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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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



For the quarterly period ended June 30, 2004



OR



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



For the transition period from  to



Commission File No. 33-960-70-LA



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THANKSGIVING COFFEE COMPANY, INC.

(Exact name of small business issuer as specified 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 offices)

(Zip Code)



Issuers telephone number, including area code: 707: 964-0118





(Former name, former address and former fiscal year, if changed since last report.)



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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ̈



As of August 12, 2004, there were 1,234,544 shares outstanding of common stock of the issuer.



Transitional Small Business Disclosure Format (check
one):    Yes ̈No  x



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##### Table of Contents

THANKSGIVING COFFEE COMPANY, INC.



INDEX



|                                                                                |  |                                                                                       |  |   
|------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                   |  |                                                                                      
|                                                                                |  |                                                                                      
|Item 1.                                                                         |  | Financial Statements and Notes to Financial Statements                                |  |   
|                                                                                | 
|Balance Sheets as of June 30, 2004 and 2003                                     |  | 3-4                                                                                  
|                                                                                | 
|Statements of Income for the Three and Six Months Ended June 30, 2004 and 2003  |  | 5                                                                                    
|                                                                                | 
|Statements of Retained Earnings for the Six Months Ended June 30, 2004 and 2003 |  | 6                                                                                    
|                                                                                | 
|Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003        |  | 7                                                                                    
|                                                                                | 
|Notes to Financial Statements                                                   |  | 8-19                                                                                 
|                                                                                |  |                                                                                      
|Item 2.                                                                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 20
|                                                                                |  |                                                                                      
|Item 3.                                                                         |  | Controls and Procedures                                                               |  | 25
|                                                                                | 
|PART II. OTHER INFORMATION                                                      |  |                                                                                      
|                                                                                |  |                                                                                      
|Item 1.                                                                         |  | Legal Proceedings                                                                     |  | 26
|                                                                                |  |                                                                                      
|Item 2.                                                                         |  | Changes in Securities                                                                 |  | 26
|                                                                                |  |                                                                                      
|Item 3.                                                                         |  | Defaults Upon Senior Securities                                                       |  | 26
|                                                                                |  |                                                                                      
|Item 4.                                                                         |  | Submission of Matters to a Vote of Security-Holders                                   |  | 26
|                                                                                |  |                                                                                      
|Item 5.                                                                         |  | Other Information                                                                     |  | 26
|                                                                                |  |                                                                                      
|Item 6.                                                                         |  | Exhibits and Reports on Form 8-K                                                      |  | 26



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Balance Sheets

Unaudited



|                                       |  |          |            |   |      |   |            |  
|-------------------------------------- |  | -------- | ---------- | - | ---- | - | ---------- | -
|                                       |  | June 30, |           
|                                       |  | 2004     |            |   | 2003 |  
|Assets                                 |  |          |            |   |      |   |            |  
|Current assets                         |  |          |            |   |      |   |            |  
|Cash                                   |  | $        | 29,569     |   |      | $ | 86,582     |  
|Accounts receivable                    |  |          | 301,973    |   |      |   | 290,646    |  
|                                       |  |         
|Inventory                              |  |          | 385,403    |   |      |   | 440,883    |  
|Prepaid expenses                       |  |          | 37,783     |   |      |   | 27,737     |  
|Deferred taxes                         |  |          | 39,300     |   |      |   |           |  
|                                       |  |          |            |   |      |   |            |  
|Total current assets                   |  |          | 794,027    |   |      |   | 845,848    |  
|                                       |  |         
|Property and equipment                 |  |          |            |   |      |   |            |  
|Property and equipment                 |  |          | 2,696,899  |   |      |   | 2,680,980  |  
|Accumulated depreciation               |  |          | (2,134,198 | ) |      |   | (2,079,232 | )
|                                       |  |          |            |   |      |   |            |  
|Total property and equipment           |  |          | 562,701    |   |      |   | 601,748    |  
|                                       |  |         
|Other assets                           |  |          |            |   |      |   |            |  
|Deposits and other assets              |  |          | 60,307     |   |      |   | 43,415     |  
|Goodwill                               |  |          | 171,773    |   |      |   | 171,773    |  
|Other intangibles, net of amortization |  |          | 37,781     |   |      |   | 41,154     |  
|Deferred tax asset                     |  |          | 44,300     |   |      |   | 71,407     |  
|                                       |  |          |            |   |      |   |            |  
|Total other assets                     |  |          | 314,161    |   |      |   | 327,749    |  
|                                       |  |          |            |   |      |   |            |  
|Total assets                           |  | $        | 1,670,889  |   |      | $ | 1,775,345  |  
|                                       |  |          |            |   |      |   |            |  



