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                                                                   EXHIBIT 10.39


                        SEPARATION AND RELEASE AGREEMENT

               The parties to this Separation and Release Agreement (the
"Agreement") are Jonathan B. Eddison ("Employee") and Diedrich Coffee, Inc. (the
"Company") who agree and state that:

               (A) Employee has been employed by the Company in the position of
Vice President and General Counsel since June 29, 1997.

               (B) Employee and the Company entered into that certain Employment
Agreement, dated June 16, 1997, (the "Employment Agreement").

               (C) The position of Vice President and General Counsel is being
eliminated from the Company effective January 30, 1998, which is no reflection
on Employee or Employee's job performance.

               (D) The elimination of the position will terminate the Employment
Agreement and exchange the consideration set forth below upon the terms and
conditions set forth below in full satisfaction of Employee's and the Company's
rights and obligations set forth in the Employment Agreement.

               THEREFORE, based on the following promises contained herein,
Employee and the Company hereby agree as follows:

               1. PAYMENT. The Company agrees to pay Employee as separation
amount (the equivalent of three months salary), the total amount of which is
twenty-five thousand dollars ($25,000.00) (the "Separation Amount"). The
Separation Amount was paid in full on February 20, 1998, receipt of which is
hereby acknowledged.

               Employee and the Company acknowledge that the Employee has not
yet crossed the agreed upon vesting period pursuant to the original Stock Option
Grant. Contingent on Board approval, the Company agrees that the Employee shall
retain the right to purchase eleven thousand six hundred sixty-seven (11,667)
shares at an exercise price of $3.00 per share as previously granted under the
Company's 1996 Stock Incentive Plan. Unless terminated earlier pursuant to
Paragraph 10, this option will become exercisable one year from original hire
date (June 29, 1998). Options expire June 29, 2007. Employee may exercise these
stock options by "cashless exercise" whereby capital stock of the Company will
be retained by the Company from the stock otherwise issuable upon exercise or
surrender of vested and/or exercisable option shares. Employee further
acknowledges and agrees that the option to purchase 23,333 additional shares, as
previously granted under the Company's 1996 Stock Incentive Plan, is terminated
effective the date of his termination.

               Company agrees to continue Employee's health insurance payments
and



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benefits from January 31, 1998 through February 28, 1998.

               Employee acknowledges that he received a final paycheck for all
wages due, including all accrued vacation, through the date of his termination.
Employee further acknowledges and agrees that the Separation Amount shall be the
sole amount paid to him, and he shall have no entitlement or claim to any
further compensation or benefits from the Company, including without
limitations, salary, bonuses, incentive compensation, vacation payments,
severance, unvested pension benefits, employer-paid health benefits or any other
employment benefits; provided, however, that if the Board of Directors of the
Company elects to award management bonuses for fiscal year 1998, the Board shall
grant an equitable bonus to Employee.

               2. WHOLESALE ACCOUNT. In consideration of Employee's service and
loyalty, Employee is granted the right to order roasted coffee for personal use
as a wholesale account without regard to the minimum purchase requirements which
are or may be imposed on wholesale accounts.

               3. RELEASE. Except for that certain Indemnification Agreement
dated June 16, 1997, Employee on behalf of himself and his executors, legatees,
devises, administrators, successors and assigns, does hereby knowingly and
willingly forever release and absolutely and forever fully discharge the Company
and all of its current and former officers, directors, partners, agents,
servants, lawyers, employees, assigns, insurers, predecessors-in-interest,
successors-in-interest, underwriters, and all of its parent, affiliated and
subsidiary entities from any and all causes of action, judgements, liens,
indebtedness, costs, damages, obligations, attorney's fees, losses, claims,
liabilities and demands of whatever kind and character, whether known or
unknown, suspected or unsuspected (including, for example, claims for wrongful
termination, unlawful discrimination, payment of wages, vacation pay, health
benefits, business and travel expenses, life insurance, disability insurance,
pension and retirement plans, severance pay, layoff benefit or other
entitlements), arising out of or in any way related to any of the circumstances
of Employee's relationship with the Company, up to the date he signs below.

