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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File No. 33-960-70-LA



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THANKSGIVING COFFEE COMPANY, INC.

(Name of small business issuer in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 94-2823626                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)



19100 South Harbor
Drive

Fort Bragg, California 95437

(Address of principal executive officers)(Zip Code)



Issuers telephone number: (707) 964-0118



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Securities registered under Section 12(b) of the Exchange Act:



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|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|                    |  |                                          
|                    |  |                                          



Securities
registered under Section 12(g) of the Exchange Act:



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| |  | ---------------- |  | 
| |  |                  |  | 
| |  | (Title of class) |  | 
| |  |                  |  | 
| |  | (Title of class) |  | 



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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B not contained in this form, and no disclosure
will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- KSB or any amendment to this Form 10-KSB.  x



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State issuers revenues for its most recent fiscal year: $4,891,992



There has been one trade in the Companys Common Stock since 1999. In June 2004, 750
shares were traded at $4.50 per share. See Part II, Item 5, Market for Common Equity and Related Stockholder Matters. The aggregate market value of common equity held by non-affiliates as of December 31, 2004, using the June 2004 price per share,
was $1,163,448.



As of March 25, 2005, there were 1,236,744 shares outstanding
of common stock of the issuer.



DOCUMENTS
INCORPORATED BY REFERENCE



None.



INDEX



|                                                                                                        |  |         
|------------------------------------------------------------------------------------------------------- |  | --------
|                                                                                                        |  | Page No.
|PART I.                                                                                                 |  |         
|                                                                                                        | 
|Item 1.
Description of Business                                                                         |  | 3       
|Item 2.
Description of Property                                                                         |  | 7       
|Item 3.
Legal Proceedings                                                                               |  | 8       
|Item 4.
Submission of Matters to a Vote of Security Holders                                             |  | 8       
|                                                                                                        | 
|PART II.                                                                                                |  |         
|                                                                                                        | 
|Item 5.
Market for Common Equity and Related Stockholder Matters                                        |  | 8       
|                                                                                                        | 
|Item 6.
Managements Discussion and Analysis                                                            |  | 8       
|                                                                                                        | 
|Item 7.
Financial Statements                                                                            |  | 13      
|                                                                                                        | 
|Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure            |  | 13      
|                                                                                                        | 
|Item 8A.
Controls and Procedures                                                                        |  | 13      
|                                                                                                        | 
|Item 8B.
Other Information                                                                              |  | 13      
|                                                                                                        | 
|PART III.                                                                                               |  |         
|                                                                                                        | 
|Item 9.
Directors and Executive Officers of the Registrant                                              |  | 13      
|Item 10.
Executive Compensation                                                                         |  | 14      
|Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 15      
|Item 12.
Certain Relationships and Related Transactions                                                 |  | 15      
|Item 13.
Exhibits                                                                                       |  | 16      
|Item 14.
Principal Accountant Fees and Services                                                         |  | 16      



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PART I



ITEM 1 BUSINESS



FORWARD LOOKING INFORMATION



In addition to historical information, this Annual Report on Form 10-KSB
contains forward-looking statements within the meaning of Section 27A of The Securities Act and Section 21E of The Securities Exchange Act of 1934. Forward-looking statements are identified by words such as believe,
anticipate, expect, intend, plan, will, may, and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. These statements relate to, among other things, possible expansions into new and existing markets and trends in the operations of Thanksgiving Coffee Company, Inc. (the Company). Any
such statements should be considered in light of various risks and uncertainties that could cause results to differ materially from expectations, estimates or forecasts expressed. The various risks and uncertainties include, but are not limited to:
changes in general economic conditions, changes in business conditions in the coffee industry, fluctuations in consumer demand for coffee products and in the availability and costs of green coffee beans, continuing competition within the
Companys businesses, variances from budgeted sales mix and growth rate, consumer acceptance of the Companys products, inability to secure adequate capital to fund its operating expenses and working capital requirements, inability to
hire, train and retain qualified personnel, concentration of production and sales in Northern California, the loss of one or more major customers, inability to successfully implement the Companys sales goals, natural disasters, civil unrest in
countries which produce coffee and tea, weather and other risks identified herein. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date of this 10-KSB.



GENERAL



For over thirty years, the Company has purchased and roasted high quality coffee beans and marketed them to the specialty coffee market. The
Company buys green coffee beans through six main importers.



The Company was
incorporated as a California corporation on May 10, 1982. Prior to that time, the Company was operated as a partnership.



The Company retails over 100 varieties of its coffee and tea through its own distribution system and through outside distributors in the Northern California market. In
other parts of the nation, the Company distributes its products either directly to retailers or through brokers and distributors. The Company also markets directly to consumers through both print and electronic media. It publishes flyers that
feature most of the Companys coffee and tea products, in addition to complementary products and accessories of third parties. The same product offerings are made on the Companys web site on the Internet. The Company also markets its
coffee and tea products in its retail bakery (the Bakery), located in Mendocino, California.



In October 1996, the Company completed its offering of shares of Common Stock. As of December 31, 2004, 1,305 non- affiliated shareholders held shares of the Companys Common Stock, representing approximately
21.08% of the outstanding shares.



PRODUCTS



COFFEE. The Company roasts a wide variety of whole bean caffeinated, decaffeinated,
flavored, blended and unblended coffees. With the exception of its high-caffeinated coffees, the Company roasts only high quality arabica beans with a focus on organic, shade grown and fair traded beans. Arabica beans are grown at high altitudes
where the cooler climate results in slow growth and usually higher quality. In addition to its full line of classic specialty and estate coffees from over 20 countries currently, the Company is producing custom products for the American Birding
Association and the Dian Fossey Gorilla Fund International under exclusive contracts and private-label products for over 100 retail and serving accounts. The Company has the ability to have products custom packaged and blended for retailers and
serving accounts.



TEA. The Companys Royal Gardens Tea Company
(Royal Gardens) division currently offers sixteen traditional teas from South Africa, China, India, Sri Lanka and Japan.



COMPLEMENTARY PRODUCTS. The Company sells a wide variety of complementary coffee and tea products and accessories, such as coffee makers, grinders, thermal carafes,
books, T- shirts, mugs, CDs and chocolate covered espresso beans.



The
Company sells its coffees and teas through a multi-channel distribution network consisting of wholesale distribution operations, the Bakery and direct marketing operations. The Company offers complementary products through all of these channels of
distribution. Products are purchased from third party vendors on an as-needed basis and resold to its customers. The Company generally provides its wholesale customers with brewing, grinding and related equipment (leased from third party leasing
companies) and product displays (designed and manufactured by the Company) at no charge if predetermined sales volumes are reached. Of the total fiscal 2004 revenues of $4,891,992, 82% were from roasted coffee, 15% were from the Bakery, 2% were from
resale items, and 1% were from tea products.



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COFFEE INDUSTRY



According to the Specialty Coffee Association of America (SCAA), Mintel Group, the United States specialty coffee retail sales exceeded $8.96 billion in 2004, a 6%
increase over 2003. Over 80% of the population drank coffee and over half of the population were occasional coffee drinkers. In 2004, 16% of the adult population drank specialty coffee daily, a four percentage increase over 2003 even though total
coffee consumption was flat. Specialty coffee beverage retailers have been the fastest growing distribution channel in the specialty coffee business. As of the end of 2003, (the latest data available) there were over 17,000 specialty coffee
retailers compared to 6,000 just seven years previously. Cross outlet competition is sharpening as away-from-home consumption is growing as new or existing locations gain market share at the expense of at-home consumption reducing sales by
supermarkets and mass merchandisers.



The SCAA reports espresso-based beverages
are driving increased specialty coffee consumption, with this segment showing a rise from 4% to 7% of total drinks sold over the past year, as consumption of traditional coffee declined. Consumers are purchasing more value-added coffee products
(i.e., specialty coffee drinks), and such purchases are driving the market. Coffee consumers have been moving away from price-based drinks to beverages with a focus on product variety and quality. This quality conscious purchasing trend has caused
coffee to evolve from a beverage with commodity characteristics to one with cultural and sensory ties. In addition, gourmet coffee tends to be purchased by younger consumers, compared to traditional coffee, which continues to bode well for future
growth of the category, although, according to the SCAA there was a significant increase in the over 60 population consumption of specialty coffee from 0 to 13% in 2004.



In the 1970s, when Thanksgiving Coffee began to roast, there were less than 100 roasters in the country, with the large roasters
accounting for nearly all of the coffees consumed. Today, there are 1,200 specialty coffee roasters, each segmenting and fragmenting the market, adapting to a wide variety of niche markets. They are focusing on their ability to provide a wide range
of coffee origins, freshly roasted in the appropriate style to meet the specific needs of local marketers.



Sales of organic food and beverages have grown to $10.9 billion in 2004 according to the Natural Marketing Institute (NMI) in its study of 2005 Organic Consumer Trends Report, increasing by 18 % for 2004 compared to 2003. As sales were increasing, according to
NMI, consumer awareness of organically grown products has increased to 90% of the population. The USDA regulations have given uniformity and legitimacy to the organic industry strengthening the stock of these products in the consumers eye.



There has been a trend of increased public awareness of the
environmental issues associated with clear cutting of rain forests to provide land for sun-grown coffee. Recent changes in the coffee industry noted by the SCAA have included:



1. The SCAA has changed its 14-year old mission statement to include the words: social responsibility,
environmental sensitivity, and sustainability.



2. The country of Nicaragua has embraced the policy of shade in its coffee plantations as public policy.



3. Large grocery chains such as Safeway have announced agreements with roasters to sell entire lines of shade grown, Fair Trade Certified and organic
coffees.



4. Shade grown coffee and fair trade coffee now
appear on the offer lists of most coffee brokers and importers and are offered by a majority of small to mid-size coffee roasters of specialty coffee.



5. The largest coffee company in the country has decided to dedicate a portion of its offerings to certified fair trade
coffee.



6. Nearly 39% of the U. S. population uses organic
products and nearly 58% purchased organic products in 2004, according to NMI.



In addition to the environmental impact of coffee, the drop in pricing of green coffee beans has caused an international crisis in the growing countries of the world even though the price declined has reversed in the latter part of 2004.
According to an article in Time magazine in March of 2004, the world price of $.60 per pound is below cost of production. As a backlash to free trade, Fair Trade has gained the attention of consumers in this country. TransFair USA, a
certification agency, states that $208 million worth of Fair Trade coffee has been certified. Although still a small percentage of the total market, sales have tripled in the past three years and constitute a growing segment of the gourmet coffee
market. Today, Fair Trade coffee is roasted by 280 U. S. companies and sold at thousands of retail outlets. Dunkin Donuts, the number 1 US retailer of coffee by the cup, is rolling out a Fair Trade espresso line of drinks.



MARKETING STRATEGY



The Companys sales and marketing efforts are currently organized in four different segments:



1. Wholesale, direct delivery - This segment includes customers in northern California
counties contiguous to the Companys plant in Fort Bragg, California, and is serviced by Company trucks and outside distributors. The Company owns or leases trucks and delivers coffee within a 125 mile radius of Fort Bragg.



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2. Wholesale, delivery by other means - This segment includes accounts that are serviced by UPS or other common carriers.
Delivery is made to over 500 accounts that span all 50 states of the United States. This segment is either handled direct, via broker or a distributor.



3. Direct Marketing - This segment includes accounts serviced through catalogue or online programs.



4. Retail - This segment consists of sales through the Companys Bakery. However, the Company is pursuing the sale of the Bakery.



During fiscal 1997, the Company developed an exclusive arrangement with the
American Birding Association, one of Americas most active and prestigious birding membership associations, to market Song Bird Coffee to the marketplace. This strategy was predicated on the fact that migratory bird populations are in decline due to loss of habitat, which results from
the clearing of shade tree canopy to allow coffee to grow in the sun. The Smithsonian Migratory Bird Centers landmark 1996 study reported that as many as 60% of the migratory bird population of North America had disappeared since 1972, and
that this disappearance could be traced to the reduction of forest habitat in Central and South America caused by technification of coffee agriculture. This alliance has provided alternative venues for the Company to reach bird lovers in
bird stores and home and garden centers as well as to traditional venues of supermarkets and serving locations.



