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                                                               EXHIBIT 10.46
                                













                                   DIEDRICH COFFEE

                                 FRANCHISE AGREEMENT
                                




<PAGE>


                                TABLE OF CONTENTS

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ARTICLE 1       DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE 2       GRANT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
     2.1        Grant. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
     2.2        No Sublicensing Rights . . . . . . . . . . . . . . . . . . . 4
     2.3        No Exclusive Territory . . . . . . . . . . . . . . . . . . . 4

ARTICLE 3       TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
     3.1        Initial Term . . . . . . . . . . . . . . . . . . . . . . . . 5
     3.2        No Renewal Right . . . . . . . . . . . . . . . . . . . . . . 5
     3.3        Notice Required by Law . . . . . . . . . . . . . . . . . . . 5

ARTICLE 4       PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 5
     4.1        Initial Franchise Fees . . . . . . . . . . . . . . . . . . . 5
     4.2        Continuing Royalty . . . . . . . . . . . . . . . . . . . . . 5
     4.3        Advertising Fee. . . . . . . . . . . . . . . . . . . . . . . 5
     4.4        Pre-Authorized Payments. . . . . . . . . . . . . . . . . . . 6
     4.5        Other Payments . . . . . . . . . . . . . . . . . . . . . . . 6
     4.6        Application of Funds . . . . . . . . . . . . . . . . . . . . 7
     4.7        Interest and Charges for Late Payments . . . . . . . . . . . 7

ARTICLE 5       CONSTRUCTION AND COMMENCEMENT OF BUSINESS. . . . . . . . . . 7
     5.1        Location . . . . . . . . . . . . . . . . . . . . . . . . . . 7
     5.2        Franchisor Site Selection Assistance . . . . . . . . . . . . 7
     5.3        Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
     5.4        Construction and Renovation. . . . . . . . . . . . . . . . . 9
     5.5        Maintaining and Remodeling of Coffeehouse. . . . . . . . . .10

ARTICLE 6       TRAINING . . . . . . . . . . . . . . . . . . . . . . . . . .11
     6.1        Initial Training Program . . . . . . . . . . . . . . . . . .11
     6.2        Additional Training. . . . . . . . . . . . . . . . . . . . .12
     6.3        Other Assistance . . . . . . . . . . . . . . . . . . . . . .13

ARTICLE 7       OBLIGATIONS OF FRANCHISOR. . . . . . . . . . . . . . . . . .13
     7.1        General. . . . . . . . . . . . . . . . . . . . . . . . . . .13
     7.2        Franchisor Default . . . . . . . . . . . . . . . . . . . . .14
     7.3        No Other Obligations . . . . . . . . . . . . . . . . . . . .14

ARTICLE 8       MANUALS AND STANDARDS OF OPERATOR
                QUALITY, CLEANLINESS AND SERVICE . . . . . . . . . . . . . .14
     8.1        Product Line and Service . . . . . . . . . . . . . . . . . .14
     8.2        Containers, Fixtures and Other Goods . . . . . . . . . . . .15
     8.3        Menus. . . . . . . . . . . . . . . . . . . . . . . . . . . .15
     8.4        POS System . . . . . . . . . . . . . . . . . . . . . . . . .15
     8.5        Manuals. . . . . . . . . . . . . . . . . . . . . . . . . . .15
     8.6        Hours. . . . . . . . . . . . . . . . . . . . . . . . . . . .16

                                       i
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     8.7        Compliance with Applicable Law . . . . . . . . . . . . . . .17
     8.8        Signs, Designs and Forms of Publicity. . . . . . . . . . . .17
     8.9        Uniforms and Employee Appearance . . . . . . . . . . . . . .18
     8.10       Vending or Other Machines. . . . . . . . . . . . . . . . . .18
     8.11       Co-Branding. . . . . . . . . . . . . . . . . . . . . . . . .18

ARTICLE 9       ADVERTISING AND CO-OPS . . . . . . . . . . . . . . . . . . .18
     9.1        General. . . . . . . . . . . . . . . . . . . . . . . . . . .18
     9.2        Local Advertising. . . . . . . . . . . . . . . . . . . . . .19
     9.3        Co-op Advertising. . . . . . . . . . . . . . . . . . . . . .19
     9.4        Advertising Program. . . . . . . . . . . . . . . . . . . . .20
     9.5        Telephone Numbers and Directory Advertising. . . . . . . . .21
     9.6        Promotional Campaigns. . . . . . . . . . . . . . . . . . . .21

ARTICLE 10      DISTRIBUTION AND PURCHASE OF
                EQUIPMENT, SUPPLIES, AND OTHER PRODUCTS. . . . . . . . . . .21
     10.1       Coffee and Diedrich Coffee Brand Products. . . . . . . . . .21
     10.2       Proprietary Products . . . . . . . . . . . . . . . . . . . .22
     10.3       Non-Proprietary Products . . . . . . . . . . . . . . . . . .22
     10.4       Purchases from Franchisor, Extensions of Credit. . . . . . .23
     10.5       Purchase/Distribution Programs . . . . . . . . . . . . . . .24
     10.6       Test Marketing . . . . . . . . . . . . . . . . . . . . . . .24

ARTICLE 11      REPORTS, BOOKS AND RECORDS, INSPECTIONS. . . . . . . . . . .25
     11.1       General Reporting. . . . . . . . . . . . . . . . . . . . . .25
     11.2       Inspections. . . . . . . . . . . . . . . . . . . . . . . . .26
     11.3       Audits . . . . . . . . . . . . . . . . . . . . . . . . . . .26

ARTICLE 12      MARKS. . . . . . . . . . . . . . . . . . . . . . . . . . . .27
     12.1       Use of Marks . . . . . . . . . . . . . . . . . . . . . . . .27
     12.2       Non-Use of Trade Name. . . . . . . . . . . . . . . . . . . .27
     12.3       Use of Other Marks . . . . . . . . . . . . . . . . . . . . .27
     12.4       Non-ownership of Marks . . . . . . . . . . . . . . . . . . .27
     12.5       Defense of Marks . . . . . . . . . . . . . . . . . . . . . .27
     12.6       Prosecution of Infringers. . . . . . . . . . . . . . . . . .28
     12.7       Modification of Marks. . . . . . . . . . . . . . . . . . . .28
     12.8       Acts in Derogation of the Marks. . . . . . . . . . . . . . .28
     12.9       Assumed Name Registration. . . . . . . . . . . . . . . . . .28

ARTICLE 13      COVENANTS REGARDING OTHER BUSINESS INTERESTS . . . . . . . .29
     13.1       Non-Competition and Trade Secrets. . . . . . . . . . . . . .29
     13.2       Operator's Affiliates. . . . . . . . . . . . . . . . . . . .30

ARTICLE 14      INTERFERENCE WITH EMPLOYMENT RELATIONS . . . . . . . . . . .30

ARTICLE 15      NATURE OF INTEREST, ASSIGNMENT . . . . . . . . . . . . . . .31

                                     ii

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     15.1       Assignment by Franchisor . . . . . . . . . . . . . . . . . .31
     15.2       Assignment by Operator . . . . . . . . . . . . . . . . . . .31

ARTICLE 16      DEFAULT AND TERMINATION. . . . . . . . . . . . . . . . . . .33
     16.1       General. . . . . . . . . . . . . . . . . . . . . . . . . . .33
     16.2       Automatic Termination Without Notice . . . . . . . . . . . .33
     16.3       Option to Terminate Without Notice . . . . . . . . . . . . .34
     16.4       Termination With Notice and Opportunity To Cure. . . . . . .36
     16.5       Reimbursement of Franchisor Costs. . . . . . . . . . . . . .36
     16.6       Cross-Default. . . . . . . . . . . . . . . . . . . . . . . .37
     16.7       Notice Required By Law . . . . . . . . . . . . . . . . . . .37

ARTICLE 17      RIGHTS AND OBLIGATIONS UPON TERMINATION. . . . . . . . . . .37
     17.1       General. . . . . . . . . . . . . . . . . . . . . . . . . . .37
     17.2       Survival of Obligations. . . . . . . . . . . . . . . . . . .38
     17.3       No Ownership of Marks. . . . . . . . . . . . . . . . . . . .38
     17.4       Government Filings . . . . . . . . . . . . . . . . . . . . .38

ARTICLE 18      INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . .38
     18.1       Insurance. . . . . . . . . . . . . . . . . . . . . . . . . .38
     18.2       Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . .39
     18.3       Proof of Insurance . . . . . . . . . . . . . . . . . . . . .39

ARTICLE 19      RELATIONSHIP OF PARTIES, DISCLOSURE. . . . . . . . . . . . .39
     19.1       Relationship of Operator to Franchisor . . . . . . . . . . .39
     19.2       Indemnity by Operator. . . . . . . . . . . . . . . . . . . .39

ARTICLE 20      NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . .40
     20.1       General. . . . . . . . . . . . . . . . . . . . . . . . . . .40

ARTICLE 21      MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . .40
     21.1       Franchisor's Right To Cure Defaults. . . . . . . . . . . . .40
     21.2       Waiver and Delay . . . . . . . . . . . . . . . . . . . . . .41
     21.3       Survival of Covenants. . . . . . . . . . . . . . . . . . . .41
     21.4       Successors and Assigns . . . . . . . . . . . . . . . . . . .41
     21.5       Joint and Several Liability. . . . . . . . . . . . . . . . .41
     21.6       Governing Law. . . . . . . . . . . . . . . . . . . . . . . .42
     21.7       Entire Agreement . . . . . . . . . . . . . . . . . . . . . .42
     21.8       Titles For Convenience . . . . . . . . . . . . . . . . . . .42
     21.9       Gender And Construction. . . . . . . . . . . . . . . . . . .42
     21.10      Severability . . . . . . . . . . . . . . . . . . . . . . . .42
     21.11      Counterparts . . . . . . . . . . . . . . . . . . . . . . . .43
     21.12      Fees and Expenses. . . . . . . . . . . . . . . . . . . . . .43
     21.13      Waiver of Jury . . . . . . . . . . . . . . . . . . . . . . .43

ARTICLE 22      SUBMISSION OF AGREEMENT. . . . . . . . . . . . . . . . . . .43

                                      iii
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     22.1       General. . . . . . . . . . . . . . . . . . . . . . . . . . .43

ARTICLE 23      ACKNOWLEDGEMENT. . . . . . . . . . . . . . . . . . . . . . .43
     23.1       General. . . . . . . . . . . . . . . . . . . . . . . . . . .43
     23.2       Due Execution. . . . . . . . . . . . . . . . . . . . . . . .43

</TABLE>

                                          iv


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Exhibit A - Minimum Hours of Operation



                                             v



<PAGE>


                                   DIEDRICH COFFEE
                                 FRANCHISE AGREEMENT


        THIS AGREEMENT is made this _____ day of _______________ , 199__ (the
"Effective Date") by and between Diedrich Coffee, Inc., a California
corporation, located at 2144 Michelson Drive, Irvine, California  92612, (the
"Franchisor"), and ____________________________________________________, [  ]
an individual OR [  ] a ___________________ organized under the laws of
_________________ (the "Operator"), with reference to the following facts:

        A.      Franchisor owns certain proprietary and other property rights
and interests in and to the "Diedrich Coffee" trademark and service mark, and
such other trademarks, service marks, logo types and commercial symbols as
Franchisor may from time to time authorize or direct Operator to use in
connection with the operation of a "Diedrich Coffee" Coffeehouse (the "Marks").

