 2006, by and between BANK OF THE WEST (the “Bank”) and DIEDRICH COFFEE, INC. (the “Borrower”) with respect to the following:

This Amendment shall be deemed to be a part of and subject to that certain Credit Agreement dated as of November 4, 2005, as it may be amended from time to time, and any and all addenda and riders thereto (collectively the “Agreement”). Unless otherwise defined herein, all terms used in this Amendment shall have the same meanings as in the Agreement. To the extent that any of the terms or provisions of this Amendment conflict with those contained in the Agreement, the terms and provisions contained herein shall control.

WHEREAS, the Borrower and the Bank mutually desire to extend and/or modify the Agreement.

NOW THEREFORE, for value received and hereby acknowledged, the Borrower and the Bank agree as follows:

1. Extension of Expiration Date. The Expiration Date provided for in Section 1.1.8 of the Agreement shall be extended to October 15, 2007.

2. Representations and Warranties. The Borrower hereby reaffirms the representations and warranties contained in the Agreement and represents that no event, which with notice or lapse of time, could become an Event of Default, has occurred or is continuing.

3. Confirmation of Other Terms and Conditions of the Agreement. Except as specifically provided in this Amendment, all other terms, conditions and covenants of the Agreement unaffected by this Amendment shall remain unchanged and shall continue in full force and effect and the Borrower hereby covenants and agrees to perform and observe all terms, covenants and agreements provided for in the Agreement, as hereby amended.

4. Governing Law. This Amendment shall be governed and construed in accordance with the laws of the State of California to which jurisdiction the parties hereto hereby consent and submit.

5. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as of the date first hereinabove written.

BANK		BORROWER
BANK OF THE WEST		DIEDRICH COFFEE, INC.
BY:	/s/ Bruce Young	BY:	/s/ Sean McCarthy
NAME:	Bruce Young, Vice President	NAME:	Sean McCarthy CFO
		ADDRESS:
		28 Executive Park, Suite 200 Irvine, CA 92614

EX-10.3

Exhibit 10.3

SECOND AMENDMENT TO CREDIT AGREEMENT

This SECOND Amendment to Credit Agreement (the “Amendment”) is made and entered into as of October 28, 2007, by and between BANK OF THE WEST (the “Bank”) and DIEDRICH COFFEE, INC. (the “Borrower”) with respect to the following:

This Amendment shall be deemed to be a part of and subject to that certain Credit Agreement dated as of November 4, 2005, as it may be amended from time to time, and any and all addenda and riders thereto (collectively the “Agreement”). Unless otherwise defined herein, all terms used in this Amendment shall have the same meanings as in the Agreement. To the extent that any of the terms or provisions of this Amendment conflict with those contained in the Agreement, the terms and provisions contained herein shall control.

WHEREAS, the Borrower and the Bank mutually desire to extend and/or modify the Agreement.

NOW THEREFORE, for value received and hereby acknowledged, the Borrower and the Bank agree as follows:

1. Extension of Expiration Date. The Expiration Date provided for in Section 1.1.8 of the Agreement shall be extended to October 15, 2008.

2. Representations and Warranties. The Borrower hereby reaffirms the representations and warranties contained in the Agreement and represents that no event, which with notice or lapse of time, could become an Event of Default, has occurred or is continuing.

3. Confirmation of Other Terms and Conditions of the Agreement. Except as specifically provided in this Amendment, all other terms, conditions and covenants of the Agreement unaffected by this Amendment shall remain unchanged and shall continue in full force and effect and the Borrower hereby covenants and agrees to perform and observe all terms, covenants and agreements provided for in the Agreement, as hereby amended.

4. Governing Law. This Amendment shall be governed and construed in accordance with the laws of the State of California to which jurisdiction the parties hereto hereby consent and submit.

5. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as of the date first hereinabove written.

BANK:		BORROWER:
BANK OF THE WEST		DIEDRICH COFFEE, INC.
BY:	/s/ Bruce Young	BY:	/s/ Sean McCarthy
NAME:	Bruce Young, Vice President	NAME:	Sean McCarthy CFO
		ADDRESS:
		28 Executive Park, Suite 200 Irvine, CA 92614

EX-10.4

Exhibit 10.4

THIRD AMENDMENT TO CREDIT AGREEMENT

This THIRD Amendment to Credit Agreement (the “Amendment”) is made and entered into as of October 29, 2008, by and between BANK OF THE WEST (the “Bank”) and DIEDRICH COFFEE, INC. (the “Borrower”) with respect to the following:

This Amendment shall be deemed to be a part of and subject to that certain Credit Agreement dated as of November 4, 2005, as it may be amended from time to time, and any and all addenda and riders thereto (collectively the “Agreement”). Unless otherwise defined herein, all terms used in this Amendment shall have the same meanings as in the Agreement. To the extent that any of the terms or provisions of this Amendment conflict with those contained in the Agreement, the terms and provisions contained herein shall control.

WHEREAS, the Borrower and the Bank mutually desire to extend and/or modify the Agreement.

NOW THEREFORE, for value received and hereby acknowledged, the Borrower and the Bank agree as follows:

1. Extension of Expiration Date. The Expiration Date provided for in Section 1.1.8 of the Agreement shall be extended to October 15, 2009.

2. Representations and Warranties. The Borrower hereby reaffirms the representations and warranties contained in the Agreement and represents that no event, which with notice or lapse of time, could become an Event of Default, has occurred or is continuing.

3. Confirmation of Other Terms and Conditions of the Agreement. Except as specifically provided in this Amendment, all other terms, conditions and covenants of the Agreement unaffected by this Amendment shall remain unchanged and shall continue in full force and effect and the Borrower hereby covenants and agrees to perform and observe all terms, covenants and agreements provided for in the Agreement, as hereby amended.

4. Governing Law. This Amendment shall be governed and construed in accordance with the laws of the State of California to which jurisdiction the parties hereto hereby consent and submit.

5. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as of the date first hereinabove written.

BANK		BORROWER
BANK OF THE WEST		DIEDRICH COFFEE, INC.
BY:	/s/ Bruce Young	BY:	/s/ Sean McCarthy
NAME:	Bruce Young, Vice President	NAME:	Sean McCarthy CFO
		ADDRESS:
		28 Executive Park, Suite 200 Irvine, CA 92614

EX-10.5

Exhibit 10.5

FOURTH AMENDMENT TO CREDIT AGREEMENT

This FOURTH Amendment to Credit Agreement (the “Amendment”) is made and entered into as of October 23, 2009, by and between BANK OF THE WEST (the “Bank”) and DIEDRICH COFFEE, INC. (the “Borrower”) with respect to the following:

This Amendment shall be deemed to be a part of and subject to that certain Credit Agreement dated as of November 4, 2005, as it may be amended from time to time, and any and all addenda and riders thereto (collectively the “Agreement”). Unless otherwise defined herein, all terms used in this Amendment shall have the same meanings as in the Agreement. To the extent that any of the terms or provisions of this Amendment conflict with those contained in the Agreement, the terms and provisions contained herein shall control.

WHEREAS, the Borrower and the Bank mutually desire to extend and/or modify the Agreement.

NOW THEREFORE, for value received and hereby acknowledged, the Borrower and the Bank agree as follows:

1. Extension of Expiration Date. The Expiration Date provided for in Section 1.1.8 of the Agreement shall be extended to October 31, 2010.

2. Change in Dollar Amount/Letter of Credit Facility. The dollar amount of the Letter of Credit Facility set forth in Section 2.1.1 of the Agreement is hereby changed to be $500,000.00.

3. Representations and Warranties. The Borrower hereby reaffirms the representations and warranties contained in the Agreement and represents that no event, which with notice or lapse of time, could become an Event of Default, has occurred or is continuing.

4. Confirmation of Other Terms and Conditions of the Agreement. Except as specifically provided in this Amendment, all other terms, conditions and covenants of the Agreement unaffected by this Amendment shall remain unchanged and shall continue in full force and effect and the Borrower hereby covenants and agrees to perform and observe all terms, covenants and agreements provided for in the Agreement, as hereby amended.

5. Governing Law. This Amendment shall be governed and construed in accordance with the laws of the State of California to which jurisdiction the parties hereto hereby consent and submit.

6. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as of the date first hereinabove written.

BANK:		BORROWER:
BANK OF THE WEST		DIEDRICH COFFEE, INC.
BY:	/s/ Bruce Young	BY:	/s/ Sean McCarthy
NAME:	Bruce Young, Vice President	NAME:	Sean McCarthy CFO
		ADDRESS:
		28 Executive Park, Suite 200 Irvine, CA 92614

EX-10.6

Exhibit 10.6

LEASE

THIS Lease (the “Lease”), between STECAR PROPERTIES, LLC, a California limited liability company (the “Lessor”), and DIEDRICH COFFEE, INC., a Delaware corporation (the “Lessee”), is effective on the date indicated in Paragraph 39 (the “Effective Date”) (i.e., January 1, 2006). This Lease is supplemented and modified pursuant to that Addendum of Lease attached hereto as “Addendum to Lease” (paragraphs 40 through 44) and incorporated herein by reference and made a part of the Lease.

