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                                                                  EXHIBIT 10.26

                               SECURITY AGREEMENT
                               ------------------


         THIS SECURITY AGREEMENT is made as of July 7, 1999, by and among
DIEDRICH COFFEE, INC., COFFEE PEOPLE, INC., COFFEE PEOPLE WORLDWIDE, INC.,
GLORIA JEAN'S, INC., EDGLO ENTERPRISES, INC., GLORIA JEAN'S GOURMET COFFEES
CORP., GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP., and all future
Subsidiaries who hereafter become parties hereto (collectively, the "Debtors"
and each individually, a "Debtor") and BANKBOSTON, N.A. (the "Secured Party").

         FOR VALUE RECEIVED, the receipt of which is hereby acknowledged,
including without limitation, enabling the Debtors to obtain credit or other
financial accommodations from the Secured Party, each Debtor hereby agrees as
follows:

         Section 1. Definitions. All capitalized terms used herein or in any
certificate, report or other document delivered pursuant hereto shall have the
meanings assigned to them below (unless otherwise defined). Except as otherwise
defined, terms defined in the Uniform Commercial Code shall have the meanings
set forth therein.

         Accounts. All rights of any Debtor to payment for goods sold or leased
or for services rendered, all sums of money or other proceeds due or becoming
due thereon, all instruments pertaining thereto, all guarantees and security
therefor, and such Debtor's rights pertaining to and interest in such goods,
including the right of stoppage in transit, replevin or reclamation; all chattel
paper; all credit card receivables; all franchise and development fees and other
fees under franchising agreements or otherwise; all royalties; all amounts due
from Affiliates of such Debtor whether under intercompany notes or otherwise;
all other rights and claims to the payment of money, under contracts or
otherwise, including amounts due from Affiliates, tax refunds and insurance
proceeds; and all other property constituting "accounts" as such term is defined
in the Uniform Commercial Code.

         Business Day. The meaning specified for such term in the Credit
Agreement.

         Collateral. See Section 2.

         Credit Agreement. The Credit Agreement of even date herewith among the
Debtors and the Secured Party, as amended, restated, replaced, supplemented or
otherwise modified from time to time.

         Encumbrance. The meaning specified for such term in the Credit
Agreement.

         Equipment. All machinery, equipment and fixtures, restaurant equipment
and fixtures, office furniture, furnishings and trade fixtures, specialty tools
and parts, motor vehicles and materials handling equipment of any Debtor,
together with such Debtor's interest in, and right to, any and all manuals,
computer programs, data bases and other materials relating to the use,

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operation or structure of any of the foregoing; and all other property
constituting "equipment" as such term is defined in the Uniform Commercial Code.

         Event of Default. The meaning specified for such term in the Credit
Agreement.

         General Intangibles. All of the Debtors' presently existing or
hereafter acquired or arising general intangibles (including, those arising
under concession agreements, franchise agreements, lease agreements or other
agreements) and other personal property including any and all royalties,
franchise fees, choses or things in action, recipes, all rights with respect to
all patents, together with any reissue, extension or renewal thereof, all patent
applications, all patent licenses, all trademarks, service marks, trademark and
service mark applications, trade names, trade styles, patents, copyrights, mask
works and trade-secrets information and all goodwill associated with the
foregoing, and all other proprietary rights and rights to prevent others from
doing acts that constitute unfair competition with any Debtor or
misappropriation of its property, including without limitation any sums (net of
expenses) that any Debtor may receive arising out of any claim for infringement
of its rights in any of the foregoing, and all rights of any Debtor under
contracts to enjoy performance by others or to be entitled to enjoy rights
granted by others, including without limitation any licenses (including liquor
licenses to the extent a security interest may be granted in a liquor license
under applicable law), franchises and purchase orders; all rights to prevent
others from entering into competition with any Debtor; all tax refunds and tax
refund claims; all deposit accounts; all rights, title and interest of each
Debtor in and to all literature, reports, catalogs, documents, books, records
and other information (on whatever medium recorded, and including without
limitation computer programs, tapes, discs, punch cards, data processing
software and related property and rights) maintained by such Debtor that reflect
the conduct of such Debtor's business, such as financial records, marketing and
sales records, research and development records, and design, engineering and
manufacturing records; all rights under service bureau service contracts; all
computer data and the concepts and ideas on which said data is based; all
developmental ideas and concepts, papers, plans, schematics, drawings,
blueprints, sketches and documents; all data bases; all monies due or
recoverable from pension funds; all economic interests (including money due or
to become due) under partnership agreements, whether as a general partner or a
limited partner; all Intercompany Notes; all customer lists and route lists; and
all other property constituting "general intangibles" as such term is defined in
the Uniform Commercial Code.

         Inventory. All goods, merchandise and other personal property
(including warehouse receipts and other negotiable and non-negotiable documents
of title covering any such property) of any Debtor that are held for sale, lease
or other disposition, or for display or demonstration, or leased or consigned,
or that are raw materials, piece goods, work-in-process or materials used or
consumed or to be used or consumed in such Debtor's business, whether in transit
or in the possession of such Debtor or another, including without limitation all
goods covered by purchase orders and contracts with suppliers and all goods
billed and held by suppliers and goods located on the premises of any carriers,
forwarding agents, truckers, warehousemen, vendors, selling agents or other
third parties; all proprietary rights, patents, plans, drawings, diagrams,
schematics, assembly and display materials relating to any of the foregoing; and
all other property constituting "inventory" as such term is defined in the
Uniform Commercial Code.






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         Obligations. The meaning specified for such term in the Credit
Agreement.

         Perfection Certificate. A certificate signed by a responsible officer
of a Debtor in the form attached hereto as Exhibit A and delivered concurrently
herewith.

