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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, 2003



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:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|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)



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(Title of class)



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



State issuers revenues
for its most recent fiscal year: $4,741,877



There have
been no trades in the Companys Common Stock since 1999. See Part II, Item 5, Market for Common Equity and Related Stockholder Matters.



As of March 25, 2004, there were 1,236,744 shares outstanding of common stock of the issuer.



DOCUMENTS INCORPORATED BY REFERENCE



List hereunder the documents if incorporated by reference and the Part of this Form 10-KSB into which the document is
incorporated: None.



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INDEX



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



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PART I



ITEM 1 DESCRIPTION OF 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, planned 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 its business plan,
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 which 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 in the Northern California market. In other
parts of the nation the Company distributes its products either direct 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, 2003, 1,305 non-affiliated shareholders held shares of the Companys Common Stock that represents approximately
20.7% 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 under an exclusive ten-year contract and private-label products for over 100 retail and serving accounts in an effort to meet customers needs. The Company has the ability to have products custom packaged for retailers.



TEA. The Companys Royal Gardens Tea Company (Royal Gardens)
division currently offers twelve 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 and espresso 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, a Company-owned Bakery and direct marketing operations. The Company offers complementary products through all of these channels of distribution. Products
are purchased from third party vendors without contract 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 2003 revenues of $4,741,877, 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), the United States specialty coffee retail sales exceeded $2.5 billion and
specialty coffee beverage sales exceeded $8.4 billion annually in a $19.2 billion coffee market in 2003. Specialty coffee beverage retailers have been the fastest growing distribution channel in the specialty coffee business. As of the end of 2003,
there were over 17,000 locations compared to 6,000 just seven years previously. Cross outlet competition is sharpening as away-from-home consumption is growing through new or existing locations to gain market share at the expense of at-home
consumption, represented by supermarkets and mass merchandisers. The outlet market was expected to top out at 13,000 units. However, the units grew well beyond that expectation.



The SCAA reports that total coffee consumption grew slightly again in 2003 on the strength of the growth in new products and the
introduction of a wider variety of coffees, 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 evolved coffee from a beverage with commodity characteristics to one with cultural and sensory ties. In
addition, gourmet coffee tends to be purchased by younger consumers on average, compared to traditional coffee, which continues to bode well for future growth of the category.



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 also grown from $ 1billion in 1990 to $11 billion in 2002 according to the U. S. market for Organic Foods and Beverages published by MarketResearch.com. Sales of organic
product rose 17.3 % for the year. The USDA regulations have given uniformity and legitimacy to the organic industry strengthening the stock of these products in the consumers eye. They also promote more sustainable agricultural practices.



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 in their operations.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Shade grown coffee and fair trade coffee now appear on the offer lists of most coffee brokers and importers and is 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% have purchased organic products during the year according to the Natural Marketing Institute.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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. According to a Time article 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. The Company owns or leases trucks and delivers coffee within a 200 mile radius of Fort
Bragg.



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.



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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 with a real estate agent (see Item 2 Property).



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. The dedication of more of the Companys resources to the production of Song Bird Coffee and an increased public awareness
of the environmental effects of coffee growing has resulted in a corresponding increase in the sales of the Companys packaged and bulk roasted shade grown and organic coffee varieties, from approximately 33% of sales in 1997,40% in 1998, 46%
in 1999 and 60% in each of 2000, 2001, 2002 and 2003. 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 and 2003.



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 last quarter
of 2003, the Company began work on the Campesino Estate Coffee program. The Company is offering coffee from individual small-scale family farmers directly to the customers who drink the coffee. This 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 as 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s the
culmination of nearly 20years work with Nicaraguan grower cooperatives. The sales of this coffee will be implemented in 2004.



There are no assurances that any of the Companys programs will be successful and grow volume.



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.



The clear cutting of the rain forests to provide land for sun-grown coffee has destroyed the habitat of neo-tropical songbirds. The Company
provides a $0.15 donation for every Song Bird coffee package and every pound of bulk Song Bird coffee sold to the American Birding Association (ABA) that supports the promotion of public awareness of this destruction.



Since 2000, the Company has worked in partnership with TransFair USA, and has adopted a fair
trade label that distinguishes the 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. It 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.



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The Company sells the fair trade product under a number of different labels and a new fair trade coffee label, which was
introduced in the last quarter of 2000. The higher price of the coffee is generally passed on to the consumer. The benefit of fair trade coffee to the consumer is a reliable source of quality coffee and the ability to favorably impact the economic
welfare of the farmer. Although sales of fair trade coffee are not material at this time, the Company feels that this is a new niche for its business. The Company believes that fair trade coffee, like the Song Bird line, provides a potential
opportunity for growth. The Company has begun to provide educational programs, tastings and brochures to familiarize the public with the fair trade theme. Sales of fair trade certified coffee for the year 2003 was $228,754, for 2002 was $206,352,
$170,000 in 2001 and $73,400 in 2000, when the Company was just introducing the products.



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.



The Company attempts to cooperate with retailers in introducing what
it believes are novel products and place its products in markets where such products have not previously been sold. For example, Song Bird Coffee is marketed in stores where bird lovers purchase birdseed and bird houses. In addition there are
similar programs with the environmental artist Wyland, under the Companys ECOBOOM label that creates awareness for the protection of the seas, and Fair Traded coffees that provide a floor price to the small coffee farmer.



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 repositioning and partnering has enabled it 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 their 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, does purchase coffee contracts when it is not able to enter into coffee purchase commitments. Changes in the market value of option contracts are reported by the Company in the period in which the change occurs
and are included as part of cost of sales. There are no contracts at this time.



The Company believes its long-term relationships with coffee bean brokers, including Sustainable Harvest, 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 operations in Mendocino because the
Company does not deem it a fit with its wholesale operations. It has listed the bakery with a real estate agent. 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 2003, there are no customers accounting for more than 10% of the Companys revenue from coffee sales. However, a significant
reduction in sales to any of the Companys principal customers, or the loss of one or more major customers, may have an adverse impact on the Company. See Managements Discussion and Analysis of Financial Conditions.



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).



EMPLOYEES



As of December 31, 2003, 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 DESCRIPTION OF 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, 2004, 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 has exercised one option to extend the lease for one five-year period at the rate of $8,600 per month. 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. The Company 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 and intends to extend the lease. See Item 12, Certain Relationships and Related Transactions.



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The Company maintains adequate insurance property and liability coverage on all of its buildings. The property is in good
condition and repair.



The Companys Bakery in Mendocino is approximately
1,617 square feet and is leased from an unaffiliated third party. The Company currently pays rent of approximately $3,631 per month for the Bakery pursuant to a lease that expires September 30, 2011.



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, 2003 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.



ITEM 3 LEGAL PROCEEDINGS



No legal matters are
pending at this time.



ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matters were submitted for a vote of the security holders during the past quarter.



PART II



ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS 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 have taken place in 2000, 2001, 2002 or 2003.