WITNESSETH:

1. Premises. For and in consideration of the rent herein received and of the covenants, conditions, agreements, and stipulations of Lessee hereinafter expressed, Lessor hereby leases to Lessee and Lessee hereby leases from Lessor the following described real property (collectively, the “Premises”): (i) the tract of land in Castroville, California, with a street address of 11480 Industrial Parkway, Castroville, CA (the “Land”), more particularly described on Exhibit “A” attached hereto, together with any and all easements, rights and appurtenances appertaining to same, and (ii) those certain improvements thereon (the “Buildings”), together with all structures, fixtures and other improvements existing on the Land (the Building and such other structures, fixtures and improvements collectively referred to as the “Improvements”).

2. Intentionally left blank.

3. Term - Option. Lessee is to have and to hold the Premises for a ten (10) year term which shall expire upon December 31, 2015 (“Initial Term”), as extended or renewed below (“Term”). Lessor shall deliver possession of the Premises to Lessee on the Effective Date. The Lessee shall have the option to extend the Initial Term of the Lease as provided in Section 40 of the Addendum to Lease.

4. Rent. Lessee shall pay to Lessor without demand and without deduction, abatement or set-off (except as otherwise provided herein or permitted under applicable law), on the first day of each month the Rent as described in this Paragraph 4.

(a) Base Rental. Upon the Commencement Date, as defined in Paragraph 34 herein (i.e., January 1, 2006), Lessee covenants to pay Lessor, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts during the Term of this Lease, the initial Base Rental of Three Hundred Thirty-Four Thousand Eight Hundred Seventy-Two Dollars ($334,872.00) per Lease Year (as defined in Paragraph 35 herein), payable in equal monthly installments of Twenty-Seven Thousand Nine Hundred Six Dollars ($27,906.00).

(b) Adjustments. Base Rental shall be increased in accordance with the following schedule:

Months 01-60: $27,906.00, per month, NNN

Months 61-90: $29,301.00, per month, NNN

Months 91-120: $30,766.00, per month, NNN

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(c) Option Periods. Base Rental For the Option Period(s), shall be increased in accordance with the following schedule:

Months 121-150: $32,304.00, per month, NNN

Months 151-180: $33,919.00, per month, NNN

Months 181-300: 90% of fair market value or “Fair Market Rental Rate”

(as determined in accordance with Section 41 of the Addendum to Lease)

5. Additional Rent. Lessee shall pay one hundred percent (100%) of the taxes on the Premises, the cost of insurance premiums on the Premises and additional amounts as hereinafter provided in Subparagraph 5(c), as Additional Rent.

(a) Taxes. Lessee shall on or before the due date established by the taxing authorities pay the real estate taxes and assessments levied during the Term against the Premises and all business and occupation taxes relating to Lessee’s business, sales tax on rentals and other governmental taxes levied against the Premises or Lessee’s business ventures and activities conducted or permitted to be conducted on the Premises by Lessee (“Taxes”). Nothing contained in this Lease shall be construed to require Lessee to pay any federal or state income, gift or inheritance taxes imposed on Lessor. The amount due for all partial calendar years shall be prorated on a per diem basis. Lessee shall have the right to contest any tax bill with the appropriate taxing authority, at Lessee’s cost. Lessee may pay taxes directly to the taxing authority so long as Lessee is not in default hereunder and Lessee provides timely proof of payment to Lessor without delinquency or penalty. If Lessee failed to pay taxes directly to the taxing authorities for a prior year resulting in penalties or interest being assessed against the Premises by one or more of such taxing authorities, Lessee shall be obligated to pay to Lessor each month on the first day thereof, as Additional Rent, an estimated amount for the annual taxes assessed against the Premises. Lessee shall pay to Lessor, or Lessor shall rebate to Lessee, any difference between such estimated annual taxes and the actual taxes due for such year.

(b) Insurance.

(i) Lessee shall, at Lessee’s sole cost, obtain and maintain in force during the Term the following insurance coverages: (a) insurance against loss or damage by risks included under “all risk” policies, at the time the policy is acquired, in an amount equal to the actual replacement cost of the Improvements, subject to a co-insurance clause of not less than ninety percent (90%); (b) commercial general liability insurance against claims for personal injury, death, or property damage occurring in, on or about the Premises or the adjacent streets and sidewalks with the following minimum limits of liability for the Premises: (i) $1,000,000.00 in respect of bodily injury or death to any one person, (ii) $2,000,000.00 in respect of bodily injury or death to any number of persons arising out of one accident or disaster, (iii) $2,000,000.00 in respect to damage to or destruction of property arising out of any one accident, and (c) loss of rents or business income coverage in an amount of not less than the annual Base Rental provided for herein, increased as provided in Subparagraph 4(c).

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(ii) Lessee agrees that as to each of the above referenced insurance policies the following conditions shall apply during the Term: (1) each policy of insurance shall not be subject to cancellation or substantial modification without at least thirty (30) days prior written notice to the Lessor and to Lessor’s mortgagee, if any, provided Lessor has notified Lessee in writing of such mortgagee’s name and address; (2) Lessee shall deposit with the Lessor certificates of such insurance or other evidence reasonably satisfactory to the Lessor that (i) the insurance required hereby has been obtained and is in full force and effect, and (ii) all premiums thereon have been paid in full; (3) Lessee shall furnish the Lessor with evidence satisfactory to the Lessor that such insurance has been renewed or replaced and that all premiums thereon have been paid in full, prior to the expiration of any such insurance, and all insurance policies required hereby are in full force and effect; (4) Lessee authorizes the Lessor to collect, adjust and compromise any claims under such “all-risk” insurance policies and authorizes and directs the insurer to pay any and all such proceeds directly to the Lessor, and not to the Lessee, and unless this Lease shall have been terminated under Paragraph 10, Lessor shall use such proceeds to reconstruct the Improvements as provided in Paragraph 10; (5) Lessor shall be named an additional insured and a loss payee as its interest appears under said policies; (6) upon Lessor’s request, Lessor’s mortgagee, if any, shall be added as loss payee under said policies;, and (7) Lessee’s obligation to carry the insurance required by this Lease may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Lessee; provided, however, (A) Lessor will be named an additional insured and a loss payee as its interest appears under such policies, (B) the coverage afforded Lessor will not be reduced or diminished by reason of the use of such blanket policy of insurance, and (C) all other requirements set forth in this Paragraph 5 are otherwise satisfied.

(iii) All insurance required to be obtained or maintained pursuant to this Lease shall be obtained from generally recognized, responsible insurance companies qualified or licensed to transact such business in the State in which the Premises is located and otherwise reasonably satisfactory to the Lessor.

(c) Other Charges. Lessee agrees to pay to Lessor all charges for any services, goods, or materials furnished by Lessor at Lessee’s request which are not required to be furnished by Lessor under this Lease within thirty (30) days after Lessor renders a written statement therefor to Lessee. (The Base Rent, together with all such other sums paid to Lessor by Lessee under this Paragraph 5 as Additional Rent, is hereinafter collectively referred to as “Rent”). In the event any payment of Rent, including but not limited to a monthly installment of Base Rent, or other amounts as provided in Subparagraphs 5(c), 13(c) and Paragraph 7 herein, are not received by Lessor within five (5) days after it is due and payable, such delinquent payment of Rent will bear interest at a rate of ten percent of the monthly payment following the expiration of such five (5) day period until Lessee pays such Rent. Payment of such interest shall be made by Lessee in accordance with the provisions of this Subparagraph 5(c).

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(d) Independent Obligation. Except with regard to a breach of the Covenant of quiet enjoyment or as otherwise provided herein, the obligation of Lessee to pay all Rent provided to be paid by Lessee and the obligations of Lessee to perform Lessee’s other covenants and duties hereunder constitute independent and unconditional obligations to be performed at all times provided for hereunder, save and except only when an abatement thereof or reduction therein is herein expressly provided for and not otherwise.

6. Maintenance of Premises. Responsibility for all repairs, replacements and alterations to the Premises shall be as set forth in this Paragraph 6.

(a) Lessor’s Responsibility. Lessor shall not be required to furnish any service or facilities to make any repairs or alterations in, on or about the Premises.

