SECURITY AGREEMENT

         The parties to this Security Agreement ("Agreement") are:

SECURED PARTY:       The Virginia Cirica Trust
DEBTOR:              Diedrich Coffee, Inc., a Delaware Corporation

                                      TERMS

         1. Definitions.

            (a) "Collateral" refers to all of Debtor's assets, both tangible and
intangible, whether on Debtor's premises or elsewhere, including, without
limitation:

                (i) all of Debtor's present and future accounts receivable,
         including accounts, instruments, documents, chattel paper, and general
         intangibles in which Debtor, has or later acquires rights
         (collectively, "Accounts");

                (ii) all present and future proceeds of all Accounts;

                (iii) all of Debtor's present and future contract rights,
         including, without limitation, all rights under any insurance policy;

                (iv) all of Debtor's present and future rights as lessee under
         any lease, including furnishings, fixtures, improvements, and personal
         property;

                (v) all of Debtor's present and future rights as lessor under
         any lease, including furnishings, fixtures, improvements, and personal
         property;

                (vi) all of Debtor's present and future equipment, fixtures, and
         trade fixtures;

                (vii) all of Debtor's present and future inventory;


<PAGE>   2

                (viii) all of Debtor's present and future bank accounts,
         deposits, and certificates of any kind;

                (ix) all of Debtor's present and future brokerage accounts of
         any kind;

                (x) all shares, bonds, securities, or other indicia of ownership
         in or rights with respect to any corporation or business entity owned
         by Debtor, now or in the future;

                (xi) all interests which Debtor has or may acquire in any real
         property, wherever located;

                (xii) all books, records, ledger cards, computer programs, and
         other property and general intangibles evidencing or relating to the
         Accounts, any account debtor, or any form of Collateral, including all
         file cabinets or containers in which they are stored (collectively,
         "Records");

                (xiii) all of Debtor's present and future rights with respect to
         intellectual property, including, without limitation, all trade names
         and trademarks (and the goodwill of the business they symbolize),
         patents, copyrights, and licenses, as well as all applications for any
         of the above;

                (xiv) all of Debtor's present and future Federal, State and
         local tax refund claims of all kinds, insurance claims; and
         condemnation awards;

                (xv) all of Debtor's other present and future property rights
         and general intangibles of every kind, including without limitation,
         goodwill, judgments and choses in action, whether tangible or
         intangible, vested or contingent;

                (xvi) all of Debtor's present and future rights of stoppage in
         transit, replevin, repossession and reclamation and other rights and
         remedies of an unpaid vendor, lienor or secured party, guaranties or
         other contracts of suretyship with respect to the Accounts, deposits or
         other security for the obligation of any account debtor, and credit and
         other insurance;

                (xvii) all proceeds of any of the Collateral, including sale
         proceeds, claims against third parties for loss or damage to or
         destruction of Collateral, and insurance proceeds;


                                       -2-

<PAGE>   3

                (xviii) to the extent permitted by law, all of Debtor's
         licenses, permits, qualifications, privileges, rights, franchises,
         authority, and authorizations which are adequate, necessary or
         appropriate for the conduct of Debtor's business;

                (xix) to the extent permitted by applicable leases, all of
         Debtor's present and future rights to possess, occupy, or conduct
         business on the real property owned, leased, or occupied by Debtor for
         use in the continued operation of any or all of Secured Party's stores
         or in connection with the operation of any other lawful business
         thereon; and

                (xx) all of Debtor's present and future rights to possess and
         use the personal property and fixtures owned, leased, or possessed by
         the Company for use in connection with the continued operation of any
         or all of Secured Party's stores or in connection with the operation of
         any other lawful business.

            (b) "Indebtedness" means all of the Obligations (as defined below)
of Debtor to Secured Party under the Secured Promissory Note between the parties
of even date (the "Promissory Note") and the Term Loan Agreement to be entered
into between Debtor and Secured Party (the "Term Loan Agreement") (including,
without limitation, attorneys' fees and out-of-pocket costs and interest on
those fees and costs at annual rate of 10% from the date incurred), or any other
agreement between the parties, including future agreements by which Debtor
becomes indebted or otherwise obligated to Secured Party.

