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                                                                   EXHIBIT 10.16

                              EMPLOYMENT AGREEMENT

       THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") entered into effective as of
the 29th day of June, 2001 (the "EFFECTIVE DATE"), is made by and between
DIEDRICH COFFEE, INC., a Delaware corporation (the "COMPANY"), and MARTIN R.
DIEDRICH, an individual (the "EXECUTIVE").

                                    RECITALS

       The Company and the Executive desire to enter into this Agreement in
order to set forth the terms and conditions of the Executive's employment by the
Company during the term hereof.

                                    AGREEMENT

       NOW, THEREFORE, in consideration of the covenants contained herein, the
above recitals and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:

                                    ARTICLE I
                                     DUTIES

       1.01 Term. The Company hereby employs the Executive, and the Executive
hereby accepts such employment, as the Chief Coffee Officer upon the terms and
conditions set forth in this Agreement. The Executive will report directly to
the Chief Executive Officer. Unless earlier terminated as provided in this
Agreement, the term of Employee's employment under this Agreement shall continue
for a period of three (3) years from the date hereof (the "TERM").

       1.02 Duties. The Executive shall perform such duties and functions
consistent with his role as Chief Coffee Officer as may from time to time be
assigned to him by the Company's Chief Executive Officer or the Board of
Directors of the Company (the "BOARD").

       1.03 Other Business. The Executive agrees that during the course of the
Company's business hours, he will devote the whole of his time, attention and
efforts to the performance of his duties and obligations hereunder. The
Executive shall not, during the term of this Agreement, engage in any activity
which materially interferes with his performance of duties assigned the
Executive hereunder.

                                   ARTICLE II
                                  COMPENSATION

       For all services to be rendered by Executive under this Agreement, the
Company shall pay, or cause to be paid to the Executive in cash in accordance
with the normal payroll practices of the Company for senior executive officers
(including deductions withholdings and collections as required by law), the
following:

       2.01 Annual Base Salary. An annual base salary ("ANNUAL BASE SALARY")
equal to One Hundred Sixty Thousand Dollars ($160,000) per year. During the term
of this Agreement, the Chief Executive Officer shall review the Executive's
Annual Base Salary with the Compensation Committee on or about each anniversary
date of the date of this Agreement. The Compensation Committee, in its sole and
absolute discretion from time to time, may adjust the Executive's Annual Base
Salary.

       2.02 Annual Incentive Bonus. The Executive will be eligible for a cash
bonus (the "ANNUAL INCENTIVE BONUS") of up to Twenty-five percent (25%) of the
Executive's annual base salary, as determined by the Compensation Committee in
its sole and absolute discretion, and subject to the achievement of fiscal year
budgeted income targets for the Company as set forth by the Board.


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       2.03 Gross Amounts. The Annual Base Salary and Annual Incentive Bonus set
forth in this Article II shall be the gross amounts of such Annual Base Salary
and Annual Incentive Bonus. The Executive is responsible for paying any and all
taxes due on any amounts received by him as Annual Base Salary or Annual
Incentive Bonus, including, but not limited to any income tax, social security
tax, Medicare tax or capital gains tax.

       2.04 Stock Options. The Board will review the issuance of additional
stock options annually.

                                   ARTICLE III
                                 OTHER BENEFITS

       3.01 Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable and necessary travel and other business
expenses incurred or paid by the Executive in connection with the performance of
his services under this Agreement, in accordance with the Company's policies for
other senior executives of the Company.

       3.02 Vacation. The Executive shall be entitled to vacation leave
consistent with the Company's policies.

       3.03 Car Allowance. The Executive will be entitled to an automobile
allowance equal to Four Hundred Dollars ($400) per month, paid on a bi-weekly
basis, in reimbursement of all expenses associated with the operation,
maintenance and use of a vehicle for business purposes.

       3.04 Other Benefits. In addition to the benefits set forth above, the
Executive shall be entitled to participate in any other policies, programs and
benefits which the Company may, in its sole and absolute discretion, make
generally available to the other senior executives from time to time including,
but not limited to, health, dental, medical, life and disability insurance,
pension and retirement plans, stock plans and other similar programs.

                                   ARTICLE IV
                                   TERMINATION

       4.01 Termination of Employment. The Executive's employment under this
Agreement is expressly "at will" and may be terminated at any time, with or
without cause or notice. Any termination of the Executive's employment is,
however, subject to the terms and provisions of this Agreement.

       4.02 Termination for Cause. The Company may terminate the Executive's
employment for Cause by giving the Executive written notice of such termination.
For purposes of this Agreement, "CAUSE" for termination shall mean:

              (i) the willful failure or refusal to carry out the reasonable
directions of the Chief Executive Officer or the Board, which directions are
consistent with the Executive's duties as set forth under this Agreement;

              (ii) a willful act by the Executive that constitutes gross
negligence in the performance of the Executive's duties under this Agreement and
which materially injures the Company. No act, or failure to act, by the
Executive shall be considered "willful" unless committed without good faith and
without a reasonable belief that the act or omission was in the Company's best
interest;

              (iii) a conviction for a violation of a state or federal criminal
law involving the commission of a felony or other crime involving moral
turpitude; or

              (iv) unethical business practices, including fraud or dishonesty,
in connection with the Company's business.


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Upon termination of the Executive's employment by the Company for Cause or
termination of the Executive's employment by the Executive for any reason, the
Executive shall not be entitled to payment of any compensation other than salary
under this Agreement earned up to the date of such termination, any accrued but
unpaid vacation days, and any stock options, warrants, retirement benefits or
similar rights which have vested at the date of such termination unless the
terms of such stock options, warrants, retirement benefits or similar rights
provide otherwise.