         Permitted Encumbrances. The meaning specified for such term in the
Credit Agreement.

         Securities. All of the securities and instruments held by any Debtor,
including without limitation all stocks, bonds, U.S. Treasury bills,
certificates of deposit, mutual or money market fund shares; and all
distributions made and all sums due or to become due on any of the foregoing,
and all securities, instruments or other property purchased or acquired as a
result of the investment and reinvestment thereof as hereinafter provided, and
all other property constituting "investment property" and "securities
entitlements" as such term is defined in the Uniform Commercial Code.

         Uniform Commercial Code. The Uniform Commercial Code as in effect in
The Commonwealth of Massachusetts.

         Section 2. Grant.

         (a) To secure the payment and performance of the Obligations, each
Debtor hereby assigns and pledges to the Secured Party all of its rights, title
and interest in, and grants to the Secured Party a continuing security interest
in, the following described property: Accounts, Equipment, Inventory, General
Intangibles and Securities; whether now owned or existing or hereafter arising
or acquired, together with all goods, instruments, documents of title, policies
and certificates of insurance, securities, chattel paper, deposit accounts, cash
or other property owned by such Debtor or in which such Debtor has an interest;
any and all additions, substitutions, replacements and accessions thereto; and
all proceeds and products of respect any of the foregoing (collectively, the
"Collateral").

         (b) Notwithstanding the foregoing provisions of Section 2(a) or
elsewhere in this Agreement, so long as no Event of Default has occurred and is
continuing, the Secured Party shall not take any act or omit to take any act
toward perfection of the Encumbrance granted to the Secured Party pursuant to
Section 2(a), above, in the following described property of any Debtor: motor
vehicles and, to the extent the same are held by third parties and not Lender,
deposit, checking or other bank accounts.

         (c) Notwithstanding the foregoing provisions of Section 2(a), such
grant of security interest shall not extend to and the term "Collateral" shall
not include, any chattel paper and general intangibles which are now or
hereafter held by the Debtor as licensee, lessee or otherwise, to the extent
that (i) such chattel paper and general intangibles are not assignable or
capable of being encumbered as a matter of law or under the terms of the
license, lease or other agreement applicable thereto (but solely to the extent
that any such restriction shall be enforceable under applicable law), without
the consent of the licensor or lessor thereof or other applicable party thereto
consent of the licensor or lessor thereof or other applicable party thereto and
(ii) such consent has not been obtained; provided, however, that the foregoing
grant of security interest shall extend to, and the term "Collateral" shall
include, (A) any and all proceeds of such chattel paper and general intangibles
to the extent that the assignment or encumbering of





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such proceeds is not so restricted and (B) upon any such licensor, lessor or
other applicable party consent with respect to any such otherwise excluded
chattel paper or general intangibles being obtained, thereafter such chattel
paper or general intangibles as well as any and all proceeds thereof that might
have theretofore have been excluded from such grant of a security interest and
the term "Collateral".

         Section 3. Representations, Warranties and Covenants. Each Debtor
hereby (a) confirms the representations, warranties and covenants set forth in
the Credit Agreement, which are incorporated by reference herein, (b) makes the
following representations and warranties and (c) agrees to the following
covenants, each of which representations, warranties and covenants shall be
continuing and in force so long as this Agreement is in effect:

         3.1 Perfection Certificate. The information contained in such Debtor's
Perfection Certificate is true, correct and complete, except for changes which
would not affect perfection of the Secured Party's security interest in the
Collateral.

         3.2 Name; Debtor/Collateral Location; Changes.

         (a) The name of each Debtor set forth on the first page hereof is the
true and correct legal name of such Debtor, and except as otherwise disclosed in
the Perfection Certificate, within the last five years such Debtor has not done
business as or used any other name.

         (b) The address of each Debtor set forth in such Debtor's Perfection
Certificate and identified as its chief executive office is such Debtor's chief
executive office and the place where its business records are kept. All tangible
Collateral other than Securities and items in transit in the ordinary course of
business is located at the addresses specified in such Debtor's Perfection
Certificate.

         (c) No Debtor will change its name, identity or organizational
structure or chief executive office or place where its business records are
kept, or move any tangible Collateral (other than Securities and items in
transit - in the ordinary course of business) to a location other than those set
forth in its Perfection Certificate (or to new store locations which would not
affect perfection of the Secured Party's security interest in any of the
Collateral), or merge into or consolidate with any other entity, unless such
Debtor shall have given the Secured Party at least 30 days' prior written notice
thereof and shall have delivered to the Secured Party such new Uniform
Commercial Code financing statements or other documentation as may be necessary
or required by the Secured Party to ensure the continued perfection and priority
of the security interests granted by this Agreement. An updated Perfection
Certificate for such Debtor shall be delivered to the Secured Party with any
such notice.

         3.3 Ownership of Collateral; Absence of Liens and Restrictions. The
Debtors are, and in the case of property acquired after the date hereof, will
be, the sole legal and equitable owners of the Collateral, holding good and
marketable title to the same free and clear of all Encumbrances except for the
security interests granted hereunder or Permitted Encumbrances, and have good
right and legal authority to assign, deliver, and create a security interest in
the Collateral in the manner herein contemplated.



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         3.4 Security Interest. Subject to Section 2(b), above, this Agreement,
together with the filing of Uniform Commercial Code financing statements in the
appropriate offices for the locations of Collateral listed in the Perfection
Certificate, create in favor of the Secured Party a valid and continuing lien on
and perfected security interest in the Collateral (except for property located
in the United States in which a security interest may not be perfected by filing
under the Uniform Commercial Code), and, based on the information listed in the
Perfection Certificate, such security interest is prior to all other
Encumbrances, except Permitted Encumbrances, and is enforceable as such against
creditors of any Debtor. Other than as disclosed in the Perfection Certificate,
no financing statement under the Uniform Commercial Code of any state or other
instrument evidencing an Encumbrance that names any Debtor as debtor is on file
in any jurisdiction and no Debtor has signed any such document or any agreement
authorizing the filing of any such financing statement or instrument.