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

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

        NOW, THEREFORE, the parties agree as follows:
                                       
                                  ARTICLE 1
                                 DEFINITIONS
                                       
                In this Agreement the following capitalized terms shall have the
meanings set forth below, unless the context otherwise requires:

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

"Applicable Law" means and includes applicable common law and all applicable
statutes, laws, rules, regulations, ordinances, policies and procedures
established by any 

                                       1
<PAGE>

Governmental Authority governing the operation of the Coffeehouse, including 
all immigration, labor, disability, food and drug laws, health and safety 
regulations, and Americans With Disabilities Act requirements, as in effect 
on the Effective Date hereof, and as may be amended from time to time.

"Assets" shall have the meaning set forth in Section 15.3.

"Assignment" shall have the meaning set forth in Section 15.2.

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

"Barrista" means a person who has been certified by Franchisor as an expert 
in the knowledge and preparation of espresso drinks.

"Business Entity" means any general partnership or limited partnership (each 
of which shall be referred to as a "Partnership"), limited liability company, 
and any trust, association, corporation or other entity which is not an 
individual. 

"Closing" shall have the meaning set forth in Section 15.3.2 and shall refer 
to the closing of a sale of Operator's Assets to Franchisor pursuant to 
Section 15.3.1.

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

"Continuing Royalty" shall have the meaning set forth in Section 4.2

"Co-op Advertising Regions" shall have the meaning set forth in Section 9.2.

"Designated Operator Representative" shall have the meaning set forth in 
Section 6.1.1.

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

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

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


                                       2
<PAGE>

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

"Initial Fee" shall have the meaning set forth in Section 4.1

"Lease" shall have the meaning set forth in Section 5.3.

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

"Location" shall have the meaning set forth in Section 5.1.1.
 
"Manuals" means Franchisor's Front Line Team Member Training Guide; Diedrich 
Coffee Operations Manual and Support Manual, and all related manuals now or 
hereafter created by Franchisor for use in the operation of a Coffeehouse, as 
the same may be amended and revised from time to time, including all 
bulletins, supplements and ancillary manuals.

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

"Negotiating Period" shall have the meaning set forth in Section 15.3.4. 

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

"Owner" means any shareholder, member, general or limited partner, trustee, 
or other equity owner of a Business Entity.

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

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

"Supplier" shall have the meaning set forth in Section 10.3.

"System" shall have the meaning set forth in Recital B.

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

"Trade Secrets" shall have the meaning set forth in Section 13.1.3.
"Transfer Fee" shall have the meaning set forth in Section 15.2.9.

                                       3
<PAGE>


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

                                  ARTICLE 2
                                    GRANT

                2.1     GRANT.

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

                        [  ] Full Service Coffeehouse 
                        [  ] Kiosk
                        [  ] Cart

                        2.1.2   Operator may not use or operate any permanent or
temporary cart, kiosk or other vending device in connection with any full
service Coffeehouse pursuant to this Agreement, except with Franchisor's prior
written consent and pursuant to a separate addendum hereto on a form specified
by Franchisor.

                2.2     NO SUBLICENSING RIGHTS.  Operator shall not
subfranchise, sublicense, subcontract, sublease, or enter any management
agreement providing for the right to operate the Coffeehouse or to use the
System granted pursuant to this Agreement.

                2.3     NO EXCLUSIVE TERRITORY.  

                        2.3.1   The license and franchise granted to the
Operator under this Agreement is non-exclusive, and does not grant Operator any
protected trading area or territory, nor any rights to obtain additional
franchises from Franchisor.  Without limiting the generality of the foregoing,
the Franchisor expressly reserves the exclusive, unrestricted right, in its sole
and absolute discretion, directly and indirectly:

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

                        (b)     to produce, promote, license, distribute and
market products, whether or not they bear any of the Marks, at wholesale or
retail, through its employees, affiliates, representatives, licensees,
franchisees, assigns, agents and others, including bulk and pre-packaged roasted
coffee, premium teas, ice cream, beverages, snacks and other food products;
clothing; books, souvenirs and novelty items, through any outlet or channel 

                                       4
<PAGE>


of commerce, including grocery stores and convenience stores (regardless of 
their proximity to Operator's Coffeehouse), sales by means of the internet, 
mail order catalogs, direct mail advertising, vending machines and other 
distribution methods.

                                  ARTICLE 3
                                    TERM

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

                3.2     NO RENEWAL RIGHT.  Operator shall not have any right to
renew this Agreement or to enter into a new franchise agreement for Operator's
Coffeehouse.

                3.3     NOTICE REQUIRED BY LAW.  If applicable law requires that
Franchisor give notice to Operator prior to the expiration of the Term, this
Agreement shall remain in effect on a week to week basis until Franchisor has
given the notice required by such applicable law.  


                                   ARTICLE 4
                                   PAYMENTS

                4.1     INITIAL FRANCHISE FEES.  Operator shall pay to
Franchisor an initial franchise fee (the "Initial Fee") equal to $20,000, or
$7,500 if the Operator's Coffeehouse is a kiosk or cart.  The Initial Fee shall
be payable in good funds 50% upon signing this Agreement, and 50% at or prior to
opening the Coffeehouse to the public, and shall be deemed fully earned by
Franchisor upon the execution of this Agreement by Franchisor and Operator and
shall be non-refundable, in whole or in part, under any circumstances.

                4.2     CONTINUING ROYALTY.  Operator shall pay to Franchisor
each Week during the Term, an amount equal to the following percentage of its
Gross Sales during the preceding Week (the "Continuing Royalty"): (a) 5% in the
case of a full service Coffeehouse; or (b) 7.5% in the case of a Kiosk or Cart. 
Operator shall cause its Continuing Royalty for each Week to be actually
received by Franchisor on or before Wednesday of the following of Week, or the
following business day if Wednesday falls on a legal holiday during which
Operator's bank is closed.  

                4.3     ADVERTISING FEE.  Operator shall pay to Franchisor each
Week during the Term, simultaneously with its Continuing Royalty payments and in
the manner described in Section 4.2, an Advertising Fee equal to up to 2%, as
established by Franchisor, of its Gross Sales during the preceding Week
("Advertising Fee").  

                        4.3.1   Until an Advertising Program shall have been
established pursuant to Section 9.3, Franchisor shall refund up to the full
amount of Operator's 


                                       5
<PAGE>

Advertising Fee payments to reimburse Operator for approved Coffeehouse 
advertising expenditures, in accordance with such reasonable policies and 
procedures as Franchisor may establish from time to time, which may include, 
among other requirements, submission of evidence Operator's actual 
expenditures.  

                        4.3.2   Following implementation of the Advertising
Program, Franchisor shall contribute the Advertising Fee to the Advertising
Program to be administered in the manner provided in Section 9.3.

                4.4     PRE-AUTHORIZED PAYMENTS.  

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

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

                4.5     OTHER PAYMENTS.  In addition to all other payments
provided herein, Operator shall pay to Franchisor, its parent companies,
subsidiaries, affiliates and designees, as applicable, promptly when due:

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

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

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


                                       6
<PAGE>


responsibility to pay any sales, use or other taxes now or hereinafter 
imposed on Initial Fees, Continuing Royalties, and Advertising Fees imposed 
by any Governmental Authorities.

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

                4.7     INTEREST AND CHARGES FOR LATE PAYMENTS.

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

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

                                 ARTICLE 5
                CONSTRUCTION AND COMMENCEMENT OF BUSINESS

                5.1     LOCATION.

                        5.1.1   Operator's Coffeehouse shall be located at the
following address: ________________________________________________, and if the
Coffeehouse is a kiosk or cart, the following specific location at the address
inserted above: ___________________________________________________________ (the
"Location").

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

                5.2     FRANCHISOR SITE SELECTION ASSISTANCE.  Franchisor may 
voluntarily (without obligation) assist Operator in identifying or obtaining 
a location.  Franchisor's said assistance, if any, shall not be construed to 
insure or guarantee the profitable or successful operation of the Location by 
Operator, and Franchisor hereby expressly disclaims any responsibility 
therefor. Operator acknowledges that it is its sole responsibility to find a 
suitable Location, that the location of the Coffeehouse will be a 

                                       7
<PAGE>

critical factor in the success of Operator's business, and that Franchisor is 
not obligated to directly or indirectly identify or obtain a location for 
Operator.  