See accompanying notes to Financial
Statements



3



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Balance Sheets

Unaudited



|                                                                                                 |  |          |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------ |  | -------- | --------- | - | ---- | - | --------- | -
|                                                                                                 |  | June 30, |          
|                                                                                                 |  | 2004     |           |   | 2003 |  
|Liabilities and shareholders equity                                                             |  |          |           |   |      |   |           |  
|Current liabilities                                                                              |  |          |           |   |      |   |           |  
|Accounts payable                                                                                 |  | $        | 400,828   |   |      | $ | 371,335   |  
|Notes payable-bank, current portion                                                              |  |          | 56,250    |   |      |   | 165,925   |  
|Notes payable-other, current portion                                                             |  |          | 7,982     |   |      |   | 30,535    |  
|Notes payable-shareholders, current portion                                                      |  |          | 19,919    |   |      |   | 32,931    |  
|Capital lease obligations, current portion                                                       |  |          | 32,394    |   |      |   | 19,713    |  
|Merrill Lynch Credit Line                                                                        |  |          | 194,688   |   |      |   |           |  
|Accrued liabilities                                                                              |  |          | 57,611    |   |      |   | 46,070    |  
|Deferred income taxes                                                                            |  |          |          |   |      |   |          |  
|                                                                                                 |  |          |           |   |      |   |           |  
|Total current liabilities                                                                        |  |          | 769,672   |   |      |   | 666,509   |  
|                                                                                                 |  |         
|Long term debt                                                                                   |  |          |           |   |      |   |           |  
|Notes payable-bank                                                                               |  |          | 117,187   |   |      |   | 168,750   |  
|Notes payable-other                                                                              |  |          | 10,226    |   |      |   | 18,207    |  
|Capitalized Leases                                                                               |  |          | 91,935    |   |      |   | 52,043    |  
|Notes payable-shareholders                                                                       |  |          |          |   |      |   |          |  
|                                                                                                 |  |          |           |   |      |   |           |  
|Total long term debt                                                                             |  |          | 219,348   |   |      |   | 239,000   |  
|                                                                                                 |  |          |           |   |      |   |           |  
|Total liabilities                                                                                |  |          | 989,020   |   |      |   | 905,509   |  
|                                                                                                 |  |         
|Shareholders equity                                                                             |  |          |           |   |      |   |           |  
|Common stock, no par value, 1,960,000 shares authorized, 1,234,544 shares issued and outstanding |  |          | 861,816   |   |      |   | 861,816   |  
|Additional paid in capital                                                                       |  |          | 24,600    |   |      |   | 24,600    |  
|Retained Earnings (Deficit)                                                                      |  |          | (204,547  | ) |      |   | (16,580   | )
|                                                                                                 |  |          |           |   |      |   |           |  
|Total shareholders equity                                                                       |  |          | 681,869   |   |      |   | 869,836   |  
|                                                                                                 |  |          |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                       |  | $        | 1,670,889 |   |      | $ | 1,775,345 |  
|                                                                                                 |  |          |           |   |      |   |           |  