(b) Lessee’s Repairs and Replacements. Lessee agrees that it shall make all repairs, replacements, and alterations to Premises, including, but not limited to, the foundations, outside walls of the buildings, the interior and exterior of the buildings, including all overhead doors, frames, and operating equipment and all doors and door frames, all glass and window sashes, all plumbing, sewerage, heating, air conditioning and the electrical system, including ventilation, air conditioning, and heating units and systems, the exterior lighting system, public areas, parking areas, landscaping, and sidewalks and driveways suitably paved and marked for parking and traffic flow and reasonably free of refuse and obstruction and reasonably free of snow and ice as may be necessary to maintain said portions of the Premises in good repair and condition, reasonable wear and tear excepted, or which may be required by any laws, ordinances or regulations of any public authority or insurance underwriter having jurisdiction, the validity of which Lessee shall be entitled to contest. Lessor shall and does hereby assign to Lessee, to the extent they are assignable, any warranties it may hold with respect to each item of real property, personal property or fixture that Lessee is obligated hereunder to repair, maintain or replace.

(c) Permits Required. Lessee agrees that it will procure all necessary permits before making any repairs, alterations, other improvements and/or installations for which it is responsible under this Lease. Lessee agrees to pay promptly when due the entire cost of any work caused to be done by it upon the Premises, and to at all times maintain the Premises free and clear from liens for labor or materials. Lessee shall, within thirty (30) days from the filing of any such lien, bond or discharge the same. Lessee shall not, by the exercise of its rights or performance of its obligations hereunder or under any other provision of this Lease be deemed to be performing any work on behalf of Lessor.

7. Alterations and Improvements. Lessee shall have the right, only with the express written approval of Lessor which shall not be unreasonably withheld, to make such alterations or improvements costing more than twenty-five thousand dollars ($25,000) per project within the Premises at Lessee’s sole expense as may be proper and necessary for use of the Premises as a coffee manufacturing facility, provided that Lessee shall fully and completely indemnify Lessor against any mechanic’s or other liens or claims in connection with the making of such alterations

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or improvements. Lessee may make alterations or improvements costing twenty-five thousand dollars ($25,000) or less without Lessor’s consent. No structural changes, including, but not limited to changes to the roof, however, shall be made by Lessee without on each occasion submitting to Lessor plans and specifications for any proposed changes and obtaining the prior written consent of Lessor, which shall not be unreasonably withheld, conditioned or delayed as long as the structural integrity of the Premises is not diminished. In the event Lessor’s property tax assessment for the Premises includes property owned by Lessee, Lessee shall be liable for all taxes levied or assessed against such property assessed against Lessor. If any such taxes for which Lessee is liable are levied or assessed against Lessor or Lessor’s property or if the assessed value of Lessor’s property is increased by inclusion of Lessee’s personal property, furniture or fixtures in the Premises, and Lessor elects to pay the taxes so assessed (or the results increase in tax by reason of such inclusion of Lessee’s property), Lessee shall pay to Lessor upon demand that part of such taxes for which Lessee is liable hereunder.

8. Assignment or Sublet. This Lease may be assigned and, a portion of the Premises subleased only as permitted by this Paragraph 8.

(a) Lessee. This Lease may be assigned or all or a portion of the Premises subleased by Lessee only with the express written consent of Lessor which consent shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing, Lessee shall at all times after said assignment or sublease remain responsible for the Lessee’s performance of this Lease, including the payment of Rent and Additional Rent. Any attempt to do any of the foregoing without the prior express written consent of Lessor, shall be void and of no effect. Notwithstanding the foregoing restriction on Lessee’s right to assign this Lease or sublease all or a portion of the Premises, (1) Lessee shall have the right to assign this Lease or sublet the Premises (or any portion of the Premises) to an entity controlling, controlled by, or under common control with, Lessee, in which event Lessee will remain fully liable and responsible for all Lessee’s obligations under this Lease, (2) if Lessee merges with another entity or sells all or substantially all of Lessee’s assets to another entity, Lessee may assign. this Lease to such successor entity, in which event Lessee will remain fully liable and responsible for all Lessee’s obligations under this Lease, and (3) Lessee may enter into one or more subleases to entities providing services related to Lessee’s use of the Premises, in which event Lessee will remain fully liable and responsible for all Lessee’s obligations under this Lease, in all such instances without the necessity of Lessor’s prior consent. In the event Lessee requests Lessor’s consent as to any assignment, sublease or other transaction, a signed counterpart of all instruments relative thereto (executed or to be executed by all parties to such transaction with the exception of Lessor) shall be submitted by Lessee to Lessor prior to, or contemporaneously with, the request for Lessor’s written consent (it being understood that no such instrument shall be effective without the written consent of Lessor). If Lessor elects to consent to a sublease, and if the amount due and payable by a sub-lessee under any such permitted sublease (or a combination of the rent payable under such sublease plus any bonus or other consideration therefor less any costs to Lessee of the subletting (i.e., improvement allowance or commissions)) exceeds the Rent payable under this Lease or, with respect to a permitted sublease, permitted license or other

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permitted transfer by Lessee, the consideration payable to Lessee by the assignee, licensee or other transferee exceeds the Rent payable under this Lease, then Lessee shall be bound and obligated to pay Lessor, as Rent hereunder, fifty percent (50%) of such amount received which exceeds the Rent and other amounts due hereunder, within ten (10) days following receipt thereof by Lessee from such sub-lessee, assignee, licensee or other transferee, as the case might be, unless the sub-lessee or assignee is an entity under common control of the principals of Lessee.

(b) Lessor. Lessor shall have the right to transfer, assign and convey, in whole or in part, the Premises and any and all of its rights under this Lease. Should Lessor assign its rights under this Lease, Lessor shall thereby be released from any further obligations hereunder, arising after the date of such assignment. Lessee agrees to look solely to such successor-in-interest of the Lessor for performance of obligations arising after such assignment. Subsequent to any such assignment, Lessee shall have the right to make a claim against the proceeds from the sale or assignment to the extent such proceeds exceed the amount required to satisfy any liens against the Premises. Any such claim shall be limited to the valid and binding financial obligations of Lessor in existence prior to such transfer or assignment. The term “Lessor” as used in this Lease shall mean the owner of the Premises, at the time in question, and in the event of the transfer by such owner of its interest in the Premises, such owner shall thereupon be released and discharged from all covenants and obligations of the Lessor thereafter accruing, but such covenants and obligations shall be binding during the Term upon each new owner for the duration of such owner’s ownership.

9. Use. Lessee will use and occupy the demised Premises in a careful, safe and proper manner and will comply with the directions of all public officers and governmental agencies having jurisdiction thereof respecting the use of the demised Premises to the extent that it is Lessee’s obligation hereunder to maintain the condition of the demised Premises. Lessee shall use the demised Premises as a coffee manufacturing and distribution facility and all uses reasonably related thereto.

10. Total or Partial Destruction. Continuation or termination of this Lease upon total or partial destruction of the Building from fire or other casualty shall be as provided in this Paragraph 10.

(a) Definition. For the purpose of this paragraph “Totally Destroyed” shall mean a destruction of more than thirty-three percent (33%) of the Improvements on the Land, and “Partially Destroyed” shall mean any lesser degree of destruction.

(b) Total Destruction. In the event the Premises shall be Totally Destroyed by fire or other casualty, Lessor and Lessee shall each have the option to terminate this Lease. Such option shall be exercised by providing to the other party hereto written notice of such election within thirty (30) days after such fire or other casualty. Such 30 day period following the casualty during which notice to terminate may be given shall not begin until Lessor, or Lessee, as applicable has received actual notice that the Premises have been Totally Destroyed.

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(c) Partial Destruction. In the event the Premises shall be Partially Destroyed by fire or other casualty (or Totally Destroyed and the parties have not elected to terminate this Lease under Paragraph 10(b) above), Lessor shall repair the Building to substantially its condition immediately prior to said damage. Lessor shall commence such repairs promptly after notice of said damage and expiration of a reasonable period for adjustment of insurance claims. Lessor shall use its best efforts to complete such repairs as expeditiously as possible. If repairs have not been completed due to reasons within Lessor’s control, within six (6) months from the date of which the Premises was Totally Destroyed or Partially Destroyed, Lessee may terminate the Lease by giving written notice to Lessor within fifteen (15) days of the expiration of said 6-month period.

(d) Fixtures. Nothing contained in this Paragraph 10 shall require Lessor to replace any fixtures or other work paid for and installed by Lessee pursuant to the provisions of this Lease, except Lessor shall be obligated to replace any such work or return the proceeds to Lessee to the extent such fixtures were covered by insurance proceeds delivered to Lessor and this Lease has not terminated in accordance with the provisions of this Paragraph 10. In the event of Lease termination, Lessor shall return proceeds to Lessee to the extent such fixtures were covered by insurance proceeds delivered to Lessor.