                5.3     LEASE.  If the Location is leased or subleased by 
Operator, (i) Franchisor shall have the right of approval of such lease or 
sublease, as applicable (the "Lease"), a true and correct copy of which shall 
be delivered to Franchisor at least 15 days prior to the execution thereof; 
(ii) the term of said Lease shall be for a period which is not less than the 
Term of this Agreement, unless Franchisor shall approve, in writing, a 
shorter term; (iii) Operator shall neither create nor purport to create any 
obligations on behalf of Franchisor, nor grant or purport to grant to the 
landlord thereunder any rights against Franchisor, nor agree to any other 
term, condition, or covenant which is inconsistent with any provision of this 
Franchise Agreement; (iv) Operator shall duly and timely perform all of the 
terms, conditions, covenants and obligations imposed upon him under the 
Lease; (v) the Location shall be constructed and improved pursuant to the 
provisions of Section 5.4 hereof; (vi) the Lease shall grant Franchisor an 
option, without cost or expense to Franchisor, to assume the Lease in the 
event of termination or expiration of the Franchise Agreement for any reason, 
and shall expressly provide that Franchisor shall have the right (but not the 
obligation) to succeed to Operator's rights under the Lease if Operator fails 
to exercise any option to renew, and upon Operator's default thereunder, and 
that upon any alleged breach thereof by Operator, the landlord thereunder 
shall be obligated to notify Franchisor in writing at least 15 days prior to 
its termination or non-renewal and, in the case of a default, Franchisor 
shall have the right, but not the obligation, to cure the breach and to 
succeed to Operator's rights under said Lease by giving written notice of 
such election to Operator and such landlord; Operator hereby appoints 
Franchisor as its attorney-in-fact to execute an assignment and all other 
documents and instruments which Franchisor deems necessary or appropriate to 
effectuate the foregoing; (vii) a fully executed copy of said Lease shall be 
delivered to Franchisor promptly following the execution thereof; and (viii) 
the Lease shall provide that it may not be assigned, subleased, modified or 
amended without Franchisor's prior written consent and that Franchisor shall 
be provided with copies of all such assignments, subleases, modifications and 
amendments, and shall consent in advance to any assignment or sublease to 
Franchisor or a "Diedrich Coffee" franchisee or licensee approved by 
Franchisor during the initial term or any renewal term of the Lease.  In all 
cases, the Lease shall provide that upon expiration or termination thereof 
for any reason, Operator shall, upon Franchisor's demand, remove all of the 
Marks from the Location and Premises and modify the decor of the Location so 
that it no longer resembles, in whole or in part, a Diedrich Coffee 
coffeehouse, kiosk or cart and that if Operator shall fail do so, Franchisor 
will be given written notice and the right to enter the Location and Premises 
to make such alterations, in which event Operator shall reimburse Franchisor 
for all direct and indirect costs and expense it may incur in connection 
therewith, including attorney's fees.


                                       8
<PAGE>

                5.4     CONSTRUCTION AND RENOVATION.

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

                        5.4.2   Following the Effective Date and prior to any 
construction or renovation of the Coffeehouse or Location, Franchisor shall 
provide Operator with copies of Franchisor's specifications for the design 
and layout of the Coffeehouse and required Leasehold Improvements.  Operator 
shall, in all respects, comply with all such specifications and criteria 
unless Franchisor shall, in writing, agree to modifications thereof.  
Operator shall employ architects, engineers and general contractors of its 
own selection, and at its sole cost and expense, to prepare such 
architectural, engineering and construction drawings and site plans, and/or 
to modify the standard architectural, engineering and construction drawings 
and site plans which may be provided by Franchisor, and to obtain all Permits 
required to construct, remodel, renovate, and/or equip the Coffeehouse and 
Location.  All such drawings and plans, and all modifications and revisions 
thereto, shall be submitted to Franchisor for its prior review and approval 
before Operator's commencement of construction pursuant thereto.  When 
completed, said Coffeehouse and Location shall in all respect strictly comply 
with the Franchisor's specifications therefor, as modified or revised if 
applicable with Franchisor's prior written consent. 

                        5.4.3   Subject only to causes beyond the reasonable 
control of Operator, such as, by way of illustration, strikes, material 
shortages, fires and other acts of God, which Operator could not by the 
exercise of due diligence have avoided, Operator shall complete construction 
or renovation, as the case may be, of the Location and Coffeehouse and shall 
install all Leasehold Improvements therein as soon as possible, but in any 
event within 3 months after commencement of construction.  At all times prior 
to Operator commencing the operation of the Coffeehouse, Franchisor shall 
have the right, and Operator shall provide access to Franchisor, to inspect 
and examine the Premises, Location, Coffeehouse and all Leasehold 
Improvements, for the purpose of insuring compliance with Franchisor's 
standards and specifications.

                        5.4.4   Operator shall commence the operation of the 
Coffeehouse not later than 6 months following the Effective Date.

                        5.4.5   The time periods for the commencement and
completion of construction and the installation of Leasehold Improvements as
referred to in this Section 5.4 are of the essence of this Agreement.  If
Operator fails to perform its obligations 

                                       9
<PAGE>

contained in this Section, the Franchisor may deem the Operator's failure to 
so perform its obligations as aforesaid to constitute a material breach of 
this Agreement.

                5.5     MAINTAINING AND REMODELING OF COFFEEHOUSE. 

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

                        5.5.2   From time to time during the Term, Franchisor 
may require Operator at Operator's sole cost and expense to refurbish, 
remodel and improve the Coffeehouse to conform the Operator's building 
design, trade dress, color schemes, and presentation of Marks to the 
Franchisor's then current public image.  Such a remodeling may include 
extensive structural changes to the Coffeehouse and replacement or 
modification of Leasehold Improvements as well as such other changes as the 
Franchisor may direct, and Operator shall undertake such a program promptly 
upon notice from the Franchisor, and shall complete any such remodeling as 
expeditiously as possible, but in any event within 90 days of commencing 
same.  Franchisor may, on one or more occasions, waive or defer for such 
period of time as Franchisor may deem appropriate, Operator's obligation to 
remodel any such Coffeehouse, if Franchisor determines in its reasonable 
judgment that any such Coffeehouse is, on the date scheduled for commencement 
of such remodel, in substantial conformity with Franchisor's then current 
standard system decor specifications, or if the proposed remodeling is within 
the last two years prior to the expiration of the Term.  

                        5.5.3   If the Coffeehouse is damaged or destroyed by
fire or any other casualty, Operator, within 30 days thereof, shall initiate
such repairs or reconstruction, and thereafter in good faith and with due
diligence continue (until completion) such repairs or reconstruction, in order
to restore the premises of the Coffeehouse to its original condition prior to
such casualty.  If, in Franchisor's reasonable 


                                       10
<PAGE>

judgment, the damage or destruction is of such a nature or to such extent 
that it is feasible for Operator to repair or reconstruct the Location and 
the Coffeehouse in conformance with the then standard "Diedrich Coffee" decor 
specifications, the Franchisor may require Operator, by giving written notice 
thereof, that Operator repair or reconstruct the Location and Coffeehouse in 
conformance with the then standard System decor specifications.  

                                  ARTICLE 6
                                  TRAINING

                6.1     INITIAL TRAINING PROGRAM.  

                        6.1.1   Operator shall, at all times, employ a 
general manager and one or more assistant managers and other employees 
acceptable to Franchisor each of whom shall have been trained and qualified 
as "Barristas" in accordance with Franchisors policies and standards, and at 
least one of whom shall be working at the Coffeehouse at all times while the 
Coffeehouse is open to the public.  At no extra charge, Franchisor shall 
provide an initial training program in the Franchisor's System and methods of 
operation to up to 5 persons selected by Operator who shall be the general 
manager and assistant manager(s) of the Coffeehouse.  Said initial training 
program shall consist of up to 4 weeks of training, as Franchisor in its 
reasonable judgment may determine, at one or more of the following locations: 
(i) Franchisor's corporate headquarters in Irvine, California, (ii) at a 
Franchisor-owned or franchised coffeehouse, (iii) at Operator's Location, or 
(iv) at such place or places as may be designated by Franchisor.  In the case 
of a Operator which is a Business Entity, Franchisor may require the general 
manager to be an Owner, officer or other designated representative selected 
by Operator and acceptable to, and approved by Franchisor ("Designated 
Operator Representative").  Subject to Section 6.1.4, Franchisor will bear 
its costs of providing the initial training program concurrently to up to 5 
persons pursuant to this Section 6.1.1, including Franchisor's staff 
salaries, materials, and all technical training tools. Operator shall pay all 
travel, living, compensation, and other expenses, if any, incurred by 
Operator and/or Operator's employees in connection with attendance at 
training programs.  Operator may not open its Coffeehouse until such training 
shall have been successfully completed by Operator's general manager, 
assistant manager and Operator's management team and staff has been certified 
by Franchisor.  Franchisor shall pay no compensation for any services 
performed by trainee(s) in connection with such training programs.

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


                                       11
<PAGE>

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

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

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


                                       12
<PAGE>

                6.3     OTHER ASSISTANCE.  

                        6.3.1   Operator shall have the right, at no 
additional charge, to inquire of Franchisor's headquarters staff, its field 
representatives and training staff with respect to problems relating to the 
operation of the Coffeehouse, by telephone or correspondence, and Franchisor 
shall use its best efforts to diligently respond to such inquiries, in order 
to assist Operator in the operation of the Coffeehouse.  At no time shall 
reasonable assistance be interpreted to require Franchisor to pay any money 
to Operator.  

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

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

                                  ARTICLE 7
                          OBLIGATIONS OF FRANCHISOR

                7.1     GENERAL.  Franchisor shall perform the following
obligations:

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

                        7.1.2   To supply to Operator a set of standard decor 
and layout plans and to thereafter approve the initial decor and layout of 
Operator's Coffeehouse;

                        7.1.3   To loan Operator a copy of its Manuals which 
contain mandatory and suggested specifications, standards and procedures.  
The Manuals are confidential and remains Franchisor's property.

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

                                       13
<PAGE>

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

                        7.1.6   To use its best efforts, in good faith, to 
supply Operator's requirements for roasted coffee beans and blends in 
sufficient quantities to meet Operator's needs for its Coffeehouse, as 
provided in Section 10.1.2.

                7.2     FRANCHISOR DEFAULT.  Franchisor shall not, and can 
not be held in breach of this Agreement until (i) Franchisor has received 
written notice from Operator describing in detail any alleged breach from 
Operator; and (ii) Franchisor has failed to remedy the breach within a 
reasonable period of time after such notice, which period shall not be less 
than 60 days plus such additional time as reasonably required by Franchisor 
if because of the nature of the alleged breach it cannot reasonably be cured 
within said 60 days, provided Franchisor promptly commences and continues 
diligently to cure such alleged breach.  This is a material term of this 
Agreement and may not be modified or changed by any arbitrator in an 
arbitration proceeding or otherwise.

                7.3     NO OTHER OBLIGATIONS.  Franchisor shall not be 
obligated to provide any services to Operator except expressly provided 
herein and any and all other services which Franchisor may provide to 
Operator during the Term shall be at its sole discretion and Franchisor may 
cease to provide the same without notice of further obligation to Operator.