See accompanying notes to Financial
Statements



4



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Statements of Income

Unaudited



|                                             |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  
|-------------------------------------------- |  | ------------------------------------ | --------- | - | ---------------------------------- | - | --------- | ------------------------------------ |  | --------- | ---------------------------------- |  | --------- | -
|                                             |  | Three MonthPeriod EndedJune 30, 2004 |           |   | Six MonthPeriod EndedJune 30, 2004 |   |           | Three MonthPeriod EndedJune 30, 2003 |  |           | Six MonthPeriod EndedJune 30, 2003 | 
|                                             |  |                                      |          
|                                             |  |                                      |          
|Income                                       |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  
|Net sales                                    |  | $                                    | 1,151,982 |   |                                    | $ | 2,247,251 |                                      |  | 1,160,735 |                                    |  | 2,273,049 |  
|Cost of sales                                |  |                                      | 652,490   |   |                                    |   | 1,223,177 |                                      |  | 591,123   |                                    |  | 1,144,405 |  
|                                             |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  
|Gross profit                                 |  |                                      | 499,492   |   |                                    |   | 1,024,074 |                                      |  | 569,612   |                                    |  | 1,125,644 |  
|                                             |  |                                      |           |  
|Operating expenses                           |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  
|Selling, general and administrative expenses |  |                                      | 506,922   |   |                                    |   | 1,048,575 |                                      |  | 543,694   |                                    |  | 1,087,203 |  
|Depreciation and amortization                |  |                                      | 32,290    |   |                                    |   | 65,942    |                                      |  | 42,209    |                                    |  | 82,337    |  
|                                             |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  
|Total operating expenses                     |  |                                      | 539,212   |   |                                    |   | 1,114,517 |                                      |  | 585,903   |                                    |  | 1,169,540 |  
|                                             |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  
|Operating income (Loss)                      |  |                                      | (39,720   | ) |                                    |   | (90,443   | )                                    |  | (16,291   | )                                  |  | (40,896   | )
|                                             |  |                                      |           |  
|Other income (expense)                       |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  
|Interest income                              |  |                                      |          |   |                                    |   |          |                                      |  | 1,277     |                                    |  | 21        |  
|Miscellaneous expense                        |  |                                      | (1,591    | ) |                                    |   | 537       |                                      |  |          |                                    |  | 844       |  
|Gain                                         |  |                                      | 200       |   |                                    |   | 93        |                                      |  |          |                                    |  |          |  
|Interest expense                             |  |                                      | (8,751    | ) |                                    |   | (17,874   | )                                    |  | (12,028   | )                                  |  | (18,870   | )
|                                             |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  
|Total other income (expense)                 |  |                                      | (10,142   | ) |                                    |   | (17,243   | )                                    |  | (10,751   | )                                  |  | (18,005   | )
|                                             |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  
|Income (loss) before income taxes            |  |                                      | (49,862   | ) |                                    |   | (107,686  | )                                    |  | (27,042   | )                                  |  | (58,901   | )
|Income tax expense                           |  |                                      |          |   |                                    |   | 800       |                                      |  |          |                                    |  | (800      | )
|                                             |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  
|Net income (loss)                            |  | $                                    | (49,862   | ) |                                    | $ | (108,486  | )                                    |  | (27,042   | )                                  |  | (59,701   | )
|                                             |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  
|Earnings (loss) per share (basic)            |  | $                                    | (0.040    | ) |                                    | $ | (0.087    | )                                    |  | (0.022    | )                                  |  | (.004     | )
|                                             |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  
|Earnings (loss) per share (dilutive)         |  | $                                    | (0.040    | ) |                                    | $ | (0.087    | )                                    |  | (0.022    | )                                  |  | (.004     | )
|                                             |  |                                      |           |   |                                    |   |           |                                      |  |           |                                    |  |           |  



See accompanying notes to Financial
Statements



5



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Thanksgiving Coffee Company, Inc.



Statements of Accumulated Deficit

Unaudited



|                                                 |  |          |          |   |      |   |         |  
|------------------------------------------------ |  | -------- | -------- | - | ---- | - | ------- | -
|                                                 |  | June 30, |         
|                                                 |  | 2004     |          |   | 2003 |  
|Retained Earnings (Deficit), beginning of period |  | $        | (96,061  | ) |      | $ | 43,121  |  
|Net income (loss)                                |  |          | (108,486 | ) |      |   | (59,701 | )
|                                                 |  |          |          |   |      |   |         |  
|Accumulated deficit, end of period               |  | $        | (204,547 | ) |      | $ | (16,580 | )
|                                                 |  |          |          |   |      |   |         |  



See accompanying notes to Financial
Statements



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Thanksgiving Coffee Company, Inc.