The Company has not 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. The Companys bank credit agreement prohibits the payment of cash dividends without the banks consent.



As of December 31, 2003, there were 1,306 holders of record of the Common Stock.



The only equity compensation plan maintained by the Company is an option granted to a past
officer of the Company in fiscal 1997. This option expired on December 31, 2003.



Equity Compensation Plan Information



|                                                           |  |                                                                                             |  |                                                            |  |                                                                                             
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------- |  | --------------------------------------------------------------------------------------------
|                                                           |  | Number of securities to be issued upon exercise of outstanding options, warrants
and rights |  | Exercise price of outstanding options, warrants and rights |  | Number of securities Remaining available for future issuance under equity compensation Plans
|Equity compensation Plans approved by Security holders     |  | 0                                                                                           |  | 0                                                          |  | 0                                                                                           
|                                                           |  |                                                                                             | 
|Equity compensation Plans not approved by Security holders |  | 0                                                                                           |  | 0                                                          |  | 0                                                                                           
|Total                                                      |  | 0                                                                                           |  | 0                                                          |  | 0                                                                                           



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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 Companys business. Additional competition, customers that have gone out of business, and customers that have begun roasting for their own use has 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. Recently, it has changed its method of distribution, and is now using an independent distributor in a test region to
determine if such method could stop the slide. If the Company cannot stop the decline in its sales volume, it may not be able to achieve profitability in subsequent years.



The Company has enjoyed favorable margins in the last four years 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 has purchased green beans at lower prices than it has purchased in past
years. If there should be a rise in green bean prices 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 with Merrill Lynch that is a current liability and
that is renewed annually. While the Company believes the credit line will be renewed, should the line not be renewed, the stability of the Companys business would be in question.



RESULTS OF OPERATIONS



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                  |  | $           | (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.



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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 has switched its Bay Area
truck distribution to an outside distributor. There can be no assurances that that this downward trend will be reversed.



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 last year. 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 has shifted its emphasis away from
traditional mail order towards its Internet store and increased it 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. However, the Company cannot be sure that this strategy will be successful and replace volume lost in the traditional mail order business.



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 same period last year. There can be no assurance that the Company will have the same favorable green bean costs while the cost of workers compensation and medical benefits are continuing to
increase in the new 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 4.1% when compared to expenses of $169,786 for the same period last 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 same period last 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 last 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). There can be no assurances that the Company will be able to continue to obtain favorable interest rates or that it could obtain debt financing in
the future (if financing were needed).



NET INCOME. 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 last 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 periods.



8



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2002 COMPARED TO 2001



|                            |  |            |          |   |             |       |   
|--------------------------- |  | ---------- | -------- | - | ----------- | ----- | --
|Consolidated                |  | $Inc/(Dec) |          |   | % Inc/(Dec) |      
|Net Sales                   |  | $          | (159,024 | ) |             | (3.1  | )%
|Cost of sales               |  | $          | (174,489 | ) |             | (6.3  | )%
|Gross Margin                |  |            | 1.79     | % |             | 3.9   | % 
|Selling, G&A Expense        |  | $          | 55,056   |   |             | 2.6   | % 
|Depreciation & Amortization |  | $          | (32,223  | ) |             | (16.0 | )%
|Interest Expense            |  | $          | (27,286  | ) |             | (32.2 | )%
|Net Income                  |  | $          | 4,777    |   |             | 4.3   | % 



REVENUES. Consolidated net sales for
the year ended December 31, 2002 were $5,010,650, down 3.1% or approximately $160,000 when compared to net sales of $5,169,674 for December 31, 2001.



Distribution revenues for fiscal 2002 (e.g., revenues generated on our own truck distribution) were down $170,000 or 6.3% for the year for the year ended December 31,
2002 when compared to fiscal 2001. Nearly 60% of the decline was a result of a loss of a customer in one of the territories who began roasting for their own use during the fourth quarter of 2001. The remaining difference is a result of the loss of a
second customer in two different territories that changed coffee vendors.



National revenues (e. g., revenues not derived by mail order and direct truck distribution) were up by $10,000 or 4% for the year ended December 31,2002 when compared to the same period last year. Growth in a major national account and a
distributor in Southern California resulted in higher sales. There can be no assurances that this positive trend will continue.



Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) were flat for the year ended December
31,2002 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
$22,000 in revenue since it began in the third quarter of 2002, offsetting a loss of business of nearly the same amount in the traditional mail order business. In addition, the Companys Internet sales were up over $35,000 for this fiscal year.
The Company has shifted it 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. However, the Company cannot be sure that this strategy will be successful and replace volume lost in the traditional mail order business.



Sales attributable to operation of the Companys bakery were up $3,000 or .5% for the
year ended December 31,2002 compared to the same period last year. Increase in business from a wholesale account and a price increase implemented in May 2002, were offset by a slight decline in purchases during the year.



COST OF SALES. Consolidated cost of sales were $2,587,937, a decrease of nearly $175,000 or
6.3% from cost of $2,762,426 for the same period last year. This decline was a result of lower per pound bean costs, lower sales volume and lower overhead costs. Per pound green bean costs dropped to an average of $1.49 for the year compared to
$1.60 last year for the same period. Approximately $85,000 of the drop was due to lower prices, $40,000 was due to lower sales volume and $50,000 because of a drop in overhead costs ($24,000 lower storage and late charges, $10,000 reduction in lease
charges for the roaster, $6,000 drop in utility costs, $5,000 reduction in operating supplies and a $3,000 reduction in freight for green beans inbound). There can be no assurance that green bean prices will remain low.



GROSS MARGIN. Consolidated gross margin (gross profit as a percentage of net sales) for the
year ended December 31, 2002 was 48.4%, 1.79% improvement when compared to gross margin of 46.6% for the same period last year. This increase was a result of the aforementioned change in sales and cost of sales. There can be no assurances that the
price of green beans will remain at their current levels or that overhead costs will remain at this years levels.



SELLING, GENERAL & ADMINISTRATIVE. Consolidated selling, general and administrative expenses for the year ended December 31, 2002 were $2,108,374, a $55,000 increase
or 2.6% over selling general and administrative expenses of $2,053,3618, for the same period last year. Most of the increase was for a higher wage to an existing employee of $15,000 to head the new Cornucopia program and a manager of the bakery for
$36,000.



DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expenses were $169,786 for the year ended December 31, 2002, a decrease of over $32,000 or 16% when compared to expenses of $202,009 for the same period last year. This decline was a result of fewer capital expenditures, the change in
accounting method for startup and other organization costs that were written off at December 31, 2001 and a change in accounting method for amortizing goodwill effected January 1, 2002.



INTEREST EXPENSE. Interest expense for the year ended December 31, 2002 was $57,457, a decrease of 32.2% or over $27,000 from interest
expense of $84,743 for the same period last year. The decrease is a result of lower borrowings for the year having decreased from nearly $595,000 in fiscal 2001 to nearly $461,000 in fiscal 2002. Interest rates during 2002 were not materially
different from 2001.