         3.5 Maintenance; Taxes; Sales; Encumbrances; Insurance. The Debtors
will: (a) keep the Collateral in good order and repair; (b) not use the
Collateral in violation of law or any policy of insurance thereon; (c) except as
may be permitted in the Credit Agreement, pay promptly when due all taxes and
assessments on the Collateral or on its use or operation; (d) except as may be
permitted in the Credit Agreement, not sell, grant, assign or transfer any
interest in, or permit to exist any Encumbrances on, any of the Collateral other
than Permitted Encumbrances; (e) defend their title to, and the Secured Party's
interest in, the Collateral against all claims and take any action necessary to
remove any Encumbrances other than Permitted Encumbrances and defend the right,
title and interest of the Secured Party in and to any of the Debtors' rights in
the Collateral; and (f) keep the Collateral insured at all times as required in
the Credit Agreement.

         3.6 Fixture Conflicts; Required Waivers. The Debtors intend, to the
extent not inconsistent with applicable law, that the Collateral shall remain
personal property of the Debtors and shall not be deemed to be a fixture
irrespective of the manner of its attachment to any real estate. Each Debtor
will use reasonable efforts to deliver to the Secured Party such disclaimer,
waiver, or other document as the Secured Party may request, executed by each
person having an interest in such real estate, which efforts shall include,
without limitation, delivering any such disclaimer, waiver, or document in
executable form to each such person.

         3.7 Accounts: Collection and Delivery of Proceeds. Until the Secured
Party exercises its rights to collect the Accounts pursuant to this Agreement,
each Debtor will, in accordance with its customary business practices,
diligently collect all of its Accounts constituting Collateral. So long as any
Event of Default has occurred and is continuing, each Debtor shall, at the
request of the Secured Party, notify account debtors of the security interest of
the Secured Party in any Account and that payment thereof is to be made directly
to the Secured Party. So long as any Event of Default has occurred and is
continuing, any proceeds of Accounts or Inventory constituting Collateral
received by any Debtor, whether in the form of cash, checks, notes or other
instruments, shall be held in trust for the Secured Party and the Debtors shall
deliver said proceeds daily into a Bank Account (as defined in Exhibit B)
designated and controlled by the Secured Party without commingling, in the
identical form received (properly endorsed or assigned where required to enable
the Secured Party to collect same).

         3.8 Further Assurances. Subject to Section 2(b), above, upon the
written request of the Secured Party, and at the sole expense of the Debtors,
the Debtors will promptly execute and deliver such further instruments and
documents and take such further actions as the Secured




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Party may reasonably deem desirable to obtain the full benefits of this
Agreement and of the rights and powers herein granted, including, without
limitation, filing of any financing statement under the Uniform Commercial Code;
execution of collateral assignments of General Intangibles, pledges or
designations of Inventory and assignments of Accounts (giving the Secured Party
full power to collect, compromise or otherwise deal with the assigned accounts
receivable as the sole owner thereof subject to the terms hereof), all in form
and substance satisfactory to the Secured Party; and transfer of Collateral to
the Secured Party's possession to the extent necessary to perfect the same. When
an Event of Default has occurred and is continuing, upon the written request of
the Secured Party, and at the sole expense of the Debtors, the Secured Party may
take any act or omit to take any act the Secured Party deems desirable to
perfect its security interest in Debtors' property listed in Section 2(b),
above, including, without limitation, at such time, the immediate execution and
delivery by the Debtors to the Secured Party of an Agency Agreement ("Agency
Agreement"), substantially in the form of Exhibit B hereto (with all blanks
appropriately completed) with respect to each deposit, checking or other bank
account maintained by each Debtor, and Debtors shall so execute and deliver the
same, upon Secured Party's request. Each Debtor authorizes the Secured Party to
file any such financing statement without the signature of a Debtor to the
extent permitted by applicable law, and to file a copy of this Agreement in lieu
of a financing statement. If any amount in excess of $25,000 payable under or in
connection with any of the Collateral shall be or become evidenced by any
promissory note or other instrument, such note or instrument shall be
immediately delivered to the Secured Party, duly endorsed in a manner
satisfactory to it, provided, that, so long as any Event of Default has occurred
and is continuing, all such notes or instruments, regardless of amount shall be
immediately delivered to the Secured Party, duly endorsed in a manner
satisfactory to the Secured Party, and provided, further, that, until the
occurrence of an Event of Default, the Debtors shall be entitled to collect the
proceeds of such notes and instruments.

         Section 4. Notices and Reports Pertaining to Collateral. Each Debtor
will, with respect to the Collateral:

         (a) promptly furnish to the Secured Party, from time to time upon the
Secured Party's reasonable request, reports regarding the Collateral, in form
and detail satisfactory to the Secured Party, including those reports required
in the Credit Agreement;

         (b) promptly notify the Secured Party of any Encumbrance asserted
against the Collateral, including any attachment, levy, execution or other legal
process levied against any of the Collateral, and of any other material
information received by any Debtor relating to the Collateral, including the
Accounts, the account debtors, or other persons obligated in connection
therewith, that may in any way materially and adversely affect the value of the
Collateral or the rights and remedies of the Secured Party with respect thereto;
and

         (c) promptly after the application by any Debtor for registration of
any General Intangibles, notify the Secured Party thereof.