Statement of Cash Flows

Unaudited



|                                                        |  |                                  |          |   |      |   |          |  
|------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | -
|                                                        |  | Six Month Periods Ended June 30, |         
|                                                        |  | 2004                             |          |   | 2003 |  
|Operating activities                                    |  |                                  |          |   |      |   |          |  
|Net income (loss)                                       |  | $                                | (108,486 | ) |      | $ | (59,701  | )
|Noncash items included in net income (loss)             |  |                                  |          |   |      |   |          |  
|Depreciation and amortization                           |  |                                  | 65,942   |   |      |   | 90,974   |  
|Loss (gain) on sale of assets                           |  |                                  |          |   |      |   |          |  
|                                                        |  |                                 
|Changes in operating assets and liabilities Receivables |  |                                  | 30,505   |   |      |   | 22,287   |  
|Inventory                                               |  |                                  | 24,296   |   |      |   | (62,005  | )
|Prepaid expenses                                        |  |                                  | 2,920    |   |      |   | 1,215    |  
|Deposits and other assets                               |  |                                  | 2,646    |   |      |   | (5,843   | )
|                                                        |  |                                 
|Deferred Income Taxes                                   |  |                                  |          |   |      |   |          |  
|Accounts payable                                        |  |                                  | 54,564   |   |      |   | 68,432   |  
|Accrued liabilities                                     |  |                                  | (3,787   | ) |      |   | (8,728   | )
|                                                        |  |                                  |          |   |      |   |          |  
|Net cash provided by operating activities               |  |                                  | 68,600   |   |      |   | 46,631   |  
|Investing activities                                    |  |                                  |          |   |      |   |          |  
|                                                        |  |                                 
|Purchases of property and equipment                     |  |                                  | (92,237  | ) |      |   | (52,544  | )
|Unrealized Gain                                         |  |                                  | 93       |   |      |   |         |  
|                                                        |  |                                  |          |   |      |   |          |  
|Net cash used by investing activities                   |  |                                  | (92,144  | ) |      |   | (52,544  | )
|                                                        |  |                                 
|Financing activities                                    |  |                                  |          |   |      |   |          |  
|Proceeds from note payable                              |  |                                  | 79,107   |   |      |   | 351,319  |  
|Repayments of notes payable and capital leases          |  |                                  | (66,457  | ) |      |   | (323,998 | )
|                                                        |  |                                  |          |   |      |   |          |  
|Net cash used by financing activities                   |  |                                  | 12,650   |   |      |   | 27,321   |  
|Net increase in cash                                    |  |                                  | (10,894  | ) |      |   | 21,408   |  
|Cash, beginning of period                               |  |                                  | 40,463   |   |      |   | 65,174   |  
|                                                        |  |                                  |          |   |      |   |          |  
|Cash, end of period                                     |  | $                                | 29,569   |   |      | $ | 86,582   |  
|                                                        |  |                                  |          |   |      |   |          |  



Supplemental disclosure of cash
flow information:



Interest paid for the six months period ended June 30,
2004 and 2003 was $17,874 and $16,199, respectively.



Income taxes paid for the
six month periods ended June 30, 2004 and 2003 were $800 and $800, respectively.



See accompanying notes to Financial Statements



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements



June 30, 2004
and 2003



1. Summary of Significant Accounting Policies



Nature of Operations



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



Basis of Presentation



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



Concentration of Credit Risk



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



Inventories



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



Property and Equipment



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



|                                      |  |              
|------------------------------------- |  | -------------
|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      



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)



Property and Equipment (continued)



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 adopted 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.



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 June 30, 2004 financial statements.