NET INCOME. As a consequence of the foregoing factors,
the Company realized a net profit of $113,628 for the year ended December



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31, 2002 an increase of $4,777 or 4.3% when compared to the net profit of $108,851 for the same period last year. The
improvement in operating results of nearly $30,000 for the current fiscal year was offset by a reduced income tax benefit provided by the loss carry forwards of $23,000. 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 periods.



LIQUIDITY AND CAPITAL RESOURCES



Working capital as of December 31, 2003 was $147,897 as compared to working capital of $249,259 as of December 31, 2002. Increases in borrowing from the credit line to
finance higher inventories, receivables and prepaid expenses resulted in a reduction of working capital.



Cash used in operating activities was $6,940 in fiscal 2003 compared to cash provided by operating activities of $315,263 in fiscal 2002. The decline in cash provided by operating activities was a result of the loss
this year and increases in current assets for the year.



Cash used in investing
activities for the year ended December 31, 2003 was $74,921 compared to $215,558 used during the same period in fiscal 2002. Capital expenditures made during the year included $7,500 for new hardware and software, $5,000 for improvements to the web
site and store, $11,000 for design and application of decals for Companys delivery vans, $20,000 for leasehold improvements to the facility, $20,000 for brewers and grinders, $3,000 for new packaging plates and $3,000 for production equipment.



Net cash provided by financing activities for the year ended December 31, 2003
was $57,150 as compared to a use of cash for the same period in fiscal 2002 was $134,035. Repayments of debt to Wells Fargo of $278,000, repayment of $26,136 to the majority shareholders and $69,488 to Laoma Yaski (former owner of the bakery) were
the largest amounts of the debt repayments.



Cash as of December 31, 2003 was
$40,463, a nearly $25,000 decrease when compared to $65,174 for the same period in fiscal 2002. The primary reason for the decline was the loss, repayment of debt and financing the current assets



The Companys debt at December 31, 2003 was $517,932 for all term debt and obligations
under capital leases, up over $57,000 from $460,782 due at December 31, 2002. Of the total, $317,657 is due in fiscal 2004. Of the total borrowings, $391,632 is due to Merrill Lynch. The Companys accounts receivable, inventory, equipment,
fixtures, and improvements secure the borrowings from Merrill Lynch. The Merrill Lynch 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 two notes payable to the majority
shareholders, one that was due on demand after June 30,1996 for $24,919, unsecured, and previously subordinated to Wells Fargo notes. The second is a note payable to the majority shareholders dated November 15, 2003 for $25,000 payable in monthly
installments of $4,000, unsecured, due May 15,2004. At December 31,2004, the Company owes $19,919 and $21,000 respectively on the notes.



The Company is dependent on successfully executing its business plan 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 could be adversely affected.



A summary of the
Companys principal contractual obligations and other commitments as of December 31, 2003 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          |  | $                      | 517,932   |                    | $ | 317,657   |  | $         | 160819  |               | $ | 39,456  |  | $ | 0      
|Operating Leases        |  |                        | 155,208   |                    |   | 54,924    |  |           | 85,583  |               |   | 14,701  |  |   | 0      
|Real Estate Leases      |  |                        | 848,441   |                    |   | 157,645   |  |           | 300,901 |               |   | 231,870 |  | $ | 158,025
|Total Cash Obligations  |  | $                      | 1,521,581 |                    | $ | 530,226   |  | $         | 547,303 |               | $ | 286,027 |  | $ | 158,025



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.



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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 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 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.



ITEM 7 FINANCIAL STATEMENTS



Incorporated as part
of this document beginning on page F-1 of this filing



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



None



Information in response to this item is set forth in the Financial statements beginning on page F-1 of this filing



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 and the President and Chief Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures within 90 days before the filing date of this annual report. Based on that evaluation, the Companys management, including the Chief Executive Officer and the President and Chief Financial
Officer, concluded that the Companys disclosure controls and procedures were effective. There have been no significant changes in the Companys internal controls or in other factors that could significantly affect internal controls
subsequent to their evaluation.



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 |  | 66  |  | Chief Executive Officer & Director
|Joan Katzeff |  | 54  |  | President and Director            
|Roy Doughty  |  | 54  |  | Director                          
|Sam Kraynek  |  | 56  |  | Chief Financial Officer           



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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 has 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 Mendocino 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 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 seven 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 who holds the qualifications as defined in the most current SEC requirements. 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 this
requirement. 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 CFO to assure that our filings and financial statements are fairly, clearly and accurately reported. The Company continues to seek board members who may be deemed
independent directors to fulfill the current requirement of the SEC. However, there can be no assurance that the Company will be successful at locating members who would be willing to serve.



The Company has adopted a code of ethics that is applicable to all members of senior
management and the Companys employees. A copy is attached as an exhibit 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 2001, 2002 and 2003. All other Executive Officers received less than $100,000 in fiscal 2003.



SUMMARY COMPENSATION TABLE



|                                               |  |              |  |            |                       |           |     |                    |     |            |    
|---------------------------------------------- |  | ------------ |  | ---------- | --------------------- | --------- | --- | ------------------ | --- | ---------- | ---
|Name and Principal Position                    |  | Year         |  | Salary ($) |                       | Bonus ($) |     | Underlying Options |     | Securities
|Paul Katzeff Chief Executive Off. and Director |  | 200320022001 |  | $$$        | 100,000100,000100,000 |           |  |                    |  |            | 
|                                               |  |              |  |            |                      
|Joan Katzeff President and Director            |  | 200320022001 |  | $$$        | 100,000100,000100,000 |           |  |                    |  |            | 



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STOCK OPTION GRANTS



The Company did not grant stock options to any of the above named executive officers during fiscal 2003.



COMPENSATION OF DIRECTORS



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



ITEM 11 SECURITY OWNERSHIP OF MANAGEMENT CERTAIN OTHERS



The following table sets forth certain information regarding beneficial ownership of the Companys Common Stock as of December 31, 2003, (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.



|                                                                                                                                       |  |                           |     |  |            |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | --- |  | ---------- | -
|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 1918 Fort Bragg, CA 95437                                                   |  | 200                       |     |  | 0.02       | %
|All directors and executive officers as a group (3 persons)                                                                            |  | 979,200                   | (1) |  | 78.92      | %

---

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



ITEM 12 CERTAIN REALTIONSHIPS AND RELATED TRANSACTIONS



The Company leases its corporate headquarters, warehouse and waterfront facilities from Joan and Paul Katzeff, who are affiliates of the Company (the Katzeffs). The lease provides for monthly payments of $8,600 in fiscal 2003,
and the Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. See Note 6 and Note 12 of Notes to Financial Statements.



Global Insights, of which Mr. Doughty, a director of the Company, is a principal, is party to a one year consulting agreement that
commenced January 1, 2003 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 $5,500 during fiscal 2003 for similar services
provided outside the agreement. In 2002, Global Insights received an aggregate of $18,000 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 or officers or employees of the Company.