The Company believes that its relationship with the American Birding Association and its marketing of Song Bird Coffee have distinguished the Companys role and
image in the marketplace. Song Bird Coffee sales have grown to represent 6% of the Companys packaged and bulk roasted coffee sales in fiscal 1997, 10% in 1998, 12% in fiscal 1999 and 13.5% in both fiscal 2000 and 2001 and 14% in fiscal 2002,
2003 and 2004.



In the third quarter of fiscal 2002, after working with a
marketing group, the Company began promoting its coffee products to non-profit organizations to raise funds by selling the Companys coffee to their constituency through the Companys mail order division. The products offered are shade
grown, fair-traded and organically grown coffees. The products are packaged with either Company controlled labels or, if the size of the organization warrants, custom labels. Organizations receive a share of the proceeds for each bag of coffee their
members purchase from the Company. Most are sold on a subscription basis where the individual purchases their coffee needs throughout the year. The program is available for consumers and for foodservice locations. The program has been named the
Cornucopia Coffee subscription program.



During the first quarter of 2004, the
Company began to sell products from its Campesino Estate Coffee program. The Company is offering coffee from individual small-scale family farmers directly to the customers who drink the coffee. This product includes packaging that has the story of
the farm and its linked partner coop. The green beans are kept separate at every stage of processing including harvesting, production, roasting, marketing and distributing. In this way, the Company hopes to redefine fair trade to a single farm
origin and to increase the educational potential and to develop the issues of economic justice and ecological responsibility for the consumer. This program makes cup quality and grower familiarity the foundation of the Companys efforts to
achieve a socially oriented market. Additionally, it illustrates the educational potential of personalized fair trade, as well as the capacity of relationship coffee to improve coffee quality by capitalizing on the advantages of
long-term relationships between growers and roasters. It is the culmination of nearly 20 years work with Nicaraguan grower cooperatives.



There are no assurances that any of the Companys programs will be successful and increase its sales, revenue or profitability.



SOCIAL RESPONSIBILITY



It has been the philosophy of the Company to not only provide an excellent cup of quality coffee but also to procure, roast, package and
market its products in a manner that is fair to all its customers and suppliers. The Companys motto, Not Just a Cup, but a Just Cup, reflects the Companys commitment to local coffee growers in developing nations.



Since 2000, the Company has worked in partnership with TransFair USA, and has adopted a fair
trade label that distinguishes this product from its other offerings. The fair trade certification program was born in Europe in recognition of the need for small farmers to receive a fair price for their crop to enhance their economic viability.
The green coffee market generally takes into consideration only the supply and demand in establishing price. It does not recognize the farmers cost factors and the need for a return for the small farmer to survive.



In addition to providing a floor price, currently at $1.26 per pound for the cost of coffee,
the program works only with democratically-run coops which are the recipients and disbursers of the additional funds. With this program the layers of middlemen are cut, so that the coop is generally dealing directly with a green coffee broker or the
roaster itself. The coop also provides a source of low cost credit for farmers that could not generally get bank credit because of the risks in their business. In addition, most of these farmers grow their coffee in the shade of taller forest
canopies providing habitat for songbirds.



Although sales of fair trade coffee
are not material at this time, the Company believes that this niche provides a potential opportunity for growth. The Company provides educational programs, tastings and brochures to familiarize the public with the fair trade theme. Sales of fair
trade certified coffee for the year 2004 were nearly $300,000, up from $228,754 in 2003, $206,352 in 2002 and $73,400 in 2000, when the Company introduced the products.



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The Companys most recent and far-reaching coffee program was begun in 2004 when it entered into an exclusive
arrangement with the Dian Fossey Gorilla Fund International and the Dukunde Kawa Coop to combine the elements of environmental sensitivity by preventing poaching of the last remaining mountain gorillas and promoting economic sustainability to the
Rwandan coffee farmer and produced a product called Gorilla Fund Coffee. This multifaceted task was accomplished by paying Fair Trade pricing to the coop and donating between 50 cents and $2.00, depending on distribution method, to the Dian Fossey
Gorilla Fund International. Sales of the Gorilla Fund Coffee help ensure a fair price to farmers, reduce pressure on the forests resources, support health and education advances in Rwanda and helps the Dian Fossey Gorilla Fund International
operate projects that will save the mountain gorillas. This is a perfect collaboration between producers and consumers, punctuated by a fair and equitable distribution of the value of raw coffee as it is converted to a value-added beverage. Sales
from June 2004, when the product debuted, until the end of the year were nearly $60,000. The coffee received a 90 rating from the prestigious Coffee Review cupper Ken Davids.



The Companys mix of products has evolved from that of specialty coffee with flavor and taste to one that now promotes social justice,
environmental sensitivity and organically grown coffees. Over 70% of the Companys packaged and bulk roasted sales fall into one or all of these categories.



In addition to fair trade, the Company also contributes coffee, money and employee time to a number of causes aligned with its commitment to
social and environmental responsibility both locally and around the world.



COMPETITION



The specialty coffee market is highly
competitive, and the Company competes against all sellers of specialty coffee. At the wholesale level, the Company competes with several nationally known premium coffee brands, such as Proctor & Gambles Millstone label and Nestles
Nescafe label, as well as other lesser known brands and store brands. The Company also competes regionally in Northern California with regional specialty roasters such as Peets for retail shelf space and with large regional roasters for food
service trade. In the direct mail area, the Company competes with established suppliers such as Gevalia, a division of General Foods Corporation, as well as with other direct mail companies, including Starbucks, the leading independent
specialty coffee retailer and wholesaler.



The Company competes with other eco
friendly coffee companies such as Equal Exchange, Counter Culture, Café Mam, and other coffee companies that have environmental coffees in their lines such as Green Mountain and Boyds.



The Company competes primarily on the basis of the quality of its products, its package
design, and its social and environmental philosophies. Many of the Companys competitors are larger than the Company and have significantly greater financial, marketing and other resources than the Company, and there can be no assurance that
the Company will be able to compete or maintain or expand sales successfully in the future.



Similarly, the Company sells organic and shade grown coffee to organizations focused on social and environmental issues. In fiscal 2003, the Companys coffee products were served and sold by prestigious
environmental organizations such as Monterey Bay Aquarium, the Cape May Bird Observatory and by several other national institutions.



The Company cannot guarantee successful competition against other coffee companies. The Company believes its focus on partnering (such as the relationships with the
American Birding Association and the Dian Fosse Gorilla Foundation International) has enabled the Company to find a niche in the coffee market; however there can be no assurance that the Companys marketing efforts will be successful.



The Company also experiences competition in connection with its sales of tea.
The Companys product generally is sold in specialty retailers and gift shops where there is competition from a variety of companies such as Tazo, Republic of Tea, Stash and Bigelow. The Company competes primarily on the basis of the quality of
the tea and the packaging. While the Company believes it competes favorably with respect to these factors, many of the Companys competitors are larger than the Company and have significantly greater financial, marketing and other resources
than the Company, and there can be no assurance that it will be able to compete or maintain or expand sales successfully in the future.



The Company also sells complementary products primarily to its wholesale serving accounts that are ancillary to the coffee business but are necessary to serve coffee.
These items include chocolate, syrups, coffee cups, equipment cleaner and the like. These items are provided as a convenience for those accounts and assist in increasing revenue per stop for the Companys distribution system. The Company also
sells these items in its direct marketing division. The Company experiences competition in the sale of these ancillary items from manufacturers or other distributors such as foodservice distributors. There can be no assurance that the Company will
be able to compete or maintain or expand sales of these products successfully in the future.



GREEN BEAN COFFEE SUPPLY AND AVAILABILITY



The Company purchases green beans from a number of importers as well as from farmer representatives and small producer cooperatives. Although most coffee trades in the worldwide commodities markets, coffee of the quality sought by the
Company tends to trade on a negotiated basis at a substantial premium or differential above commodity coffee pricing, depending upon the supply and demand at the time of purchase. Supply and price can be affected by multiple factors,
such as weather, politics and economics in the producing countries.



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In addition, in its attempt to reduce the cost risk resulting from market fluctuations in the cost of coffee beans, the
Company, or its brokers on its behalf, has in the past purchased coffee contracts when it is not able to enter into coffee purchase commitments. There are no coffee supply contracts at this time, although the Company may enter into coffee supply
contracts in the future.



The Company believes its long-term relationships with
coffee bean brokers provide adequate sources of supply of high-quality green beans to meet the Companys needs for the foreseeable future. However, a worldwide supply shortage of the high quality arabica coffees the Company purchases, the loss
of one or more of these brokers, or a shortage of organic and shade grown beans in particular, could have an adverse impact on the Company.



Supplies of tea are secured from traditional sources that are readily available in the marketplace.



OTHER MATTERS



The Company has been pursuing the sale of its Bakery because the Company does not deem it a fit with its wholesale operations. However, the Bakery is a major retailer of
the Companys coffee in Mendocino and the Company intends to continue to operate the business until it can find a buyer who will continue to use the Companys coffee products exclusively after the sale. There is no guarantee that the
Company will be able to sell the Bakery.



CUSTOMERS



In fiscal 2004, there were no customers accounting for more than 10% of the Companys
revenue. However, a significant reduction in sales to any of the Companys principal customers, or the loss of one or more major customers, could have an adverse impact on the Company. See Managements Discussion and
Analysis.



INTELLECTUAL PROPERTY



The Company holds various federal registrations in the United States for the following
trademarks and service marks: Thanksgiving Coffee Company, Royal Gardens Tea Company, Pony Express, Time Bandits, Grand Slam Coffee, Not Just a Cup But a Just Cup, Many Beans are Picked, Few are Chosen, Mayan Harvest, and
Inca Harvest. From time to time, federal trademark and service mark registrations must be renewed. The Company does not hold any patents.



GOVERNMENT REGULATION



The Companys roasting plant has been certified wholly organic by the USDA. The Organic Crop Improvement Association (OCIA) was the inspecting agent. The OCIA has also certified the organic practices of several
farms from which the Company receives green beans. The certification criteria of the OCIA, an independent organization, meet the standards promulgated under the Organic Foods Production Act of 1990 (OFPA), allowing the Company to market its product
as organic.



EMPLOYEES



As of December 31, 2004, the Company had forty full-time employees and nineteen part-time
employees. None of the Companys employees are covered by a collective bargaining agreement. The Company has never suffered a work stoppage due to adverse labor conditions with its employees. The Company believes that it maintains good
relations with its employees.



ITEM 2 PROPERTY



The executive offices of the
Company occupy approximately 14,500 square feet at 19100 South Noyo Harbor Drive, Fort Bragg, California 95437, which also includes a warehouse and the capacity for manufacturing operations. The Company leases an additional 1,626 square feet of
storage space on the Fort Bragg waterfront. These facilities are currently being leased on a one year extension of an existing lease expiring March 31, 2005, at a rate of approximately $8,600 per month from Joan and Paul Katzeff, who are founders,
principal shareholders, officers and directors of the Company. The Company continues to hold options to renew the lease for three successive five-year renewal periods when the current one-year extension expires on March 31, 2005. The Company
presently intends to exercise all options under the terms of this lease. The Company believes this lease represents an arms-length rate and arms-length terms for comparable space in the Fort Bragg area. See Item 12, Certain Relationships and
Related Transactions and the Auditors Report, Notes to Financial Statements Note 10.



The Bakery is approximately 1,617 square feet and is leased from an unaffiliated third party. The Company currently pays rent of approximately $3,805 per month for the Bakery pursuant to a lease that expires September
30, 2011.



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The Company leases a 1,100 square foot facility in Santa Rosa, CA for $948 per month for the purpose of repairing its
brewers and grinders that it lends to foodservice accounts. A new lease was signed on February 1, 2005 for a two-year period.



The Company believes that its current facilities are adequate for its current and expected operations, and that suitable additional space will be available in the Fort
Bragg area when and if additional space is required. The Company owns no real property. The Company maintains adequate property and liability insurance coverage on all of its buildings. The property is in good condition and repair.



ITEM 3 LEGAL PROCEEDINGS



No legal matters are
pending at this time.



ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



At the Companys annual meeting held in Fort Bragg, California at 10:00 a.m. on October 11, 2004, the Company submitted for a vote of security holders the reelection of all three members of the board of directors and ratification of
Sallman, Yang and Alameda as independent public accountants. Below is a summary to the results.