       4.03 Termination Without Cause. Should the Executive's employment be
terminated by the Company for a reason other than as specifically set forth in
Section 4.02 above, the Executive shall not be entitled to payment of any
compensation or severance other than:

              (i) the Company shall make a one-time payment to the Executive
equal to the Annual Base Salary, as defined in Section 2.01; and

              (ii) all of the stock options, warrants, retirement benefits and
other similar rights, if any, granted by the Company to the Executive which are
vested at the date of termination shall remain vested unless the terms of such
stock options, warrants, retirement benefits or similar rights provide
otherwise.

       4.04 No Mitigation. The Executive shall not be required to mitigate the
amount of any payment provided for in Section 4.03 by seeking other employment
or otherwise, nor shall the amount of any payment provided for in Section 4.03
be reduced by any compensation earned by the Executive as a result of employment
by another company, self-employment or otherwise.

                                    ARTICLE V
                                  MISCELLANEOUS

       5.01 Assignment, Successors. This Agreement is personal to the Executive
and may not be assigned by the Executive in whole or in part. This Agreement
shall be binding upon and inure to the benefit of the Executive and the
Executive's estate and the Company and any assignee of or successor to the
Company.

       5.02 Severability. If all or any part of this Agreement is declared by
any court or governmental authority to be unlawful or invalid, such unlawfulness
or invalidity shall not serve to invalidate any portion of this Agreement not
declared to be unlawful or invalid. Any paragraph or part of a paragraph so
declared to be unlawful or invalid shall, if possible, be construed in a manner
which will give effect to the terms of such paragraph or part of a paragraph to
the fullest extent possible while remaining lawful and valid.

       5.03 Amendment and Waiver. This Agreement shall not be altered, amended
or modified except by written instrument executed by the Company and the
Executive. A waiver of any term, covenant, agreement or condition contained in
this Agreement shall not be deemed a waiver of any other term, covenant,
agreement or condition and any waiver of any other term, covenant, agreement or
condition, and any waiver of any default in any such term, covenant, agreement
or condition shall not be deemed a waiver of any later default thereof or of any
other term, covenant, agreement or condition.


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5.04 Notices. All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed given upon personal delivery, facsimile
transmission (with confirmation of receipt), delivery by a reputable overnight
courier service or five (5) days following deposit in the U.S. mail (if sent by
registered or certified mail, return receipt requested, postage prepaid), in
each case duly addressed to the party to whom such notice or communication is to
be given as follows:

          If to the Company:          DIEDRICH COFFEE, INC.
                                      2144 Michelson Drive
                                      Irvine, California 92612
                                      Fax: (949) 260-1610

          With a copy to:             GIBSON DUNN & CRUTCHER LLP
                                      Attn: John M. Williams III, Esq.
                                      4 Park Plaza, Suite 1800
                                      Irvine, California 92614
                                      Fax: (949) 451-4220

          If to the Executive:        Martin Diedrich

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Either party may from time to time designate a new address by notice given in
accordance with this Section. Notice and communications shall be effective when
actually received by the addressee.

       5.05 Counterpart Originals. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

       5.06 Entire Agreement. This Agreement forms the entire agreement between
the parties hereto with respect to any severance payment and with respect to the
other subject matters contained in this Agreement.

       5.07 Applicable Law. The provisions of this Agreement shall be
interpreted and construed in accordance with the laws of the state of
California, without regard to its choice of law principles.

       5.08 Legal Fees; Arbitration. The parties hereto expressly agree that in
the event of any dispute, controversy or claim by any party regarding this
Agreement, the prevailing party shall be entitled to reimbursement by the other
party to the proceeding of reasonable attorney's fees, expenses and costs
incurred by the prevailing party. Any controversy, dispute or claim arising out
of, in connection with, or in relation to the interpretation, performance or
breach of this Agreement or otherwise arising out of the execution hereof,
including any claim based on contract, tort or statute, shall be resolved, at
the request of any party, by submission to binding arbitration at the Orange
County, California offices of Judicial Arbitration & Mediation Services, Inc.
("JAMS"), and any judgment or award rendered by JAMS shall be final, binding and
unappealable, and judgment may be entered by any state or federal court having
jurisdiction thereof. Any party can initiate arbitration by sending written
notice of intention to arbitrate (the "DEMAND") by registered or certified mail
to all parties and to JAMS. The Demand shall contain a description of the
dispute, the amount involved, and the remedy sought. The arbitrator shall be a
retired or former judge agreed to between the parties from the JAMS' panel. If
the parties are unable to agree, JAMS shall provide a list of three available
judges and each party may strike one. The remaining judge shall serve as the
arbitrator. Each party hereto intends that the provisions to arbitrate set forth
herein be valid, enforceable and irrevocable. In his or her award, the
arbitrator shall allocate, in his or her discretion, among the parties to the
arbitration all costs of the arbitration, including the fees of the arbitrator
and reasonable attorneys' fees, costs and expert witness expenses of the
parties.


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The parties hereto agree to comply with any award made in any such arbitration
proceedings that has become final and agree to the entry of a judgment in any
jurisdiction upon any award rendered in such proceeding becoming final.



       IN WITNESS WHEREOF the parties have executed this Agreement on the date
first written above.


                                        DIEDRICH COFFEE, INC.,
                                        a Delaware corporation


                                        By:
                                           -------------------------------------
                                        Name: J. Michael Jenkins
                                        Title: Chief Executive Officer



                                        MARTIN R. DIEDRICH,
                                        an individual


                                        ----------------------------------------
                                        Martin R. Diedrich


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