The Company has two notes
payable to its major shareholders, Paul Katzeff, CEO and Joan Katzeff, President. The first note is an unsecured note due on demand after June 30, 1996 at a rate of 12% per annum and at December 31, 2003, the balance on that note was $19,919. The
second note was executed on November 15, 2003, in the principal amount of $25,000 and is payable in monthly installments of $4,000 per month including interest at 10% per annum. Such note had a balance of $21,000 as of December 31, 2003. The
Katzeffs had subordinated the first note to all notes payable including the note payable to Wells Fargo. The note is no longer subordinated. See Auditors Report, Notes to Financial Statements, Note 6 and Note 12.



ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K



|(a) | Exhibits
|--- | --------



|    |  |                                                    
|--- |  | ---------------------------------------------------
|    | 
|3.1 |  | Restated Articles of Incorporation of the Company.+



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|       |  |                                                                                                                                             
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|3.2    |  | By laws 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   |  | Promissory Note issued by the Company to Joan and Paul Katzeff dated as of December 30, 1990.++++                                           
|       | 
|10.7   |  | Stock Purchase Agreement between the Company, Sustainable Harvest, Inc. and David Griswold as of December 31, 1997.! !!                     
|       | 
|10.8   |  | Summary Plan Description of the Companys Profit Sharing Plan.! +++++                                                                       
|       | 
|10.9   |  | Business Loan Agreement dated as of August 13, 1997 by and between the Company and Wells Fargo Bank, N.A. +++++                             
|       | 
|10.10  |  | Business Loan Agreement dated as of January 6, 1999 by and between the Company and Wells Fargo Bank, N.A.*                                  
|       | 
|10.11  |  | Non-exclusive License Agreement dated as of July 14, 1998 by and between the Company and Wyland International, LLC.!!!                      
|       | 
|10.12  |  | Business Loan Agreement dated as of November 30, 2000 by and between the Company and Wells Fargo Bank, N.A.!!!!                             
|       | 
|10.13  |  | Promissory Note issued by the Company to Joan and Paul Katzeff dated as of April 1,2001**                                                   
|       | 
|10.14  |  | Promissory Note issued by the Company to Joan and Paul Katzeff dated as of October, 2001***                                                 
|       | 
|10.15  |  | Promissory Note issued by the Company to Joan and Paul Katzeff as of April 1, 2002****                                                      
|       | 
|10.16  |  | Promissory Note issued by the Company to Joan and Paul Katzeff as of November 15, 2003                                                      
|       | 
|10.17  |  | Code of Ethics                                                                                                                              
|       | 
|24.1   |  | Consent of Sallmann, Yang & Alameda.*****                                                                                                   
|       | 
|31.1   |  | Certification of Chief Executive Officer                                                                                                    
|       | 
|31.2   |  | Certification of President                                                                                                                  
|       | 
|31.3   |  | Certification of Chief Financial Officer                                                                                                    
|       | 
|32.1   |  | Certification of Chief Executive Officer                                                                                                    
|       | 
|32.2   |  | Certification of President                                                                                                                  
|       | 
|32.3   |  | Certification of Chief Financial Officer                                                                                                    



14



---

##### Table of Contents

(b) Reports on 8-K



None.

---

|+ | 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, 1998.
|- | ------------------------------------------------------------------------------------------------------------

|!! | Portions of this Exhibit were omitted and have been filed separately with the Secretary of the Securities and Exchange Commission pursuant to a Confidential Treatment Request under
Rule 24-b2 of the Securities Exchange Act of 1934, as amended, filed on March 31, 1998 which was subsequently granted.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|!!! | Portions of this Exhibit were omitted and have been filed separately with the Secretary of the Securities and Exchange Commission pursuant to a Confidential Treatment Request under
Rule 24-b2 of the Securities Exchange Act of 1934, as amended, filed on March 31, 1999.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|!!!! | Incorporated by reference to the exhibits to the Companys Form 10-KSB for the year ended December 31,2000.
|---- | -----------------------------------------------------------------------------------------------------------

|* | Incorporated by reference to the exhibits to the Companys Form 10-KSB for the year ended December 31, 1999
|- | -----------------------------------------------------------------------------------------------------------

|** | Incorporated by reference to the exhibits to the Companys Form 10-QSB for the quarter ended June 30,2001.
|-- | ----------------------------------------------------------------------------------------------------------

|*** | Incorporated by reference to the exhibits to the Companys Form 10-QSB for the quarter ended September 30,2001.
|--- | ---------------------------------------------------------------------------------------------------------------

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

|***** | Incorporated by reference to the exhibits to the Companys Form 10-KSB for the year [ended December 31, 2002
|----- | ------------------------------------------------------------------------------------------------------------



ITEM 14 DISCLOSURE OF ACCOUNTING FEES AND SERVICES



The Company uses the firm of Sallmann, Yang & Alameda to perform its annual audit, prepare the Companys federal and state tax return and review the Companys quarterly financial statements. During 2003, the Company paid the
following amounts for these services:



|                               |  |   |       
|------------------------------ |  | - | ------
|Audit Services and tax returns |  | $ | 19,000
|Quarterly review               |  |   | 15,000
|                               | 
|Total                          |  | $ | 34,000



There were no fees paid for and no
work authorized other than for audit, quarterly review and tax services.



15



---

##### Table of Contents

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 KatzeffPaul Katzeff |  | Chief Executive Officer (Principal Executive Officer) and Director                           |  | March 29, 2004
|                             |  |                                                                                             
|/s/ Joan KatzeffJoan Katzeff |  | President, Chief Financial Officer (Principal Financial and Accounting Officer) and Director |  | March 29, 2004
|                             |  |                                                                                             
|/s/ Roy DoughtyRoy Doughty   |  | Director                                                                                     |  | March 29, 2004



16



---

##### Table of Contents

Financial Statements



Thanksgiving Coffee Company, Inc.



For the Years Ended December 31, 2003 and 2002



with Report of Independent Accountants



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.



Audited
Financial Statements



For the Years Ended December 31, 2003 and
2002



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



---

##### Table of Contents

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, 2003 and 2002 and the related
statements of operations, retained earnings, and cash flows for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, 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, 2004



F-1



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.