Proposal No. 1: Election of three directors.



|             |  |            |  |                  |  |        
|------------ |  | ---------- |  | ---------------- |  | -------
|Name         |  | Shares for |  | Against/Withheld |  | Abstain
|Paul Katzeff |  | 983,061    |  | 150              |  | 0      
|Joan Katzeff |  | 983,061    |  | 150              |  | 0      
|Roy Doughty  |  | 983,061    |  | 150              |  | 0      



Proposal No. 2: Ratification of
Sallman, Yang and Alameda, An Accountancy Corporation, as Independent Public Accountants for the Company.



|           |  |                  |  |        
|---------- |  | ---------------- |  | -------
|Shares for |  | Against/Withheld |  | Abstain
|983,061    |  | 150              |  | 0      



PART II



ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



Trades in the Companys Common Stock are made through Mutual Securities, Inc., (Mutual Securities) in Ukiah, California, an order matching service. No established trading market exists for the
Companys Common Stock. The Companys Common Stock is not listed on any exchange or the NASDAQ system.



During fiscal 1999, the Company was aware of only four trades of the Companys Common Stock totaling 2,350 shares of Common Stock. All transactions were individually
negotiated between the buyer and seller through Mutual Securities as intermediary. The average price of these transactions per Mutual Securities was $4.74 for all of fiscal 1999. The first three trades were for 2,200 shares at $5.00 per share and
took place in the first three quarters. The final trade for 150 shares took place in the last quarter and was for $1.00 per share. No trades took place in 2000, 2001, 2002 or 2003. In 2004, one trade was made for 750 shares at $4.50 per share in
June of that year.



The Company has neither declared nor paid any cash dividend
since its inception. The Company intends to retain all earnings for use in its business and therefore does not anticipate paying any cash dividends in the near future.



As of December 31, 2004, there were 1,305 holders of record of the Common Stock.



ITEM 6 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion of financial condition and results of operations should be read in conjunction with the Companys audited financial statements and notes
thereto appearing elsewhere in this Form 10-KSB.



Summary



Sales of the Company have continued to erode over the last four years primarily due to
declines in the distribution segment of the



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Companys business. Additional competition, customers that have gone out of business, and customers that have begun roasting coffee beans for their own
use have all had a negative impact on the Companys sales. The Company has tried a number of strategies that have not proven effective in abating these declines. In 2004, it began changing its method of distribution to rely less on direct
distribution by Company owned or leased trucks and instead to use independent distributors or shipping direct (via UPS or other common carrier) in three of the Companys nine routes. This includes new distribution with a northern California
chain. If, despite these changes, the Company cannot stop the decline in its sales volume, it may not be able to achieve profitability in future years.



The Company has enjoyed favorable margins in 2000-2003 because of the decline in the price of green beans. Although the Company pays substantially more for its product
than the market price, because of quality, organic nature of many of its lines and the fact that it uses fair-traded coffees, it still was able to purchase green beans at lower prices than in prior years. During the last six months of 2004, however,
the world price of coffee more than doubled, eroding margins. If the rise in green bean prices should continue as a consequence of inclement weather in a major producing area or any other event that effects coffee pricing, it would have a negative
impact on the Company and its margins.



The Company has a revolving line of
credit and a term debt facility with the Savings Bank of Mendocino. The term debt is a five-year note due in December 1, 2009 and the line of credit is renewed annually. If the credit line should not be renewed, the stability of the Companys
business would be in question. See Liquidity and Capital Resources.



RESULTS OF OPERATIONS



2004 Compared to 2003



|                              |  |             |          |    |           |       |   
|----------------------------- |  | ----------- | -------- | -- | --------- | ----- | --
|Consolidated                  |  | $ Inc/(Dec) |          |    | %Inc/(Dec |      
|Net Sales                     |  | $           | 150,115  |    |           | 3.2   | % 
|Cost of Sales                 |  | $           | 188,599  |    |           | 7.7   | % 
|Gross Margin                  |  |             | (2.27    | )% |           | (4.7  | )%
|Selling, G & A Expense        |  | $           | (109,860 | )  |           | (4.9  | )%
|Depreciation and Amortization |  | $           | (26,199  | )  |           | (16.2 | )%
|Other Income/ (Expense)       |  | $           | (27,210  | )  |           | (43.2 | )%
|Net Income/ (Loss)            |  | $           | 111,092  |    |           |      | % 



REVENUES. Consolidated net sales for
the year ended December 31, 2004 were $4,891,992 up 3.2% or approximately $109,000 compared to net sales of $4,741,877 for December 31, 2003.



Distribution revenues (e.g. revenues generated on our own truck distribution) were down over $200,000 for December 31, 2004 or a 9.8% drop when compared to the same
period in 2003. The decline was a result of the Company having dropped three truck distribution routes in 2004, and replacing these routes with direct shipments and two distributors. The Company believes that a substantial portion of the decline is
now offset by an increase in the Companys national revenue. The Company continues to test the concept of direct delivery and the use of distributors. There can be no assurance that the direct delivery approach will be successful and the
failure of such approach may have a negative effect on the Companys prospects.



National revenues (e.g. revenues not derived by mail order and direct truck distribution) were up nearly $319,000 or 26% for the year 2004 when compared to 2003. This growth was a result of an increase in sales to a distributor in Southern
California, an increase in a national chain account and switching three routes to direct delivery or distributors.



Mail order revenues (e.g. revenues generated from product sold directly to the consumer either through print media or the Internet) increased over $14,000 or 4%, for the
year ended December 31, 2004 when compared to 2003. The Company believes the increase in revenue for mail order reflects favorable national publicity for the Companys Gorilla Fund coffee product. The traditional mail order catalog business was
up $4,000 while Internet sales were up nearly $30,000 or 14% for the year when compared to the same period last year. Some of the increase in the Internet sales continues to reflect the ongoing migration of traditional mail order customers to the
Companys website and Internet store.



Sales of the Bakery were up $19,000
or 3% for the year ended December 31, 2004 when compared to 2003.



COST OF
SALES. Consolidated cost of sales for the year ended December 31, 2004 was $2,633,321 up 7.7% or nearly $189,000 when compared to cost of sales of $2,444,722 for 2003. This increase was a result of higher cost of green beans, up.13 cents per pound
to $1.52 for the year ended 2004 compared with $1.39 for the same period last year, and the higher sales in 2004 that accounted for over $100,000 of the increase. Additionally, higher costs of workers compensation and medical insurances and
payroll taxes accounted for an additional $80,000.



9



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GROSS MARGIN. Consolidated gross margin (gross profit as a percentage of net sales) for the year ended December 31, 2004
was 46.2%, a nearly 2% decline when compared to gross margin of 48.4% for the same period in 2003. The decline was a result of the higher green bean costs noted above and higher payroll costs. There can be no assurances that the gross margin will
not continue to be adversely affected if the green bean costs continue to rise.



SELLING, GENERAL & ADMINISTRATIVE EXPENSE. Consolidated selling, general and administrative expense for the year ended December 31, 2004 was $2,112,067 a nearly $110,000 drop or 4.9% compared to $2,221,927 for 2003. The decrease was a
result of lower bad debt expense compared to last year of $16,000, a decrease in trade show costs of $10,000 and an $85,000 reduction in route costs because of three fewer routes at the end of 2004.



DEPRECIATION & AMORTIZATION. Consolidated depreciation and amortization expense for
December 31, 2004 was $136,552 a $26,000 drop or 16.2% when compared to $162,751 for depreciation and amortization expense for 2003. The decline was a result of fewer depreciable assets when compared to 2003.



OTHER INCOME/ EXPENSE. Consolidated other Income expense for December 31, 2004 was $35,842, a
$27,000 drop or 43.2% when compared to $63,052 for other income and expense for the same period in 2003. The decrease was a result of a one-time payment of $25,000 made in 2003 to the former owner of the Bakery earned when she refrained from opening
a bakery business for seven years. Interest expense for the year was $37,396, an increase of over $5,000 or 16.4% when compared to interest expense of $32,128 in 2003. The increase was a result of refinancing the Companys debt from Merrill
Lynch, which used the LIBOR rates, to the Savings Bank of Mendocino, using the prime rate, resulting in approximately 3% higher interest rate for the Companys debt. Additionally, the Company added some new debt to acquire equipment. (See
Liquidity and Capital Resources Section)



NET INCOME/ (LOSS). Because of the
foregoing factors, the Company had a net loss at December 31, 2004 of $28,090 a decrease in the loss of over $111,000 when compared to the loss of $139,182 for the same period in 2003. Because of the increase in costs of green beans and the
inability to predict whether the Company will be able to sustain the sales increase of 2004, there can be no assurances that the Company will be profitable in any future periods.



2003 Compared to 2002



|                            |  |             |          |   |             |      |   
|--------------------------- |  | ----------- | -------- | - | ----------- | ---- | --
|Consolidated                |  | $ Inc/(Dec) |          |   | % Inc/(Dec) |     
|Net Sales                   |  | $           | (268,773 | ) |             | (5.4 | )%
|Cost of Sales               |  | $           | (143,215 | ) |             | (5.5 | )%
|Gross Margin                |  |             |         | % |             |     | % 
|Selling, G & A Expense      |  | $           | 113,553  |   |             | 5.4  | % 
|Depreciation & Amortization |  | $           | (7,035   | ) |             | (4.1 | )%
|Other Income/ (Expense)     |  | $           | 7,518    |   |             | 13.5 | % 
|Net Income/ (Loss)          |  | $           | (252,810 | ) |             |     | % 



REVENUES. Consolidated net sales for
the year ended December 31, 2003 were $4,741,877, down 5.4% or approximately $269,000 compared to net sales of $5,010,650 for December 31, 2002.



Distribution revenues (e.g.. revenues generated on our own truck distribution) were down $199,000 or 7.5% for the year ended December 31, 2003 when compared to the same
period in 2002. The Company has continued to lose business in the Sacramento territory to competition and has decided to eliminate the route to reduce expenses and ship to customers Via UPS. The Company has experienced lost customers in their other
territories due to business closures in serving locations and increased competition in retail locations. In an effort to reverse the trend of these losses, the Company switched its Bay Area truck distribution to an outside distributor.



National revenues (e.g. revenues not derived by mail order and direct truck distribution)
were down $87,000 or 8.7% for the year ended December 31,2003 when compared to the same period in 2002. Three large distributors for the Companys products had reductions in sales in their customers outlets and one had slower sales in
their own outlets.



Mail Order revenues (e.g. revenues generated directly from
product sold directly to the consumer either through print media or the Internet) were up for the year ended December 31, 2003 by $21,000 or 5.4% when compared to the same period last year. The Companys Cornucopia program through its mail
order division, having non-profit organizations raise funds by selling the Companys coffee to their constituency, generated nearly $31,000 in revenue for the year. In addition, the Companys Internet sales were up over $40,000 or 25% for
this fiscal year. The Company shifted its emphasis away from traditional mail order towards its Internet store and increased its expenditures for development of its Internet site and store. Some of the increase in the Internet sales reflects the
migration of traditional mail order customers to the Companys website and Internet store.



10



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Sales attributable to operation of the Companys bakery were down $13,000 or 1.8% for the year ended December 31,
2003 compared to the same period last year. Although sales for the year were down, the decline slowed in the second half of the year.



COST OF SALES. Consolidated cost of sales for the year was $2,444,722, a decrease of nearly $143,000 or 5.5% from cost of sales of $2,587,937 for the same period last
year. This decline was a result of lower sales volume. Additionally, bean costs dropped by $.10 per pound or 7% but were offset by higher workers compensation and medical premium costs.



GROSS MARGIN. Consolidated gross margin (gross profit as a percentage of net sales) for the year ended December 31, 2003 was 48.4%, or flat
when compared to gross margin of 48.4% for the prior year.



SELLING, GENERAL
& ADMINISTRATIVE. Consolidated selling, general and administrative expenses for the year ended December 31, 2003 were $2,221,927, a nearly $114,000 increase or 5.4% over selling general and administrative expenses of $2,108,374 for the same
period last year. The increase was a result of higher wages of $23,000 for a general increase for the staff, $25,000 for retaining a public relations firm, higher workers compensation of $25,000, higher medical premiums of $20,000 and an increase in
bad debt expense of $21,000 because of a bankruptcy of a supplier of coffee to non-profits of $11,000 and a $10,000 partial write down of a receivable (this was a receivable from the sale of the Companys Café assets five years ago and
the slow repayment of the debt).



DEPRECIATION & AMORTIZATION. Consolidated
depreciation and amortization expenses were $162,751 for the year ended December 31, 2003, a decrease of $7,000 or 4.5% when compared to expenses of $169,786 for the prior year. This decline was a result of fewer capital expenditures added during
the year.