(e) Intentionally deleted.

(f) Lessee’s Negligence. If the Premises or any portion of the Building is damaged by fire or other casualty resulting from the gross negligence or willful misconduct of Lessee or any of Lessee’s agents, employees or invites, the Rent hereunder shall not be diminished during the repair of such damage and Lessee shall be liable to Lessor for the cost and expense of the repair and restoration of the Building caused thereby to the extent such costs and expenses are not covered by insurance proceeds.

11. Condemnation Clause. If, after the execution of this Lease and prior to the expiration of its Term, the whole of the demised Premises (or such part as shall cause the remaining part to be unsuitable for use by Lessee, as determined by Lessee in its reasonable discretion) shall be appropriated by right of an eminent domain, the Term of this Lease shall cease as of the time of any appropriation, and Lessee shall have no obligation to pay Rent and Additional Rent for periods after the time of appropriation.

(a) Right to Damages. Lessor reserves to itself, and Lessee assigns to Lessor except as otherwise hereinafter expressly provided, all right to damages accruing on account of any appropriation by right of eminent domain. Lessor does not reserve to itself and Lessee does not assign to Lessor any damages payable to Lessee by the public authority for trade fixtures and other personal property (which part shall not have become part of the realty) installed by Lessee

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at its own cost and expense or any so-called moving expenses, or any lost profits or loss of goodwill, if paid by the condemning authority. Notwithstanding the foregoing, Lessee shall not be entitled to any damages for loss of the unexpired portion of the term of this Lease, or the value of the leasehold.

(b) Partial Condemnation. If, after the execution of this Lease and prior to the expiration of its Term, such part of the demised Premises as shall cause the remaining part to be still suitable for use by Lessee shall be appropriated by right of eminent domain, then Lessor shall proceed with all reasonable diligence to repair any damage to the Premises caused by the partial appropriation and Lessee shall be entitled to a reasonable adjustment in Base Rental accruing hereunder from the date of appropriation, proportionate to that part of the Premises or Improvements so taken.

12. Utilities. Lessee shall pay all water, sewer, gas, and electricity consumed or used by Lessee at the Premises.

13. Default Clause. Defaults by Lessee and Lessor’s remedies therefor shall be as provided in this Paragraph 13.

(a) Actions Constituting Default by Lessee. If Lessee at any time during the Term hereof (and regardless of the pendency of any bankruptcy, reorganization, receivership, insolvency, or other proceedings in law, in equity or before any administrative tribunal, which prevent or might prevent Lessee from complying with the terms of this Lease):

(i) shall fail to make payment of any installment of Rent or any other sum specifically to be paid by Lessee hereunder and such default shall not have been cured within ten (10) days after Lessee received written notice from Lessor of such failure; or

(ii) shall fail in the observance or performance of any of Lessee’s covenants, agreements or obligations hereunder, other than the covenant to pay Rent or any other sum herein specified to be paid by Lessee, and such default shall not have been cured within ten (10) days after Lessee shall have received written notice from Lessor specifying such default; or if said default cannot by its nature be cured within ten (10) days, if Lessee shall not have commenced the curing promptly within such period and does not thereafter diligently proceed to cure the same.

(iii) shall (1) be adjudicated bankrupt or insolvent, or (2) have a receiver or trustee appointed for all or substantially all of its business or assets on the ground of Lessee’s insolvency, or (3) suffer an order to be entered approving a petition filed against Lessee seeking reorganization of Lessee under the Federal Bankruptcy Laws or any other applicable law or statutes of the United States or any state thereof and such adjudication, appointment or order has not been vacated within ninety (90) days; or

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(iv) shall make an assignment for the benefit of its creditors or file a voluntary petition in bankruptcy or a petition or answer seeking reorganization or arrangement under the Federal Bankruptcy Laws or any other applicable law or statute of the United States, or of any state thereof, or shall file a petition to take advantage of any insolvency act;

then, Lessee shall be in default of its obligations under this Lease unless Lessee has timely cured the failure giving rise to such default.

(b) Lessor’s Remedies. At any time Lessee is in default of its obligations under this Lease, Lessor may take one or more of the following actions:

(i) without further notice to Lessee and without further demand for Rent due or for the observance or performance of any of said terms, conditions, covenants or agreements, terminate this Lease and re-enter said Premises. If this Lease shall be terminated before its expiration by reason of Lessee’s default, the same may be re-rented by Lessor for such rent and upon such terms as Lessor may deem advisable;

(ii) sue to collect any and all sums which may accrue to Lessor by virtue of the provisions of this Lease and/or for any and all damage that may accrue by virtue of the breach of this Lease, Lessee hereby waiving all demand for rent;

(iii) sue to restrain by injunction any violation or threatened violation of the covenants, conditions or provisions of this Lease;

(iv) after three (3) days written notice to Lessee and in compliance with applicable law, alter locks and other security devices; and

(v) avail itself of any other remedy at law or in equity available to Lessor.

(c) Lessor’s Right to Remedy. If Lessee shall at any time be in default in fulfilling any of the covenants of this Lease as set forth in Subparagraph 13 (a) (other than the covenants for the payment of Rent or other charges payable by Lessee to Lessor hereunder), Lessor may, but shall not be obligated to do so, and without notice to or demand upon Lessee, take or cause to be taken such action or make such payment, as may be required by such covenants, at Lessee’s risk and expense, and all reasonable expenses, costs and liabilities of Lessor incurred in taking such action or making such payment shall be deemed Additional Rent hereunder and shall be payable to Lessor on demand with interest at the rate of eighteen percent (18%) per annum. In case of re-entry, or of the termination of this Lease, whether by summary proceedings or otherwise, Lessee shall remain liable for the balance of said Term, whether Premises be relet or not, and for reasonable expenses to which Lessor may be put in re-entering, including preservation of the demised Premises, less however, the amounts received under the re-let after deducting brokers’ commissions of the reletting. Any such reletting may be for a term exceeding or less than the period of this Lease or the existing renewal term. Lessor shall not be liable for failure to relet the Premises, and in the event of reletting, for failure to collect the rent under such reletting; provided, however, Lessor shall use diligent efforts to mitigate its damages.

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14. Indemnification. Lessee and Lessor agree to indemnify and save harmless each other against and from any and all claims by or on behalf of any person, firm, corporation, or entity, arising from any accident, injury or damages of whatsoever cause, including any environmental conditions caused by indemnitor, its agents or employees, suits brought against indemnitor or indemnitee (except, however, to the extent any of the foregoing are caused by negligence or willful misconduct of the indemnitee, its agents, contractors, servants, employees or licensees) occurring during the Term, in, on or about the demised. Premises, and from and against all costs, reasonable counsel fees, expenses and liabilities incurred in or about any such claim or action or proceeding brought thereon; and in case any action or proceeding be brought against the indemnitee by reason of any such claim, the indemnitor upon notice from the indemnitee covenants to resist or defend such action or proceeding. Indemnification by the indemnitor hereunder shall not extend to any matter against which, and to the extent which, the indemnitee has been indemnified from insurance. . Except as set forth above, Lessor shall have no liability to Lessee or its shareholders, officers, directors, employees, affiliates or subsidiaries, and Lessee hereby waives any claims to damages against Lessor for any and all losses, claims, liabilities, damages, demands, fines, costs and expenses (including reasonable legal expenses) of whatever kind and nature resulting from any accident, occurrence or condition caused by the release of any toxic or hazardous substance or waste in, on, under, about or affecting the Premises, occurring prior to Lessor’s acquisition of the Premises or occurring during Lessee’s occupation of the Premises, including without limitation, the existence removal, remediation, leaking of spills and overfills related to underground storage tanks on or under the Premises, which results in any injury or death to any person or damage to any property or which required the removal or treatment of such hazardous or toxic substance or waste or underground storage tanks (including without limitation, removals, remediation, leaking, spills or overfills related to underground storage tanks), or any other remedial action or fine under the terms of any applicable law, regulation, rule or direction of any federal state or local government authority. The provisions of this paragraph shall survive the termination or expiration of this Lease and the surrender of the Premises by Lessee.

15. Right to Inspect and to Show the Premises. Lessee agrees that Lessor or its representatives shall have the right during normal business hours upon at least twenty-four (24) hours prior notice to enter upon and to inspect the Premises to ascertain that Lessee is carrying out the terms, conditions and provisions hereof Lessor shall have the right to show the Premises to prospective purchasers during normal business hours upon at least twenty-four (24) hours prior notice during the Term of the Lease and to prospective tenants during the last six (6) months of the Term. Notwithstanding the foregoing, such inspections and showings shall not unreasonably interfere with Lessee’s use and enjoyment of the Premises.