Balance Sheets



|                                       |  |              |            |   |      |   |            |  
|-------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                       |  | December 31, |           
|                                       |  | 2003         |            |   | 2002 |  
|Assets                                 |  |              |            |   |      |   |            |  
|Current assets                         |  |              |            |   |      |   |            |  
|Cash                                   |  | $            | 40,463     |   |      | $ | 65,174     |  
|Accounts receivable                    |  |              | 343,052    |   |      |   | 312,933    |  
|Inventories                            |  |              | 409,698    |   |      |   | 378,878    |  
|Prepaid expenses                       |  |              | 40,703     |   |      |   | 28,952     |  
|Deferred tax asset                     |  |              | 39,300     |   |      |   | 25,074     |  
|                                       |  |              |            |   |      |   |            |  
|Total current assets                   |  |              | 873,216    |   |      |   | 811,011    |  
|                                       |  |             
|Property and equipment                 |  |              |            |   |      |   |            |  
|Property and equipment                 |  |              | 2,664,598  |   |      |   | 2,628,435  |  
|Accumulated depreciation               |  |              | (2,128,605 | ) |      |   | (1,990,354 | )
|                                       |  |              |            |   |      |   |            |  
|Total property and equipment           |  |              | 535,993    |   |      |   | 638,081    |  
|                                       |  |             
|Other assets                           |  |              |            |   |      |   |            |  
|Deposits and other assets              |  |              | 52,379     |   |      |   | 37,572     |  
|Goodwill                               |  |              | 171,773    |   |      |   | 171,773    |  
|Other intangibles, net of amortization |  |              | 38,288     |   |      |   | 43,250     |  
|Deferred tax asset                     |  |              | 44,300     |   |      |   | 46,333     |  
|                                       |  |              |            |   |      |   |            |  
|Total other assets                     |  |              | 306,740    |   |      |   | 298,928    |  
|                                       |  |              |            |   |      |   |            |  
|Total assets                           |  | $            | 1,715,949  |   |      | $ | 1,748,020  |  
|                                       |  |              |            |   |      |   |            |  



See accompanying notes and
accountants report



F-2



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.



Balance Sheets



|                                                                                                |  |              |           |   |      |   |          
|----------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | ---------
|                                                                                                |  | December 31,
|                                                                                                |  | 2003         |           |   | 2002
|Liabilities and shareholders equity                                                            |  |              |           |   |      |   |          
|Current liabilities                                                                             |  |              |           |   |      |   |          
|Accounts payable                                                                                |  | $            | 346,264   |   |      | $ | 302,903  
|Notes payable - bank                                                                            |  |              | 246,319   |   |      |   | 92,800   
|Notes payable - other                                                                           |  |              | 9,566     |   |      |   | 53,906   
|Notes payable - shareholders                                                                    |  |              | 40,919    |   |      |   | 42,055   
|Capital lease obligations                                                                       |  |              | 20,853    |   |      |   | 15,290   
|Accrued liabilities                                                                             |  |              | 61,398    |   |      |   | 54,798   
|                                                                                                |  |              |           |   |      |   |          
|Total current liabilities                                                                       |  |              | 725,319   |   |      |   | 561,752  
|                                                                                                |  |             
|Long term debt                                                                                  |  |              |           |   |      |   |          
|Notes payable - bank                                                                            |  |              | 145,313   |   |      |   | 185,600  
|Notes payable - other                                                                           |  |              | 13,646    |   |      |   | 23,211   
|Capital lease obligations                                                                       |  |              | 41,316    |   |      |   | 47,920   
|                                                                                                |  |              |           |   |      |   |          
|Total long term debt                                                                            |  |              | 200,275   |   |      |   | 256,731  
|                                                                                                |  |              |           |   |      |   |          
|Total liabilities                                                                               |  |              | 925,594   |   |      |   | 818,483  
|                                                                                                |  |             
|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)                                                         |  |              | (96,061   | ) |      |   | 43,121   
|                                                                                                |  |              |           |   |      |   |          
|Total shareholders equity                                                                      |  |              | 790,355   |   |      |   | 929,537  
|                                                                                                |  |              |           |   |      |   |          
|Total liabilities and shareholders equity                                                      |  | $            | 1,715,949 |   |      | $ | 1,748,020
|                                                                                                |  |              |           |   |      |   |          



See accompanying notes and
accountants report



F-3



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.



Statements of Operations



|                                                                                            |  |                                  |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------------------------------------------------- |  | -------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                            |  | For the Years ended December 31, |          
|                                                                                            |  | 2003                             |           |   | 2002 |   |           | 2001 | 
|Income                                                                                      |  |                                  |           |   |      |   |           |      |  |   |           |  
|Net sales                                                                                   |  | $                                | 4,741,877 |   |      | $ | 5,010,650 |      |  | $ | 5,169,674 |  
|Cost of sales                                                                               |  |                                  | 2,444,722 |   |      |   | 2,587,937 |      |  |   | 2,762,426 |  
|                                                                                            |  |                                  |           |   |      |   |           |      |  |   |           |  
|Gross profit                                                                                |  |                                  | 2,297,155 |   |      |   | 2,422,713 |      |  |   | 2,407,248 |  
|                                                                                            |  |                                  |          
|Operating expenses                                                                          |  |                                  |           |   |      |   |           |      |  |   |           |  
|Selling, general and administrative expenses                                                |  |                                  | 2,221,927 |   |      |   | 2,108,374 |      |  |   | 2,053,318 |  
|Depreciation and amortization                                                               |  |                                  | 162,751   |   |      |   | 169,786   |      |  |   | 202,009   |  
|                                                                                            |  |                                  |           |   |      |   |           |      |  |   |           |  
|Total operating expenses                                                                    |  |                                  | 2,384,678 |   |      |   | 2,278,160 |      |  |   | 2,255,327 |  
|                                                                                            |  |                                  |           |   |      |   |           |      |  |   |           |  
|Operating income                                                                            |  |                                  | (87,523   | ) |      |   | 144,553   |      |  |   | 151,921   |  
|                                                                                            |  |                                  |          
|Other income (expense)                                                                      |  |                                  |           |   |      |   |           |      |  |   |           |  
|Interest income                                                                             |  |                                  | 21        |   |      |   | 330       |      |  |   | 2,784     |  
|Covenant not to compete                                                                     |  |                                  | (25,000   | ) |      |   |          |      |  |   |          |  
|Miscellaneous income (expense)                                                              |  |                                  | (5,945    | ) |      |   | 965       |      |  |   | (8,271    | )
|Gain on sale of equipment                                                                   |  |                                  |          |   |      |   | 628       |      |  |   | 1,523     |  
|Interest expense                                                                            |  |                                  | (32,128   | ) |      |   | (57,457   | )    |  |   | (84,743   | )
|                                                                                            |  |                                  |           |   |      |   |           |      |  |   |           |  
|Total other income (expense)                                                                |  |                                  | (63,052   | ) |      |   | (55,534   | )    |  |   | (88,707   | )
|                                                                                            |  |                                  |           |   |      |   |           |      |  |   |           |  
|Income (loss) before income taxes and cumulative effect of a change in accounting principle |  |                                  | (150,575  | ) |      |   | 89,019    |      |  |   | 63,214    |  
|Income tax benefit                                                                          |  |                                  | 11,393    |   |      |   | 24,609    |      |  |   | 47,650    |  
|Cumulative effect of change in accounting principle                                         |  |                                  |          |   |      |   |          |      |  |   | (2,013    | )
|                                                                                            |  |                                  |           |   |      |   |           |      |  |   |           |  
|Net income (loss)                                                                           |  | $                                | (139,182  | ) |      | $ | 113,628   |      |  | $ | 108,851   |  
|                                                                                            |  |                                  |           |   |      |   |           |      |  |   |           |  
|Earnings (loss) per share (basic)                                                           |  | $                                | (0.11     | ) |      | $ | 0.09      |      |  | $ | 0.09      |  
|                                                                                            |  |                                  |           |   |      |   |           |      |  |   |           |  
|Earnings (loss) per share (dilutive)                                                        |  | $                                | (0.11     | ) |      | $ | 0.09      |      |  | $ | 0.09      |  
|                                                                                            |  |                                  |           |   |      |   |           |      |  |   |           |  



See accompanying notes and
accountants report



F-4



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.