OTHER INCOME/ EXPENSE. Consolidated other income and expense was
$63,052 for the year ended December 31, 2003, an increase of $7500 or 13.5% when compared to other income and expense of $55,534 for the prior year. This increase was a result of a one-time charge in 2003 for a covenant not to compete of $25,000
that the former owner of the Companys bakery earned when she refrained from opening a bakery business for seven years. Interest expense for the year ended December 31, 2003 was $32,128 a decrease of 44.1% or over $25,000 from interest expense
of $57,457 for the same period during the prior year. The decrease is a result of lower interest rates because of refinancing the Companys debt from 7.75% to just slightly above 4% from July through the end of the year. Total debt was up to
$517,932 at December 31, 2003 from $460,782 at December 31, 2002. See Liquidity and Capital Resources Section.



NET INCOME/ (LOSS). As a consequence of the foregoing factors, the Company realized a net loss of $139,182 for the year ended December 31, 2003 a decrease of nearly
$253,000 when compared to the net profit of $113,628 for the same period during the prior year. Because of the decline in sales and the increases in selling general and administrative expenses, there can be no assurances that the Company will be
profitable in any future period.



LIQUIDITY AND CAPITAL RESOURCES



Working capital as of December 31, 2004 was $293,755 as compared to working capital of
$147,897 as of December 31, 2003. The increase in working capital is a result of refinancing the existing Merrill Lynch debt with a five-year note held by the Savings Bank of Mendocino that resulted in nearly a $200,000 reduction in current
liabilities.



Cash provided by operating activities was $229,227 in fiscal 2004
compared to cash used in operating activities of $6,940 in fiscal 2003. The increase in cash provided by operating activities was a result of a reduction in net loss in 2004 and an increase in payables and a reduction in receivables.



Cash used in investing activities for the year ended December 31, 2004 was $235,483 compared
to $74,921 used during the same period in fiscal 2003. Capital expenditures made during the year included $57,000 for a new after burner to control emissions from the Companys coffee bean roaster, $35,000 for a used auto, $20,000 for a portion
control packing machine that will allow the Company to pack office coffee product and sample sizes, $25,000 for brewers and grinders, $30,000 for racks for the introduction of the Companys line into a major northern California chain, $20,000
for an upgrade of the phone system, $19,000 for artwork for new package designs, $10,500 for plates and cylinders for packaging, $6,200 for decals and signage for vehicles, $3,500 for computers and $8,000 for various other pieces of production
equipment.



Net cash provided by financing activities for the year ended
December 31, 2004 was $74,349 as compared to net cash provided by for the same period in fiscal 2003 of $57,150. Refinancing of debt in both 2004 and 2003 provided cash in both of those years.



Cash as of December 31, 2004 was $111,556, an increase of over $61,000 when compared to cash
of $40,463 for the same period in fiscal 2003.



In November 2004, the Company
refinanced its note and credit line with Merrill Lynch by securing a term note with the Savings Bank of Mendocino. This new note is amortized over ten years and is payable in five years with a balloon payment on December 1, 2009 at 3% over the prime
rate. The rate was 8.25% at December 31, 2004. The new note is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments general intangibles and contract rights. This new note is personally
guaranteed by the Companys majority shareholders.



11



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The Company has also secured a $30,000 line of credit with the Savings Bank of Mendocino. The credit line is interest
only payments renewable annually at 3% over the prime rate. Prime rate was 8% at December 31, 2004. The credit line is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general
intangibles and contract rights. The line of credit is personally guaranteed by the Companys majority shareholders. At December 31, 2004, there were no amounts borrowed on this line.



The Companys debt at December 31, 2004 was $592,281 for all term debt and obligations
under capital leases, up over $74,000 from $517,932 due at December 31, 2003. Of the total, $100,400 is due in fiscal 2005. Of the total borrowings, $358,000 is due to Savings Bank of Mendocino. The Companys accounts receivable, inventory,
equipment, fixtures, and improvements secure the borrowings from Savings Bank of Mendocino. The Savings Bank of Mendocino indebtedness and a small loan to Chase Manhattan are guaranteed by the Companys majority shareholders. See Auditors
Report, Notes to the Financial Statements Note 6.



The Company has one note
payable to the majority shareholders, due on demand after June 30,1996 for $19,919, unsecured.



The Company is dependent on successfully reaching its sales goals to achieve profitable operations, obtaining additional sources of borrowings (including normal trade credit), and securing favorable financing
arrangements (including lease financing) to become profitable. There can be no assurance that the Company will be successful in this regard. If the Company is not able to meet its credit obligations, the Companys business would be adversely
affected.



A summary of the Companys principal contractual obligations
and other commitments as of December 31, 2004 is shown in the following table:



|                        |  |                        |           |                    |   |           |  |           |         |               |   |         |  |   |        
|----------------------- |  | ---------------------- | --------- | ------------------ | - | --------- |  | --------- | ------- | ------------- | - | ------- |  | - | -------
|                        |  | Payments Due By Period
|Contractual Obligations |  | Total                  |           | Less than One year |   | 1-3 years |  | 4-5 years |         | After 5 years
|Long Term Debt          |  | $                      | 592,281   |                    | $ | 100,400   |  | $         | 146,300 |               | $ | 74,164  |  | $ | 271,417
|Operating Leases        |  |                        | 113,930   |                    |   | 52,434    |  |           | 56,552  |               |   | 4,944   |  |   |       
|Real Estate Leases      |  |                        | 690,796   |                    |   | 149,791   |  |           | 304,530 |               |   | 133,650 |  | $ | 102,825
|Total Cash Obligations  |  | $                      | 1,397,007 |                    | $ | 302,625   |  | $         | 507,382 |               | $ | 212,758 |  | $ | 374,242



The Company anticipates that its
existing capital resources and cash generated from operations will be sufficient to meet its cash requirement for the next 12 months at approximately the same level of operations.



SEASONALITY AND OTHER FACTORS AFFECTING PERFORMANCE



The Companys business is seasonal in nature. The seasonal availability of green bean coffee in the first two quarters of the year and
increased sales in the last quarter historically creates a high use of cash and a build up in inventories in the first two quarters, with a corresponding decrease in inventory and increase in cash in the last quarter. Because of the seasonality of
the Companys business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.



Furthermore, past seasonal patterns are not necessarily indicative of future results. The Companys future results of operations and earnings could also be
significantly affected by other factors, such as changes in general economic conditions, changes in business conditions in the coffee industry, fluctuations in consumer demand for coffee products and in the availability and costs of green coffee
beans, increased competition within the Companys businesses, variances from budgeted sales mix and growth rate, consumer acceptance of the Companys new products, inability to secure adequate capital to fund its operating losses and
working capital requirements, inability to hire, train and retain qualified personnel, concentration of production and sales in Northern California, the loss of one or more major customers, inability to successfully implement its business plan,
civil unrest in countries that produce coffee and tea, weather and other natural disasters. There can be no assurance that sales will be maintained or increase in future quarters.



INDEMNIFICATION MATTERS



The Companys Bylaws provide that the Company may indemnify its directors, officers, employees and other agents to the fullest extent permitted by California law.
The Company believes that indemnification under its Bylaws also permits the Company to secure insurance



12



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on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether
California law would permit indemnification. The Company maintains such liability insurance for its directors and certain officers and employees.



At present, there is no pending litigation or proceeding involving any director, office, employee or agent of the Company where indemnification would be required or
permitted. The Company is not aware of any pending or threatened litigation or proceeding that might result in a claim for such indemnification.



OFF-BALANCE SHEET ARRANGEMENTS



None.



ITEM 7 FINANCIAL STATEMENTS



Information in
response to this item is set forth in the Financial Statements on page F-1 of this report.



ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



ITEM 8A CONTROLS AND PROCEDURES



An evaluation
was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer, the President and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and
procedures as of December 31, 2004. Based on that evaluation, the Companys management, including the Chief Executive Officer, the President and Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective. There have been no changes in the Companys controls over financial reporting during the fourth quarter of 2004 that have materially affected or are reasonably likely to materially affect the Companys internal controls over
financial reporting.



Item 8B Other Information



On November 19, 2004,
the Company executed two Promissory Notes in favor of the Savings Bank of Mendocino County. The first Promissory Note is for a loan in the principal amount of $358,000. The Promissory Note has an interest rate of 3% over the prime interest rate
(8.25% at December 31, 2004). The first Promissory Note is payable in monthly payments over five years, with a final balloon payment due on December 1, 2009. The second Promissory Note provides the Company with a $30,000 revolving line of credit
permitting interest-only payments and renewable annually at 3% over the prime interest rate. As of December 31, 2004, the Company had not obtained any advances on the line of credit.



Both Promissory Notes are secured by a first priority security interest in all accounts receivable, inventory, equipment, instruments
general intangibles and contract rights and are personally guaranteed by the Companys majority shareholders. The terms of both Promissory Notes permit the Savings Bank of Mendocino to declare the entire unpaid principal amount and all accrued
interest immediately due upon the occurrence of certain events of default, as defined in the Promissory Notes. The specified events of default under both Promissory Notes include, but are not limited to, failure to make any payment when due,
revocation of the majority shareholders personal guarantees, insolvency or forfeiture proceedings against the Company or the majority shareholders or any change in ownership of 25% or more of the Companys common stock.



PART III



ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The directors, nominees, key employees and executive officers of the Company and their ages as of the date of this Form 10-KSB are as follows:



|             |  |     |  |                                   
|------------ |  | --- |  | ----------------------------------
|Name         |  | Age |  | Position with the Company         
|Paul Katzeff |  | 67  |  | Chief Executive Officer & Director
|             |  |    
|Joan Katzeff |  | 55  |  | President and Director            
|             |  |    
|Roy Doughty  |  | 55  |  | Director                          
|             |  |    
|Sam Kraynek  |  | 57  |  | Chief Financial Officer           



13



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Paul Katzeff, a co-founder of the Company, has served as Roastmaster, Chief Executive Officer and a Director since its
incorporation on May 10, 1982. Mr. Katzeff is a co-founder of the Specialty Coffee Association of America (S.C.A.A.) and served as its Chairman in 1985. He has served as an elected Board member of the S.C.A.A. since 1994, and served as Chairman of
the Environmental Committee of the Board in 1994. Mr. Katzeff co-chaired the Second Annual Sustainable Coffee Conference held in April of 1998 and is an advisory Board member of Coffee Kids, a non-profit organization concerned with social and
environmental issues as they relate to the coffee industry. Mr. Katzeff served as S.C.A.A. President in the year 2000. Mr. Katzeff and Joan Katzeff are husband and wife. Mr. Katzeff holds a Bachelors degree in Agriculture from Cornell University and
a Masters degree in Social Work from Adelphi University.



Joan Katzeff, a
co-founder of the Company, has served as President and a Director of the Company since its incorporation on May 10, 1982. Her experience in the Companys early years included production, delivery and bookkeeping. Mrs. Katzeff now has planning
and administrative responsibilities in operations, marketing and public relations. In addition, Mrs. Katzeff has responsibility for managing the Bakery.



Roy Doughty has served as a Director of the Company since September 1997 and as an outside consultant to the Company since February 1994. Since 1992, Mr. Doughty has
served as a Principal of Global Insights, a consulting firm devoted to assisting value-centered businesses. He was the co-founder of the Spirituality and Worklife Project and has created and delivered programs for the Center for Ethics and Social
Policy, the Center for Eco-literacy, the California School of Integral Studies, the California School of Professional Psychology and the Social Investment Forum.



Sam Kraynek has served as the Companys Chief Financial officer since December 2004. Mr. Kraynek has been in the food business for over
thirty years. He has been President and General Manager of the Rosarita Mexican Food Division of Beatrice Companies, General Manager of the Bakery Distribution Division of International Multifoods and Vice President of Sales and Marketing for Bay
State Milling Company. Mr. Kraynek has a B.S. in accounting and started his career in public accounting. Mr. Kraynek has been with the Company for eight years.



The authorized number of directors is five. Currently there are three directors and two vacancies. All directors will hold office until the next annual meeting of
shareholders and until their successors have been elected and qualified, unless they earlier resign or are removed from office. Committees of the Board may be appointed by resolution passed by a majority of the directors. The Company does not
presently have any standing audit, nominating or compensation committee, or any committee performing similar functions. The executive officers of the Company are elected annually by the Board of Directors and serve at the discretion of the Board.