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16. Condition of the Premises at Termination. Lessee agrees that upon the termination of its tenancy by expiration or otherwise, it will leave the Premises in good condition, ordinary wear and tear, damage by fire or other casualty and conditions not the responsibility of Lessee under this Lease, excepted. All trade fixtures installed by Lessee that are not replacements or part of realty shall be removed at the expiration of the Term, and Lessee shall repair any damage by reason of the said removal. All carpeting, signs, kitchen hood systems, plumbing systems, seating booths, ventilation systems and other improvements installed by Lessee shall remain the property of Lessor, provided, however, that other trade fixtures shall remain the property of the Lessee.

17. Subordination, Attornment and Nondisturbance. Lessor shall, within thirty (30) days after the date of the Lease, provide Lessee with a nondisturbance agreement in form and substance reasonably satisfactory to Lessee pursuant to which Lessor’s lenders with respect to the Building and ground lessors, if any, each agree that Lessee’s rights to possession of the Premises pursuant to the terms of the Lease shall not be disturbed, so long as Lessee is not in default of its obligations under the Lease beyond any applicable notice and cure periods. Such subordination, nondisturbance and attornment agreement shall be in recordable form and shall be substantially in Lessor’s lenders form attached hereto at Exhibit “B”.

18.(a) Delivery of Estoppel Certificates. Lessee shall from time to time, upon not less than ten (10) days’ prior written notice from Lessor, execute, acknowledge and deliver to Lessor a statement in writing certifying such information as Lessor may reasonably request including, but not limited to, the following: (i) that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect), (ii) the date to which the Base Rent and other charges are paid in advance and the amounts so payable, (iii) that there are not, to Lessee’s knowledge, any uncured defaults or unfulfilled obligations on the part of Lessor, or specifying such defaults or unfulfilled obligations, if any are claimed, (iv) that all Lessee improvements to be constructed by Lessor, if any, have been completed in accordance with Lessor’s obligations, and (v) that Lessee has taken possession of the Premises. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Property.

(b) Failure to Deliver Certificate. At Lessor’s option, the failure of Lessee to deliver such statement within such time as provided hereunder, it shall be conclusive upon Lessee that (i) this Lease is in full force and effect, without modification except as may be represented by Lessor, (ii) there are no uncured defaults in Lessor’s performance, (iii) not more than one month’s Base Rent has been paid in advance, (iv) all improvements to be constructed by Lessor, if any, have been completed in accordance with Lessor’s obligations, and (v) Lessee has taken possession of the Premises.

19. Non-waiver. Neither acceptance of Rent by Lessor nor failure by either party to complain of any action, omission or default of the other party, whether singular or repetitive, shall constitute a waiver of any of Lessor’s or Lessee’s, as applicable, rights hereunder. Waiver

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by either party of any remedy for any default of the other party shall not constitute a waiver of any remedy for either a subsequent default of the same obligation or any other default. No act or thing done by Lessor or its agents shall be deemed to be an acceptance of surrender of the Premises. No agreement to accept a surrender of the Premises shall be valid unless it is in writing and signed by a duly authorized officer or agent of Lessor.

20. Entire Agreement. This Lease embodies the entire agreement between the parties hereto relative to the subject matter hereof and Lessee acknowledges that Lessor has made no representations or warranties in connection with the demised Premises except as set forth in this Lease. This Lease shall not be modified, changed or altered in any respect, except in writing executed by the parties hereto.

21. Notices. Any notice, communication, request, demand, reply or advice (severally and collectively referred to as “Notice”) in this Agreement required or permitted to be given, made or accepted must be in writing. Notice may, unless otherwise provided herein, be given or served by depositing the same in the United States Mail, postage paid, registered or certified, and addressed to the party to be notified, with return receipt requested. Notice shall be effective at the time of receipt thereof by the addressee or any agent of the addressee, except that to the extent the addressee or an agent of the addressee shall refuse to receive any notice given by registered mail or certified mail as above provided or there shall be no person available at the time of the delivery thereof to receive any notice, the time of the giving of such notice shall be the time of such refusal or the time of such delivery, as the case may be. Notice given in any other manner shall be effective only if and when received by the party to be notified (except in the case of a facsimile transmission received after normal business hours, which notice shall be effective the next day). For the purposes of notice, the addresses of the parties shall, until changed as provided below, be as follows:

Lessor:	Stecar Properties, LLC 1 Northwood Drive Orinda, CA 94563
Lessee:	Diedrich Coffee, Inc. 28 Executive Park Suite 200 Irvine, CA 92614 Attn: Real Estate

The parties hereto shall have the right from time to time to change their respective addresses, and each shall have the right to specify as its address any other address within the United States of America, by not less than ten (10) days prior written notice to the other party.

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22. Waiver of Subrogation. Lessor and Lessee each do hereby waive all rights of recovery and causes of action against the other and their respective employees, servants, agents, and all parties claiming through or under such party for any damage to the demised Premises and/or the building in which they are located, or the personal property of Lessee, as the case may be, caused by any of the perils which are included in an “all-risk” property insurance policy, notwithstanding the fact that said damages to or destruction of said building and/or the demised Premises, or the personal property of Lessee, as the case may be, shall be due to the negligence of either party hereto or their respective employees, servants, agents or any parties claiming through such party. Such waivers shall be null and void if the foregoing waiver causes the invalidation of such insurance policy. Lessor and Lessee each hereby agree and covenant immediately to give any insurance company, which has issued to it such policies of insurance, written notice of the terms of said waiver, and have said insurance policies properly endorsed, if necessary, to recognize such waiver and prevent the invalidation of said insurance coverages by reason of said waiver. Any and all increases in insurance premiums attributed to such waiver shall be paid by the beneficiary of such waiver.

23. Liability for Damage to Lessee’s Property. All personal property of the Lessee whatsoever kept in the Premises shall be at Lessee’s sole risk, unless damaged by the negligence or actionable fault of Lessor, its agents or contractors.

24. Material Annexed. It is expressly agreed that all material attached to this Lease as Exhibit “A”, Exhibit “B”, and “Addendum to Lease” shall be incorporated in this Lease by reference thereto.

25. Signs. Lessee if it so desires may place, erect, and maintain or use a sign on the front of the Premises advertising Lessee’s business. The said sign shall be erected and maintained in compliance of applicable laws, shall be subject to approval by Lessor which shall not be unreasonably conditioned, delayed or withheld. Upon expiration of the term of the Lease, said sign shall remain the property of Lessor. However, Lessee may remove its sign facia on the condition that Lessee properly cover the sign with plastic panel inserts. In addition, all existing signs can be used and maintained at Lessee’s sole expense.

26. Real Estate Commission. The parties each represent to the other that no real estate broker was involved in presenting or arranging for the consummation of this Lease and will indemnify each other for claims presented through the indemnifying party.

27. Captions and Parties. The captions in this Lease are for convenience only and are not part of this Lease and do not in any way limit or amplify the terms or provisions of this Lease. Wherever the word “Lessor” or “Lessee” is used in this Lease, it shall be considered as meaning “Lessors” or “Lessees,” respectively wherever the context permits or requires, and when the singular, the masculine, or the neuter pronouns are used herein, the same shall be construed as including all persons and corporations designated, respectively as Lessor or Lessee in the heading of this instrument wherever the context requires.

28. Quiet Enjoyment. Lessor covenants and agrees that Lessee, Upon paying the Rent and all other charges herein provided for and observing and keeping the covenants, agreements and conditions of this Lease on its part to be kept, shall lawfully and quietly hold, occupy and enjoy said demised Premises during the Term of this Lease without hindrance or molestation.

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29. Binding Lease. This Lease shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and assigns; provided, however, that there shall be no liability on any Lessor following transfer of title for acts or matters related to the period following such transfer of title, so long as such transferee agrees in writing to be so liable.

30. Holding Over. In the event of Lessee’s continued occupancy of the Premises after the expiration of the Term or any renewal or extension thereof, or after any earlier termination provided or permitted by this Lease, either with or without the consent of Lessor, such tenancy shall be month to month and in no event from year to year, and such continued occupancy shall not defeat Lessor’s right to possessions of the Premises. All other covenants, provisions, obligations and conditions of the within Lease shall remain in full force and effect during such hold-over period with the exception of rental which shall be one hundred fifty percent (150%) of the then current Rent under Paragraph 4.

31. Choice of Law. This Lease shall be deemed to have been signed and delivered in the State of California, and shall be construed in accordance with the laws of the State of California.

32. Enforceability of Agreement. Lessor warrants to Lessee and Lessee warrants to Lessor that the person executing this Agreement for or on behalf of the warranting party was fully authorized to act in their behalf and that this Agreement is valid and enforceable against the warranting party.