Statements of Accumulated Deficit



|                                                |  |                                  |          |   |      |   |         |      |  |   |          |  
|----------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                |  | For the Years Ended December 31, |         
|                                                |  | 2003                             |          |   | 2002 |   |         | 2001 | 
|Retained earnings (deficit), beginning          |  | $                                | 43,121   |   |      | $ | (70,507 | )    |  | $ | (179,358 | )
|Net income (loss)                               |  |                                  | (139,182 | ) |      |   | 113,628 |      |  |   | 108,851  |  
|                                                |  |                                  |          |   |      |   |         |      |  |   |          |  
|Retained earnings (accumulated deficit), ending |  | $                                | (96,061  | ) |      | $ | 43,121  |      |  | $ | (70,507  | )
|                                                |  |                                  |          |   |      |   |         |      |  |   |          |  



See accompanying notes and
accountants report



F-5



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.



Statements of Cash Flows



|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                           |  | For the Years ended December 31, |         
|                                                                           |  | 2003                             |          |   | 2002 |   |          | 2001 | 
|Operating activities                                                       |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net income (loss)                                                          |  | $                                | (139,182 | ) |      | $ | 113,628  |      |  | $ | 108,851  |  
|Adjustments to reconcile net loss to cash flows from operating activities: |  |                                  |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                              |  |                                  | 177,009  |   |      |   | 191,185  |      |  |   | 224,818  |  
|Allowance for bad debts                                                    |  |                                  | 12,077   |   |      |   | 974      |      |  |   | 3,019    |  
|Cumulative effect of change in accounting principle                        |  |                                  |         |   |      |   |         |      |  |   | 2,013    |  
|Deferred income tax expense (benefit)                                      |  |                                  | (12,193  | ) |      |   | (25,409  | )    |  |   | (48,450  | )
|(Increase) decrease in:                                                    |  |                                  |          |   |      |   |          |      |  |   |          |  
|Receivables                                                                |  |                                  | (42,196  | ) |      |   | 10,848   |      |  |   | 53,972   |  
|Inventories                                                                |  |                                  | (30,820  | ) |      |   | 592      |      |  |   | 124,398  |  
|Prepaid expenses                                                           |  |                                  | (11,751  | ) |      |   | 31,982   |      |  |   | 7,557    |  
|Deposits and other assets                                                  |  |                                  | (9,845   | ) |      |   | 3,647    |      |  |   | 836      |  
|Increase (decrease) in:                                                    |  |                                  |          |   |      |   |          |      |  |   |          |  
|Accounts payable                                                           |  |                                  | 43,361   |   |      |   | (19,330  | )    |  |   | (170,306 | )
|Accrued liabilities                                                        |  |                                  | 6,600    |   |      |   | 7,774    |      |  |   | 718      |  
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) operating activities                        |  |                                  | (6,940   | ) |      |   | 315,891  |      |  |   | 307,426  |  
|                                                                           |  |                                  |         
|Investing activities                                                       |  |                                  |          |   |      |   |          |      |  |   |          |  
|Purchases of property and equipment                                        |  |                                  | (74,921  | ) |      |   | (217,319 | )    |  |   | (94,551  | )
|Gain on sale of equipment                                                  |  |                                  |         |   |      |   | (628     | )    |  |   | (1,523   | )
|Proceeds from sale of equipment                                            |  |                                  |         |   |      |   | 2,389    |      |  |   | 3,167    |  
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                      |  |                                  | (74,921  | ) |      |   | (215,558 | )    |  |   | (92,907  | )
|                                                                           |  |                                  |         
|Financing activities                                                       |  |                                  |          |   |      |   |          |      |  |   |          |  
|Payments from notes receivable                                             |  |                                  |         |   |      |   |         |      |  |   | 12,028   |  
|Proceeds from notes payable and capital leases                             |  |                                  | 466,586  |   |      |   | 87,699   |      |  |   | 66,967   |  
|Repayments of notes payable and capital leases                             |  |                                  | (409,436 | ) |      |   | (221,734 | )    |  |   | (236,533 | )
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                        |  |                                  | 57,150   |   |      |   | (134,035 | )    |  |   | (157,538 | )
|                                                                           |  |                                  |         
|Net increase (decrease) in cash                                            |  |                                  | (24,711  | ) |      |   | (33,702  | )    |  |   | 56,981   |  
|Cash at beginning of year                                                  |  |                                  | 65,174   |   |      |   | 98,876   |      |  |   | 41,895   |  
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Cash at end of year                                                        |  | $                                | 40,463   |   |      | $ | 65,174   |      |  | $ | 98,876   |  
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  



See accompanying notes and
accountants report



F-6



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements



December 31,
2003 and 2002



|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.



F-7



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



|1. | Summary of Significant Accounting Policies (continued)
|-- | ------------------------------------------------------



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:



|                                      |  |              
|------------------------------------- |  | -------------
|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.



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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 2003 and 2002 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 their 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, 2003,
2002 and 2001, respectively.



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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 $11,300 and $9,300 as of December 31, 2003 and 2002, 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, 2003 and 2002 the Company did not engage in any direct
response advertising that would require capitalization. Advertising costs charged to expense were $43,759, $14,907 and $26,413 for the years ended December 31, 2003, 2002 and 2001, 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.