Each Debtor authorizes the Secured Party to destroy all invoices, delivery
receipts, reports and other types of documents and records submitted to the
Secured Party in connection with the transactions contemplated herein at any
time subsequent to 12 months from the time such items are delivered to the
Secured Party.



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         Section 5. Secured Party's Rights with respect to Collateral. Each
Debtor hereby appoints the Secured Party as its lawful attorney-in-fact, with
full power of substitution, in the name of such Debtor, for the sole use and
benefit of the Secured Party, but at such Debtor's expense, at the Secured
Party's option and at any time, after the occurrence of an Event of Default, and
during the continuance thereof, without notice or demand on such Debtor, to
exercise all or any of following powers with respect to the Collateral:

         (a) with respect to any Accounts: (i) notify account debtors of the
security interest of the Secured Party in such Accounts and that payment thereof
is to be made directly to the Secured Party (which notice shall not affect the
duties of the Debtors described in Section 3.6); (ii) demand, collect, and
receipt for any amounts relating thereto, as the Secured Party may determine;
(iii) commence and prosecute any actions in any court for the purposes of
collecting any such Accounts and enforcing any other rights in respect thereof;
(iv) defend, settle or compromise any action brought and, in connection
therewith, give such discharges or releases as the Secured Party may deem
appropriate; (v) receive, open and dispose of mail addressed to such Debtor and
endorse checks, notes, drafts, acceptances, money orders, bills of lading,
warehouse receipts or other instruments or documents evidencing payment,
shipment or storage of the goods giving rise to such Accounts or securing or
relating to such Accounts, on behalf of and in the name of such Debtor; and (vi)
sell, assign, transfer, make any agreement in respect of, or otherwise deal with
or exercise rights in respect of, any such Accounts or the goods or services
which have given rise thereto, as fully and completely as though the Secured
Party were the absolute owner thereof for all purposes;

         (b) with respect to any Equipment and Inventory: (i) make, adjust and
settle claims under any insurance policy related thereto and place and pay for
appropriate insurance thereon; (ii) discharge taxes and other Encumbrances at
any time levied or placed thereon; (iii) make repairs or provide maintenance
with respect thereto; and (iv) pay any necessary filing fees and any taxes
arising as a consequence of any such filing (it being understood and agreed that
the Secured Party shall have no obligation to make any such expenditures nor
shall the making thereof relieve such Debtor of its obligation to make such
expenditures); and

         (c) with respect to any Securities (i) transfer them at any time to
itself, or to its nominee, and receive the income thereon and hold the same as
Collateral hereunder or apply it to any matured Obligations; and (ii) demand,
sue for, collect or make any compromise or settlement it deems desirable.

Except as otherwise provided herein, the Secured Party shall have no duty as to
the collection or protection of the Collateral nor as to the preservation of any
rights pertaining thereto, beyond the safe custody of any Collateral in its
possession.

         Section 6. Secured Party's Rights and Remedies.

         (a) So long as any Event of Default shall have occurred and be
continuing, the Secured Party shall have all of the following rights and
remedies:

                  (i) The Secured Party may, at its option, without notice or
         demand (other than as provided for in the Credit Agreement), cause all
         of the Obligations to become immediately due and payable and take
         immediate possession of the Collateral, and for that




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         purpose the Secured Party may, so far as the Debtors can give authority
         therefor, enter upon any premises on which any of the Collateral is
         situated and remove the same therefrom or remain on such premises and
         in possession of such Collateral for purposes of conducting a sale or
         enforcing the rights of the Secured Party.

                  (ii) Each Debtor will, upon demand, assemble the Collateral
         and make it available to the Secured Party at such places and times
         designated by the Secured Party that are reasonably convenient to both
         parties.

                  (iii) The Secured Party may collect and receive all income and
         proceeds in respect of the Collateral and exercise all rights of any
         Debtor with respect thereto, including without limitation the right to
         exercise all voting and corporate rights at any meeting of the
         shareholders of the issuer of any Securities and to exercise any and
         all rights of conversion, exchange, subscription or any other rights,
         privileges or options pertaining to any Securities as if the Secured
         Party were the absolute owner thereof, including the right to exchange,
         at its discretion, any and all of any Securities upon the merger,
         consolidation, reorganization, recapitalization or other readjustment
         of the issuer thereof, all without liability except to account for
         property actually received (but the Secured Party shall have no duty to
         exercise any of the aforesaid rights, privileges or options and shall
         not be responsible for any failure to do so or delay in so doing).

                  (iv) The Secured Party may sell, lease or otherwise dispose of
         the Collateral at a public or private sale, with or without having the
         Collateral at the place of sale, and upon such terms and in such manner
         as the Secured Party may determine, and the Secured Party may purchase
         any Collateral at any such sale. Unless the Collateral threatens to
         decline rapidly in value or is of the type customarily sold on a
         recognized market, the Secured Party shall send to the Debtors prior
         written notice (which, if given within ten days of any sale, shall be
         deemed to be reasonable) of the time and place of any public sale of
         the Collateral or of the time after which any private sale or other
         disposition thereof is to be made. Each Debtor agrees that upon any
         such sale the Collateral shall be held by the purchaser free from all
         claims or rights of every kind and nature, including any equity of
         redemption or similar rights, and all such equity of redemption and
         similar rights are hereby expressly waived and released by the Debtors.
         In the event any consent, approval or authorization of any governmental
         agency is necessary to effectuate any such sale, the Debtors shall
         execute all applications or other instruments as may be required.

                  (v) In any jurisdiction where the enforcement of its rights
         hereunder is sought, the Secured Party shall have, in addition to all
         other rights and remedies, the rights and remedies of a secured party
         under the Uniform Commercial Code.