At the present time, the Company does not have an independent member on the
Board of Directors, or an audit committee financial expert, as those terms are defined by the Securities and Exchange Commission. The very small size of the Board, the small size of the Company and the remote location render it both difficult at
this time to fulfill these requirements. In addition, our financial statements are relatively simple to read and understand. The current Board members have had years of experience with the Company and are familiar with its financial reporting and
operations. The Company makes every attempt, in conjunction with our independent auditors, our attorneys and our Chief Financial Officer to assure that our filings and financial statements are fairly, clearly and accurately reported.



The Company has adopted a code of ethics that is applicable to all members of senior
management and the Companys employees. A copy of the code of ethics is listed in the exhibits to this report.



ITEM 10 EXECUTIVE COMPENSATION



The following
table provides certain information concerning the compensation paid to the Companys Chief Executive Officer and President for fiscal 2002, 2003 and 2004. All other Executive Officers received less than $100,000 in fiscal 2004.



SUMMARY COMPENSATION TABLE



|                                               |  |              |  |            |                       |   |       |         |                          |         |                        |         |                           |         |             |         |                       |        
|---------------------------------------------- |  | ------------ |  | ---------- | --------------------- | - | ----- | ------- | ------------------------ | ------- | ---------------------- | ------- | ------------------------- | ------- | ----------- | ------- | --------------------- | -------
|Name and Principal Position                    |  | Year($)      |  | Salary ($) |                       |   | Bonus |         | Other AnnualCompensation |         | RestrictedStock Awards |         | SecuritiesUnderlying Opts |         | LTIPPayouts |         | All OtherCompensation
|Paul Katzeff Chief Executive Off. and Director |  | 200420022001 |  | $$$        | 95,804100,000100,000  | @ |       |      |                          |      |                        |      |                           |      |             |      |                       |     
|                                               |  |              |  |            |                       |   |       |        
|Joan Katzeff President and Director            |  | 200420032002 |  | $$$        | 100,000100,000100,000 |   |       |      |                          |      |                        |      |                           |      |             |      |                       |     

---

|@ | Mr. Katzeff receives use of a company-leased car, which he uses primarily for business purposes. Mr. Katzeff voluntarily reduced his compensation in October 2004 to offset the
increased cost incurred by the Company in leasing a new vehicle to replace his prior company car. The salary reduction equals the additional cost of the new lease compared to the cost of the prior vehicle. See Auditors Report, Notes to
Financial Statements, Note 6.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14



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EQUITY COMPENSATION



The Company did not grant equity compensation, such as options, restricted stock awards or stock appreciation rights to any of the above named executive officers during
fiscal 2004, 2003 or 2002. The Company does not have a long-term incentive plan.



COMPENSATION OF DIRECTORS



Members of the Board of Directors do not
receive compensation for service on the Board.



ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



The following table sets forth certain information regarding beneficial ownership of the Companys Common Stock as of December 31, 2004, (i) by each person (or group
of affiliated persons) who is known by the Company to own beneficially more than five per cent of the Companys Common Stock, (ii) by each of the named executive officers, (iii) by each of the Companys directors and nominees, and (iv) by
all directors and executive officers as a group. The Company believes that the person and entities named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to
community property laws, where applicable. The Company does not have an equity compensation plan.



|                                                                                                                                       |  |                           |     |  |            |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | --- |  | ---------- | -
|Name and Address of Beneficial
Owner                                                                                                   |  | Shares Beneficially Owned |     |  | Percentage |  
|Joan and Paul Katzeff(1) (Joan Katzeff, President) (Paul Katzeff, CEO) c/o Thanksgiving Coffee Co., Inc. POB 1918 Fort Bragg, CA 95437 |  | 977,000                   | (1) |  | 78.9       | %
|                                                                                                                                       |  |                          
|Roy Doughty Director c/o Thanksgiving Coffee Co., Inc. POB 1918Fort Bragg, CA 95437                                                    |  | 200                       |     |  | 0.02       | %
|                                                                                                                                       |  |                          
|All directors and executive officers as a group (4 persons)                                                                            |  | 978,200                   | (1) |  | 78.92      | %

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|(1) | Shares are originally issued, restricted and jointly owned by Joan Katzeff and Paul Katzeff.
|--- | --------------------------------------------------------------------------------------------



ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The Company leases its corporate headquarters, warehouse and waterfront facilities from Joan and Paul Katzeff, who are directors and executive officers of the Company (the Katzeffs). The lease provided for monthly payments of
$8,600 in fiscal 2003 and 2004, and the Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The Company also has an unsecured interest only note due on demand to the Katzeffs. The Katzeffs
also guaranteed personally the Companys note and line of credit with the Savings Bank of Mendocino. See Note 6 and Note 11 of Notes to Financial Statements. See Liquidity and Capital Resources.



Global Insights, of which Mr. Doughty, a director of the Company, is a principal, is a party
to a oneyear consulting agreement that commenced January 1, 2004 for the provision of specific business functions including a provision of shareholder relation services for $18,000 per year. Global Insights also received an additional $8,250
during fiscal 2004 for similar services provided outside the agreement. In 2003, Global Insights received an aggregate of $23,500 for similar services.



The Company carries insurance indemnifying its directors and certain officers and certain employees against certain liabilities by reason of their status or service as
directors, officers or employees of the Company.



15



---

ITEM 13 EXHIBITS



|       |  |                                                                                                                                                    
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|3.1    |  | Restated Articles of Incorporation of the Company.+                                                                                                
|       | 
|3.2    |  | Bylaws of the Company.+                                                                                                                            
|       | 
|3.2.1  |  | Amendment No. 1 to Bylaws of the Company, dated June 3, 1996.++                                                                                    
|       | 
|10.1   |  | Business Loan Agreement dated as of September 5, 1995 by and between the Company and Wells Fargo Bank, N.A., as amended on August 11,1997.++       
|       | 
|10.2   |  | Lease agreements for the Companys Fort Bragg facilities.++++                                                                                      
|       | 
|10.2.1 |  | Extension of Term and Further Amendment to Lease Agreement dated April 1, 1992.+++++                                                               
|       | 
|10.2.2 |  | Further Amendment to Lease Agreement dated July 1, 1992.+                                                                                          
|       | 
|10.2.3 |  | Third Amendment to Lease Agreement dated July 1, 1994.+                                                                                            
|       | 
|10.2.4 |  | Exercise Option to Extend Lease Agreement April 1, 1995.+                                                                                          
|       | 
|10.3   |  | Lease Agreement for the Companys Bakery in Mendocino.++++                                                                                         
|       | 
|10.4   |  | Sample Coffee Purchase Agreement.+                                                                                                                 
|       | 
|10.5   |  | Promissory Note issued by the Company to Joan and Paul Katzeff dated as of April 17, 1996.++++                                                     
|       | 
|10.6   |  | Summary Plan Description of the Companys Profit Sharing Plan. +++                                                                                 
|       | 
|10.8   |  | Promissory Note issued by the Company to Joan and Paul Katzeff as of April 1, 2002.****                                                            
|       | 
|10.9   |  | Promissory Note issued by the Company to Joan and Paul Katzeff as of November 15, 2003.*                                                           
|       | 
|10.10  |  | License Agreement between the Company and the American Birding Association, Inc.                                                                   
|       | 
|10.11  |  | Promissory Note issued by the Company to the Savings Bank of Mendocino County.                                                                     
|       | 
|10.12  |  | Promissory Note issued by the Company to the Savings Bank of Mendocino County.                                                                     
|       | 
|14.1   |  | Code of Ethics*                                                                                                                                    
|       | 
|31.1   |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.    
|       | 
|31.2   |  | Certification of President Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.             
|       | 
|31.3   |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|       | 
|32.1   |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                            
|       | 
|32.2   |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                            
|       | 
|32.3   |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                            

---

|+ | Incorporated by reference to the exhibits to the Companys Registration Statement on Form S-1 (File No 33-96070-LA).
|- | --------------------------------------------------------------------------------------------------------------------

|++ | Incorporated by reference to the exhibits to the Companys Form 10-QSB for the quarter ended March 31, 1998.
|-- | ------------------------------------------------------------------------------------------------------------

|+++ | Incorporated by reference to the exhibits to the Companys Form 10-QSB for the quarter ended June 30, 1998.
|--- | -----------------------------------------------------------------------------------------------------------

|++++ | Incorporated by reference to the exhibits to the Companys Form 10-QSB for the quarter ended September 30, 1998.
|---- | ----------------------------------------------------------------------------------------------------------------

|+++++ | Incorporated by reference to the exhibits to the Companys Form 10-KSB for the year ended December 31, 1998.
|----- | ------------------------------------------------------------------------------------------------------------

|* | Incorporated by reference to the exhibits to the Companys Form 10-KSB for the year ended December 31, 2003
|- | -----------------------------------------------------------------------------------------------------------

|**** | Incorporated by reference to the exhibits to the Companys Form 10-QSB for the quarter ended June 30, 2002.
|---- | -----------------------------------------------------------------------------------------------------------



ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES



The Company uses the firm of Sallmann, Yang & Alameda (SYA) to perform its annual audit, prepare the Companys federal and state tax return and review the Companys quarterly financial statements. The Company paid the
following fees to SYA in 2003and 2004:



|           |  |        
|---------- |  | -------
|AUDIT FEES |  |        
|           | 
|2003       |  | $38,500
|2004       |  | $42,000



AUDIT-RELATED FEE



None



16



---

|         |  |       
|-------- |  | ------
|TAX FEES |  |       
|         | 
|2003     |  | $5,000
|2004     |  | $5,000



ALL OTHER FEES



None



There were no fees paid for and no work authorized other than for audit, quarterly review and tax services. SYA provides a proposal,
including proposed fee, that is discussed by the Board of Directors and at the annual meeting of shareholders prior to ratification of the selection of SYA as the Companys auditors.



17



---

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.



THANKSGIVING COFFEE COMPANY,
INC.



|                 |  |                                                                    |  |               
|---------------- |  | ------------------------------------------------------------------ |  | --------------
|Name             |  | Title                                                              |  | Date          
|/s/ Paul Katzeff |  | Chief Executive Officer (Principal Executive
Officer) and Director |  | March 23, 2005
|Paul Katzeff     |  |                                                                    |  |               
|                 |  |                                                                   
|/s/ Joan Katzeff |  | President and Director                                             |  | March 23, 2005
|Joan Katzeff     |  |                                                                    |  |               
|                 |  |                                                                   
|/s/ Roy Doughty  |  | Director                                                           |  | March 23, 2005
|Roy Doughty      |  |                                                                    |  |               
|                 |  |                                                                   
|/s/ Sam Kraynek  |  | Chief Financial Officer (Principal Financial
Officer)              |  | March 23, 2005
|Sam Kraynek      |  |                                                                    |  |               



18



---

Financial Statements



Thanksgiving Coffee Company, Inc.



For the Years Ended December 31, 2004 and 2003

with Report of Independent Accountants



---

Thanksgiving Coffee Company, Inc.



Audited Financial Statements



For the Years Ended December 31, 2004 and 2003



Table of Contents



|                                  |  |  
|--------------------------------- |  | -
|Report                            |  |  
|                                  | 
|Report of Independent Accountants |  | 1
|                                  | 
|Audited Financial Statements      |  |  
|                                  | 
|Balance Sheets                    |  | 2
|Statements of Income              |  | 4
|Statements of Accumulated Deficit |  | 5
|Statements of Cash Flows          |  | 6
|Notes to Financial Statements     |  | 7



---

Report of Independent Accountants



To The Board
of Directors

Thanksgiving Coffee Company, Inc.

Fort Bragg,
California



We have audited the accompanying balance sheets of Thanksgiving
Coffee Company, Inc. (a California Corporation) as of December 31, 2004 and 2003 and the related statements of operations, retained earnings, and cash flows for each of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.



In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial position of Thanksgiving Coffee Company, Inc. at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2004, in conformity with accounting principles generally accepted in the United States of America.



SALLMANN, YANG & ALAMEDA

An Accountancy Corporation

/s/ SALLMANN, YANG & ALAMEDA

Pleasanton, California

March 1, 2005



1



---

Thanksgiving Coffee Company, Inc.