                    Company on behalf of itself, its officers, directors,
affiliates and authorized agents and representatives does hereby knowingly and
willingly forever release and absolutely forever fully discharge Employee and
his successors and assigns from any and all causes of action, judgments, liens,
indebtedness, costs, damages, obligations, attorney's fees, losses, claims,
liabilities, and demands of whatever kind and character, whether known or
unknown, suspected or unsuspected, arising out of or in any way related to any
of the circumstances of Company's relationship with the Employee, up to the date
of this Agreement.

               4. ADEA WAIVER. Employee specifically agrees that the foregoing
release includes any and all claims, rights and/or remedies arising under the
Age Discrimination in Employment Act ("ADEA") and the Older Workers Benefit
Protection



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Act. Employee acknowledges that, prior to signing this Agreement, he was
provided a period of twenty-one (21) days to consider its provisions, including
this ADEA wavier. Employee further acknowledges that he is entitled to revoke
this ADEA waiver within seven (7) days after he executes this Agreement, and
this ADEA waiver is not effective or enforceable until this seven-day revocation
period has expired. Employee also acknowledges that he has been advised to
consult with an attorney prior to signing this ADEA waiver and Agreement.

               5. ALL DISPUTES. This Agreement also extends to all disputes of
every nature and kind by Employee against the Company whether known or unknown,
suspected or unsuspected, past or present, and regardless of whether they arise
out of or are attributable to the circumstances of Employee's employment or
termination of employment with Company. Specifically, Employee hereby expressly
waives any and all rights under Section 1542 of the California Civil Code, which
reads in full as follows:

               "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
               DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
               EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
               AFFECCTED HIS SETTLEMENT WITH THE DEBTOR."

               Employee acknowledges that he has separately bargained for the
foregoing waiver of section 1542. Employee understands and agrees that the
provisions regarding the disputes released herein be construed as broadly as
possible, and incorporates herein similar federal, state or other laws, all of
which are similarly waived by Employee.

               6. NO OTHER CHARGES OR CLAIMS. Employee represents that except
for ordinary minor business expenses he presently has no charges or claims of
any kind against the Company (including any of the Company's current or former
employees, officers, directors and affiliates) arising out of or related to any
of the circumstances of his relationship with the Company. If, arguendo, any
such charges or claims are pending, Employee agrees that he will withdraw the
same with prejudice. Employee further covenants that he will not hereafter
pursue, initiate or cause to be instituted any claim or charge before any state,
federal or other court, or state or federal agency or other governmental entity
arising out of or related to any of the circumstances of Employee's relationship
or cessation or termination of such relationship with the Company, up to the
date he signs this Agreement, and that if any agency or court assumes
jurisdiction of any complaint, charge or lawsuit against any of these entities
or persons on behalf of Employee, he will promptly request such agency or court
to withdraw from the matter, with prejudice, and he will not seek or accept any
damages.

                    Company represents that it presently has no charges or
claims of any kind against Employee arising out of or related to any of the
circumstances of Employee's relationship with the Company. If, arguendo, any
such charges or claims are



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pending, Company agrees that it will withdraw the same with prejudice. Company
further covenants that it will not hereafter pursue, initiate or cause to be
instituted any claim or charge before any state, federal or other court, or
state or federal agency or other governmental entity arising out of or related
to any of the circumstances of Employee's employment or cessation or termination
of such relationship with Company, up to the date of this Agreement, and further
that if any agency or court assumes jurisdiction of any complaint, charge or
lawsuit by Company, its officers, directors, employees, authorized agents for
representatives against Employee, Company will promptly request such agency or
court to withdraw from the matter, with prejudice, and it will not seek or
accept any damages.

               7. COOPERATION AND ASSISTANCE. Employee agrees to provide
reasonable assistance to the Company as requested by and at the expense of the
Company to affect a smooth and orderly transition and continuation of the
business of the Company. As of February 2, 1998, Employee shall be an
independent contractor and consultant to the Company as more particularly
described in that certain Consulting Agreement between the parties dated as of
February 2, 1998.