         (b) So long as any Event of Default shall have occurred and be
continuing, prior to any disposition of Collateral pursuant to this Agreement
the Secured Party may, at its option, cause any of the Collateral to be repaired
or reconditioned (but not upgraded unless mutually agreed) in such manner and to
such extent as to make it salable.

         (c) The Secured Party is hereby granted a license or other right to
use, so long as any Event of Default shall have occurred and be continuing,
without charge, any Debtor's labels, patents, copyrights, rights of use of any
name, trade secrets, trade names, trademarks and




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<PAGE>   9

advertising matter, or any property of a similar nature, relating to the
Collateral, in completing production of, advertising for sale and selling any
Collateral; and (subject to Section 2(b)) all Debtors' rights under all licenses
and all franchise agreements shall inure to the Secured Party's benefit.

         (d) Each Debtor recognizes that the Secured Party may be unable to
effect a public sale of all or a part of the Securities by reason of certain
prohibitions contained in the Securities Act of 1933 (as amended from time to
time, the "Securities Act") or the securities laws of various states (the "Blue
Sky Laws"), but may be compelled to resort to one or more private sales to a
restricted group of purchasers who will be obliged to agree, other things, to
acquire the Securities for their own account, for investment and not with a view
to the distribution or resale thereof. Each Debtor acknowledges that private
sales so made may be at prices and upon other terms less favorable to the seller
than if the Securities were sold at public sales. Each Debtor agrees that the
Secured Party has no obligation to delay sale of any of the Securities for the
period of time necessary to permit the Securities to be registered for public
sale under the Securities Act or the Blue Sky Laws, and that private sales made
under the foregoing circumstances shall be deemed to have been made in a
commercially reasonable manner.

         (e) So long as any Event of Default shall have occurred and be
continuing, the Secured Party shall be entitled to retain and to apply the
proceeds of any disposition of the Collateral, first, to its reasonable expenses
of retaking, holding, protecting and maintaining, and preparing for disposition
and disposing of, the Collateral, including attorneys' fees and other legal
expenses incurred by it in connection therewith; and second, to the payment of
the Obligations in such order of priority as the Secured Party shall determine.
Any surplus remaining after such application shall be paid to the Debtors or to
whomever may be legally entitled thereto, provided that in no event shall any
Debtor be credited with any part of the proceeds of the disposition of the
Collateral until such proceeds shall have been received in cash by the Secured
Party. The Debtor shall remain liable for any deficiency.

         Section 7. Waivers. Each Debtor waives presentment, demand, notice,
protest, notice of acceptance of this Agreement, notice of any loans made,
credit or other extensions granted, collateral received or delivered or any
other action taken in reliance hereon and all other demands and notices of any
description, except for such demands and notices as are expressly required to be
provided to such Debtor under this Agreement or any other document evidencing
the Obligations. With respect to both the Obligations and the Collateral, each
Debtor assents to any extension or postponement of the time of payment or any
other forgiveness or indulgence, to any substitution, exchange or release of
Collateral, to the addition or release of any party or person primarily or
secondarily liable, to the acceptance of partial payment thereon and the
settlement, compromise or adjustment of any thereof, all in such manner and at
such time or times as the Secured Party may deem advisable. The Secured Party
may exercise its rights with respect to the Collateral without resorting, or
regard, to other among collateral or sources of reimbursement for Obligations.
The Secured Party shall not be deemed to have waived any of its rights with
respect to the Obligations or the Collateral unless such waiver is in writing
and signed by the Secured Party. No delay or omission on the part of the Secured
Party in exercising any right shall operate as a waiver of such right or any
other right. A waiver on any one occasion shall not bar or waive the exercise of
any right on any future occasion. All rights and remedies of the Secured Party
in the Obligations or the Collateral, whether evidenced hereby or by any other
instrument or papers,




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<PAGE>   10

are cumulative and not exclusive of any remedies provided by law or any other
agreement, and may be exercised separately or concurrently.

         Section 8. Expenses. Each Debtor shall, on demand, pay or reimburse the
Secured Party for all reasonable expenses (including attorneys' fees of outside
counsel or allocation costs of in-house counsel) incurred or paid by the Secured
Party in connection with the preparation, negotiation and closing, and the
administration or enforcement, of this Agreement, its commercial credit
examinations (subject to any limitations in the Credit Agreement) and any other
amounts permitted to be expended by the Secured Party hereunder, including
without limitation such expenses as are incurred to preserve the value of the
Collateral and the validity, perfection, priority and value of any security
interest created hereby, the collection, sale or other disposition of any of the
Collateral or the exercise by the Secured Party of any of the rights conferred
upon it hereunder.

         Section 9. Notices. Any demand upon or notice to the Debtors that the
Secured Party may give shall be effective when delivered in accordance with the
Credit Agreement.

         Section 10. General. This Agreement may not be amended or modified
except by a writing signed by the Debtors and the Secured Party, nor may the
Debtors assign any of their rights hereunder. Section headings are for
convenience of reference only and are not a part of this Agreement. This
Agreement shall be binding upon the Debtors, their successors and assigns, and
shall inure to the benefit of and be enforceable by the Secured Party and its
successors and assigns.

         SECTION 11. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF TRIAL BY
JURY.

         (a) THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER SEAL AND
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS (WITHOUT GIVING REFERENCE TO ANY CONFLICTS OF LAW
PROVISIONS THEREIN) EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF A
SECURITY INTEREST GRANTED HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY
PARTICULAR COLLATERAL ARE REQUIRED TO BE GOVERNED BY THE LAWS OF A JURISDICTION
OTHER THAN THE COMMONWEALTH OF MASSACHUSETTS.