Balance Sheets



|                                       |  |              |            |   |      |   |            |  
|-------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                       |  | December 31, |           
|                                       |  | 2004         |            |   | 2003 |  
|Assets                                 |  |              |            |   |      |   |            |  
|Current assets                         |  |              |            |   |      |   |            |  
|Cash                                   |  | $            | 111,556    |   |      | $ | 40,463     |  
|Accounts receivable                    |  |              | 277,853    |   |      |   | 343,052    |  
|Inventories                            |  |              | 452,537    |   |      |   | 409,698    |  
|Prepaid expenses                       |  |              | 40,551     |   |      |   | 40,703     |  
|Deferred tax asset                     |  |              | 3,400      |   |      |   | 39,300     |  
|                                       |  |              |            |   |      |   |            |  
|Total current assets                   |  |              | 885,897    |   |      |   | 873,216    |  
|                                       |  |             
|Property and equipment                 |  |              |            |   |      |   |            |  
|Property and equipment                 |  |              | 2,827,793  |   |      |   | 2,664,598  |  
|Accumulated depreciation               |  |              | (2,214,248 | ) |      |   | (2,128,605 | )
|                                       |  |              |            |   |      |   |            |  
|Total property and equipment           |  |              | 613,545    |   |      |   | 535,993    |  
|                                       |  |             
|Other assets                           |  |              |            |   |      |   |            |  
|Deposits and other assets              |  |              | 60,181     |   |      |   | 52,379     |  
|Goodwill                               |  |              | 171,773    |   |      |   | 171,773    |  
|Other intangibles, net of amortization |  |              | 36,192     |   |      |   | 38,288     |  
|Deferred tax asset                     |  |              | 78,700     |   |      |   | 44,300     |  
|                                       |  |              |            |   |      |   |            |  
|Total other assets                     |  |              | 346,846    |   |      |   | 306,740    |  
|                                       |  |              |            |   |      |   |            |  
|Total assets                           |  | $            | 1,846,288  |   |      | $ | 1,715,949  |  
|                                       |  |              |            |   |      |   |            |  



See accompanying
notes and accountants report



2



---

Thanksgiving Coffee Company, Inc.



Balance Sheets



|                                                                                                |  |              |           |   |      |   |           |  
|----------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                                                                |  | December 31, |          
|                                                                                                |  | 2004         |           |   | 2003 |  
|Liabilities and shareholders equity                                                            |  |              |           |   |      |   |           |  
|Current liabilities                                                                             |  |              |           |   |      |   |           |  
|Accounts payable                                                                                |  | $            | 421,994   |   |      | $ | 346,264   |  
|Notes payable - bank                                                                            |  |              | 23,841    |   |      |   | 246,319   |  
|Notes payable - other                                                                           |  |              | 12,834    |   |      |   | 9,566     |  
|Notes payable - shareholders                                                                    |  |              | 19,919    |   |      |   | 40,919    |  
|Capital lease obligations                                                                       |  |              | 43,806    |   |      |   | 20,853    |  
|Accrued liabilities                                                                             |  |              | 69,748    |   |      |   | 61,398    |  
|                                                                                                |  |              |           |   |      |   |           |  
|Total current liabilities                                                                       |  |              | 592,142   |   |      |   | 725,319   |  
|                                                                                                |  |             
|Long term debt                                                                                  |  |              |           |   |      |   |           |  
|Notes payable - bank                                                                            |  |              | 334,159   |   |      |   | 145,313   |  
|Notes payable - other                                                                           |  |              | 34,268    |   |      |   | 13,646    |  
|Capital lease obligations                                                                       |  |              | 123,454   |   |      |   | 41,316    |  
|                                                                                                |  |              |           |   |      |   |           |  
|Total long term debt                                                                            |  |              | 491,881   |   |      |   | 200,275   |  
|                                                                                                |  |              |           |   |      |   |           |  
|Total liabilities                                                                               |  |              | 1,084,023 |   |      |   | 925,594   |  
|                                                                                                |  |             
|Shareholders equity                                                                            |  |              |           |   |      |   |           |  
|Common stock, no par value, 1,960,000 shares authorized, 1,236,744 shares issued and oustanding |  |              | 861,816   |   |      |   | 861,816   |  
|Additional paid in capital                                                                      |  |              | 24,600    |   |      |   | 24,600    |  
|Retained earnings (accumulated deficit)                                                         |  |              | (124,151  | ) |      |   | (96,061   | )
|                                                                                                |  |              |           |   |      |   |           |  
|Total shareholders equity                                                                      |  |              | 762,265   |   |      |   | 790,355   |  
|                                                                                                |  |              |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                      |  | $            | 1,846,288 |   |      | $ | 1,715,949 |  
|                                                                                                |  |              |           |   |      |   |           |  



See accompanying
notes and accountants report



3



---

Thanksgiving Coffee Company, Inc.



Statements of Operations



|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|-------------------------------------------- |  | -------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                             |  | For the Years ended December 31, |          
|                                             |  | 2004                             |           |   | 2003 |   |           | 2002 | 
|Income                                       |  |                                  |           |   |      |   |           |      |  |   |           |  
|Net sales                                    |  | $                                | 4,891,992 |   |      | $ | 4,741,877 |      |  | $ | 5,010,650 |  
|Cost of sales                                |  |                                  | 2,633,321 |   |      |   | 2,444,722 |      |  |   | 2,587,937 |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Gross profit                                 |  |                                  | 2,258,671 |   |      |   | 2,297,155 |      |  |   | 2,422,713 |  
|                                             |  |                                  |          
|Operating expenses                           |  |                                  |           |   |      |   |           |      |  |   |           |  
|Selling, general and administrative expenses |  |                                  | 2,112,067 |   |      |   | 2,221,927 |      |  |   | 2,108,374 |  
|Depreciation and amortization                |  |                                  | 136,552   |   |      |   | 162,751   |      |  |   | 169,786   |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Total operating expenses                     |  |                                  | 2,248,619 |   |      |   | 2,384,678 |      |  |   | 2,278,160 |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Operating income                             |  |                                  | 10,052    |   |      |   | (87,523   | )    |  |   | 144,553   |  
|                                             |  |                                  |          
|Other income (expense)                       |  |                                  |           |   |      |   |           |      |  |   |           |  
|Interest income                              |  |                                  |          |   |      |   | 21        |      |  |   | 330       |  
|Covenant not to compete                      |  |                                  |          |   |      |   | (25,000   | )    |  |   |           |  
|Miscellaneous income (expense)               |  |                                  | 1,461     |   |      |   | (5,945    | )    |  |   | 965       |  
|Gain on sale of equipment                    |  |                                  | 93        |   |      |   |          |      |  |   | 628       |  
|Interest expense                             |  |                                  | (37,396   | ) |      |   | (32,128   | )    |  |   | (57,457   | )
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Total other income (expense)                 |  |                                  | (35,842   | ) |      |   | (63,052   | )    |  |   | (55,534   | )
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Income (loss) before income taxes            |  |                                  | (25,790   | ) |      |   | (150,575  | )    |  |   | 89,019    |  
|Income tax (expense) benefit                 |  |                                  | (2,300    | ) |      |   | 11,393    |      |  |   | 24,609    |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Net income (loss)                            |  | $                                | (28,090   | ) |      | $ | (139,182  | )    |  | $ | 113,628   |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Earnings (loss) per share (basic)            |  | $                                | (0.02     | ) |      | $ | (0.11     | )    |  | $ | 0.09      |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Earnings (loss) per share (dilutive)         |  | $                                | (0.02     | ) |      | $ | (0.11     | )    |  | $ | 0.09      |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  



See accompanying
notes and accountants report



4



---

Thanksgiving Coffee Company, Inc.



Statements of Accumulated Deficit



|                                                |  |                                  |          |   |      |   |          |      |  |   |         |  
|----------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                |  | For the Years Ended December 31, |         
|                                                |  | 2004                             |          |   | 2003 |   |          | 2002 | 
|Retained earnings (deficit), beginning          |  | $                                | (96,061  | ) |      | $ | 43,121   |      |  | $ | (70,507 | )
|Net income (loss)                               |  |                                  | (28,090  | ) |      |   | (139,182 | )    |  |   | 113,628 |  
|                                                |  |                                  |          |   |      |   |          |      |  |   |         |  
|Retained earnings (accumulated deficit), ending |  | $                                | (124,151 | ) |      | $ | (96,061  | )    |  | $ | 43,121  |  
|                                                |  |                                  |          |   |      |   |          |      |  |   |         |  



See accompanying
notes and accountants report



5



---

Thanksgiving Coffee Company, Inc.



Statements of Cash Flows



|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                           |  | For the Years ended December 31, |         
|                                                                           |  | 2004                             |          |   | 2003 |   |          | 2002 | 
|Operating activities                                                       |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net income (loss)                                                          |  | $                                | (28,090  | ) |      | $ | (139,182 | )    |  | $ | 113,628  |  
|Adjustments to reconcile net loss to cash flows from operating activities: |  |                                  |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                              |  |                                  | 157,931  |   |      |   | 177,009  |      |  |   | 191,185  |  
|Allowance for bad debts                                                    |  |                                  | (13,974  | ) |      |   | 12,077   |      |  |   | 974      |  
|Deferred income tax expense (benefit) (Increase) decrease in:              |  |                                  | (1,500   | ) |      |   | (12,193  | )    |  |   | (25,409  | )
|Accounts receivable                                                        |  |                                  | 79,173   |   |      |   | (42,196  | )    |  |   | 10,848   |  
|Inventories                                                                |  |                                  | (42,839  | ) |      |   | (30,820  | )    |  |   | 592      |  
|Prepaid expenses                                                           |  |                                  | 152      |   |      |   | (11,751  | )    |  |   | 31,982   |  
|Deposits and other assets                                                  |  |                                  | (5,706   | ) |      |   | (9,845   | )    |  |   | 3,647    |  
|Increase (decrease) in:                                                    |  |                                  |          |   |      |   |          |      |  |   |          |  
|Accounts payable                                                           |  |                                  | 75,730   |   |      |   | 43,361   |      |  |   | (19,330  | )
|Accrued liabilities                                                        |  |                                  | 8,350    |   |      |   | 6,600    |      |  |   | 7,774    |  
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) operating activities                        |  |                                  | 229,227  |   |      |   | (6,940   | )    |  |   | 315,891  |  
|                                                                           |  |                                  |         
|Investing activities                                                       |  |                                  |          |   |      |   |          |      |  |   |          |  
|Purchases of property and equipment                                        |  |                                  | (235,390 | ) |      |   | (74,921  | )    |  |   | (217,319 | )
|Gain on sale of equipment                                                  |  |                                  | (93      | ) |      |   |         |      |  |   | (628     | )
|Proceeds from sale of equipment                                            |  |                                  |         |   |      |   |         |      |  |   | 2,389    |  
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                      |  |                                  | (235,483 | ) |      |   | (74,921  | )    |  |   | (215,558 | )
|                                                                           |  |                                  |         
|Financing activities                                                       |  |                                  |          |   |      |   |          |      |  |   |          |  
|Proceeds from notes payable and capital leases                             |  |                                  | 533,497  |   |      |   | 466,586  |      |  |   | 87,699   |  
|Repayments of notes payable and capital leases                             |  |                                  | (459,148 | ) |      |   | (409,436 | )    |  |   | (221,734 | )
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                        |  |                                  | 74,349   |   |      |   | 57,150   |      |  |   | (134,035 | )
|Net increase (decrease) in cash                                            |  |                                  | 71,093   |   |      |   | (24,711  | )    |  |   | (33,702  | )
|Cash at beginning of year                                                  |  |                                  | 40,463   |   |      |   | 65,174   |      |  |   | 98,876   |  
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Cash at end of year                                                        |  | $                                | 111,556  |   |      | $ | 40,463   |      |  | $ | 65,174   |  
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  



See accompanying
notes and accountants report



6



---

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements



December 31,
2004 and 2003



1. Summary of Significant Accounting Policies



Nature of Operations



Thanksgiving Coffee Company, Inc. (the Company), was incorporated in California in 1985. The
Company purchases and roasts high-quality whole bean coffees and sells them to restaurants, grocery stores and other retail outlets. Additionally, the Company produces and sells a line of high-quality tea products under the trademark of Royal
Gardens Tea Company. Products are sold through the Companys distribution network in Northern California, nationally through common carriers selling direct, or through brokers and distributors. Distributors and retailers do not have the right
to return products. The Company also sells coffee, tea and related specialty products through mail order and Internet sales on a nationwide basis. Additionally, the Company operates a sandwich and baked goods store in Mendocino, California.