                                  ARTICLE 8
                      MANUALS AND STANDARDS OF OPERATOR
                      QUALITY, CLEANLINESS AND SERVICE

        In order to promote the value and goodwill of Franchisor's Marks and 
the System and to protect Franchisor's Marks and the other Diedrich Coffee 
operators who comprise the Diedrich Coffee franchise system, Operator shall 
conduct its business in accordance with the standards promulgated by 
Franchisor as follows:

                8.1     PRODUCT LINE AND SERVICE.  Operator shall serve all 
and only Authorized Diedrich Coffee Products at or from the Coffeehouse, all 
of which shall be purchased by Operator from a Franchisor or a designated or 
approved distributor or manufacturer, as provided in Article 10.  Operator 
acknowledges that Authorized Diedrich Coffee Products may differ at 
Coffeehouses, kiosks, carts, and may vary depending on the operating season 
and geographic location of the Operator's Coffeehouse or other factors.  

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

                                       14
<PAGE>

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

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

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

                8.4     POS SYSTEM.  Operator shall purchase, use and 
maintain the point of sale cash collection system (the "POS System") as 
specified in the Manuals or otherwise by Franchisor in writing.  The POS 
System may include a cash register, register tape printer, magnetic stripe 
reader and cash drawer. Upon at least 90 days prior written notice, 
Franchisor may require Operator to computerize the POS System and connect the 
POS System to Operator's telephone line(s) via modem or other communications 
medium.  At Franchisor's request, Operator shall also maintain membership in 
a designated third party network (such as CompuServe, AOL, MSN, Prodigy, 
etc.) for the purpose of implementing, transmitting, collecting and 
maintaining any Information or data exchange system.  Within a reasonable 
time upon Franchisor's request, Operator shall apply for and maintain debit 
cards, credit cards or other non-cash systems existing or developed in the 
future to enable customers to purchase Authorized Diedrich Coffee Products 
via such procedure, as specified by Franchisor.

                8.5     MANUALS.  Operator shall operate the Coffeehouse in 
strict compliance with the standard procedures, policies, rules and 
regulations established by Franchisor and incorporated in Franchisor's 
Manual(s).  The subject matter of the Manuals may include, without 
limitation, matters such as: forms, information relating to product and menu 
specifications, cash control, purchase orders, general operations, labor 
schedules, personnel, Gross Sales reports, payroll procedures, training and 
accounting; safety and sanitation; design specifications and color of 
uniforms; display of signs and notices; authorized and required equipment and 
fixtures, including specifications therefor; 

                                       15
<PAGE>

Mark usage; insurance requirements; lease requirements; decor; standards for 
management and personnel, hours of operation; yellow page and local 
advertising formats; standards of maintenance and appearance of the 
Coffeehouse; and required posting of notices to customers as to how to 
contact the Franchisor to submit complaints.  Without limiting the generality 
of the foregoing, the Franchisor may establish emergency procedures pursuant 
to which it may require Operator to temporarily close the Coffeehouse to the 
public, in which event Franchisor shall not be liable to Operator for any 
losses or costs, including consequential damages or loss profits occasioned 
thereby.  

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

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

                8.6     HOURS.  Subject to Applicable Law to the contrary,
Franchisor and Operator agree that Operator's Coffeehouse shall be open and
operational during at least the minimum hours and days set forth on Exhibit A
which is attached hereto and incorporated herein by this reference.  Operator
shall diligently and efficiently exercise its best efforts to achieve the
maximum Gross Sales possible from its Location, and shall remain open for longer
hours if additional opening hours are reasonably required to maximize operations
and sales.  Without limiting the foregoing, if the hours set forth in 

                                       16
<PAGE>

Exhibit A are incorrect in relation to the sales potential of Operator's 
Coffeehouse, then Franchisor and Operator shall reasonably adjust such hours 
by jointly establishing new hours of operation.  It is acknowledged that the 
hours of other operators will vary in relation to each respective location, 
and local legal restrictions, if any.  

                        8.6.1   Authorized Diedrich Coffee Products shall be 
marketed by approved menu formats to be utilized in Operator's Coffeehouse.  
The approved and authorized menu and menu format(s) may include, in 
Franchisor's discretion, requirements concerning organization, graphics, 
product descriptions, illustrations, and any other matters (except prices) 
related to the menu, whether or not similar to those listed.  In Franchisor's 
discretion, the menu and/or menu format(s) may vary depending upon region, 
market size, season and other factors.  Franchisor may change the menu and/or 
menu format(s) from time to time or region to region or authorize tests from 
region to region or authorize non-uniform regions or Coffeehouses within 
regions, in which case Operator will be given a reasonable time (not longer 
than 60 days) to discontinue use of any old menu format(s) and implement use 
of the new menu format(s).

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

                8.7     COMPLIANCE WITH APPLICABLE LAW.  Operator shall 
operate its Coffeehouse as a clean, orderly, legal and respectable place of 
business in accordance with Franchisor's business standards and merchandising 
policies, and shall comply with all Applicable Laws.  Operator shall not 
cause or allow any part of its Location or Premises to be used for any 
immoral or illegal purpose.

                8.8     SIGNS, DESIGNS AND FORMS OF PUBLICITY.  Operator 
shall maintain suitable signs and/or awnings at, on, or near the front of the 
Location and Premises, identifying the Location as a "Diedrich Coffee" 
Coffeehouse, which shall conform in all respects to Franchisor's 
specifications and requirements and the layout and design plan approved for 
the Location, subject only to restrictions imposed by Applicable Law.  
Without limiting the foregoing: 

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

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


                                       17
<PAGE>

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

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

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

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

                                  ARTICLE 9
                           ADVERTISING AND CO-OPS
                                          

                9.1     GENERAL REQUIREMENTS.  Operator shall conduct all 
local advertising and promotion in accordance with such policies and 
provisions with respect to format, content, media, geographic coverage and 
other criteria as are from time to time contained in the Manuals, or as 
otherwise directed by Franchisor, and shall not use or publish any 
advertising material which does not conform to said policies and provisions 
or as to which Operator shall not have received Franchisor's prior written 
approval; PROVIDED, HOWEVER, that if Franchisor shall not object to any 
proposed advertisement submitted by Operator for approval within 10 business 
days after Franchisor's receipt thereof, such advertisement shall be deemed 
approved subject to Franchisor's right to subsequently withdraw its approval. 
 

                                       18
<PAGE>

                9.2     LOCAL ADVERTISING.  Each calendar quarter, Operator 
shall expend an amount of not less than 2% of its Gross Sales for Local 
Advertising relating to Operator's Coffeehouse which amount may be reduced in 
accordance with Section 9.3.4 below.  Such local advertising must include 
Franchisee listing its Store in the white pages and yellow pages of such 
telephone directories distributed in Operator's area as Franchisor authorizes 
or directs, the cost of which shall be in addition to said 2% of Gross Sales. 
Operator's advertisement in the yellow pages must be listed under each 
category specified by Franchisor.  Operator shall deliver evidence of such 
expenditures in the form and manner prescribed by Franchisor from time to 
time.

                9.3     CO-OP ADVERTISING.  The Franchisor shall have the 
right at any time, and from time to time, to create regions for regional 
cooperative advertising ("Co-op Advertising Regions"), which shall function 
for the purpose of creating a cohesive team to coordinate advertising, 
marketing efforts and programs and maximizing the efficient use of local 
and/or regional advertising media.  

                        9.3.1   If and when Franchisor creates a Co-op 
Advertising Region for the region in which Operator's Coffeehouse is located, 
Operator and, if Franchisor owns a Coffeehouse in such Co-op Advertising 
Region, Franchisor, shall become subscribers and members thereof and shall 
execute a Subscription Agreement on a form prescribed by Franchisor, and 
participate therein in accordance with the Subscription Agreement and the 
Certificate of Incorporation and Bylaws of such Co-op Advertising Region.  
The size and content of such regions, when and if established by the 
Franchisor, shall be binding upon Operator, all other "Diedrich Coffee" 
franchisees similarly situated and Franchisor, if applicable.  At all 
meetings of such Co-op Advertising Region each participating Operator, as 
well as Franchisor, if applicable, shall be entitled to one vote for each 
Coffeehouse owned by Operator and located within such Co-op Advertising 
Region.  At any time upon reasonable notice, 20% of the eligible member 
votes, a majority of the directors of such Co-op Advertising Region (who 
shall be elected in accordance with the Bylaws of such Co-op Advertising 
Region), or Franchisor by itself, may call a meeting of all members of a 
Co-op Advertising Region.  Except for any amendment of the Certificate of 
Incorporation, Operating Agreement or By-laws of the Co-op Advertising Region 
(which shall require the affirmative vote of the Franchisor), all matters 
concerning operation of a Co-op Advertising Region shall be decided by 
majority vote, provided that a quorum is present, and such vote shall bind 
all members of said region, including Franchisor.  For purposes hereof, a 
quorum shall consist of members entitled to cast at least 50% of the total 
number of votes in such Co-op Advertising Region.  

                        9.3.2   Operator and other franchisees who are 
members of the Co-op Advertising Region will contribute to the Co-op 
Advertising Region such amount as may be determined by vote of the Co-op 
Advertising Region (not to exceed 2% of the Gross Sales of each members 
Coffeehouse(s) located in the region) only to the extent actually paid by 
Operator and after written approval of the Co-op Advertising Region's 
advertising plans.  

                                       19
<PAGE>

                        9.3.3   Each Co-op Advertising Region will decide as 
to the usage of funds contributed pursuant to Section 9.2.2 for media time, 
production of media materials, whether for radio, television, newspapers or 
store level materials such as flyers, or posters, or for any other type of 
advertising or marketing use, and then such Co-op Advertising Region shall in 
writing request approval from Franchisor to use said funds in said manner. 
Franchisor shall not withhold approval unreasonably, but no placement of 
advertising or commitment of advertising funds on behalf of an Co-op 
Advertising Region will be made without Franchisor's prior written approval.  
Franchisor reserves the right to establish general standards concerning the 
operation of the Co-op Advertising Region, advertising agencies retained by 
Co-op Advertising Region, and advertising programs conducted by Co-op 
Advertising Region.  

                        9.3.4   Expenditures made by Operator pursuant to any 
Co-op Advertising Region program, in accordance with this Section 9.3, shall 
be credited against Operator's local advertising requirement described in 
Section 9.2 above.