         (b) EACH OF THE DEBTORS AND THE SECURED PARTY AGREES THAT NEITHER IT
NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT,
PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT, ANY COLLATERAL OR THE DEALINGS OR THE
RELATIONSHIP BETWEEN SUCH DEBTOR AND THE SECURED PARTY OR (B) SEEK TO
CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT
BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY
DISCUSSED BY THE PARTIES HERETO, AND THESE PROVISIONS SHALL BE SUBJECT TO NO
EXCEPTIONS. NEITHER THE SECURED PARTY NOR ANY DEBTOR HAS




                                      -10-

<PAGE>   11

AGREED WITH OR REPRESENTED TO ANY OTHER THAT THE PROVISIONS OF THIS PARAGRAPH
WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.

         (c) EACH DEBTOR HEREBY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE
COMMONWEALTH OF MASSACHUSETTS AND THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF MASSACHUSETTS, AS WELL AS TO THE JURISDICTION OF ALL COURTS FROM
WHICH AN APPEAL MAY BE TAKEN OR OTHER REVIEW SOUGHT FROM THE AFORESAID COURTS,
FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF ANY OF
THE DEBTORS' OBLIGATIONS UNDER OR WITH RESPECT TO THIS AGREEMENT OR ANY OTHER
LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREBY, AND EXPRESSLY
WAIVES ANY AND ALL OBJECTIONS IT MAY HAVE AS TO VENUE IN ANY OF SUCH COURTS.

         Section 12. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same Agreement.






                                      -11-

<PAGE>   12
         IN WITNESS WHEREOF, each of the Debtors and the Secured Party have
caused this Agreement to be duly executed as an instrument under seal as of the
date first written above.

                                            DEBTORS:

                                            DIEDRICH COFFEE, INC.


                                            By:  /s/ Ann Wride
                                               ---------------------------------


                                            COFFEE PEOPLE, INC.


                                            By:  /s/ Ann Wride
                                               ---------------------------------


                                            COFFEE PEOPLE WORLDWIDE, INC.


                                            By:  /s/ Ann Wride
                                               ---------------------------------


                                            GLORIA JEAN'S, INC.


                                            By:  /s/ Ann Wride
                                               ---------------------------------


                                            EDGLO ENTERPRISES, INC.


                                            By:  /s/ Ann Wride
                                               ---------------------------------


                                            GLORIA JEAN'S GOURMET COFFEES CORP.


                                            By:  /s/ Ann Wride
                                               ---------------------------------


                                            GLORIA JEAN'S GOURMET COFFEES
                                            FRANCHISING CORP.


                                            By:  /s/ Ann Wride
                                               ---------------------------------


                                            SECURED PARTY:

                                            BANKBOSTON, N.A.


                                            By:  /s/
                                               ---------------------------------



                                      -12-

<PAGE>   13
State of       California
            -----------------------------
County of      Orange                                  June 30            1999
            -----------------------------         ----------------------,------


         Then personally appeared the above named Ann Wride, and acknowledged
that he/she executed the foregoing Agreement as his/her free act and deed before
me on behalf of each of the foregoing Debtors, as duly authorized agent thereof.


                                                       /s/
                                                       -------------------------
                                                       Notary Public
                                                       My commission expires:




                                      -13-

<PAGE>   14
                                    EXHIBIT A
                                    ---------


                             PERFECTION CERTIFICATE

                                       to

                               SECURITY AGREEMENT

                               dated July 7, 1999

                                       of

   DIEDRICH COFFEE, INC., COFFEE PEOPLE, INC., COFFEE PEOPLE WORLDWIDE, INC.,
       GLORIA JEAN'S, INC., EDGLO ENTERPRISES, INC., GLORIA JEAN'S GOURMET
       COFFEES CORP., and GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP.

         The undersigned, the Vice President and Chief Financial Officer of
DIEDRICH COFFEE, INC., and the Secretary and Treasurer of each of COFFEE PEOPLE,
INC., COFFEE PEOPLE WORLDWIDE, INC., GLORIA JEAN'S, INC., EDGLO ENTERPRISES,
INC., GLORIA JEAN'S GOURMET COFFEES CORP. and GLORIA JEAN'S GOURMET COFFEES
FRANCHISING CORP., and all future Subsidiaries who hereafter become parties
hereto (collectively, the "Debtors" and each individually a "Debtor"), hereby
certify solely in such capacity, with reference to a certain Security Agreement
dated of even date herewith (terms defined in such Security Agreement having the
same meanings herein as specified therein), among the Debtors and BankBoston,
N.A., (the "Secured Party"), to the Bank as follows:


         1. NAMES.

         (a) THE EXACT CORPORATE NAME OF EACH DEBTOR AS IT APPEARS ON ITS
ORGANIZATIONAL DOCUMENTS AND ITS TAXPAYER IDENTIFICATION NUMBER IS AS FOLLOWS:

                                    Diedrich Coffee, Inc.
                                    Tax ID No.: 33-0086628

                                    Coffee People, Inc.
                                    Tax ID No.: 93-1073218

                                    Coffee People Worldwide, Inc.
                                    Tax ID No.: 33-0862454

                                    Gloria Jean's Inc.
                                    Tax ID No.: 86-0743352





<PAGE>   15

                                    Edglo Enterprises, Inc.
                                    Tax ID No.: 36-3401583

                                    Gloria Jean's Gourmet Coffees Corp.
                                    Tax ID No.: 36-3185413

                                    Gloria Jean's Gourmet Coffees
                                    Franchising Corp.
                                    Tax ID No.: 36-3447732

         (b) THE FOLLOWING IS A LIST OF ALL OTHER NAMES (INCLUDING TRADE NAMES
OR SIMILAR APPELLATIONS) USED BY THE DEBTOR, OR ANY OTHER BUSINESS OR
ORGANIZATION TO WHICH THE DEBTOR BECAME THE SUCCESSOR BY MERGER, CONSOLIDATION,
ACQUISITION, CHANGE IN FORM, NATURE OR JURISDICTION OF ORGANIZATION OR
OTHERWISE, NOW OR AT ANY PREVIOUS TIME:

         Barn Owl, Inc.
         CP Acquisition
         CP Old, Inc.
         Gloria Jean's Corp.
         Coffee Midwest Corp.
         Gourmet Roasters Corp.
         Gloria Jean's Coffee Bean Corp.
         Gloria Jean's Coffee Bean Franchising Corp.
         The Coffee Bean, Inc.