Basis of Presentation



The Company has prepared the financial statements on the accrual basis of accounting in
accordance with generally accepted accounting principles in the United States of America. In the opinion of management, all adjustments considered necessary for a fair presentation have been included.



Concentration of Credit Risk



The Company grants credit to customers in the retail and food service industries throughout
the country. Consequently, the Companys ability to collect the amounts due from customers is affected by economic fluctuations in the retail and food service industries.



Inventories



Inventories are stated at the lower of cost (first-in, first-out) or market.



Property and Equipment



Property and equipment are carried at cost less accumulated depreciation. Depreciation is provided on the straight-line and 150% declining balance methods over estimated useful lives of the assets. The following
useful lives are used:



7



---

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)



Property and Equipment (continued)



|                                      |  |              
|------------------------------------- |  | -------------
|Equipment                             |  | 7 to 12 years
|Furniture and fixtures                |  | 5 to 7 years 
|Leasehold improvements                |  | 7 to 39 years
|Transportation equipment              |  | 5 years      
|Marketing equipment                   |  | 5 to 7 years 
|Capitalized website development costs |  | 3 years      



Leasehold improvements are carried at
cost and are amortized over the shorter of their estimated useful lives or the related lease term. Expenditures for major renewals that extend the useful lives of property, fixtures and improvements are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization expense related to production facilities is included in cost of sales.



The Company adapted Emerging Issues Tax Force (EITF) No. 00-2, Accounting for Web Site DevelopmentCosts, in 2001. This accounting rule provides guidance regarding
capitalization or expense of certain website development costs. Accordingly, website development costs incurred in the operation phase that will result in future added functionality are capitalized and expenditures for training, administration and
maintenance of an existing website are expensed as incurred.



For income tax
purposes, depreciation is computed using the accelerated cost recovery system and the modified cost recovery system.



Stock Based Compensation



The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and its related interpretations. As such, compensation expense is recorded on the date of the grant only if the current market price of the underlying stock exceeds the exercise price. The
Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards (FASB) No. 123, Accounting for Stock-Based Compensation, which establishes a fair value method of accounting for stock options and
similar equity instruments. At present, there are no outstanding stock options that were granted to employees, and the Company has no plans to offer stock-based compensation to its employees or others.



8



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)



Goodwill and Other Intangible Assets



As of January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (FASB) No. 142, Goodwill and Other Intangibles. Goodwill
is assigned to a specific reporting unit and is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the reporting units carrying amount is greater than its
fair value. Intangible assets with definite lives are amortized over their useful economic lives. Financial condition and results of operations in accordance with FASB Statement No. 142 are reflected in the accompanying 2004 and 2003 financial
statements.



Intangible assets are amortized over the following estimated
useful lives using primarily straight-line basis.



|                |  |              
|--------------- |  | -------------
|                |  | Life in Years
|Leasehold value |  | 14           
|Trademarks      |  | 17           
|Refinance costs |  | 5            



Income Taxes



The Company accounts for income taxes under the asset and liability method as prescribed by
Statement of Financial Accounting Standards (FASB) No. 109, Accounting for Income Taxes. As such, deferred income tax assets and liabilities are recognized for the future tax consequences of the differences between the financial
statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.



Retirement Plan



In 2003 the Company converted its existing profit sharing plan into a
401(k) savings plan. The plan covers substantially all Company employees and allows pre-tax contributions through a salary deferral program. Employer contributions are on a discretionary basis with substantially all employees eligible for allocation
of employer contributions. Employees are 100% vested in amounts they contribute and vest over years of service in employer contributions. No employer contributions to the profit sharing/401(k) plan were made for the years ended December 31, 2004,
2003 and 2002, respectively.



9



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)



Compensated Absences



Employees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. The
Companys policy is that fully vested vacation is accrued at each quarter end. The accrued liability for vacation pay was $6,500 and $11,300 as of December 31, 2004 and 2003, respectively and such amounts are included in accrued liabilities.
Carryover paid sick days are not available, nor ever considered vested.



Advertising



Advertising costs are expensed as incurred,
except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of mail order solicitation and catalog costs. For years ending December 31, 2004
and 2003 the Company did not engage in any direct response advertising that would require capitalization. Advertising costs charged to expense were $26,879, $43,759 and $14,907 for the years ended December 31, 2004, 2003 and 2002, respectively.



Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Accordingly, actual results could differ from those estimates.



Revenue Recognition



The Company adopted Securities and Exchange Commission Staff Accounting Bulletins No. 101
(SAB101). Revenue Recognition in Financial Statements in 2002, retroactive to November 1, 2000. No restatement of the consolidated financials was necessary since the financials were already in conformity with the revenue
recognition principles and not material transactions were effected by this adoption.



Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs, the sales price is fixed or determinable and collectibility is reasonably assured. Product is considered delivered and revenue is recognized when
title and risk of loss have been transferred to the customer. Under the terms and conditions of the sale, the transfer of title may occur either at the time of shipment or when product is delivered to the customer.



10



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



2. Accounts Receivable



Accounts receivable consist of the following:



|                                      |  |      |         |   |      |   |         |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                      |  | 2004 |         |   | 2003 |  
|Accounts receivable                   |  | $    | 281,540 |   |      | $ | 363,157 |  
|Due from employees                    |  |      | 3,449   |   |      |   | 1,005   |  
|                                      |  |      |         |   |      |   |         |  
|                                      |  |      | 284,989 |   |      |   | 364,162 |  
|Less: Allowance for doubtful accounts |  |      | (7,136  | ) |      |   | (21,110 | )
|                                      |  |      |         |   |      |   |         |  
|                                      |  | $    | 277,853 |   |      | $ | 343,052 |  
|                                      |  |      |         |   |      |   |         |  



The Company utilizes a percentage
method to establish the allowance for doubtful accounts. The estimated allowance ranges from 1% to 10% of outstanding receivables. Bad debt expense (recovery) for the years ended December 31, 2004, 2003 and 2002 was $(2,773), $24,508 and $3,224,
respectively. The adjustment to the allowance account for the years ended December 31, 2004 and 2003 was $13,974 and $12,077, respectively.



3. Inventories



Inventories consist of the following:



|                                                        |  |      |         |      |   |        
|------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                        |  | 2004 |         | 2003
|Coffee                                                  |  |      |         |      |   |        
|Unroasted                                               |  | $    | 152,226 |      | $ | 157,078
|Roasted                                                 |  |      | 78,430  |      |   | 69,497 
|Tea                                                     |  |      | 15,088  |      |   | 19,522 
|Packaging, supplies and other merchandise held for sale |  |      | 206,793 |      |   | 163,601
|                                                        |  |      |         |      |   |        
|Total inventories                                       |  | $    | 452,537 |      | $ | 409,698
|                                                        |  |      |         |      |   |        



11



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)

4. Property and Equipment



Property and
equipment consist of the following:



|                                      |  |      |            |   |      |   |            |  
|------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                      |  | 2004 |            |   | 2003 |  
|Equipment                             |  | $    | 1,531,115  |   |      | $ | 1,553,854  |  
|Furniture and fixtures                |  |      | 276,628    |   |      |   | 294,411    |  
|Leasehold improvements                |  |      | 421,811    |   |      |   | 420,121    |  
|Transportation equipment              |  |      | 168,695    |   |      |   | 123,936    |  
|Marketing equipment                   |  |      | 14,077     |   |      |   | 18,427     |  
|Capitalized website development costs |  |      | 166,861    |   |      |   | 148,506    |  
|Property held under capital leases    |  |      | 240,706    |   |      |   | 105,343    |  
|                                      |  |      |            |   |      |   |            |  
|Total property and equipment          |  |      | 2,819,893  |   |      |   | 2,664,598  |  
|Accumulated depreciation              |  |      | (2,206,348 | ) |      |   | (2,128,605 | )
|                                      |  |      |            |   |      |   |            |  
|Property and equipment, net           |  | $    | 613,545    |   |      | $ | 535,993    |  
|                                      |  |      |            |   |      |   |            |  



Depreciation expense for the years
ended December 31, 2004, 2003 and 2002 was $155,835, $177,001 and $185,678, respectively.



5. Goodwill and Other Intangible Assets



As part of the adoption of Statement of Financial Accounting Standards (FASB) No. 142, Goodwill and Other Tangible Assetsas of January 1, 2002, the Company no longer amortizes goodwill. The Company performed a test of impairment on
goodwill which resulted in no impairment loss as of December 31, 2004 or 2003, respectively. Consequently, there was no change in the carrying value of goodwill in years ended December 31, 2004 or 2003.



Intangible assets subject to amortization consist of the following:



|                         |  |      |         |   |      |   |         |  
|------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                         |  | 2004 |         |   | 2003 |  
|Leasehold value          |  | $    | 67,000  |   |      | $ | 67,000  |  
|Trademark                |  |      | 5,127   |   |      |   | 5,127   |  
|Refinance cost           |  |      |        |   |      |   | 4,500   |  
|                         |  |      |         |   |      |   |         |  
|Total intangible assets  |  |      | 72,127  |   |      |   | 76,627  |  
|Accumulated amortization |  |      | (35,935 | ) |      |   | (38,339 | )
|                         |  |      |         |   |      |   |         |  
|Intangible assets, net   |  | $    | 36,192  |   |      | $ | 38,288  |  
|                         |  |      |         |   |      |   |         |  



Amortization expense for the years
ended December 31, 2004, 2003 and 2002 was $2,095, $6,962 and $5,558, respectively.



12



---

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



6. Long Term Debt



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |         |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 2004 |         | 2003
|Notes Payable and Capital Lease Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |      |         |      |   |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |     
|Note payable to Merrill Lynch, monthly installments of $4,687 plus interest at 3.3% over the one month LIBOR rate beginning August 1, 2003
(4.42% at December 31, 2003), final payment is due on July 1, 2007. The note payable and the Companys credit line are collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments,
general intangibles and contract rights along with a personal guarantee of up to $150,000 by Paul and Joan Katzeff. |  | $    |        |      | $ | 201,562
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |     
|Working capital line of credit ($200,000 maximum), payable to Merrill Lynch, interest only installments, at 3.3% over the one month LIBOR rate
(4.42% at December 31, 2003), maturing June 30, 2004. The credit line and the Companys note payable are collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles
and contract rights along with a personal guarantee of up to $150,000 by Paul and Joan Katzeff.           |  |      |        |      |   | 190,707
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |     
|Note payable to Savings Bank of Mendocino, monthly installments of $4,307.02 including interest at 3% over prime rate beginning January 1,
2005 (8.25% at December 31, 2004), final payment is due on December 1, 2009. The note payable is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles and contract
rights. This note is personally guaranteed by the Companys majority shareholder.                        |  |      | 358,000 |      |   |       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |     
|Note payable to majority shareholders, Paul and Joan Katzeff, payable in monthly installments of interest only at 12%, with balance due on
demand after June 30, 1996. The shareholders had subordinated this note to all other notes payable in 2002.                                                                                                                                                                                                                                                       |  |      | 19,919  |      |   | 19,919 



13



---

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



6. Long Term Debt (continued)



|                                                                                                                                                                                                                                                                              |  |      |        |      |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | ------
|                                                                                                                                                                                                                                                                              |  | 2004 |        | 2003
|Note Payable to Mercedes-Benz Credit payable in monthly installments of $691.46 including interest at 6.99%, secured by a vehicle, final
payment due September 24, 2009. The CEO has reduced his compensation by $300 per month to offset the cost of the car to the Company. |  | $    | 33,456 |      |      
|                                                                                                                                                                                                                                                                              |  |     
|Note payable to majority shareholders, Paul & Joan Katzeff, payable in six monthly installments of $4,000 each and a seventh payment of
$1,000, plus interest at 10% per annum. Final payment is due on May 15, 2004.                                                         |  |      |       |      | 21,000
|                                                                                                                                                                                                                                                                              |  |     
|Note payable to Chase Manhattan Bank, payable in monthly installments of $324, including interest at 8.637%, secured by a vehicle, final
payment due on October 26, 2004. The note is personally guaranteed by the Companys majority shareholders.                           |  |      |       |      | 3,118 
|                                                                                                                                                                                                                                                                              |  |     
|Note payable to Chase Manhattan Bank, payable in monthly installments of $304, including interest at 9.90% secured by vehicle, final payment
due on November 16, 2005. The note is personally guaranteed by the Companys majority shareholders.                              |  |      | 3,193  |      | 6,356 
|                                                                                                                                                                                                                                                                              |  |     
|Note payable to Chrysler financing, payable in monthly installments of $335, including interest at 6.00% secured by vehicle, final payment due
on October 30, 2007.                                                                                                           |  |      | 10,453 |      | 13,738