                    Employee will reasonably cooperate with and assist the
Company, its agents, owners, employee, and attorneys in the preparation and/or
defense and/or pursuit of any litigation involving the Company, and, in
addition, with respect to any issues related to his employment by the Company,
his performance as an employee/officer of the Company, or any related matters,
except as he may be prevented by law.

                    Employee further agrees that he will not voluntary aid,
assist, cooperate with or encourage any current, former or future employee or
independent contractor of the Company in connection with the pursuit of any
claim or dispute against the Company, unless compelled by deposition or other
legal process. Employee further agrees that, unless expressly requested in
writing to do so by the Company, he will not voluntarily involve himself in any
way with respect to any claim or dispute by any current, former or future
employee, officer, director or independent contractor of the Company, or by
other third party, against the Company. This paragraph is intended to preclude
the voluntary aid or involvement of Employee as described above, and nothing in
this paragraph is intended to influence the substance of such aid or involvement
which is properly compelled by legal process. The provisions of this paragraph
shall be continuing.

               8. NON-SOLICITATION OF EMPLOYEES. Employee agrees not to solicit
or encourage employees of the Company to leave employment of the Company before
June 29, 1998. During such period, if Employee is contacted by employees of the
Company with regard to employment opportunities with Employee, Employee agrees
to inform such employees at the first discussion thereof that Employee cannot
encourage, follow up on, hire or promote the hiring of such employees unless
consent is provided to Employee by the Board of Directors of the Company to
continue such discussions.



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               9. TRADE SECRETS AND CONFIDENTIAL INFORMATION. During the term of
Employee's employment with the Company, Employee had access to and became
familiar with various secrets and other confidential information including, but
not limited to, coffee roasting recipes and processes, proposals, computer
software or programming, budgets or other financial information, product
pricing, growth strategies, contracts, and compilations of confidential
information, data and records which are owned by the Company and which are
regularly used in the operation of the business of the Company (the "Proprietary
Information"). Employee agrees no to disclose any of the Proprietary Information
directly or indirectly, nor use it in any way, except as required by order of a
court of competent jurisdiction or a federal governmental agency. All files,
records, document, data, and similar items relating to the Proprietary
Information or to the business of the Company, whether prepared by Employee or
otherwise coming into his possession, shall remain the exclusive property of the
Company. Employee agrees not to remove from the premises or otherwise take,
procure, or copy this property of the Company under any circumstances
whatsoever. Employee represents and warrants that prior to or concurrently with
the execution of this Agreement, he will return to the Company any of said
property in his possession.

               10. NON-DISPARAGEMENT. Employee agrees that he shall not make any
untruthful or derogatory statements about, or otherwise disrupt, interfere,
impair or damage the business of the Company. This paragraph is not intended to
prohibit Employee from testifying truthfully about the Company when compelled to
testify by law. Company agrees that it will give Employee the best possible
references and recommendations to Employee's future employer(s) and agrees
further that, if it reestablishes the position of Vice President and General
Counsel within 24 months of the Effective Date of this Agreement, Employee will
be advised of the fact and seriously considered in good faith for the position.

               11. TERMINATION OF PAYMENT OBLIGATIONS. Employee acknowledges and
agrees that all of the Company's obligations under Paragraph 1 of this Agreement
will terminate immediately if Employee materially breaches any provision if this
Agreement. The termination provisions of this Paragraph do not limit in any way
the Company's remedies provided in other provisions of this Agreement, all such
remedies being cumulative. The Company's decision to discontinue benefits to
Employee under this Paragraph shall not affect the remaining obligations and
benefits under this Agreement.

               12. NO TRANSFER. Employee represents and warrants that he has not
heretofore assigned or transferred, or purported to have assigned or
transferred, to any firm, corporation, entity or person, any dispute released
herein. Employee agrees to indemnify, defend and hold the Company's harmless
from and against any and all claims based on or arising out of any such
assignment or transfer, or purported assignment or transfer of any claims or any
portion thereof or interest therein.