         2. LOCATIONS.

         (a) THE CHIEF EXECUTIVE OFFICE OF EACH DEBTOR IS LOCATED AT THE
FOLLOWING ADDRESSES:

         Diedrich Coffee, Inc. at 2144 Michelson Drive, Irvine, CA 92602
         Coffee People, Inc. at 11480 Commercial Parkway, Castroville, CA 95012
         Gloria Jean's, Inc., Gloria Jean's Gourmet Coffees Corp., Gloria Jean's
         Gourmet Coffees Franchising Corp., and Edglo Enterprises, Inc. at
         11480 Commercial Parkway, Castroville, CA 95012

         (b) THE FOLLOWING IS A LIST OF ALL OTHER LOCATIONS IN WHICH ANY DEBTOR
MAINTAINS ANY BOOKS OR RECORDS RELATING TO ANY OF THE COLLATERAL CONSISTING OF
ACCOUNTS, CHATTEL PAPER, GENERAL INTANGIBLES OR MOBILE GOODS:

Currently:

 Street and Number                  County           State             Zip Code
 -----------------                  ------           -----             --------

 See Attachment B






                                      -2-
<PAGE>   16



Within the last four months, if different:

 Street and Number                  County           State             Zip Code
 -----------------                  ------           -----             --------

      None.



         (c) THE FOLLOWING ARE ALL THE OTHER PLACES OF BUSINESS OF ANY DEBTOR:

Currently:

 Street and Number                  County           State             Zip Code
 -----------------                  ------           -----             --------

 See Attachment B



Within the last four months, if different:

 Street and Number                  County           State             Zip Code
 -----------------                  ------           -----             --------

 Crossroads Mall                    Omaha             NE                68114



         (d) THE FOLLOWING ARE ALL THE OTHER LOCATIONS WHERE ANY OF THE
COLLATERAL (OTHER THAN SECURITIES AND ANY DEPOSIT ACCOUNTS) IS LOCATED:

Currently:

 Street and Number                  County           State             Zip Code
 -----------------                  ------           -----             --------

 None.



Within the last four months, if different:

 Street and Number                  County           State             Zip Code
 -----------------                  ------           -----             --------

 See Attachment C





                                      -3-

<PAGE>   17

         (e) THE FOLLOWING ARE THE NAMES AND ADDRESSES OF ALL PERSONS OR
ENTITIES OTHER THAN ANY OF THE DEBTORS, SUCH AS LESSEES, CONSIGNEES,
WAREHOUSEMEN, POUNDERKEEPERS OR PURCHASERS OF CHATTEL PAPER, THAT HAVE
POSSESSION OR ARE INTENDED TO HAVE POSSESSION OF ANY OF THE COLLATERAL
CONSISTING OF CHATTEL PAPER, INVENTORY OR EQUIPMENT:

Currently:

 Street and Number                  County           State             Zip Code
 -----------------                  ------           -----             --------

 See Attachment D



Within the last four months, if different:

 Street and Number                  County           State             Zip Code
 -----------------                  ------           -----             --------

 None.









                                      -4-

<PAGE>   18



         IN WITNESS WHEREOF, we have hereunto signed this Certificate as an
instrument under seal as of July 7,1999.


                                            DIEDRICH COFFEE, INC.


                                            By:
                                               ---------------------------------
                                               Title:


                                            COFFEE PEOPLE, INC.


                                            By:
                                               ---------------------------------
                                               Title:


                                            COFFEE PEOPLE WORLDWIDE, INC.


                                            By:
                                               ---------------------------------
                                               Title:


                                            GLORIA JEAN'S, INC.


                                            By:
                                               ---------------------------------
                                               Title:


                                            EDGLO ENTERPRISES, INC.


                                            By:
                                               ---------------------------------
                                               Title:


                                            GLORIA JEAN'S GOURMET COFFEES CORP.


                                            By:
                                               ---------------------------------
                                               Title:


                                            GLORIA JEAN'S GOURMET COFFEES
                                            FRANCHISING CORP.


                                            By:
                                               ---------------------------------
                                               Title:





                                      -5-

<PAGE>   19

                                    EXHIBIT B
                                    ---------

                                AGENCY AGREEMENT

                        --------------------------------

                           Telephone:
                                      ------------------
                           Telecopier:
                                      ------------------
                           Dated:
                                  ----------------------


[Agency Account Institution]
[Address]

         Re: Account No.
                         --------------------

Ladies and Gentlemen:

         This letter refers to Account No. _________ and all other accounts
(collectively, the "Bank Account") which ___________________________ (the
"Company") maintains with you (the "Bank").

         The Company hereby notifies you that it has entered into certain
financial arrangements with BankBoston, N.A. ("BKB") and certain other lenders
and, in connection with those financial arrangements, it has transferred
exclusive control of the Bank Account to BKB, as agent for itself and such
lenders.