                9.4     ADVERTISING PROGRAM.

                        9.4.1   Franchisor shall administratively segregate 
on its books and records all Advertising Fees received from Operator and all 
other franchisees of Franchisor.  Nothing herein shall be deemed to create a 
trust fund, and Franchisor may commingle advertising fees with its general 
operating funds and expend such sums in the manner herein provided.  For each 
Coffeehouse that Franchisor or any of its affiliate operates,  Franchisor or 
such affiliate will similarly allocate to the Advertising Program the amount 
that would be required to be contributed to the Advertising Program if it 
were a franchised Coffeehouse.

                        9.4.2   If less than the total of all contributions 
and allocations to the Advertising Program are expended during any fiscal 
year, such excess may be accumulated for use during subsequent years.  If 
Franchisor advances money to the Advertising Program, Franchisor will be 
entitled to be reimbursed for such advances, including interest at the rate 
equal to the Franchisor's cost of funds.  Each determination by Franchisor of 
an interest rate hereunder shall be conclusive and binding for all purposes, 
absent manifest error.

                        9.4.3   An amount equal to all Advertising Program 
revenues and allocations will be expended for national, regional, or local 
advertising, public relations or promotional campaigns or programs designed 
to promote and enhance the image, identity or patronage of franchised and 
Franchisor-owned "Diedrich Coffee" Coffeehouses.  Such expenditures may 
include, without limitation (a) to conduct marketing studies, and to produce 
and purchase advertising art, commercials, musical jingles, print 
advertisements, point of sale materials, media advertising, outdoor 
advertising art, and direct mail pamphlets and literature; and (b) a payment 
to Franchisor or its affiliates, for internal expenses incurred to administer 
the Advertising Program.  Franchisor shall determine, in its final and 
subjective discretion, exercised in good faith, the cost, media, content, 
format, style, timing, allocation and all other matters relating to such 
advertising, 

                                       20
<PAGE>

public relations and promotional campaigns.  Although the Franchisor will 
attempt to allocate advertising expenditures fairly and in good faith, 
nothing herein shall be construed to require Franchisor to allocate or expend 
Advertising Program Contributions or allocations so as to benefit any 
particular franchisee or group of franchisees on a pro rata or proportional 
basis or otherwise.  Franchisor may make copies of advertising materials 
available to Operator with or without additional reasonable charge, as 
determined by Franchisor.  Any additional advertising shall be at the sole 
cost and expense of Operator.

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

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

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

                                 ARTICLE 10
                        DISTRIBUTION AND PURCHASE OF
                  EQUIPMENT, SUPPLIES, AND OTHER PRODUCTS

                10.1    COFFEE AND DIEDRICH COFFEE BRAND PRODUCTS.  

                        10.1.1  At all times throughout the Term, Operator 
shall purchase and maintain in inventory such types and quantities of 
Authorized Diedrich Coffee Products as are needed to meet reasonably 
anticipated consumer demand.  Operator shall purchase Diedrich Coffee Brand 
Products, and all roasted coffee beans and blends served, offered or sold at 
the Coffeehouse, solely and exclusively from Franchisor or its designated 
third party distributors or suppliers.

                                       21
<PAGE>

                        10.1.2  Franchisor shall use its best efforts, in 
good faith, to supply Operator's requirements for roasted coffee beans and 
blends in sufficient quantities to meet Operator's needs for its Coffeehouse, 
at Franchisor's then current published wholesale prices, which may be changed 
or modified from time to time without prior notice. 

                10.2    PROPRIETARY PRODUCTS.  Franchisor may, from time to 
time throughout the Term hereof in its sole subjective discretion exercised 
in good faith, require that Operator  purchase, use, offer and/or promote, 
and maintain in stock at the Coffeehouse in such quantities as are needed to 
meet reasonably anticipated consumer demand, certain proprietary powder mixes 
and other ingredients and raw materials, which are manufactured in accordance 
with Franchisor's proprietary recipes, specifications and/or formulas 
("Proprietary Products").  Operator shall purchase Proprietary Products only 
from Franchisor (if it sells the same) or its designees.  Franchisor shall 
not be obligated to reveal such recipes, specifications and/or formulas of 
such Proprietary Products to Operator, non-designated suppliers, or any other 
third parties.

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

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

                        10.3.2  If Operator should desire to procure 
authorized Non-Proprietary Products from a Supplier other than Franchisor or 
one previously approved or designated by Franchisor, Operator shall deliver 
written notice to Franchisor of its desire to seek approval of such Supplier, 
which notice shall (i) identify the name and address of such Supplier, (ii) 
contain such information as may be requested by Franchisor 

                                       22
<PAGE>

or required to be provided pursuant to the Manuals (which may include 
reasonable financial, operational and economic information regarding its 
business ), and (iii) identify the authorized Non-Proprietary Products 
desired to be purchased from such Supplier.  Franchisor shall, upon request 
of Operator, furnish to Operator specifications for such Non-Proprietary 
Products if such are not contained in the Manuals.  The Franchisor may 
thereupon request that the proposed Supplier furnish Franchisor at no cost to 
Franchisor product samples, specifications and such other information as 
Franchisor may require.  Franchisor or its representatives shall also be 
permitted to inspect the facilities of the proposed Supplier and establish 
economic terms, delivery, service and other requirements consistent with 
other distribution relationships for other Diedrich Coffee Coffeehouses.  

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

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

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

                10.4    PURCHASES FROM FRANCHISOR, EXTENSIONS OF CREDIT.

                                       23
<PAGE>


                        10.4.1  Franchisor shall not be liable to Operator on 
account of any delay or failure in the manufacture, delivery or shipment of 
roasted coffee beans, blends or other products caused by events or 
circumstances beyond Franchisor's reasonable control including such events as 
labor or material shortages, conditions of supply and demand, import/export 
restrictions, or disruptions in Franchisor's supply sources.  In the event 
from time to time that the available supply of any product is inadequate to 
fulfill the needs or orders of all coffeehouses operated by Franchisor, its 
affiliates and its franchisees, including Operator, Franchisor shall make 
such allocations of product as it may decide in good faith. 

                        10.4.2  All product orders by Operator shall be 
subject to acceptance by Franchisor at Franchisor's designated offices, and 
Franchisor reserves the right to accept or reject, in whole or in part, any 
order placed by Operator.  Operator shall submit to Franchisor, upon written 
request, financial statements which contain sufficient information to enable 
Franchisor to determine the credit limits, if any, to be extended to 
Operator.  Franchisor, in its sole discretion, may establish the credit 
terms, if any, upon which it will accept Operator's orders, and may require 
Operator to pay for orders on a cash-in-advance or cash-on-delivery basis.

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

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

                10.6    TEST MARKETING.  Franchisor may, from time to time, 
authorize Operator to test market products and/or services in connection with 
the operation of the Coffeehouse.  Operator shall cooperate with Franchisor 
in connection with  the conduct of such test marketing programs and shall 
comply with the Franchisor's rules and regulations established from time to 
time in connection herewith.

                                       24
<PAGE>

                                   ARTICLE 11
                   REPORTS, BOOKS AND RECORDS, INSPECTIONS

                11.1    GENERAL REPORTING.  Operator shall submit weekly 
financial reporting forms and such other financial, operational and 
statistical information as Franchisor may require to: (i) assist Operator in 
the operation of its Coffeehouse in accordance with the System; (ii) allow 
Franchisor to monitor the Operator's Gross Sales, purchases, costs and 
expenses; (iii) enable Franchisor to develop chain wide statistics which may 
improve bulk purchasing; (iv) assist Franchisor in the development of new 
Authorized Products or the removal of existing unsuccessful products; (v) 
enable Franchisor to refine existing Authorized Diedrich Coffee Products; 
(vi) generally improve chain-wide understanding of the System (collectively, 
the "Information").  Without limiting the generality of the foregoing:

                        11.1.1  Unless otherwise directed by Franchisor in 
writing, by the Tuesday following each Week, or at such other times as may be 
established by Franchisor, Operator shall submit to Franchisor by facsimile a 
written weekly summary in form prescribed by Franchisor showing the results 
of its operations for that Week.  Operator will allow Franchisor to poll on a 
daily basis at a time selected by the Franchisor the Operator's Coffeehouse 
computerized POS system to retrieve sales, usage, and operations data.

                        11.1.2  On or before the 10th day of each month 
during the Term hereof, Operator shall submit a monthly sales summary signed 
by Operator, on a form prescribed by Franchisor, reporting all Gross Sales 
for the preceding month, together with such additional financial information 
as Franchisor may from time to time request. 

                        11.1.3  On or before the 30th day following each 
calendar quarter during the Term hereof, Operator shall submit to Franchisor 
financial statements for the preceding quarter, including a balance sheet and 
profit and loss statement, prepared in the form and manner prescribed by the 
Franchisor and in accordance with generally accepted accounting principles, 
which shall be certified by Operator to be accurate and complete.

                        11.1.4   Operator shall submit to Franchisor a 
semi-annual Profit and Loss Statement, signed and certified by Operator.  The 
Profit and Loss Statement shall be prepared by a Certified or Public 
Accountant, in accordance with generally accepted accounting principles, and 
shall provide Operator's sales, expenses and financial status with respect to 
Operator's Coffeehouse.  Operator shall submit to Franchisor a copy of the 
original signed 1120 or 1120S tax form each and every year or any other forms 
which take the place of the 1120 or 1120S forms.  Operator shall also provide 
Franchisor with copies of signed original sales and use tax forms 
contemporaneously with their filing with the appropriate state or local 
authority.  Franchisor reserves the right to require such further 


                                       25
<PAGE>

information concerning Operator's Coffeehouse as Franchisor may from time to 
time reasonably request.  

