EXHIBIT 10.38

THIRD AMENDMENT  TO CREDIT AGREEMENT

THIS THIRD AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made and dated as of the 1st day of July, 2003 by and between DIEDRICH COFFEE, INC., a
Delaware corporation (the "Company"), and BANK OF THE WEST (the "Lender").

RECITALS

A.    Pursuant
to that certain Credit Agreement dated as of September 3, 2002 by and between the Company and the Lender (as amended, extended and replaced from time to
time, the "Credit Agreement," and with capitalized terms used herein and not otherwise defined used with the meanings given such terms in the Credit Agreement), the Lender agreed to extend credit to
the Company on the terms and subject to the conditions set forth therein.

B.    The
Company has requested the Lender to amend the Credit Agreement in certain respects and the Lender has agreed to do so on the terms and subject to the conditions set
forth herein.

NOW,
THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby
agree as follows:

AGREEMENT

1.Applicable Interest Rates. To reflect the agreement of the parties hereto to modify the interest rates applicable to the
Loans, as of the Effective Date (as defined inParagraph 7below):



2.Modification to Equipment Acquisition Line Term-Out Loan. To reflect the agreement of the parties hereto to
modify the date of the final payment of principal with respect to the Equipment Acquisition Line Term-Out Loan,Paragraph 1(b)is
hereby amended by deleting the date "August 31, 2006" set forth therein and replacing the same with the date "August 28, 2006."

1

---

3.Modifications to Working Capital Facility. To reflect the agreement of the parties hereto to make certain modifications to
the credit facility provided for inParagraph 4of the Credit Agreement, as of the Effective Date:



4.Modifications to Letter of Credit Facility. To reflect the agreement of the parties hereto to make certain modifications
to the letter of credit facility provided for inParagraph 5of the Credit Agreement, as of the Effective Date:



5.Fiscal Year 2004 Expansion Line. The parties hereto hereby acknowledge and agree that notwithstanding anything else
contained in the Credit Agreement, as of the Effective Date, the credit facility provided underParagraph 3of the Credit Agreement is hereby
terminated and the principal amount of any and all FY 2004 Expansion Line Loans outstanding as of the Effective Date is immediately due and payable without amortization.

6.Modification of Covenants. To reflect the agreement of the parties hereto to modify certain of the covenants applicable to
the Company under the Credit Agreement, as of the Effective Date:



2

---



3

---



4

---



7.Effective Date. This Amendment shall be effective as of the date first written above upon the date that the Lender shall
have received:



8.Reaffirmation of the Loan Documents. The Company and each of the Guarantors, by executing this Amendment as provided
below, hereby affirms and agrees that: (a) the execution and delivery by it of and the performance of its obligations under this Amendment shall not in any way amend, impair, invalidate or
otherwise affect any of its obligations under the Loan Documents to which it is party except to the extent expressly amended hereby, (b) the term "Obligations" as used in the Loan Documents
include, without limitation, the Obligations of the Company under the Credit Agreement as amended by this Amendment, and (c) except as expressly amended hereby, the Loan Documents remain in
full force and effect as written.

9.Representations and Warranties. The Company and each of the Guarantors by executing this Amendment as provided below,
hereby represents and warrants to the Lender that:



10.No Other Amendment. Except as expressly amended hereby, the Credit Agreement and other Loan Documents shall remain in
full force and effect as written.

11.Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be
deemed to be an original and all of which when taken together shall constitute one and the same agreement.

[Signatures
Page Following]

5

---

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

| |  | DIEDRICH COFFEE, INC.,
a Delaware corporation
| |  | ---------------------------------------------
| |  | By:                                          
| |  | Name:                                        
| |  | By:                                          
| |  | Name:                                        
| |  | BANK OF THE WEST                             
| |  | By:                                          

|ACKNOWLEDGED AND AGREED TO:                          
|-----------------------------------------------------
|COFFEE PEOPLE WORLDWIDE, INC.,
a Delaware corporation
|By:                                                  
|Name:                                                
|By:                                                  
|Name:                                                

6

---

|COFFEE PEOPLE, INC.,
an Oregon corporation      
|------------------------------------------------
|By:                                             
|Name:                                           
|By:                                             
|Name:                                           
|GLORIA JEAN'S, INC.,
a Delaware corporation     
|By:                                             
|Name:                                           
|By:                                             
|Name:                                           
|EDGLO ENTERPRISES, INC.,
an Illinois corporation
|By:                                             
|Name:                                           
|By:                                             
|Name:                                           

7

---

|GLORIA JEAN'S GOURMET COFFEES CORP.,
an Illinois corporation            
|------------------------------------------------------------------------
|By:                                                                     
|Name:                                                                   
|By:                                                                     
|Name:                                                                   
|GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP.,
an Illinois corporation
|By:                                                                     
|Name:                                                                   
|By:                                                                     
|Name:                                                                   

8

---

QuickLinks