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



|2. | Accounts Receivable
|-- | -------------------



Accounts receivable consist of the following:



|                                      |  |      |         |   |      |   |         |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                      |  | 2003 |         |   | 2002 |  
|Accounts receivable                   |  | $    | 363,157 |   |      | $ | 317,693 |  
|Due from employees                    |  |      | 1,005   |   |      |   | 4,273   |  
|                                      |  |      |         |   |      |   |         |  
|                                      |  |      | 364,162 |   |      |   | 321,966 |  
|Less: Allowance for doubtful accounts |  |      | (21,110 | ) |      |   | (9,033  | )
|                                      |  |      |         |   |      |   |         |  
|                                      |  | $    | 343,052 |   |      | $ | 312,933 |  
|                                      |  |      |         |   |      |   |         |  



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 for the years ended December 31, 2003, 2002 and 2001 was $24,508, $3,224 and $13,970, respectively.
The adjustment to the allowance account for the years ended December 31, 2003 and 2002 was $12,077 and $974, respectively.



|3. | Inventories
|-- | -----------



Inventories consist of the following:



|                                                        |  |      |         |      |   |        
|------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                        |  | 2003 |         | 2002
|Coffee                                                  |  |      |         |      |   |        
|Unroasted                                               |  | $    | 157,078 |      | $ | 112,237
|Roasted                                                 |  |      | 69,497  |      |   | 90,394 
|Tea                                                     |  |      | 19,522  |      |   | 12,175 
|Packaging, supplies and other merchandise held for sale |  |      | 163,601 |      |   | 164,072
|                                                        |  |      |         |      |   |        
|Total inventories                                       |  | $    | 409,698 |      | $ | 378,878
|                                                        |  |      |         |      |   |        



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



|4. | Property and Equipment
|-- | ----------------------



Property and equipment consist of the following:



|                                      |  |      |            |   |      |   |            |  
|------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                      |  | 2003 |            |   | 2002 |  
|Equipment                             |  | $    | 1,553,854  |   |      | $ | 1,562,635  |  
|Furniture and fixtures                |  |      | 294,411    |   |      |   | 287,653    |  
|Leasehold improvements                |  |      | 420,121    |   |      |   | 423,200    |  
|Transportation equipment              |  |      | 123,936    |   |      |   | 111,007    |  
|Marketing equipment                   |  |      | 18,427     |   |      |   | 18,427     |  
|Capitalized website development costs |  |      | 148,506    |   |      |   | 136,814    |  
|Property held under capital leases    |  |      | 105,343    |   |      |   | 88,699     |  
|                                      |  |      |            |   |      |   |            |  
|Total property and equipment          |  |      | 2,664,598  |   |      |   | 2,628,435  |  
|Accumulated depreciation              |  |      | (2,128,605 | ) |      |   | (1,990,354 | )
|                                      |  |      |            |   |      |   |            |  
|Property and equipment, net           |  | $    | 535,993    |   |      | $ | 638,081    |  
|                                      |  |      |            |   |      |   |            |  



Depreciation expense for the years
ended December 31, 2003, 2002 and 2001 was $177,009, $185,628 and $210,880, 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, 2003 or 2002, respectively. Consequently, there was no change in the carrying value of goodwill in years ended
December 31, 2003 or 2002.



Intangible assets subject to amortization consist
of the following:



|                         |  |      |         |   |      |   |         |  
|------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                         |  | 2003 |         |   | 2002 |  
|Leasehold value          |  | $    | 67,000  |   |      | $ | 67,000  |  
|Trademarks               |  |      | 5,127   |   |      |   | 5,127   |  
|Refinance cost           |  |      | 4,500   |   |      |   | 2,500   |  
|                         |  |      |         |   |      |   |         |  
|Total intangible assets  |  |      | 76,627  |   |      |   | 74,627  |  
|Accumulated amortization |  |      | (38,339 | ) |      |   | (31,377 | )
|                         |  |      |         |   |      |   |         |  
|Intangible assets, net   |  | $    | 38,288  |   |      | $ | 43,250  |  
|                         |  |      |         |   |      |   |         |  



Amortization expense for the years
ended December 31, 2003, 2002 and 2001 was $6,962, $5,558 and $13,938, respectively.



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



|6. | Long Term Debt
|-- | --------------



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |         |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 2003 |         | 2002
|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.           |  |      | 190,070 |      |   |       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |     
|Note payable to Wells Fargo Bank, monthly installments of $7,733 plus interest at 3% over prime rate beginning December 15, 2000 (7.25% at December 31, 2002), final payment is due on January 15,
2005. 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.                                       |  |      |        |      |   | 278,400
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |     
|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  |      |   | 24,919 



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



|6. | Long Term Debt (continued)
|-- | --------------------------



|                                                                                                                                                                                                                                                    |  |      |        |      |   |       
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                                                                                                                                                                                                                                    |  | 2003 |        | 2002
|Note payable to majority shareholders, Paul and Joan Katzeff, payable in monthly installments of $1,649 including interest at 11.50%, with final payment due on November 17, 2003,
unsecured.                                                       |  | $    |       |      | $ | 17,136
|                                                                                                                                                                                                                                                    |  |     
|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 Laoma Yaski for the purchase of Mendocino Bakery, payable in monthly installments of $4,249, including interest at 10%, secured by property and equipment at the bakery, final
payment due on November 14, 2003.                    |  |      |       |      |   | 44,488
|                                                                                                                                                                                                                                                    |  |     
|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  |      |   | 6,575 
|                                                                                                                                                                                                                                                    |  |     
|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.    |  |      | 6,356  |      |   | 9,223 
|                                                                                                                                                                                                                                                    |  |     
|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.                                                                                 |  |      | 13,738 |      |   | 16,831



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



|6. | Long Term Debt (continued)
|-- | --------------------------



|                                                                                                                                                                                |  |      |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                |  | 2003 |          |   | 2002 |  
|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   |   |      | $ | 15,418   |  
|                                                                                                                                                                                |  |     
|Note payable to Manifest Leasing, payable in monthly installments of $444, including interest at 12.909%, secured by equipment, final payment due March 2007.                   |  |      | 14,249   |   |      |   |         |  
|                                                                                                                                                                                |  |     
|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. |  |      | 35,243   |   |      |   | 47,792   |  
|                                                                                                                                                                                |  |      |          |   |      |   |          |  
|                                                                                                                                                                                |  |      | 417,932  |   |      |   | 460,782  |  
|Less current portion                                                                                                                                                            |  |      | (317,657 | ) |      |   | (204,051 | )
|                                                                                                                                                                                |  |      |          |   |      |   |          |  
|Long term portion of notes payable                                                                                                                                              |  | $    | 200,275  |   |      | $ | 256,731  |  
|                                                                                                                                                                                |  |      |          |   |      |   |          |  



Interest paid for the years ended
December 31, 2003, 2002 and 2001 was $32,128, $57,457 and $84,743, respectively.