            (c) "Obligations" means existing and future Indebtedness, including
any non-monetary liabilities of Debtor to Secured Party, and obligations under
the Term Loan Agreement and the Promissory Note, including attorneys' fees and
costs incurred in enforcing this Agreement or collecting payment under it.

            (d) Terms defined in the California Commercial Code not otherwise
defined in this Agreement are used in this Agreement as defined in that Code on
the date of this Agreement.

         2. Security Interest. In consideration for Secured Party's commitment
to loan Debtor monies under the Promissory Note and under the Term Loan
Agreement, Debtor grants Secured Party a first-priority security interest in the
Collateral to secure payment of the Obligations. The first-priority security
interest is subject to the following:

            (a) Debtor represents that, with the exception of UCC filings of
record, liens for taxes not yet due and payable, and mechanics' liens, it is the
sole


                                       -3-

<PAGE>   4

legal and equitable owner of 100% of the Collateral and has not previously
transferred, assigned, pledged, or hypothecated any interest in any of the
Collateral.

            (b) Except for (i) the property to be disposed of as set forth in
Schedule A attached hereto, (ii) sales of inventory in the ordinary course of
business, and (iii) sales of used equipment or furnishings in the ordinary
course of business (and not in full or partial liquidation of Borrower's
business), Debtor will not, without the written consent of Secured Party,
transfer, assign, pledge or hypothecate any interest in the Collateral until it
satisfies the Indebtedness owed to Secured Party, except that:

                (i) Borrower may grant or suffer the existence of mechanics'
         liens and landlord liens in the ordinary course of its business,
         provided that Borrower makes adequate provisions for the payment or
         other satisfaction of such liens;

                (ii) Borrower may grant purchase money liens in the ordinary
         course of its business, provided that such purchase money liens shall
         have priority over the rights of Secured Creditor only to the extent of
         the portion of the purchase price which was advanced to Borrower by the
         purchase money lender and if such purchase money lender shall require
         Borrower to convey security other than the goods sold to Borrower, the
         agreement between Borrower and the purchase money lender shall
         expressly acknowledge that the Borrower money lender's rights with
         respect to any such additional security shall be junior to the rights
         of Secured Party; and

                (iii) Borrower may enter into certain sale and leaseback
         agreements with respect to equipment as set forth in Schedule B
         attached hereto.

            (c) If any of the Collateral, or any interest in it, is conveyed,
pledged or alienated by the Debtor, by operation of law or otherwise, except as
set forth above, the Indebtedness shall immediately become due at the option of
Secured Party, and without demand or notice.

            (d) In the event of a default (as defined in Section 8 below)
Secured Party shall have the right to occupy, possess, use, or sublet any or all
of Debtor's present or future real or personal property (whether owned or
leased) as Secured Party, in its sole an absolute discretion, as Secured Party
deems appropriate or desirable (provided such action is not prohibited by any
underlying lease) and such right is a material part of the consideration for
Secured Party's loan to Debtor. This is because Secured Party's ability to
operate some or all of Debtor's stores (or to sublet the premises or use such
property as may be permitted by any underlying lease)


                                       -4-

<PAGE>   5

may, under certain circumstances, be the best or only way that Secured Party can
protect its rights as a practical matter.

         3. Covenants of Debtor. Debtor promises:

            (a) To pay the Indebtedness to Secured Party when it is due, time
being of the essence.

            (b) To pay all expenses, including attorneys' fees, incurred by
Secured Party in the perfection, preservation, realization, enforcement, and
exercise of its rights under this Agreement.

            (c) To indemnify Secured Party against actual loss of any kind,
including reasonable attorneys' fees, caused to Secured Party by reason of its
interest in the Collateral.

            (d) Not to sell, lease, transfer, or otherwise dispose of any
Collateral except for (i) the property to be disposed of as set forth in
Schedule A, (ii) sales of inventory in the ordinary course of business, (iii)
sales of used equipment or furnishings in the ordinary course of business (and
not in full or partial liquidation of Borrower's business), and (iv) the sale
and leaseback agreements as set forth in Schedule B.

            (e) Not to permit liens on the Collateral, except existing liens,
liens for taxes not yet due and payable, mechanics' liens, landlord liens, and
purchase- money liens.