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

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

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

                11.3    AUDITS.  Upon 10 days prior written notice, 
Franchisor, its agents or representatives may audit Operator's books and 
records in accordance with generally accepted standards established by 
certified public accountants.  In connection with such audit(s) or other 
operational visits, Operator shall keep its cash receipts records, weekly and 
monthly control forms, accounts payable records including all payments to 
Operator's Suppliers in its Coffeehouse or at its business office for 5 years 
after their due date, which records shall be available for examination by 
Franchisor or its representative(s), at 

                                       26
<PAGE>

Franchisor's request.  Without any prior written notice, Franchisor, its 
agents or representatives may inspect Operator's entire Coffeehouse and 
Operator's daily, weekly and monthly statistical information which is 
required under the Operational Manual.  Operator shall make such information 
available for such inspections in recognition that an operational inspection 
cannot succeed without review of essential statistical information. If any 
audit or other investigation reveals an under-reporting or under-recording 
error of 5% percent or more, then in addition to any other sums due, the 
expenses of the audit/inspection shall be borne and paid by Operator upon 
billing by Franchisor, plus interest at the highest compound rate authorized 
by law, but not to exceed the rate of 15% percent per annum.

                                  ARTICLE 12
                                    MARKS

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

                12.2    NON-USE OF TRADE NAME.  If Operator is a Business 
Entity, it shall not use Franchisor's Marks, or Franchisor's trade name, or 
any words or symbols which are confusingly similar to the Marks, as all or 
part of Operator's name.  

                12.3    USE OF OTHER MARKS.  Operator shall not display the 
trademark, service mark, trade name, insignia or logotype of any other person 
or Business Entity in connection with the operation of the Coffeehouse 
without the express prior written consent of Franchisor, which may be 
withheld in its sole subjective discretion.

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

                12.5    DEFENSE OF MARKS.  If Operator receives notice, or is 
informed, of any claim, suit or demand against Operator on account of any 
alleged infringement, unfair competition, or similar matter on account of its 
use of the Marks in accordance with the terms of this Agreement, Operator 
shall promptly notify Franchisor of any such claim, suit or demand.  
Thereupon, Franchisor shall take such action as it may deem necessary and 
appropriate to protect and defend Operator against any such claim by any 
third party; Franchisor shall not be obligated to take any such action, 
however.  Operator shall not 

                                       27
<PAGE>

settle or compromise any such claim by a third party without the prior 
written consent of Franchisor.  Franchisor shall have the sole right to 
defend, compromise or settle any such claim, in its discretion, at 
Franchisor's sole cost and expense, using attorneys of its own choosing, and 
Operator shall cooperate fully with Franchisor in connection with the defense 
of any such claim.  Operator may participate at its own expense in such 
defense or settlement, but Franchisor's decisions with regard thereto shall 
be final.

                12.6    PROSECUTION OF INFRINGERS.  If Operator shall receive 
notice or is informed or learns that any third party, which it believes to be 
unauthorized to use the Marks, is using the Marks or any variant thereof, 
Operator shall promptly notify Franchisor of the facts relating to such 
alleged infringing use.  Thereupon, Franchisor shall, in its sole discretion, 
determine whether or not it wishes to take any action against such third 
person on account of such alleged infringement of the Marks.  Operator shall 
have no right to make any demand against any such alleged infringer or to 
prosecute any claim of any kind or nature whatsoever against such alleged 
infringer for or on account of such infringement.

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

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

                12.9    ASSUMED NAME REGISTRATION.  If Operator is required 
to do so by any statute or ordinance, Operator shall promptly upon the 
execution of this Agreement file with applicable government agencies or 
offices, a notice of its intent to conduct its business under the name 
"Diedrich Coffee".  Promptly upon the expiration or termination of this 
Agreement for any reason whatsoever, Operator shall promptly execute and file 
such documents as may be necessary to revoke or terminate such assumed name 
registration, and if Operator shall fail to promptly execute and file such 
documents as may be necessary to effectively revoke and terminate such 
assumed name registration, Operator 

                                       28
<PAGE>

hereby irrevocably appoints Franchisor as its Attorney-in-fact to do so for 
and on behalf of Operator.

                                  ARTICLE 13
                 COVENANTS REGARDING OTHER BUSINESS INTERESTS

                13.1    NON-COMPETITION AND TRADE SECRETS.  Operator 
acknowledges that the Diedrich Coffee System is unique and distinctive and 
has been developed by Franchisor at great effort, time, and expense, and that 
Operator has regular and continuing access to valuable and confidential 
information, training, and trade secrets regarding the Diedrich Coffee 
System. Operator recognizes its obligations to keep confidential such 
information as set forth herein.  Operator therefore agrees as follows:

                        13.1.1  During the Term except with Franchisor's 
prior written consent, neither Operator, nor any Owner, officer or director 
of Operator, shall, in any capacity whatsoever, either directly or 
indirectly, individually or through any Business Entity, engage in the 
roasting of green coffee beans, the sale of roasted coffee beans or ground 
coffee produced by third parties, or the production or sale at retail or 
wholesale of any espresso or coffee product, or have any employment or other 
financial interest in any Business Entity engaged in the foregoing; and 

                        13.1.2  Upon the expiration or termination of this 
Agreement, or if Operator assigns or transfers its interest herein to any 
person or Business Entity, or if any Owner, officer or director of Operator 
shall terminate his or her relationship with Operator, then for a period of 
24 months thereafter, neither Operator nor such Owner, officer or director, 
as applicable, shall, in any capacity whatsoever, either directly or 
indirectly, individually or through any Business Entity, engage in the 
production or sale at retail of any type of any espresso or coffee product, 
or have any employment or interest in any firm engaged in the production or 
sale at retail or wholesale of any such products, at a site within 1 mile of 
the Location or any other "Diedrich Coffee" coffeehouse, kiosk or cart then 
existing, unless Franchisor gives its prior written consent.  

                        13.1.3  Franchisor possesses and continues to 
develop, and during the course of the relationship established hereunder, 
Operator shall have access to, proprietary and confidential information, 
including recipes, secret ingredients, specifications, procedures, concepts 
and methods and techniques of operating the Coffeehouse and producing 
Authorized Diedrich Coffee Products (the "Trade Secrets").  Franchisor will 
disclose certain of its Trade Secrets to Operator in the Operating Manual, 
bulletins, supplements, confidential correspondence, or other confidential 
communications, and through the Franchisor's training program and other 
guidance and management assistance, and in performing Franchisor's other 
obligations and exercising Franchisor's rights under this Agreement.  "Trade 
Secrets shall not include information which: (a) has entered the public 
domain or was known to Operator prior to Franchisor's disclosure of such 
information to Operator, other than by the breach of an obligation of 
confidentiality owed (by anyone) to Franchisor; (b) becomes known to Operator 
from a source other than 

                                       29
<PAGE>

Franchisor and other than by the breach of an obligation of confidentiality 
owed (by anyone) to Franchisor; or (c) was independently developed by 
Operator without the use or benefit of any of the Franchisor's Trade Secrets; 
The burden of proving the applicability of the foregoing will reside with 
Operator.

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

                        13.1.5  In the event any portion of the above 
covenants violates laws affecting Operator, or is held invalid or 
unenforceable in a final judgment to which Franchisor and Operator are 
parties, then the maximum legally allowable restriction permitted by law 
shall control and bind Operator. Franchisor may at any time unilaterally 
reduce the scope of any part of the above covenants, and Operator shall 
comply with any such reduced covenant upon receipt of written notice.
                        
                13.2    OPERATOR'S AFFILIATES.  For purposes of this Article 
only, "Operator" shall mean and include the individual Operator; Operator's 
spouse and minor children and its Owners, officers and directors if Operator 
is a Business Entity and Operator shall, except as Franchisor may otherwise 
agree, cause each such person to acknowledge and agree to be bound by the 
provisions of Section 13.1.  The provisions of this Article shall not limit, 
restrain or otherwise affect any right or cause of action which may accrue to 
Franchisor for any infringement of, violation of, or interference with, this 
Agreement, or Franchisor's Marks, System, trade secrets, or any other 
proprietary aspects of Franchisor's business.


                                       30
<PAGE>

                                  ARTICLE 14
                    INTERFERENCE WITH EMPLOYMENT RELATIONS

        Without Franchisor's prior written consent, during the term of this 
Agreement, Operator shall not employ or seek to employ, directly or 
indirectly, any person serving in an executive, managerial or operational 
position who is at the time or was at any time during the prior 6 months 
employed by Franchisor or any of its Affiliates.  Request for Franchisor's 
consent shall be sent in writing to Franchisor.

                                  ARTICLE 15
                        NATURE OF INTEREST, ASSIGNMENT

                15.1    ASSIGNMENT BY FRANCHISOR.  Franchisor shall have the 
right to transfer or assign this Agreement to any person or legal entity who 
assumes its terms and agrees to comply with Franchisor's obligations 
contained herein.  Franchisor shall have no liability for the performance of 
any obligations contained in this Agreement after the effective date of such 
transfer or assignment.

                15.2    ASSIGNMENT BY OPERATOR.  The rights and duties 
created by this Agreement are personal to Operator.  Accordingly, except as 
otherwise may be permitted herein, neither Operator nor any person with an 
interest in Operator shall, without Franchisor's prior written consent, 
directly or indirectly sell, assign, transfer, convey, give away, pledge, 
mortgage, or otherwise encumber any direct or indirect interest in this 
Agreement (an "Assignment") .  Any such purported Assignment occurring by 
operation of law or otherwise without Franchisor's prior written consent 
shall constitute a default of this Agreement by Operator, and shall be null 
and void.  Except in the instance of Operator advertising to sell its 
Coffeehouse pursuant to the terms hereof, Operator shall not, without 
Franchisor's prior written consent, offer for sale or transfer at public or 
private auction or advertise publicly for sale or transfer, the furnishings, 
interior and exterior decor items, supplies, fixtures, equipment, Operator's 
Lease or the real or personal property used in connection with Operator's 
Coffeehouse.