14



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



6. Long Term Debt (continued)



|                                                                                                                                                                                |  |      |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                |  | 2004 |          |   | 2003 |  
|Capital Lease Obligations                                                                                                                                                       |  |      |          |   |      |   |          |  
|                                                                                                                                                                                |  |     
|Note payable to Avaya Financial Services, payable in monthly installments of $372, including interest at 12.00%, secured by equipment, final
payment due on June 12, 2007.      |  | $    |         |   |      | $ | 12,677   |  
|                                                                                                                                                                                |  |     
|Note payable to Avaya Financial Services, payable in monthly installments of $871.10, including interest at 12.00% secured by phone equipment,
final payment due August 2009.   |  |      | 40,304   |   |      |   |         |  
|                                                                                                                                                                                |  |     
|Note payable to Manifest Leasing, payable in monthly installments of $444, including interest at 12.909%, secured by equipment, final payment
due March 2007.                   |  |      | 10,238   |   |      |   | 14,249   |  
|                                                                                                                                                                                |  |     
|Note payable to Axis Capital, payable in monthly installments of $709.19, including interest at 16.619% secured by store fixtures, final
payment due September 14, 2009.        |  |      | 28,161   |   |      |   |         |  
|                                                                                                                                                                                |  |     
|Note Payable to G.E. Capital payable in monthly installments of $1,354.53, including interest at 16.78%, secured by equipment, final payment
due on March 1, 2009.              |  |      | 49,154   |   |      |   |         |  
|                                                                                                                                                                                |  |     
|Note payable to US bancorp payable in monthly installments of $462, including interest at 14.237%, secured by equipment, final payment due on
May 22, 2009.                     |  |      | 18,094   |   |      |   |         |  
|                                                                                                                                                                                |  |     
|Note payable to National Financial Services, payable in monthly installments of $1,414, including interest at 10.512%, secured by equipment,
final payment due on May 10, 2006. |  |      | 21,309   |   |      |   | 35,243   |  
|                                                                                                                                                                                |  |      |          |   |      |   |          |  
|                                                                                                                                                                                |  |     
|                                                                                                                                                                                |  |      | 592,281  |   |      |   | 517,932  |  
|                                                                                                                                                                                |  |     
|Less current portion                                                                                                                                                            |  |      | (100,400 | ) |      |   | (317,657 | )
|                                                                                                                                                                                |  |      |          |   |      |   |          |  
|                                                                                                                                                                                |  |     
|Long term portion of notes payable                                                                                                                                              |  | $    | 491,881  |   |      | $ | 200,275  |  
|                                                                                                                                                                                |  |      |          |   |      |   |          |  



15



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



6. Long Term Debt (continued)



Interest paid for the years ended December 31, 2004, 2003 and 2002 was $37,326, $32,128 and $57,457, respectively.



As of December 31, 2004, maturities of notes payable and capital lease obligations for each
of the next five years and in the aggregate are as follows:



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |  
|2005                      |  | $ | 100,400
|2006                      |  |   | 75,014 
|2007                      |  |   | 71,286 
|2008                      |  |   | 74,164 
|2009 and thereafter       |  |   | 271,417
|                          |  |   |        
|                          |  | $ | 592,281
|                          |  |   |        



Based on current borrowing rates, the
fair value of the notes payable and capital lease obligations approximate their carrying amounts.



7. Income Taxes



The components of the
provision for income tax (expense) benefit are as follows:



|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                       |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Current tax (expense) - state          |  | $    | (800   | ) |      | $ | (800   | )    |  | $ | (800   | )
|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Deferred tax (expense) benefit         |  |      |        |   |      |   |        |      |  |   |        |  
|Federal                                |  |      | (4,170 | ) |      |   | 9,750  |      |  |   | 27,466 |  
|State                                  |  |      | 2,670  |   |      |   | 2,443  |      |  |   | (2,057 | )
|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Total deferred tax benefit             |  |      | (1,500 | ) |      |   | 12,193 |      |  |   | 25,409 |  
|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Net (expense) benefit for income taxes |  | $    | (2,300 | ) |      | $ | 11,393 |      |  | $ | 24,609 |  
|                                       |  |      |        |   |      |   |        |      |  |   |        |  



16



---

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



7. Income Taxes (continued)



A reconciliation of the Companys income tax benefit rate to the U.S. federal statutory rate is as follows:



|                                            |  |       |    |  |      |    |  |       |   
|------------------------------------------- |  | ----- | -- |  | ---- | -- |  | ----- | --
|                                            |  | 2004  |    |  | 2003 |    |  | 2002  |   
|Statutory income tax (expense) benefit rate |  | 15.0  | %  |  | 15.0 | %  |  | (15.0 | )%
|Property and equipment differences          |  | 23.8  | %  |  | (2.1 | )% |  | 3.9   | % 
|Nondeductible expense                       |  | 1.3   | %  |  | (1.4 | )% |  | (3.1  | )%
|Officers life insurance                    |  | (11.7 | )% |  | (2.0 | )% |  | (3.4  | )%
|Net operating loss                          |  | (28.9 | )% |  | 0.0  | %  |  | 19.0  | % 
|Net operating loss valuation adjustment     |  | (7.0  | )% |  | 0.0  | %  |  | 27.8  | % 
|Other                                       |  | (1.1  | )% |  | (2.0 | )% |  | (1.5  | )%
|                                            |  |       |    |  |      |    |  |       |   
|Effective income tax (expense) benefit rate |  | (8.9  | )% |  | 7.5  | %  |  | 27.7  | % 
|                                            |  |       |    |  |      |    |  |       |   



The primary components of temporary
differences which give rise to the Companys net deferred tax assets are as follows:



|                                                |  |      |         |   |      |   |         |  
|----------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                |  | 2004 |         |   | 2003 |  
|Net operating loss and tax credit carryforwards |  | $    | 104,700 |   |      | $ | 93,700  |  
|Depreciation and amortization                   |  |      | (22,000 | ) |      |   | (15,500 | )
|Other                                           |  |      | (600    | ) |      |   | 5,400   |  
|                                                |  |      |         |   |      |   |         |  
|Net deferred tax asset                          |  | $    | 82,100  |   |      | $ | 83,600  |  
|                                                |  |      |         |   |      |   |         |  



At December 31, 2004 the Company has
available unused contributions, manufacturers investment credit, and net operating loss carryforwards that may provide future tax benefits and that expire as follows:



Federal



|                          |  |               |        |                   |   |        
|------------------------- |  | ------------- | ------ | ----------------- | - | -------
|Years Ending December 31, |  | Contributions |        | Net OperatingLoss
|2005                      |  | $             | 12,067 |                   | $ |       
|2006                      |  |               | 758    |                   |   |       
|2008                      |  |               | 3,767  |                   |   |       
|2009                      |  |               | 5,295  |                   |   |       
|2017                      |  |               |       |                   |   | 290,210
|2018                      |  |               |       |                   |   | 128,576
|2023                      |  |               |       |                   |   | 96,867 
|2024                      |  |               |       |                   |   | 49,714 
|                          |  |               |        |                   |   |        
|                          |  | $             | 21,887 |                   | $ | 565,367
|                          |  |               |        |                   |   |        



17



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



7. Income Taxes (continued)



California



|                          |  |                                |        |               |   |                   |  |   |        
|------------------------- |  | ------------------------------ | ------ | ------------- | - | ----------------- |  | - | -------
|Years Ending December 31, |  | ManufacturersInvestment Credit |        | Contributions |   | Net OperatingLoss
|2005                      |  | $                              |       |               | $ | 12,051            |  | $ | 64,341 
|2006                      |  |                                | 5,609  |               |   |                  |  |   |       
|2008                      |  |                                | 4,382  |               |   | 3,767             |  |   |       
|2009                      |  |                                | 306    |               |   | 4,539             |  |   |       
|2010                      |  |                                | 1,082  |               |   |                  |  |   |       
|2011                      |  |                                | 1,892  |               |   |                  |  |   |       
|2012                      |  |                                | 59     |               |   |                  |  |   |       
|2013                      |  |                                |       |               |   |                  |  |   | 49,041 
|                          |  |                                |        |               |   |                   |  |   |        
|                          |  | $                              | 13,330 |               | $ | 20,357            |  | $ | 113,382
|                          |  |                                |        |               |   |                   |  |   |        



Income taxes paid for the years ended
December 31, 2004, 2003 and 2002 were $800, $800 and $800, respectively.



8.
Operating Leases



The Company leases its delivery fleet, other vehicles
and some office equipment under noncancelable operating leases with terms ranging from three to five years.



As of December 31, 2004, minimum annual lease payments due under these agreements for each of the next five years and in the aggregate are:



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |  
|2005                      |  | $ | 52,434 
|2006                      |  |   | 38,722 
|2007                      |  |   | 17,830 
|2008                      |  |   | 4,695  
|2009                      |  |   | 249    
|Thereafter                |  |   |       
|                          |  |   |        
|                          |  | $ | 113,930
|                          |  |   |        



Total operating lease payments for the
years ended December 31, 2004, 2003 and 2002 were $53,178, $56,933 and $60,377, respectively.



18



---

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)

9. Stock Option Purchase Plan



At the
discretion of the Board of Directors, the Company has periodically granted stock options to employees. Outstanding options of 16,000 shares at December 31, 2002 were granted to a single former employee under an agreement amended in 1996. These
options expired, unexercised, on December 31, 2003 and the Company has no future plans to offer stock option compensation to its employees or others. All of the 16,000 options outstanding were exercisable at an exercise price of $5.00 per share.



No options were granted during years ended December 31, 2004, 2003 and 2002,
respectively, and, accordingly, pro-forma income statement presentation as required under FASB Statement No. 123, Accounting for Stock-Based Compensation is not applicable.



10. Long Term Leases



The Company leases its corporate headquarters, warehouse and waterfront facilities from Paul and Joan Katzeff (the Companys majority
shareholders). The lease is classified as an operating lease and provides for monthly rental payments of $8,600. The Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The lease provides for
periodic cost of living increases during the term of the lease, including the option periods. The Company exercised an option to renew for one five-year term on March 31, 1995. The lease has been extended for successive one year terms since March
31, 2000. The Company continues to hold options to renew the lease for three successive five year renewal periods when the current one-year term expires on March 31, 2004. Rental expense under the lease was $103,200 for each of the years ended
December 31, 2004, 2003 and 2002. The Company presently intends to exercise all options under the terms of this lease.



The Company also leases a bakery establishment in Mendocino, California and warehouse premises in Santa Rosa, California under operating leases expiring in 2011 and 2005,
respectively.



Rental expense under these operating leases was $54,445, $52,438
and $50,552 for the years ended December 31, 2004, 2003 and 2002, respectively.



19



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



10. Long Term Leases (continued)



As of December 31, 2004, minimum future rental payments under non-cancelable facilities operating leases for each of the next five years and in the aggregate are as
follows:



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |  
|2005                      |  | $ | 149,791
|2006                      |  |   | 151,110
|2007                      |  |   | 153,420
|2008                      |  |   | 78,450 
|2009                      |  |   | 55,200 
|Thereafter                |  |   | 102,825
|                          |  |   |        
|                          |  | $ | 690,796
|                          |  |   |        



11. Related Party Transactions



As of December 31, 2004 the Company has (i) one interest only note
payable due on demand and (ii) a principal and interest note, in each case payable to Paul and Joan Katzeff (the Companys majority shareholders). The Company also leases properties from its majority shareholders (see Note 10).



The summary of payments made to Paul and Joan Katzeff in connection with these related party
transactions for the years ended December 31, 2004, 2003 and 2002 are as follows:



|                   |  |      |         |      |   |         |  |   |        
|------------------ |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                   |  | 2004 |         | 2003 |   | 2002   
|Principal on notes |  | $    |        |      | $ | 26,136  |  | $ | 53,720 
|Interest expense   |  | $    | 2,630   |      | $ | 4,050   |  | $ | 7,583  
|Rent expense       |  | $    | 103,200 |      | $ | 103,200 |  | $ | 103,200