            (f) To execute and deliver to Secured Party all financing statements
and other documents that Secured Party requests, in order to maintain a
first-perfected security interest in the Collateral in all appropriate
jurisdictions.

            (g) To maintain, satisfactory and complete books and records of all
Accounts, and to make all records available as Lender may reasonably request;
provided, however, that Lender may only use the information contained in such
records for purposes consistent with this Agreement.

            (h) That it has made adequate provisions to pay or otherwise fully
satisfy all tax obligations, mechanics' liens, and landlord liens.

         4. Insurance. Debtor represents, warrants, and covenants that, at
present and for so long as any of the Indebtedness remains unsatisfied:


                                       -5-

<PAGE>   6

            (a) Debtor maintains and shall continue to maintain adequate
insurance protection against all damages, losses, liabilities, claims, and risks
against which it is customary to insure, all in amounts as is adequate given the
nature and size of Debtor's business and its foreseeable risks. In this regard,
Debtor shall, at a minimum, carry (i) fire, casualty, and loss of income
insurance on all its business and assets, including all items of Collateral as
is customary for Debtor's business and all of Debtor's insurable interests in
its real and personal property (whether owned or leased), in amounts which are
customary and (ii) general liability insurance against all liabilities to
insure, in amounts which are customary.

            (b) Debtor is not in default with respect to payment of premiums on
any insurance policy held by Debtor.

            (c) Debtor shall cause Secured Party and its successors and assigns
to be named as additional insureds on each of the insurance policies described
above. Debtor shall likewise cause Secured Party and its successors and assigns
to be named as additional insureds on each subsequent, replacement, or
additional insurance policies which it may later acquire.

         5. Appointment of Attorney in Fact. In the event of a default (as
defined in Section 8 below), and subject to the terms of the Intercreditor
Agreement between Secured Party and the other parties thereto to be entered into
as of a later date ("the Intercreditor Agreement"), Debtor appoints Secured
Party as Debtor's attorney in fact, with the following powers:

            (a) To perform any of the Obligations of Debtor under the Agreement,
the Term Loan Agreement, or the Promissory Note in Debtor's name or otherwise;

            (b) To collect any payments due to and to enforce all of the rights
of Creditor with respect to any of the Collateral;

            (c) To give notice of Secured Creditor's right to payment, to
enforce that right, and to make extension agreements with respect to it;

            (d) To prepare and file financing statements, continuation
statements, statements of assignment, termination statements, and the like as
necessary, appropriate, or helpful to perfect, protect, preserve, or release
Secured Party's interest in the Collateral;

            (e) To endorse Debtor's name on instruments, documents, or other
forms of payment or security that come into Secured Party's possession; and


                                       -6-

<PAGE>   7

            (f) To accept cash in payment of Obligations.

         6. Termination. This Agreement and the Secured Party's security
interest hereunder shall be extinguished when Debtor satisfies the Indebtedness
in full and completes performance of all Obligations to Secured Party.

         7. Documents to Perfect. Debtor shall execute all documents, including
UCC-1 form financing statements, requested by Secured Party to effectuate and
perfect the security interest, as may be necessary, appropriate, or helpful to
secure the benefits to be provided to Secured Party under this Agreement, the
Term Loan Agreement, or the Promissory Note.

         8. Default. Debtor will be in default under this Agreement if:

            (a) Debtor fails to satisfy any Obligation on or before the required
date of performance thereof and such default remains uncured for a period of at
least 15 days;

            (b) There shall occur any event which constitutes an "Event of
Default" under the Promissory Note; or

            (c) There shall occur any event which constitutes an "Event of
Default" under the Term Loan Agreement.

         9. Remedies for Default. Upon the occurrence of any default, and
subject to the Intercreditor Agreement:

            (a) Secured Party shall have all rights of a secured creditor under
the California Commercial Code and under the Uniform Commercial Code of any
other jurisdiction as may be necessary, appropriate, or helpful to enforce this
Agreement. These rights include, but are not limited to, the right to take
possession, appropriate or sell any of the Collateral and apply proceeds of the
Collateral toward payment of the underlying obligation; the right to settle and
compromise any claims of the Debtor regarding the Collateral; the right to
prosecute any action, suite or proceeding with respect to the Collateral; and
the right to sell the Collateral at a public or private sale and to purchase
Collateral at such a sale.