        If Operator is a Business Entity, any sale, assignment, transfer, 
conveyance, gift, pledge, mortgage, or other encumbrance of 50% or more of 
the outstanding and issued stock or other ownership interest of Operator by 
one or more transfers or any other event(s) or transaction(s) which, directly 
or indirectly, effectively changes management control of Operator shall 
constitute an "Assignment" hereunder.  Franchisor will not unreasonably 
withhold its consent to any transfer or assignment which is subject to the 
restrictions of this Article, provided however, Franchisor may impose any 
reasonable condition to the granting of its consent, and requiring Operator 
to satisfy any or all of the following conditions shall be deemed reasonable:

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

                                       31
<PAGE>

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

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

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

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

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

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

                        15.2.7  The transferee/assignee, its manager or other 
employees responsible for the operation of the Coffeehouse have 
satisfactorily completed Franchisor's training program;

                        15.2.8  The transferee/assignee executes such other 
documents as Franchisor may require, including a replacement franchise 
agreement on the then-standard 

                                       32
<PAGE>

franchise agreement form used by Franchisor, in order to assume all of the 
obligations of this Agreement, to the same extent, and with the same effect, 
as previously assumed by the assignor; 

                        15.2.9  The Operator transfers all Franchise 
Agreements between Operator and Franchisor to the same transferee/assignee; 
and

                        15.2.10         Upon submission Operator's request 
for Franchisor's consent to any proposed transfer or assignment, Operator 
shall pay to Franchisor a transfer fee ("Transfer Fee") equal to the greater 
of: (a) 2% of all consideration received or receivable, directly or 
indirectly, by Operator in connection with the transfer or assignment, or (b) 
the sum of (i) a $1,500 administrative/transfer fee, plus (ii) a $15,000 
training fee (payable only for the first assigned franchise agreement in the 
case of multiple franchise agreements being assigned simultaneously to the 
same assignee).  Such Transfer Fee will not be due with respect to any 
transfer that (together with all other related previous, simultaneous, or 
proposed transfers) does not result in the transfer of control of Operator.

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

                                  ARTICLE 16
                           DEFAULT AND TERMINATION
                                          
                16.1    GENERAL.  Franchisor shall have the right to 
terminate this Agreement prior to its scheduled expiration date pursuant to 
Section 3.1 only for "cause".  "Cause" is hereby defined as a material breach 
of this Agreement.  Franchisor shall exercise its right to terminate this 
Agreement upon notice to Operator upon the following circumstances and 
manners.


                                       33
<PAGE>

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

                16.3    OPTION TO TERMINATE WITHOUT NOTICE.  Operator shall 
be deemed to be in default and Franchisor may, at its option, terminate this 
Agreement and all rights granted hereunder, without affording Operator any 
opportunity to cure the default, effective immediately upon receipt of notice 
by Franchisor upon the occurrence of any of the following events:

                        16.3.1  ABANDONMENT.  If Operator shall abandon the 
Coffeehouse.  For purposes of this Agreement, "abandon" shall refer to (i) 
Operator's failure, at any time during the term of this Agreement, to keep 
the Coffeehouse open and operating for business for a period of 5 consecutive 
days, except as provided in the Manuals, (ii) Operator's failure to keep the 
Coffeehouse open and operating for any period after which it is not 
unreasonable under the facts and circumstances for Franchisor to conclude 
that Operator does not intend to continue to operate the franchise, unless 
such failure to operate is due to fire, flood, earthquake or other similar 
causes beyond Operator's control, and (iii) failure to actively and 
continuously maintain and answer Operator's telephone;

                        16.3.2  ASSIGNMENT, DEATH OR INCAPACITY.  If Operator 
shall purport to sell, assign, transfer or encumber in whole or in part the 
Coffeehouse, or any substantial portion of its assets, without the prior 
written consent of Franchisor; provided, however, that on written request and 
on condition that the Coffeehouse continues to be operated in conformity with 
this Agreement, (i) upon the death or legal incapacity of a Operator who is 
an individual, Franchisor shall allow up to 6 months after such death or 
legal incapacity for the heirs, personal representatives, or conservators 
(the "Heirs") of Operator either to enter into a new Franchise Agreement upon 
Franchisor's then current 


                                       34
<PAGE>

form (except that no initial franchise fee or transfer fee shall be charged), 
if Franchisor is subjectively satisfied that the Heirs meet Franchisor's 
standards and qualifications, or if not so satisfied to allow the Heirs to 
sell the Coffeehouse to a person approved by Franchisor, or (ii) upon the 
death or legal incapacity of a member or stockholder owning 50% or more of 
the capital stock, membership interests or voting power of a corporate or 
limited liability company Operator, or a general or limited partner owning 
50% or more of any of the Partnership Rights of a Operator which is a 
Partnership, Franchisor shall allow a period of up to 6 months after such 
death or legal incapacity for the Heirs to seek and obtain Franchisor's 
consent to the transfer or Assignment of such stock, membership interests or 
Partnership Rights to the Heirs or to another person acceptable by 
Franchisor.  If, within said 6 month period, said Heirs fail either to enter 
into a new franchise agreement or to sell the Coffeehouse to a person 
approved by Franchisor pursuant to Section 15.2, or fail either to receive 
Franchisor's consent to the transfer or Assignment of such stock, membership 
interest or Partnership Rights to the Heirs or to another person acceptable 
by Franchisor, as provided in Section 15.2, this Agreement shall thereupon 
automatically terminate;

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

                        16.3.4  MISREPRESENTATION.  If Operator makes any 
material misrepresentations relating to the acquisition of the Coffeehouse.  

                        16.3.5  VIOLATION OF LAW.  If Operator fails, for a 
period of 10 days after having received notification of noncompliance from 
Franchisor or any governmental or quasi-governmental agency or authority, to 
comply with any federal, state or local law or regulation applicable to the 
operation of the Coffeehouse;

                        16.3.6  HEALTH OR SAFETY VIOLATIONS.  Operator's 
conduct of the Coffeehouse licensed pursuant to this Agreement is so contrary 
to this Agreement, the System and the Manuals as to constitute an imminent 
danger to the public health (for example, selling spoiled food knowing that 
the food products are spoiled or allowing a dangerous condition arising from 
a failure to strictly comply with any health code or ordinance or other 
Applicable Law to continue despite Operator's knowledge of such condition), 
or selling expired or other unauthorized products to the public after notice 
of default and continuing to sell such products whether or not Operator has 
cured the default after one or more notices;

                        16.3.7  UNFAIR COMPETITION.  Any violation by 
Operator of Section 13.1; Operator's intentional disclosure or use of the 
contents of the Manual, trade secrets or confidential or proprietary 
information provided to Operator by Franchisor in violation of this 
Agreement, excluding independent acts of employees or others if Operator has 
failed to exercise its best efforts to prevent such disclosures or use;


                                       35
<PAGE>

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

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

                        16.3.10         ASSIGNMENT WITHOUT CONSENT.  If 
Operator purports to make any Assignment without Franchisor's prior written 
consent or in violation of the terms of Section 15.2 of this Agreement;

                        16.3.11         INTELLECTUAL PROPERTY.  If Operator 
misuses or makes any unauthorized use of the Marks or otherwise materially 
impairs the goodwill associated therewith or Franchisor's rights therein, or 
which reflects materially and unfavorably upon the operation and reputation 
of the Coffeehouse or System.

                16.4    TERMINATION WITH NOTICE AND OPPORTUNITY TO CURE.  
Except for any default by Operator under Sections 16.2 or 16.3, or as 
otherwise expressly provided in this Agreement, Operator shall have 10 days 
(5 days in the case of any default in the timely payment of sums due to 
Franchisor or its Affiliates), after Franchisor's written notice of default 
within which to remedy any default under this Agreement, and to provide 
evidence of such remedy to Franchisor.  If any such default is not cured 
within that time period, or such longer time period as Applicable Law may 
require or as Franchisor may specify in the notice of default, this Agreement 
and all rights granted by it shall thereupon automatically terminate without 
further notice or opportunity to cure.

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

                        16.4.1  Operator's failure, refusal, or neglect to 
promptly pay any monies owed to Franchisor, its subsidiaries or affiliates, 
when due, or to submit the financial or other information required by 
Franchisor under this Agreement;

                        16.4.2  Operator's failure to maintain the standards 
specified by Franchisor in the Manual or otherwise;

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


                                       36
<PAGE>

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

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

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

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

                16.5    REIMBURSEMENT OF FRANCHISOR COSTS.  In the event of a 
default by Operator, all of Franchisor's costs and expenses arising from such 
default, including reasonable legal fees and reasonable hourly charges of 
Franchisor's administrative employees shall be paid to Franchisor by Operator 
within 5 days after cure.

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

                16.7    NOTICE REQUIRED BY LAW.  Notwithstanding anything to 
the contrary contained in this Article 16, in the event any valid, Applicable 
Law of a competent Governmental Authority having jurisdiction over this 
Agreement and the parties hereto shall limit Franchisor's rights of 
termination hereunder or shall require longer notice periods than those set 
forth above, this Agreement shall be deemed amended to conform to the minimum 
notice periods or restrictions upon termination required by such laws and 
regulations.  Franchisor shall not, however, be precluded from contesting the 
validity, enforceability or application of such laws or regulations in any 
action, hearing or dispute relating to this Agreement or the termination 
thereof.

                                  ARTICLE 17
                   RIGHTS AND OBLIGATIONS UPON TERMINATION

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

                        17.1.1  Operator shall immediately cease to use 
Franchisor's Marks, and any confusingly similar trademark, service mark, 
trade name, logotype, or other 


                                       37
<PAGE>

commercial symbol or insignia.  Operator shall at its own cost, make cosmetic 
changes to Operator's Coffeehouse so that it no longer contains or resembles 
Franchisor's proprietary designs including, but not limited to, Operator 
shall remove all Diedrich Coffee identifying materials and distinctive 
Diedrich Coffee cosmetic features and finishes, interior wall coverings and 
colors, exterior finishes and colors, signage and Diedrich Coffee counter 
equipment (which shall be deemed proprietary to Franchisor) from the Location 
as Franchisor may reasonably direct. 

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

                        17.1.3  Any and all obligations of Franchisor to 
Operator under this Agreement shall immediately cease and terminate.

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

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

                17.2    SURVIVAL OF OBLIGATIONS.  In no event shall a 
termination or expiration of this Agreement affect Operator's obligations to 
take or abstain from taking any action in accordance with this Agreement.  
The provisions of this Agreement which constitute post-termination covenants 
and agreements including the obligation of Franchisor and Operator to 
arbitrate any and all disputes shall survive the termination or expiration of 
this Agreement.

                17.3    NO OWNERSHIP OF MARKS.  Operator acknowledges and 
agrees that rights in and to Franchisor's Marks and the use thereof shall be 
and remain the property of Franchisor.

                17.4    GOVERNMENT FILINGS.  In the event Operator has 
registered any of Franchisor's Marks or the name "Diedrich Coffee" as part of 
Operator's assumed, fictitious or corporate name, Operator shall promptly 
amend such registration to delete Franchisor's Marks therefrom.

