Agreement

EXHIBIT 10.2

DIEDRICH COFFEE, INC.

28 Executive Park, Suite 200

Irvine, CA 92614

December 14, 2005

Stephen V. Coffey

Coffey Management Company

[Address]

Re: Engagement of Coffey Management Company

Dear Steve:

This letter agreement (the “Agreement”) sets forth the services to be provided by Coffey Management Company (“CMC”) and Stephen V. Coffey (“Coffey”) to Diedrich Coffee, Inc. (the “Company”) and the terms and conditions under which such services shall be performed (the “Engagement”).

1. Engagement. Subject to the terms set forth herein, the Company hereby engages CMC and retains Coffey to serve as the Chief Executive Officer of the Company and Coffey hereby accepts the position of Chief Executive Officer effective as of December 14, 2005 (the “Effective Date”).

2. Duties. Coffey will perform such duties customarily performed by the Chief Executive Officer and such other duties as reasonably requested by the Chairman or the Board of Directors of the Company (the “Board”). These duties will include, but not be limited to, signing SEC filings and certifications required by the Sarbanes-Oxley Act. It is understood that Coffey has other CMC client responsibilities but that he does not anticipate any significant time conflicts, will not accept any significant new engagements and will devote the time and attention necessary to fulfill these duties to the Company.

3. Term. The term of CMC’s and Coffey’s Engagement hereunder shall commence on the Effective Date and shall continue on a month to month basis until terminated by either party upon ten days prior written notice to the other party. In the event of termination prior to the end of a calendar month, the Company shall pay CMC the pro rata fees for the portion of the month that the Engagement was effective.

4. Compensation. The Company shall make payment to CMC, in arrears, on the last day of each month of $60,000. For the month of December 2005, on December 31, the Company will pay to CMC an amount equal to the product of the number of days elapsed from the Effective Date to the end of the month multiplied by $1,935.48.

5. Bonus.

(a) At the completion of the Engagement, CMC will receive a bonus amount that will be paid 60% in common stock of the Company and 40% in cash. The bonus amount will be 5%

of the appreciation of the Company’s Market Capitalization (as defined below) during the term of the engagement.

(b) “Market Capitalization” at any given time shall be calculated by multiplying the average of a 10-trading day closing price by the number of outstanding shares of capital stock on the 10th trading day. To determine the appreciation during the Engagement, the Market Capitalization calculated using the 10-trading day period ending on the Effective Date will be subtracted from the Market Capitalization calculated using the 10-trading day period ending on the date of termination of the Engagement (the “Termination Market Capitalization”).

(c) Should an acquisition in one or a series of related transactions of 50% or more of the voting securities of the Company, directly or indirectly, by any person, other than the Company or any affiliate of the Company, occur within 12 months of the termination date of the Engagement, and the per share consideration paid multiplied by the then outstanding shares of capital stock (the “Disposition Value”) is greater than the Termination Market Capitalization, CMC shall receive an additional bonus equal to 5% of the difference obtained by subtracting the Termination Market Capitalization from the Disposition Value; provided, however, that the additional bonus shall not be paid if the Engagement is terminated by either party prior to 6 months from the Effective Date.

6. Expense Reimbursement. CMC will be entitled to reimbursement for reasonable out-of-pocket expenses including, but not limited to, reproduction, typing, computer usage, legal counsel (including legal counsel retained to negotiate and draft this Agreement) and other similar direct expenses and any and all taxes (other than state, local and federal income taxes) on any of the foregoing, provided, however, that such out-of-pocket expenses shall not exceed $1,000 per month without Board approval. Expenses for ordinary course travel on Company business will not be subject to the $1,000 monthly limitation. CMC will be reimbursed within 30 days of submission of reasonable documentation for such expenses. In no event, will CMC be reimbursed later than 2-1/2 months following the close of the calendar year in which such expenses were incurred.

7. Severance Payment. If the Engagement is terminated by the Company within the first six months after the Effective Date, CMC will receive a severance payment equal to $60,000. If the Engagement is terminated by either party more than six months after the Effective Date or the Engagement is terminated by CMC or Coffey at any time (whether before or after the six month period after the Effective Date), CMC and Coffey shall not be eligible to receive any severance payment.

8. Deferred Compensation. Any nonqualified deferred compensation (within the meaning of Section 409A of the Internal Revenue Code) payable under this Agreement on account of the completion or termination of the Engagement shall be delayed to the minimum extent and in the minimum amount necessary so as to comply with Section 409A and the regulations thereunder; provided, however, that the bonus set forth in Section 5 shall be paid immediately if there is a change of control within the meaning of Section 409A of