            (b) Debtor waives any bond that might be required if Secured Party
seeks to take possession of Collateral through judicial process.

            (c) All rights, powers and remedies shall be cumulative and may be
exercised successively or concurrently in Secured Party's sole discretion
without impairing its security interest, rights or available remedies. Secured
Party's


                                       -7-

<PAGE>   8

forbearance, failure or delay in exercising any right, power, or remedy shall
not preclude further exercise of that or any other right, power, or remedy,
which shall continue in effect until Secured Party specifically waives it in
writing. Secured Party has the right to decide, in its sole discretion, which
remedies it will pursue and when. Debtor will remain liable for any deficiency
after disposition of the Collateral.

            (d) Debtor agrees that each of the following procedures will be
considered "commercially reasonable" within the meaning of the California
Commercial Code, the Uniform Commercial Code of any other state or jurisdiction,
and any similar statutes, rules, or regulations which may be applicable:

                (i) The giving of notice of any sale of any of the Collateral by
         Secured Party to Debtor, in the manner set forth in Paragraph 16 of
         this Agreement, which is at least 5 days before the date of any public
         sale (or 5 days before the time after which a private sale will be
         made); or

                (ii) The sale of any Collateral to a supplier, including sale in
         bulk or in parcels, as may be provided in any agreement between Secured
         Party and the supplier.

         If Secured Party disposes of any Collateral other than as set out in
this subparagraph, the commercial reasonableness of the disposition will be
determined under California law.

         10. Assignment of Rights of Secured Party. Secured Party may, at any
time, sell, assign, convey, alienate, pledge, hypothecate, borrow against, or
otherwise transfer or encumber any or all of the interests, rights, and powers
granted to Secured Party by this Agreement without any need to obtain Debtor's
consent or approval to such transfer or encumbrance and regardless of whether
Secured Party has provided Debtor with prior notice of that or any transfer or
encumbrance.

         11. Transfers Requiring Consent, Approval, or Waiver. Notwithstanding
any other provision of this Agreement to the contrary, if it should be
determined that any right of Debtor lessee under any lease of Debtor ("Leasehold
Right") is not assignable or transferable pursuant to the terms of such lease
without the consent, approval, or waiver of a third party, or if an assignment
or other transfer ("Transfer") of, or an agreement to Transfer, any Leasehold
Right would constitute a breach thereof or a violation of law, nothing in this
Agreement will constitute a Transfer of, or an agreement to Transfer, such
Leasehold Right.

         12. Defenses. In the event of any default, Debtor will fulfill all of
Obligations and commitments to Secured Party regardless of whether any
Collateral is defective or worth less than believed or anticipated and will
indemnify and hold


                                       -8-

<PAGE>   9

Secured Party harmless against any claims or defenses asserted by any buyer of
the Collateral relating to the condition of, or representations made by Debtor
about, any Collateral. Debtor waives all rights of offset against Secured Party
and agrees that it will not assert against Secured Party any claim or defense
Debtor has or may have against any third party.

         13. Further Acts; Cooperation. The parties will execute all further
documents reasonable, convenient, necessary, or desirable to carry out this
Agreement. The parties shall cooperate to effectuate the intent of this
Agreement and the mutual benefits intended to be conferred under it.

         14. Successors and Assigns. This Agreement shall be binding upon and
insure to the benefit of the parties and their respective heirs, successors, and
assigns.

         15. Jurisdiction and Venue for Disputes. Any action relating to any
dispute under this Agreement shall be litigated solely in the courts located in
Orange County, California. All parties consent to the jurisdiction in the State
of California over all disputes and consent that venue is proper in Los Angeles
County, California.