         By its execution and delivery of this letter to BKB, the Bank
irrevocably acknowledges and agrees as follows: (a) the Bank has been advised
that all funds which may from time to time be on deposit in the Bank Account are
subject to a lien and security interest in favor of BKB; (b) the Bank shall
disclose to BKB such information relating to the Bank Account and the debits and
credits thereto as the BKB may from time to time reasonably request; (c) except
as set forth below, the Bank will not exercise any right of set-off, banker's
lien or any similar right in favor of itself or any other person in connection
with any monies, checks, drafts, instruments or other items of payment deposited
into the Bank Account, or any funds on deposit thereon; (d) the Bank will
collect all monies, checks, drafts, instruments and other items of payment
deposited into the Bank Account; and (e) upon the Bank's receipt of written
notice from BKB, it will on a daily basis transfer the collected available
balance of funds standing to the credit of the Bank Account by wire transfer (or
other means acceptable to BKB) solely to:



<PAGE>   20



         BankBoston, N.A.
         Account No. _________________
         ABA No. ____________________
         Re:  Diedrich Coffee, Inc. and its Subsidiaries
         Attn: ________________________

(the "BKB Concentration Account") or such other destination as BKB shall
designate. BKB hereby notifies you that BKB will from time to time access the
Bank Account for the sole purpose of facilitating the transfer of funds therein
to the BKB Concentration Account pursuant to the instructions set forth in the
foregoing sentence.

         Notwithstanding anything in this letter to the contrary, the Bank shall
have the right to deduct from or set off against amounts from time to time in
the Bank Account (i) your usual and customary costs and expenses in respect of
interest on overdrafts and any return items, and your usual and customary fees
and expenses associated with any such return item, overdraft and/or the
maintenance of the Bank Account and (ii) the face amount (or portion thereof) of
any check, instrument or other item which was deposited in the Bank Account and
which has been returned unpaid for reasons of insufficient funds or has
otherwise not been collateral. You hereby acknowledge and agree that all such
interest, costs, fees and expenses shall be for the account of the Company and
in the event the amounts in the Bank Account are insufficient to reimburse you
for the same, the Company hereby agrees to reimburse you for such interest,
costs, fees and/or expenses immediately upon your demand therefor in immediately
available funds.

         The Bank shall have no duty to inquire into the source or use of any
monies, checks, drafts, instruments or other items or amounts deposited into the
Bank Account. The Company hereby agrees that any deposits of monies, checks,
drafts, instruments or other items into or withdrawals from the Bank Account now
or hereafter directed by BKB are authorized by the Company and the Company
acknowledges that it has no right to withdraw or direct the transfer of any or
all credit balances at any time, except to the extent provided on a written
notice from BKB. The Bank shall be fully protected in acting on any instruction
of BKB with respect to the Bank Account without making any inquiry as to BKB's
authority to give such instruction.

         The Company consents and agrees to the foregoing, authorizes the Bank
to enter into this letter agreement, and agrees to indemnify and hold harmless
the Bank from and against any and all claims, actions and suits (whether
groundless or otherwise), losses, damages, costs, expenses and liabilities of
every nature and character arising out of the Bank's compliance with the terms
of this letter, except such as result from the Bank's gross negligence or
willful misconduct, and in no event shall the Bank be liable for any
consequential, indirect or special damages.

         This letter agreement is binding upon each of the undersigned and you
and each of our respective successors and assigns and shall inure to the benefit
of each of us and other respective successors and assigns. It supersedes all
prior agreements, oral or written, with respect to the subject matter hereof,
and may not be modified without the prior written consent of each of the parties
hereto. In addition, the terms of this letter agreement may not be modified
without the prior written consent of BKB.

         This letter agreement may be terminated only as follows: (i) you may
terminate this letter agreement and the Bank Account at any time which is thirty
(30) days or more after the date you


                                      -2-

<PAGE>   21


shall have given written notice of such termination to BKB and to the Company
and (ii) BKB may terminate this letter agreement and the Bank Account at any
time which is ten (10) days or more after the date BKB shall have given written
notice of such termination (sent to each of the Company and you). In addition,
the terms of this letter agreement may not be modified without the prior written
consent of BKB.

         Any notice hereunder shall be delivered to the relevant party hereto at
the address and to the attention of such party set forth below, or at such other
address or to the attention of such other party as the party to be addressed may
specify by written notice delivered to each other party hereto. No termination
shall affect or impair any of the agreements, rights or obligations hereunder of
any party with respect to any periods of time prior to the date of such
termination.

         This letter agreement shall be governed by and construed in accordance
with the internal laws of the Commonwealth of Massachusetts and applicable
federal law. This letter agreement shall become effective immediately upon being
executed by all of the parties hereto.

                                          Very truly yours,

                                          -------------------------------------
                                          Name of Company

                                          By:
                                              ----------------------------------
                                          Name:
                                                --------------------------------
                                          Title:
                                                --------------------------------
                                          Address:
                                                   -----------------------------
                                          Telephone:
                                                     ---------------------------
                                          Telecopier:
                                                     ---------------------------
                                          Attention:
                                                     ---------------------------

                                          BANKBOSTON, N.A.

                                          By:
                                              ----------------------------------
                                          Name:
                                                --------------------------------
                                          Title:
                                                --------------------------------
                                          Address: 100 Federal Street
                                                   Boston, MA 02110
                                          Attention:
                                                     ---------------------------
                                          Telephone:
                                                     ---------------------------
                                          Telecopier:
                                                     ---------------------------


                             (signatures continued)






                                      -3-
<PAGE>   22

         Acknowledged and agreed to this _____ day of _________, _____.


         -----------------------------
         [Name of Bank]

         By:
             -------------------------
         Name:
               -----------------------
         Title:
                ----------------------
         Address:
                 ---------------------
         Telephone:
                   -------------------
         Telecopier:
                    ------------------
         Attention:
                    ------------------





                                      -4-