As of December 31, 2003, 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, |  |  
|2004                      |  | $ | 317,657
|2005                      |  |   | 86,212 
|2006                      |  |   | 74,607 
|2007                      |  |   | 39,456 
|2008 and thereafter       |  |   |       
|                          |  |   |        
|                          |  | $ | 517,932
|                          |  |   |        



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



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



|7. | Income Taxes
|-- | ------------



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



|                               |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                               |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Current tax (expense) - state  |  | $    | (800   | ) |      | $ | (800   | )    |  | $ | (800   | )
|Deferred tax (expense) benefit |  |      |        |   |      |   |        |      |  |   |        |  
|Federal                        |  |      | 9,750  |   |      |   | 27,466 |      |  |   | 22,759 |  
|State                          |  |      | 2,443  |   |      |   | (2,057 | )    |  |   | 25,691 |  
|                               |  |      |        |   |      |   |        |      |  |   |        |  
|Total deferred tax benefit     |  |      | 12,193 |   |      |   | 25,409 |      |  |   | 48,450 |  
|                               |  |      |        |   |      |   |        |      |  |   |        |  
|Net benefit for income taxes   |  | $    | 11,393 |   |      | $ | 24,609 |      |  | $ | 47,650 |  
|                               |  |      |        |   |      |   |        |      |  |   |        |  



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



|                                            |  |      |    |  |       |    |  |       |   
|------------------------------------------- |  | ---- | -- |  | ----- | -- |  | ----- | --
|                                            |  | 2003 |    |  | 2002  |    |  | 2001  |   
|Statutory income tax (expense) benefit rate |  | 15.0 | %  |  | (15.0 | )% |  | (15.0 | )%
|Property and equipment differences          |  | (2.1 | )% |  | 3.9   | %  |  | (13.2 | )%
|Nondeductible expense                       |  | (1.4 | )% |  | (3.1  | )% |  | (3.5  | )%
|Officers life insurance                    |  | (2.0 | )% |  | (3.4  | )% |  | (4.8  | )%
|Net operating loss                          |  | 0.0  | %  |  | 19.0  | %  |  | 41.2  | % 
|Net operating loss valuation adjustment     |  | 0.0  | %  |  | 27.8  | %  |  | 75.8  | % 
|Other                                       |  | (2.0 | )% |  | (1.5  | )% |  | (5.2  | )%
|                                            |  |      |    |  |       |    |  |       |   
|Effective income tax benefit rate           |  | 7.5  | %  |  | 27.7  | %  |  | 75.3  | % 
|                                            |  |      |    |  |       |    |  |       |   



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



|                                                |  |      |         |   |      |   |       
|----------------------------------------------- |  | ---- | ------- | - | ---- | - | ------
|                                                |  | 2003 |         |   | 2002
|Net operating loss and tax credit carryforwards |  | $    | 93,700  |   |      | $ | 61,879
|Depreciation and amortization                   |  |      | (15,500 | ) |      |   | 7,191 
|Other                                           |  |      | 5,400   |   |      |   | 2,337 
|                                                |  |      |         |   |      |   |       
|Net deferred tax asset                          |  | $    | 83,600  |   |      | $ | 71,407
|                                                |  |      |         |   |      |   |       



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



|7. | Income Taxes (continued)
|-- | ------------------------



At December 31, 2003 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 Operating Loss |   | Total  
|2005                      |  | $             | 12,067 |                    | $ |        |  | $ | 12,067 
|2006                      |  |               | 758    |                    |   |        |  |   | 758    
|2008                      |  |               | 3,767  |                    |   |        |  |   | 3,767  
|2017                      |  |               |       |                    |   | 290,210 |  |   | 290,210
|2018                      |  |               |       |                    |   | 128,576 |  |   | 128,576
|2023                      |  |               |       |                    |   | 96,867  |  |   | 96,867 
|                          |  |               |        |                    |   |         |  |   |        
|                          |  | $             | 16,592 |                    | $ | 515,653 |  | $ | 532,245
|                          |  |               |        |                    |   |         |  |   |        



|                          |  |                                 |        |               |   |                    |  |       |         |  |   |        
|------------------------- |  | ------------------------------- | ------ | ------------- | - | ------------------ |  | ----- | ------- |  | - | -------
|California                |  |                                 |        |               |   |                    |  |       |         |  |   |        
|                          |  |                                 |        |              
|Years Ending December 31, |  | Manufacturers Investment Credit |        | Contributions |   | Net Operating Loss |  | Total
|2004                      |  | $                               |       |               | $ |                   |  | $     | 28,950  |  | $ | 28,950 
|2005                      |  |                                 |       |               |   | 12,051             |  |       | 64,092  |  |   | 76,143 
|2006                      |  |                                 | 5,609  |               |   |                   |  |       |        |  |   | 5,609  
|2008                      |  |                                 | 4,382  |               |   | 3,767              |  |       |        |  |   | 8,149  
|2009                      |  |                                 | 306    |               |   |                   |  |       |        |  |   | 306    
|2010                      |  |                                 | 1,082  |               |   |                   |  |       |        |  |   | 1,082  
|2011                      |  |                                 | 1,892  |               |   |                   |  |       |        |  |   | 1,892  
|2012                      |  |                                 | 59     |               |   |                   |  |       |        |  |   | 59     
|2013                      |  |                                 |       |               |   |                   |  |       | 49,041  |  |   | 49,041 
|                          |  |                                 |        |               |   |                    |  |       |         |  |   |        
|                          |  | $                               | 13,330 |               | $ | 15,818             |  | $     | 142,083 |  | $ | 171,231
|                          |  |                                 |        |               |   |                    |  |       |         |  |   |        



Income taxes paid for the years ended
December 31, 2003, 2002 and 2001 were $800, $800 and $800, respectively.



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



|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, 2003, minimum annual lease payments due under these agreements for each of
the next five years and in the aggregate are:



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |  
|2004                      |  | $ | 54,924 
|2005                      |  |   | 49,966 
|2006                      |  |   | 35,617 
|2007                      |  |   | 13,111 
|2008                      |  |   | 1,590  
|Thereafter                |  |   |       
|                          |  |   |        
|                          |  | $ | 155,208
|                          |  |   |        



Total operating lease payments for the
years ended December 31, 2003, 2002 and 2001 were $56,933, $60,337 and $77,567, respectively.



|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, 2003, 2002 and 2001, respectively, and, accordingly, pro-forma income statement presentation as required under FASB Statement No. 123, Accounting for Stock-Based
Compensation is not applicable.



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



|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, 2003, 2002 and 2001. The Company 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 $52,438, $50,552 and $48,966 for the years ended December 31, 2003, 2002 and 2001, respectively.



As of December 31, 2003, 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, |  |  
|2004                      |  | $ | 157,645
|2005                      |  |   | 149,791
|2006                      |  |   | 151,110
|2007                      |  |   | 153,420
|2008                      |  |   | 78,450 
|Thereafter                |  |   | 158,025
|                          |  |   |        
|                          |  | $ | 848,441
|                          |  |   |        



F-19



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



|11. | Related Party Transactions
|--- | --------------------------



As of December 31, 2003, 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 11).



The summary of payments made to Paul and Joan Katzeff in connection with these related party transactions for the years ended December 31, 2003, 2002 and 2001 are as
follows:



|                   |  |      |         |      |   |         |  |   |        
|------------------ |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                   |  | 2003 |         | 2002 |   | 2001   
|Principal on notes |  | $    | 26,136  |      | $ | 53,720  |  | $ | 44,941 
|Interest expense   |  | $    | 4,050   |      | $ | 7,583   |  | $ | 8,387  
|Rent expense       |  | $    | 103,200 |      | $ | 103,200 |  | $ | 103,200



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