         16. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given upon personal delivery, facsimile transmission
(with written or facsimile confirmation of receipt), telex or delivery by a
reputable overnight commercial delivery service (delivery, postage or freight
charges prepaid), or on the fourth day following deposit in the United States
mail (if sent by registered or certified mail, return receipt requested,
delivery, postage or freight charges prepaid), addressed to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):

         IF TO SECURED PARTY:

         ______________________________
         ______________________________
         ______________________________
         ______________________________


                                       -9-

<PAGE>   10

         IF TO DEBTOR:

         Diedrich Coffee, Inc.
         2144 Michelson Drive
         Irvine, California  92612
         Attention:  President
         Fax: (714) 756-1144

         WITH A COPY TO:

         Peter J. Tennyson, Esq.
         Paul, Hastings, Janofsky & Walker LLP
         695 Town Center Drive, 17th Floor
         Costa Mesa, California 92626
         Fax: (714) 979-1921

         17. Headings. Headings in this Agreement are for convenience only and
shall not be deemed a part of this Agreement.

         18. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of California.

         19. Construction. All parties have cooperated in the drafting and
preparation of this Agreement. Accordingly, no provision of this Agreement shall
be construed for or against either party by virtue of its having drafted a
specific provision.

         20. Attorneys' Fees. Debtor promises to pay all of the costs and
expense, including reasonable attorneys's fees, incurred in connection with the
perfection and enforcement of this Agreement or in connection with the
collection or enforcement of the Promissory Note. The obligation to pay
attorneys; fees as set forth herein shall not be construed as an agreement
authorizing an award of attorneys' fees incurred in connection with any
controversy or dispute concerning the interpretation, breach, or enforceability
of the Term Loan Agreement even if such fees are incurred in connection with
proceedings seeking the perfection or enforcement of this Agreement or the
collection or enforcement of the Note.

         21. No Waiver. Secured Party's waiver, forbearance, failure, or delay
in exercising any right, power, or remedy shall not preclude further exercise of
that or any other right, power, or remedy, which shall continue in effect until
Secured Party specifically waives it in writing. Secured Party has the right to
decide, in its sole discretion, which remedies it will pursue and when.


                                      -10-

<PAGE>   11

         22. Survival of Representations and Warranties. Debtor's
representations and warranties in this Agreement, the Term Loan Agreement, and
the Promissory Note will survive the execution, delivery, and termination of
this Agreement.

         23. Integration. This Agreement all prior agreement or understandings
between Secured Party and Debtor relating to its subject matter, except for
those agreements contained in the Term Loan Agreement or the Promissory Note.
There are no oral agreements pertaining to the subject matter of this Agreement,
and this Agreement shall supersede all oral representations and statements by
the parties. This Agreement may be modified only by a writing signed by the
party to be charged.

Dated: August 19, 1997

                                         DIEDRICH COFFEE INC. (DEBTOR)

                                         By: /s/ KERRY W. COIN
                                             -----------------------------------
                                         Kerry Coin, its
                                         President and Chief Operating Officer



                                         THE VIRGINIA R. CIRICA TRUST
                                         (SECURED PARTY)

                                         By: /s/ VIRGINIA R. CIRICA
                                             -----------------------------------
                                         Trustee for Virginia R. Cirica Trust


                                      -11-


<PAGE>   12
                   FORM OF SCHEDULE A TO SECURITY AGREEMENT:

                            PROPERTY TO BE DISPOSED

<PAGE>   13
                                PLANNED CLOSURES

RESTRUCTURING COSTS



                      
DEL MAR                     1555 Camino Del Mar, Del Mar, CA 92014
-------
                  Equipment
              Furn/Fixtures
                  Leasehold


ADDISON                     5100 Beltline Road, Addison, TX 75240
-------
                  Equipment
              Furn/Fixtures
                  Leasehold


GREEN MOUNTAIN              12095 West Alameda Pkwy, Lakewood, CO 80228
--------------
                  Equipment
              Furn/Fixtures
                  Leasehold


CHERRY CREEK                2626 East Third Avenue, Denver, CO 80206
------------
                  Equipment
              Furn/Fixtures
                  Leasehold


LARIMER SQUARE              1224 15th Street, Denver, CO 80202
--------------
                  Equipment
              Furn/Fixtures
                  Leasehold



                                     Page 1
<PAGE>   14
                                PLANNED CLOSURES

RESTRUCTURING COSTS



                      
EQUITABLE BLDG              724 17th Street, Denver, CO 80202
--------------
                  Equipment
              Furn/Fixtures
                  Leasehold


COLORADO BLVD               700 Colorado Blvd., Denver, CO 80206
-------------
                  Equipment
              Furn/Fixtures
                  Leasehold