33. Intentionally left blank.

34. Commencement Date. The “Commencement Date” of the term shall be the Effective Date of this Lease which shall be January 1, 2006.

35. Lease Year. The term “Lease Year” as used herein shall mean each consecutive twelve (12) month period beginning with the Commencement Date and each anniversary date thereof.

36. Relationship of Lessee and Lessor. This Lease does not create the relationship of principal and agent or of partnership or of joint venture or any association between Lessor and Lessee; the sole relationship between Lessor and Lessee is that of lessor and lessee.

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37. Environmental Provisions. Responsibility for protecting the Premises from contamination by Hazardous Substances, as defined in this Paragraph 37, and compliance with Environment Law shall be as set forth in this Paragraph 37.

(a) Applicable Definitions. The term “Hazardous Substances” means all explosive or radioactive substances or wastes, petroleum or petroleum distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls, and any of the following: (i) any ‘hazardous substances,’ as defined under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. §§9601 et seq.; (ii) any ‘extremely hazardous substance,’ ‘hazardous chemical’ or ‘toxic chemical,’ each as defined under the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. §§ 1101 et seq.; (iii) any ‘hazardous waste,’ as defined under the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901 et seq.; (iv) any ‘pollutant,’ as defined under the Clean Water Act, 33 U.S.C. §§ 1251 et seq.; and (v) any regulated substance or waste under any Environmental Law. For purposes of this Lease, “Environmental Law” means all laws relating to Hazardous Substances, pollution or protection of the environment and any judgment, decree, injunction, order or ruling of any federal, state, or local court, governmental authority or any arbitrator that are applicable to the Premises and binding on Lessee’s use or occupancy of the Premises.

(b) Lessee’s Responsibility. During the Term of this Lease, Lessee shall not permit to occur, to the extent it is within the reasonable knowledge and control of Lessee, or cause any violation of Environmental Law on, under, or about the Premises, or the use, generation, release, manufacture, refining, production, processing, storage, or disposal of any Hazardous Substances on, under, or about the Premises, or the transportation to or from the Premises of any Hazardous Substance other than customary quantities of such Hazardous Substances customarily used in the operation of Lessee’s business and then only in accordance with Environmental Law.

(c) Intentionally left blank.

(d) Environmental Indemnity. Lessee shall indemnify, defend, and hold harmless Lessor, the manager of the Premises, and their respective officers, directors, beneficiaries, shareholders, partners, agents, and employees from all fines, suits, procedures, claims, and actions of every kind and all costs associated therewith (including reasonable attorneys’ and consultants’ fees) arising out of or in any way connected with any deposit, spill, discharge, or other release of Hazardous Substances in violation of Environmental Law that occurs during the Term of the Lease and which results from Lessee’s use or occupancy of the Premises, including occurrences resulting from acts by third parties during Lessee’s occupancy or from Lessee’s failure to provide all information, make all submissions, or take all actions required of Lessee under Environmental Law. Lessee’s obligations and liabilities under this Section shall survive the expiration or earlier termination of the Lease.

38. Intentionally left blank.

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39. Effective Date. Lessor and Lessee acknowledge that the Effective Date of this Lease shall be January 1, 2006.

IN WITNESS WHEREOF, this Lease has been duly executed by the parties as of the 17th day of October, 2005.

LESSOR:
STECAR PROPERTIES, LLC, a California limited liability company
By its member:
/s/Steven L. Ruegg
Steven L. Ruegg
By its member:
Name:
LESSEE:
DIEDRICH COFFEE, INC., a Delaware corporation
By:	/s/Matthew C. McGuinness
Its:	Executive Vice President

ATTACHMENTS:

Exhibit A – Description of the Land

Exhibit B – Lessor’s Lenders form of Subordination, Non-Disturbance Agreement

Addendum to Lease – Sections 40 through 44

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ADDENDUM TO LEASE

DATED AUGUST 1, 2005

BY AND BETWEEN STECAR PROPERTIES, LLC (“LESSOR”)

AND DIEDRICH COFFEE, INC. (“LESSEE”)

THIS ADDENDUM TO LEASE (“Addendum” or “Addendum to Lease”) is hereby incorporated into the Lease (with an Effective Date of January 1, 2006) and made a part thereof as though fully set forth at length therein. To the extent any of the provisions of this Addendum conflict with any other portions of the Lease, the provisions of this Addendum shall control. Unless otherwise defined herein, all capitalized terms used herein shall have the same meaning in this Addendum as defined in the Lease.

40. Option to Extend. Lessee shall have the option to extend the Term of the Lease (“Option” or “Option to Extend”) for one (1) period of sixty (60) months and one (1) period of ten (10) years, provided Lessee is not in default beyond any applicable notice and cure period at the time the exercise of the Option to Extend, and provided Lessee gives Lessor written notice of its election to exercise the Option to Extend at least ninety (90) days prior to the expiration of the Term.

41. Determination of Fair Market Value – Option Periods. In determining the Base Rental for Months 181-300 of the Option Period (as referenced in Section 4(c) above), Lessor and Lessee shall negotiate in good faith to arrive at a mutually agreeable “Fair Market Rental Rate (the Base Rental for such period is to be “90% of the Fair Market Rental Rate) one hundred twenty (120) days prior to the commencement of such time period. If the parties cannot agree within thirty (30) thereafter, then the Fair Market Rental Rate shall be determined as follows: (1) Lessor and Lessee shall each select one (1) independent unaffiliated real estate appraiser with at least five (5) years full-time experience appraising commercial properties; (ii) within five (5) days after agreement upon this list of appraisers, the selected appraisers shall meet and shall select a third appraiser (“Appraiser”); (iii) within thirty (30) days after the appointment of the Appraiser, the Appraiser shall independently determine the Fair Market Rental Rate. Each party shall pay one-half of the Appraiser’s fee and costs. The determination of the Appraiser in accordance with this Section shall be final and binding on the parties and a judgment may be rendered in a court of competent jurisdiction.

42. Memorandum of Lease. The parties shall execute and acknowledge, and cause to be recorded in the Official Records of Monterey County, California, a short form memorandum of the Lease in the form attached hereto as Exhibit “C”.

43. Eminent Domain Awards. Notwithstanding anything to the contrary in Section 11 of the Lease, Lessee shall be entitled to the amount of any award with respect to its Lessee improvements, moving expenses, and personal property, including, but not limited to, Lessee’s furniture, fixtures, equipment and goodwill, if paid by the condemning authority.

44. Counterparts. The Lease (including the Addendum to Lease) may be executed in several counterparts, and/or by the execution of counterpart signature pages that may be attached to one or more counterparts of the Lease, and all so executed shall constitute one agreement

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binding on the parties hereto, notwithstanding that all of the parties are not signatory to the original or the same counterpart. In addition, any counterpart signature page may be executed by any party wherever such party is located, and may be delivered by telephone facsimile transmission, and any such facsimile transmitted signature pages may be attached to one or more counterparts of the Lease (including this Addendum to Lease), and such faxed signature(s) shall have the same force and effect, and be as binding, as if original signatures had been executed and delivered in person.

IN WITNESS WHEREOF, this Addendum to the Lease has been duly executed by the parties as of the      day of             , 2005.

LESSOR:

STECAR PROPERTIES, LLC,

a California limited liability company

By its member:

Steven L. Ruegg

LESSEE:

DIEDRICH COFFEE, INC.,

a Delaware corporation

By:

Its:

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EXHIBIT “A”

Legal Description

Parcel A as said parcel is shown and so designated on that certain Parcel Map filed February 3, 1992 in Volume 18 of “Parcel Maps” at Page 147, Monterey County Records, and more particularly described as follows:

Beginning at the Southwesterly corner of said Parcel A, said point being on the Easterly line of Commercial Parkway as shown on said Map; thence along the said Easterly line N. 14° 00’ 00” W., 399.32 feet and along a tangent curve to the left thru a central angle of 5° 47’ 57” with a radius of 460.00 feet for an arc length of 46.56 feet; thence leaving said Easterly line N. 70° 12’ 03” E., 342.23 feet; thence S. 14° 04’ 00” E., 480.38 feet; thence S. 76° 00’ 00” W., 338.68 feet to the point of beginning.

A.P.No.: 133491-040

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EXHIBIT “B”

Estoppel, Subordination and Non-Disturbance Agreement

When Recorded Mail To:

CENTENNIAL BANK

18837 Brookhurst Street

Suite 100

Fountain Valley, CA 92708

LOAN NO.: 0011-004579-06

LEASE SUBORDINATION,

ATTORNMENT AND

NON-DISTURBANCE AGREEMENT

NOTICE: THIS SUBORDINATION AGREEMENT RESULTS IN THE LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN THE LIEN OF SOME OTHER OR LATER SECURITY INSTRUMENT.