               13. NO ADMISSION. Employee understands and agrees that neither
the



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payment or promise of consideration, nor the execution of this Agreement shall
constitute or be construed as an admission of any alleged liability or
wrongdoing whatsoever by the Company or its employees, officers, directors, and
affiliates. The Company expressly denies it has committed any alleged liability
or wrongdoing. Company understands and agrees that execution of this Agreement
by Employee shall not constitute nor be construed as an admission of any alleged
liability or wrongdoing whatsoever by the Employee. Employee expressly denies
that he committed any alleged liability or wrongdoing.

               14. ENFORCEMENT OF THIS AGREEMENT. This Agreement shall be
governed by the substantive law of the State of California. In the event of any
dispute concerning the validity, interpretation, enforcement or breach of this
Agreement or in any way related to Employee's employment or termination of
employment with the Company, the dispute shall be resolved by arbitration within
the County of Orange, California, in accordance with the then existing rules for
arbitration of employment disputes of the American Arbitration Association, and
judgement upon any arbitration award may be entered by any state or federal
court having jurisdiction thereof. The Arbitrator's decision in any such
arbitration shall be final and binding on the parties. The parties intend this
arbitration provision to be valid, enforceable, irrevocable and construed s
broadly as possible. The prevailing party in such arbitration shall recover its
reasonable costs and expenses (including, but not limited to arbitration fees
and expenses) and reasonable attorneys' fees.

               15. INVALID PROVISIONS. If any provision of this Agreement is
determined to be invalid or unenforceable, all of the other provisions shall
remain valid and enforceable notwithstanding, unless the provisions found to be
unenforceable is of such material effect that this Agreement cannot be performed
in accordance with the intent of the parties in the absence thereof.

               16. ENTIRE AGREEMENT. No promise, inducement or agreement other
than that expressed herein has been made by either party. This Agreement
constitutes a single integrated contract expressing the entire Agreement of the
parties hereto, and it supersedes all prior agreements and understandings
between the parties with respect to such subject matter, including the
Employment Agreement. Except for that certain Indemnification Agreement between
the parties dated as of June 16, 1997 and that certain Consulting Agreement
dated as of February 2, 1998, there are no other agreements, written or oral,
express or implied, between the parties hereto concerning the subject matter
hereof, except the provisions set forth in this Agreement. This Agreement may be
executed in one or more counterparts, all of which shall constitute a single
original.

               17. AMENDMENTS. This Agreement can be amended, modified or
terminated only by a writing executed by Employee and the President of the
Company.

               18. COMPETENCY. Employee represents that he is in good health and
fully competent to manage his business affairs, he has carefully read this
document, he



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understands all of its contents, he fully understands the final and binding
effect of this Agreement, he has been advised in writing to consult an attorney,
and he executes this Agreement freely and voluntarily. Employee represents and
acknowledges that in executing this Agreement he does not rely and has not
relied upon any representation or statement not set forth herein made by the
Company or by any of its agents, representatives or attorneys with regard to the
subject matter, basis or effect of this Agreement or otherwise. Accordingly, the
parties agree that the common-law principles of construing ambiguities against
the drafter shall have no application hereto. It should be construed fairly and
not in favor of or against one party as to the drafter hereof.

               19. SURVIVAL OF WARRANTIES. All representations and warranties
contained in this Agreement shall survive its execution, effectiveness and
delivery. It is expressly understood and agreed by the Parties hereto that none
of the releases set forth herein are intended to or do release any claims or
rights arising out of this Agreement or the breach of it.

AGREED AND ACCEPTED:

                                            /s/ JONATHAN B. EDDISON
Dated:  January 30, 1998                    ------------------------------------
                                            Jonathan B. Eddison


Dated:  January 30, 1998                    Diedrich Coffee, Inc.

                                            By:   /s/ TIMOTHY J. RYAN
                                                --------------------------------
                                                  Timothy J. Ryan
                                                  President and
                                                  Chief Executive Officer



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