JEWEL & SHERIDAN            1945 So Sheridan Blvd, Unit 105-A, Denver, Co 
----------------            (Location closed in fiscal 1997)
                  Equipment
              Furn/Fixtures
                  Leasehold


MISSION PLAZA               15473-I East Hampden, Aurora, CO 80013
-------------
                  Equipment
              Furn/Fixtures
                  Leasehold


                                     Page 2
<PAGE>   15
                                PLANNED CLOSURES

RESTRUCTURING COSTS



                      
BLVD CENTER                 1685 South Colorado Blvd., Denver, CO 80222
-----------
                  Equipment
              Furn/Fixtures
                  Leasehold


TIFFANY PLAZA               7400 East Hampden Avenue, Denver, CO 80231
-------------
                  Equipment
              Furn/Fixtures
                  Leasehold




                                     Page 3
<PAGE>   16
                                   WATCH LIST

LOCATION A
----------
         Equipment
     Furn/Fixtures
         Leasehold


LOCATION B
----------
         Equipment
     Furn/Fixtures
         Leasehold



                                     Page 4
<PAGE>   17
                       SCHEDULE B TO SECURITY AGREEMENT:

                          PROPOSED EQUIPMENT FINANCING
<PAGE>   18
                             FORM OF SCHEDULE B(1)

COFFEEHOUSE FF&E TO BE LEASED -- FISCAL 1998




    Item         Vendor                            Invoice(s)                Description
    ----         ------                           ----------                -----------
                                                             
     1       Raygal Package                                           1 Clearlake* Package
                                                                      1 Irvine (Jitters)** Package
                                                                      1 Santa Monica (Home Savings)*** Pkg

     2       Diedrich Package                                         1 Clearlake* Package
                                                                      1 Irvine (Jitters) Package
                                                                      1 Santa Monica (Home Savings) Pkg

     3       Sign Vendors                                             1 Clearlake Package
                                                                      1 Irvine (Jitters) Package
                                                                      1 Santa Monica (Home Savings) Pkg



---------------------
  * Clearlake refers to the Diedrich coffeehouse located on Bay Area Blvd. in
    Houston, Texas which opened in July 1997

 ** Jitters refers to a Diedrich coffeehouse to be established in the
    University Center in Irvine, CA in the fall of 1997

*** Santa Monica (Home Savings) refers to a Diedrich coffeehouse to be
    established at 26th & Wilshire Blvd. in Santa Monica in the fall or winter 
    of 1997/8 

                                  Page 1 of 3
<PAGE>   19
                             FORM OF SCHEDULE B(2)

   HOME OFFICE DATA PROCESSING HARDWARE & SOFTWARE TO BE LEASED - FISCAL 1998




    Item     Vendor                                 Invoice(s)                Description
    ----     ------                                 ----------                ----------- 
                                                              
     1       Data Enhancement International, Inc.                      Xcellenet & Related Software*
             (Vendor not yet selected - may vary)                      Implementation**
                                                                       Hardware***

     2       Lotus Development                                      15 Organizer GS*
                                                                    75 Notes 4.5 client*
                                                                       (includes software for coffeehouses)

     3       Microsoft                                              35 Office 97*
                                                                     1 SQL Server*

--------------------
      * Software to be purchased from third parties

     ** Third party time to install, test and debug software and hardware

    *** PC based server, modem pool and telecommunications equipment


                                  Page 2 of 3
<PAGE>   20
                            FORM OF SCHEDULE B(3)

COFFEE CARTS TO BE LEASED - FISCAL 1998




    Item          Vendor              Invoice(s)      Description
    ----          ------              ----------      -----------
                                             
     1       VanSan                                   6 8' Carts



     2       Various                                  6 Cart Equipment Packages
               Rio or La Mazzorco                       Espresso Machines
               Bunn-O-Matic                             Grinder
               Curtis                                   Brewer
               Vita Mix                                 Blender
               Mazer                                    Grinder
               Other                                    Water Conditioner & Other

     3       Microsoft                                6 Javelin Terminals
                                                      6 Modem
                                                      6 Cash drawers



                                  Page 3 of 3

Source: OneCLE Business Contracts.