                                  ARTICLE 18
                                  INSURANCE

        18.1  INSURANCE.  Operator shall obtain and maintain insurance 
coverage which shall in each instance designate Franchisor and designated 
parent companies, subsidiaries, 

                                       38
<PAGE>

and affiliates as additional named insureds, with an insurance company 
approved by Franchisor, which approval shall not be unreasonably withheld as 
follows:

                        18.1.1  comprehensive general liability insurance 
(including products liability); with coverage of $1,000,000.00 to 
$3,000,000.00 combined single limit for death, personal injury, and 
$100,000.00 property damage coverage; 

                        18.1.2  business interruption insurance, including 
Continuing Royalty coverage, for 12 months after casualty, in amounts equal 
to at least $100,000 ($50,000 in the case of a cart or kiosk);

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

                        18.1.4  windstorm, fire, and extended coverage 
insurance, insuring the construction of improvements and completed 
Coffeehouse operated by Operator, for the full replacement value thereof.

                 18.2    USE OF PROCEEDS.  In the event of damage to the 
Coffeehouse covered by insurance, the proceeds of any such insurance shall be 
used to restore the Coffeehouse to its original condition as soon as 
possible, unless such restoration is prohibited by the Location lease or 
Franchisor has otherwise consented to in writing.  Upon the obtaining of such 
insurance, Operator shall promptly provide to Franchisor proof of such 
insurance coverage and/or at such other times upon the request of Franchisor. 
 

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

                                       39
<PAGE>

                                   ARTICLE 19
                     RELATIONSHIP OF PARTIES, DISCLOSURE
                                          
        19.1    RELATIONSHIP OF OPERATOR TO FRANCHISOR.  It is expressly 
agreed that the parties intend by this Agreement to establish between 
Franchisor and Operator the relationship of franchisor and franchisee.  It is 
further agreed that Operator has no authority to create or assume in 
Franchisor's name or on behalf of Franchisor, any obligation, express or 
implied, or to act or purport to act as agent or representative on behalf of 
Franchisor for any purpose whatsoever.  Neither Franchisor nor Operator is 
the employer, employee, agent, partner or co-venturer of or with the other, 
each being independent.  Operator agrees that it will not hold himself out as 
the agent, employee, partner or co-venturer of Franchisor.  All employees 
hired by or working for Operator shall be the employees of Operator and shall 
not, for any purpose, be deemed employees of Franchisor or subject to 
Franchisor control.  Each of the parties shall file its own tax, regulatory 
and payroll reports, and be responsible for all employee benefits and workers 
compensation payments, with respect to its respective employees and 
operations, saving and indemnifying the other party hereto of and from any 
liability of any nature whatsoever by virtue thereof.

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

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

                                  ARTICLE 20
                                   NOTICES

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

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<PAGE>

        If to Franchisor:       Diedrich Coffee 
                                2144 Michelson Drive
                                Irvine, CA  92612
                                Attn:   President
                                        
                                Facsimile No.: (714) 756-1144

        With copy (which shall not constitute notice) to:

                                Kenneth R. Costello, Esq. 
                                Jenkens & Gilchrist P.C.
                                12100 Wilshire Blvd., 15th Floor 
                                Los Angeles, CA 90025
                                Facsimile No.: (213) 688-3460 

        If to Operator:         ______________________
                                ______________________
                                ______________________
                                ______________________
                                Facsimile No. _______________

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


                                  ARTICLE 21
                           MISCELLANEOUS PROVISIONS

                21.1    FRANCHISOR'S RIGHT TO CURE DEFAULTS.  In addition to 
all other remedies herein granted if Operator shall default in the 
performance of any of its obligations or breach any term or condition of this 
Agreement or any related agreement, Franchisor may, at its election, 
immediately or at any time thereafter, without waiving any claim for breach 
hereunder and without notice to Operator, cure such default for the account 
and on behalf of Operator, and the cost to Franchisor thereof shall be due 
and payable on demand and shall be deemed to be additional compensation due 
to Franchisor hereunder and shall be added to the amount of compensation next 
accruing hereunder, at the election of Franchisor.

                21.2    WAIVER AND DELAY.  No waiver by Franchisor of any 
breach or series of breaches or defaults in performance by Operator, and no 
failure, refusal or neglect of Franchisor to exercise any right, power or 
option given to it hereunder or under any other franchise agreement between 
Franchisor and Operator, whether entered into before, after or 
contemporaneously with the execution hereof (and whether or not related to 
the Coffeehouse) or to insist upon strict compliance with or performance of 
Operator's obligations under this Agreement, any other franchise agreement 
between Franchisor and Operator, whether entered into before, after or 
contemporaneously with the execution 

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<PAGE>

hereof (and whether or not related to the Coffeehouse) or the Manuals, shall 
constitute a waiver of the provisions of this  Agreement or the Manuals with 
respect to any subsequent breach thereof or a waiver by Franchisor of its 
right at any time thereafter to require exact and strict compliance with the 
provisions thereof.  Franchisor will consider written requests by Operator 
for Franchisor's consent to a waiver of any obligation imposed by this 
Agreement. Operator agrees, however, that Franchisor is not required to act 
uniformly with respect to waivers, requests and consents as each request will 
be considered on a case by case basis, and nothing shall be construed to 
require Franchisor to grant any such request.  Any waiver granted by 
Franchisor shall be without prejudice to any other rights Franchisor may 
have, will be subject to continuing review by Franchisor, and may be revoked, 
in Franchisor's sole discretion, at any time and for any reason, effective 
upon 10 days prior written notice to Operator.  Franchisor makes no 
warranties or guarantees upon which Operator may rely, and assumes no 
liability or obligation to Operator by providing any waiver, approval, 
consent, assistance, or suggestion to Operator in connection with this 
Agreement, or by reason of any neglect, delay, or denial of any request.

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

                21.4    SUCCESSORS AND ASSIGNS.  This Agreement shall be 
binding upon and inure to the benefit of the successors and assigns of 
Franchisor and shall be binding upon and inure to the benefit of Operator and 
its or their respective heirs, executors, administrators, successors and 
assigns, subject to the restrictions on transfer or Assignment contained 
herein.

                21.5    JOINT AND SEVERAL LIABILITY. If Operator consists of 
more than one person or entity, or a combination thereof, the obligations and 
liabilities of each such person or entity to Franchisor are joint and several.

                21.6    GOVERNING LAW.  This Agreement shall be governed by 
and construed in accordance with the laws of the State of California, except 
for the provisions in Article 13 which shall be governed by the laws of the 
state in which the Coffeehouse is located.


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                21.7    ENTIRE AGREEMENT.  This Agreement contains all of the 
terms and conditions agreed upon by the parties hereto with reference to the 
subject matter hereof.  No other agreements oral or otherwise shall be deemed 
to exist or to bind any of the parties hereto and all prior agreements, 
understandings and representations are merged herein and superseded hereby. 
Operator represents that there are no contemporaneous agreements or 
understandings relating to the subject matter hereof between the parties that 
are not contained herein.  No officer or employee or agent of Franchisor has 
any authority to make any representation or promise not contained in this 
Agreement or in any Offering Circular for prospective franchisees required by 
applicable law, and Operator agrees that it has executed this Agreement 
without reliance upon any such representation or promise.  This Agreement 
cannot be modified or changed except by written instrument signed by all of 
the parties hereto.

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

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

                21.10   SEVERABILITY.  Nothing contained in this Agreement 
shall be construed as requiring the commission of any act contrary to law.  
Whenever there is any conflict between any provisions of this Agreement or 
the Manuals and any present or future statute, law, ordinance or regulation 
contrary to which the parties have no legal right to contract, the latter 
shall prevail, but in such event the provisions of this Agreement or the 
Manuals thus affected shall be curtailed and limited only to the extent 
necessary to bring it within the requirements of the law.  If any part, 
article, section, sentence or clause of this Agreement or the Manuals shall 
be held to be indefinite, invalid or otherwise unenforceable, the indefinite, 
invalid or unenforceable provision shall be deemed deleted, and the remaining 
part of this Agreement shall continue in full force and effect.

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

                21.12   FEES AND EXPENSES.  Should any party hereto commence 
any action or proceeding for the purpose of enforcing, or preventing the 
breach of, any provision 

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<PAGE>

hereof, whether by judicial or quasi-judicial action or otherwise, or for 
damages for any alleged breach of any provision hereof, or for a declaration 
of such party's rights or obligations hereunder, the prevailing party shall 
be reimbursed by the losing party for all costs and expenses incurred in 
connection therewith, including, but not limited to, attorneys' fees.  All 
sums which are due but unpaid to Franchisor or Operator shall bear interest 
from the date due at the highest rate permissible by applicable law.

                21.13   WAIVER OF JURY.  IN ALL CASES, OPERATOR AND 
FRANCHISOR EACH WAIVES ANY RIGHT TO A TRIAL BY JURY.

                                  ARTICLE 22
                           SUBMISSION OF AGREEMENT

                22.1    GENERAL.  The submission of this Agreement does not 
constitute an offer and this Agreement shall become effective only upon the 
execution thereof by Franchisor and Operator.  This agreement shall not be 
binding on Franchisor unless and until it shall have been accepted and signed 
on its behalf by the president or chief financial officer of Franchisor.  
This agreement shall not become effective until and unless operator shall 
have been furnished by Franchisor with all disclosure documents, in written 
form, as may be required under or pursuant to applicable law, for requisite 
time periods.

                                  ARTICLE 23
                               ACKNOWLEDGEMENT

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

                23.2    DUE EXECUTION.  The submission of this Agreement to 
Operator does not constitute an offer and this Agreement shall become 
effective only upon the execution thereof by Franchisor and Operator.  This 
agreement shall not become effective until and unless operator shall have 
been furnished by franchisor with such disclosure, in written form, as may be 
required under or pursuant to applicable law. 

        IN WITNESS WHEREOF, the parties hereof have executed this Agreement 
as of the date of execution by Franchisor.

                                          DIEDRICH COFFEE 

                                          By:
                                             ---------------------------
                                          Its:  President

                                       44
<PAGE>

                                           OPERATOR:
                                                    ---------------------

                                           By:
                                              ---------------------------
                                           Its:
                                              ---------------------------



                                       45
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                                    EXHIBIT A
                           MINIMUM HOURS OF OPERATION

Minimum Operating Hours:  [_:__] a.m. to [_:__] p.m.
                                  _________ days per week 




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