THIS LEASE SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE AGREEMENT (“Agreement”) is made as of of September 7 2005_, by and among Stecar Properties, LLC, a California Limited Liability Company (“Lessor”), Diedrich Coffee, Inc., A Delaware Corporation (“Lessee”), and CENTENNIAL BANK (“Lender”).

RECITALS

A. Lender made a loan to Lessor, which loan is to be evidenced by a Promissory Note (“Note”) in the principal sum of One Million Seven Hundred Twenty Five Thousand Dollars ($ 1,725,000.00 ) executed by Lessor, dated as of October 17, 2001. The Note is to be secured by a Deed of Trust, Assignment of Leases and Rents and Security Agreement of even date therewith (“Deed of Trust”), which Deed of Trust is to be recorded prior to or concurrently wherewith and which Deed of Trust encumbers Lessor’s estate in the real property (“Subject Property”) in Monterey County County, California described as follows:

Parcel A as said parcel is shown and so designated on that certain Parcel Map filed February 3, 1992 in Volume 18 of “Parcel Maps” at Page 147, Monterey County Records, and more particularly described as follows:

Beginning at the Southwesterly corner of said Parcel A, said point being on the Easterly line of Commercial Parkway as shown on said Map; thence along the said Easterly line N. 14° 00’ 00” W., 399.32 feet and along a tangent curve to the left thru a central angle of 5° 47’ 57” with a radius of 460.00 feet for an arc length of 46.56 feet; thence leaving said Easterly line N. 70° 12’ 03” E., 342.23 feet; thence S. 14° 04’ 00” E., 480.38 feet; thence S. 76° 00’ 00” W., 338.68 feet to the point of beginning.

A.P.No.: 133-491-040

B. Lessee and Lessor entered into a lease (“Lease”), dated and amended by amendment(s) dated (if non, so indicate), by which Lessee leased certain premises (“Leased Premises”) constituting all or a portion of the Subject Property.

C. Lessee desires to be assured of continued occupancy of the Leased Premises under the terms of the Lease and subject to the terms of the Deed of Trust subject to the terms hereof.

D. Lenders is willing to make the Loan provided the Deed of Trust is a lien and charge upon the Leased Premises prior and superior to the Lease and provided that Lessee specifically subordinates the Lease to the lien and charge of the Deed of Trust subject to the terms hereof.

E. Lessee is willing that the Deed of Trust shall constitute a lien or charge upon the Leased Premises which is prior and superior to the Lease subject to the terms hereof and is willing to attorn to Lender provided Lender grant Lessee a nondisturbance agreement as provided herein.

NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and conditions set forth hereinbelow, and in order to induce Lender to make the loan referred to above, the parties hereto agree as follows;

1. As used in this Agreement, “Lease” includes, without limitation, all right, title and interest that Lessee may have in all or any portion of the Leased Premises, whether granted by the terms of the Lease, by a separate written or oral agreement or otherwise.

2. Lender hereby consents to the Lease and all the provisions thereof.

3. Except as permitted by the Lease, Lessee shall not assign the Lease, nor sublet any portion of the Leased Premises, and Lessor shall not consent to any such assignment, or subletting other than as permitted by the terms of the Lease, without the prior written consent of Lender, which consent shall not be unreasonably withheld.

4. The Deed of Trust and any amendments, modifications, renewals and extensions thereof shall be and remain at all times a lien and charge on the Leased Premises, prior and superior to the Lease, to the leasehold estate created thereby and to all rights and privileges of Lessee or any other Lessee thereunder, subject to the terms hereof, and the Lease, the leasehold estate created thereby and all rights and privileges of Lessee or any other lessee thereunder are hereby subjected and made subordinate to the lien and charge of the Deed of Trust in favor of Lender, subject to the terms hereof.

5. Lender would not make the Loan without this Agreement.

6. Lender in making disbursements pursuant to any agreement with Lessor is under no obligation or duty to, nor has Lender represented that it will, see to the application of the proceeds of the loan by Lessor or any other persons to whom Lender disburse the proceeds of the loan. Any application or use of such proceeds for purposes other than those provided for in any agreement between Lender and Lessor shall not defeat the subordination made in this Agreement, in whole or in part.

7. Lessee intentionally subjects and subordinates the Lease, the leasehold estate created thereby together with all rights and privileges or Lessee or any other lessee thereunder in favor of the lien and charge upon the Leased Premises of the Deed of Trust, subject to the terms hereof, and understands that in reliance upon and in consideration of this subjection and subordination, specific loans and advances are being and will be made and specific monetary and other obligations are being undertaken and will be entered into which would not be made or entered into but for said reliance upon this subjection and subordination.

8. Lender agrees that, in the event of foreclosure or other right asserted under said Deed of Trust by the holder thereof, said Lease and the rights of Lessee thereunder shall continue in full force and effect and shall not be terminated or disturbed (whether by a foreclosure, deed in lieu of foreclosure or otherwise), except for a default continuing after notice and beyond any applicable grace period and otherwise in accordance with the provisions of said Lease.

9. If Lender or any subsequent holder of said Deed of Trust, or any person claiming under said holder, including any purchaser upon foreclosure (any of which being referred to as a “Successor”), whether by a foreclosure, deed in lieu of foreclosure or otherwise, then such successor shall succeed to the interest of the Lessor in said Lease, Lessee will recognize, and attorn to such Successor, or such other person as its Landlord under the terms of said Lease and be bound to such Successor under the terms of the Lease for the balance of the term thereof and any extensions or renewals thereof. Said attornment is to be effective and self-operative without the execution of any other instruments on the part of either party hereto immediately upon Successor’s succeeding to the interest of the lessor under the Lease; provided, however, that Lessee agrees to provide written confirmation of its attornment within ten (10) days after receipt of a written request for such confirmation by such Successor. In any such event as described above, the Lease shall continue in accordance with its terms between Lessee as tenant and such Successor as Lessor; provided, however, that such Successor shall not be:

(i) liable for any act or omission of any prior landlord (including Lessor) under the Lease (without limiting any rights of Lessee under the Lease for non-monetary defaults of any prior landlord which continues and which such Successor fails to cure within a reasonable time after such Successor acquires Lessor’s interest under the Lease);

(ii) subject to any offsets or abatements against rent which Lessee may have against any prior landlord (including Lessor) except for the exercise of rights expressly set forth in the Lease;

(iii) bound by any rent or other charges with Lessee might have paid for more than the current month to any prior landlord (including Lessor) except as expressly required under the Lease;

(iv) bound by any amendment or modification of the Lease made without its consent, which consent shall not be unreasonably withheld or delayed; or

(v) such Successor shall only be liable for the Lessor’s obligations under the Lease accruing during the period of time that such Successor is the owner of the Subject Property, except as otherwise provided herein.

10. Lessor agrees that, except as expressly provided herein, this Agreement does not constitute a waiver by Lender of any of its rights under the Deed of Trust or related documents, and that the Deed of Trust and any related documents remain in full force and effect and shall be complied with in all respects by the Lessor.

11. Lessee agrees with Lender that from and after the date hereof, Lessee will not terminate or seek to terminate the Lease by reasons of any act or omission of the lessor thereunder or for any other reason until Lessee shall have given written notice and opportunity to cure (as hereafter provided), by registered or certified mail, return receipt requested, of said act or omission to Lender, which notice shall be addressed to:

Centennial Bank

18837 Brookhurst, Suite 100

Fountain Valley, CA 92708

Attn: Real Estate Loan Administration

3

Lender shall have a period of time equal to the greater of: (i) the time allowed Lessor under the Lease, or (ii) ten (10) days after receipt by Lender of such notice, during which period Lender shall have the right, but not be obligated, to remedy such act, omission or other matter.

12. This Agreement shall be the whole and only agreement with regard to the subjection and subordination of the Lease and the leasehold estate created thereby together with all rights and privileges of Lessee or any other lessee thereunder to the lien and charge of the Deed of Trust, and shall supersede and cancel (but only insofar as would affect the priority between the Deed of Trust and the Lease) any prior agreements as to such subjection or subordination, including, without limitation, those provisions, if any, contained in the Lease which provide for the subjection or subordination of the Lease and the leasehold estate created thereby to a deed or deeds of trust or to a mortgage or mortgages.

13. This Agreement shall inure to the benefit of and shall be binding upon Lessee, Lessor and Lender, and their respective heirs, personal representatives, successors and assigns. This Agreement may not be materially altered, modified or amended except in writing signed by all of the parties hereto. In the event any one or more of the provisions contained in this Agreement 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 Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

14. This Agreement shall be governed by and construed according to the laws of the State of California.

15. This instrument may be executed in multiple counterparts, and the separate signature pages and notary acknowledgments may then be combined into a single original document for recordation.

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

LESSEE: Diedrich Coffee, Inc. A Delaware Corporation
By:
By:
LESSOR:
BORROWER: Stecar Properties, LLC, a California Limited Liability Company
By:
	Steven L. Ruegg, Trustee of the Steve and Amy Ruegg
	Revocable Trust, Member

4

LENDER:
CENTENNIAL BANK
By:
	Marianne Zarcone, SVP

(Notary Acknowledgements must be attached)

NOTICE: THIS SUBORDINATION AGREEMENT CONTAINS A PROVISION WHICH ALLOWS THE PERSON OBLIGATED ON YOUR LEASE TO OBTAIN A LOAN A PORTION OF WHICH MAY BE EXPENDED FOR OTHER PURPOSES THAN IMPROVEMENT OF THE LAND.

5

EXHIBIT “C”

Memorandum of Lease

When Recorded Mail to:

Diedrich Coffee, Inc.

28 Executive Park

Suite 200

Irvine, CA 92614

Attn: Real Estate

Space above for Recorder’s Use

MEMORANDUM OF LEASE

THIS MEMORANDUM OF LEASE dated this 20th day of September, 2005, is by and between STECAR PROPERTIES, LLC, a California limited liability company, hereinafter called the “Lessor, whose address is 1 Northwood Drive., Orinda, CA 94563, and DIEDRICH COFFEE, INC., a Delaware corporation, hereinafter called the “Lessee, whose principal place of business is located at 28 Executive Park, Suite 200, Irvine, CA 92614, Attn: Real Estate.

Lessor does hereby lease to Lessee that certain premises with improvements and appurtenant easments, if any, situated in the City of Castroville, County of Monterey, State of California, more particularly described in Exhibit A attached hereto and made a part hereof.

TO HAVE AND TO HOLD for a term commencing as of January 1, 2006, and ending ten (10) years from the date thereof.

Further, Lessor does hereby grant to Lessee, the right of option to extend term of this Lease upon the expiration of the original term for one additional sixty (60) month period; and thereafter for one additional one hundred twenty (120) month period.

The rentals to be paid by Lessee and all of the obligations and rights of Lessor and Lessee in respect to the above described rental for the original term and the extension thereof are set forth in that certain Lease dated             , 2005 executed by the parties hereto. This instrument is merely a memorandum of the aforesaid Lease and is subject to all fot he terms, conditions, and provisions thereof. In the event of any inconsistency between the terms of Lease and this instrument, the terms of said Lease shall prevail as between the parties hereto. This memorandum is binding upon and shall inure to the benefit of the heirs, sucessors, assigns and executors and administrators of the parties hereto.

IN WITNESS WHEREOF, the parties have executed this memorandum as of the date and year first above written.

LESSOR:	STECAR PROPERTIES, LLC, a California limited liability company	LESSEE:	DIEDRICH COFFEE, INC., a Delaware corporation
By:		By:
Name:		Name:
Title:		Title:

ACKNOWLEDGMENT

STATE OF CALIFORNIA	)
	) ss.
COUNTY OF CONTRA COSTA	)

On this      day of         , 2005, before me,              Notary Public, personally appeared Steven Ruegg, ¨ personally known to me or ¨ proved to me based upon satisfactory evidence to be the person whose name is subscribed to the within instrument, and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person or the entity upon behalf of which the person acted, executed the instrument.

In witness whereof, I have hereunto set my hand and affixed my official seal the day and year first written above.

(SEAL)

ACKNOWLEDGMENT - CORPORATE

STATE OF CALIFORNIA	)
	) ss.
COUNTY OF	)

On this      day of         , 2005, before me,              Notary Public, personally appeared                                 , ¨ personally known to me or ¨ proved to me based upon satisfactory evidence to be the person whose name is subscribed to the within instrument, and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person or the entity upon behalf of which the person acted, executed the instrument.

In witness whereof, I have hereunto set my hand and affixed my official seal the day and year first written above.

(SEAL)

EXHIBIT “A”

Legal Description

EXHIBIT “A”

Legal Description

Parcel A as said parcel is shown and so designated on that certain Parcel Map filed February 3, 1992 in Volume 18 of “Parcel Maps” at Page 147, Monterey County Records, and more particularly described as follows:

Beginning at the Southwesterly corner of said Parcel A, said point being on the Easterly line of Commercial Parkway as shown on said Map; thence along the said Easterly line N. 14° 00’ 00” W., 399.32 feet and along a tangent curve to the left thru a central angle of 5° 47’ 57” with a radius of 460.00 feet for an arc length of 46.56 feet; thence leaving said Easterly line N. 70° 12’ 03” E., 342.23 feet; thence S. 14° 04’ 00” E., 480.38 feet; thence S. 76° 00’ 00” W., 338.68 feet to the point of beginning.

A.P.No.: 133-491-040

19

EX-10.7

Exhibit 10.7

FIRST AMENDMENT TO LEASE

This First Amendment to Lease (“First Amendment”), dated for reference purposes only as of May 10, 2006, is entered into by and between Stecar Properties, LLC, a California limited liability company (“Lessor”) and Diedrich Coffee, Inc., a Delaware corporation (“Lessee”).

RECITALS

A. Lessor and Lessee entered into a Lease dated January 1, 2006, pursuant to which Lessor leased to Lessee and Lessee leased from Lessor the premises located at 11480 Industrial Parkway, Castroville, California, as more particularly described in the Lease.

B. Lessor and Lessee now wish to amend the Lease as more specifically set forth in this First Amendment.

C. Capitalized terms not otherwise defined in this First Amendment shall have the meanings ascribed to them in the Lease.

AGREEMENT

In consideration of the mutual covenants set forth herein and other valuable consideration, receipt of which is hereby acknowledged, Lessor and Lessee agree as follows:

1. Subordination. Paragraph 17 of the Lease is hereby deleted and replaced with the following:

17. Subordination, Attornment and Nondisturbance. At Lessor’s election, this Lease shall become subject and subordinate to any mortgage or deed of trust that affects the Premises (“Security Instrument”) and is created after the Effective Date. Notwithstanding such subordination, Lessee’s right to quiet possession of the Premises shall not be disturbed so long as Lessee is not in default and performs all of its obligations under this Lease, unless this Lease is otherwise terminated pursuant to its terms. Lessee shall upon request execute any document or instrument required by any lender to make this Lease either prior to or subordinate to a Security Instrument, which may include such other matters as the lender customarily and reasonably requires in connection with such agreements, so long as such document or instrument contains customary and reasonable non-disturbance provisions that reflect Lessee’s rights set forth in the previous sentence. Lessee’s failure to execute any such document or instrument within fifteen (15) days after written demand therefor shall constitute an event of default by Lessee and shall be subject to the provisions of Paragraph 13 of this Lease.

2. No Other Modifications. Except as set forth in this First Amendment, the Lease is unmodified and in full force and effect.

[Signatures follow.]

LESSOR		LESSEE
Stecar Properties, LLC, a California limited liability company		Diedrich Coffee, Inc., a Delaware corporation
By:	/s/ Steven Ruegg, Trustee	By:	/s/ Matthew C. McGuinness
	Steven Ruegg, as Trustee of the Steve	Name:	Matthew C. McGuinness
	and Amy Revocable Trust dated April 11, 2001	Its:	Executive Vice President
Its:	Member

EX-31.1

Exhibit 31.1

Section 302 Certification

I, J. Russell Phillips, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Diedrich Coffee, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) 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: November 2, 2009	/s/ J. Russell Phillips
	J. Russell Phillips
	Chief Executive Officer

EX-31.2

Exhibit 31.2

Section 302 Certification

I, Sean M. McCarthy, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Diedrich Coffee, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) 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: November 2, 2009	/s/ Sean M. McCarthy
	Sean M. McCarthy
	Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, in his capacity as an officer of Diedrich Coffee, Inc. (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

• the Quarterly Report on Form 10-Q for the period ended September 16, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

• the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Dated: November 2, 2009	/s/ J. Russell Phillips
	J. Russell Phillips
	Chief Executive Officer

Note: A signed original of this written statement required by Section 906 has been provided to Diedrich Coffee, Inc. and will be retained by Diedrich Coffee, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, in his capacity as an officer of Diedrich Coffee, Inc. (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

• the Quarterly Report on Form 10-Q for the period ended September 16, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

• the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Dated: November 2, 2009	/s/ Sean M. McCarthy
	Sean M. McCarthy
	Vice President and Chief Financial Officer

Note: A signed original of this written statement required by Section 906 has been provided to Diedrich Coffee, Inc. and will be retained by Diedrich Coffee, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.