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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 (continued)



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



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



Income Taxes



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



Retirement Plan



In 2003, the Company converted its existing profit sharing plan into a
401(k) savings plan. The plan covers substantially all Company employees and allows pre-tax contributions through a salary deferral program. Employer contributions are on a discretionary basis with substantially all employees eligible for allocation
of employer contributions. Employees are 100% vested in amounts they contribute and vest over years of service in employer contributions. No employer contributions to the 401(k) plan were made for the six months ended June 30, 2004.



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 $7,200 as of June 30, 2004 and such amount is included in accrued liabilities. Carryover
paid sick days are not available, nor ever considered vested.



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)



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 the six months ended June 30, 2004 the Company did not engage in any direct response advertising that would require capitalization. Advertising costs
charged to expense were $15,345 for the six months ended June 30, 2004 which relate primarily to a retainer paid to the Companys public relations firm.



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 no 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.



2. Accounts Receivable



Accounts
receivable at June 30, 2004 consisted of the following:



|                                      |  |   |         |  
|------------------------------------- |  | - | ------- | -
|Accounts receivable                   |  | $ | 311,354 |  
|Due from employees                    |  |   | 63      |  
|                                      |  |   |         |  
|                                      |  |   | 311,417 |  
|Less: Allowance for doubtful accounts |  |   | (9,444  | )
|                                      |  |   |         |  
|                                      |  | $ | 301,973 |  
|                                      |  |   |         |  



11



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



2. Accounts Receivable (continued)



The Company utilizes a percentage method to establish the allowance for doubtful accounts. The estimated allowance ranges from 1% to 10% of outstanding receivables. Net
bad debt recovery for the six months ended June 30, 2004 was $1,093.



3.
Inventories



Inventories at June 30, 2004 consisted of the following:



|                                                        |  |   |        
|------------------------------------------------------- |  | - | -------
|Coffee                                                  |  |   |        
|Unroasted                                               |  | $ | 79,741 
|Roasted                                                 |  |   | 88,490 
|Tea                                                     |  |   | 16,529 
|Packaging, supplies and other merchandise held for sale |  |   | 200,642
|                                                        |  |   |        
|Total inventory                                         |  | $ | 385,402
|                                                        |  |   |        



4. Property and Equipment



Property and equipment at June 30, 2004 consisted of the following:



|                                      |  |   |            |  
|------------------------------------- |  | - | ---------- | -
|Equipment                             |  | $ | 1,506,970  |  
|Furniture and fixtures                |  |   | 281,403    |  
|Leasehold improvements                |  |   | 421,811    |  
|Transportation equipment              |  |   | 130,146    |  
|Marketing equipment                   |  |   | 28,232     |  
|Capitalized website development costs |  |   | 148,506    |  
|Property held under capital leases    |  |   | 179,831    |  
|                                      |  |   |            |  
|Total property and equipment          |  |   | 2,696,899  |  
|Accumulated depreciation              |  |   | (2,134,198 | )
|                                      |  |   |            |  
|Property and equipment, net           |  | $ | 562,701    |  
|                                      |  |   |            |  



Depreciation expense for the six
months ended June 30, 2004 was $65,435.



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



5. Goodwill and Other Intangible Assets



As part of the adoption of Statement of Financial Accounting Standards (FASB) No. 142, Goodwill and Other Tangible Assets,as 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. Consequently, there was no change in the carrying value of goodwill in the six months ended June 30,
2004.



Intangible assets subject to amortization consisted as of June 30, 2004
of the following:



|                         |  |   |         |  
|------------------------ |  | - | ------- | -
|Leasehold value          |  | $ | 67,000  |  
|Trademarks               |  |   | 5,127   |  
|Refinance cost           |  |   | 4,500   |  
|                         |  |   |         |  
|Total intangible assets  |  |   | 76,627  |  
|Accumulated amortization |  |   | (38,846 | )
|                         |  |   |         |  
|Intangible assets, net   |  | $ | 37,781  |  
|                         |  |   |         |  



Amortization expense for the six
months ended June 30, 2004 was $507.



6. Long Term Debt



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------
|Note 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
(4.66% at June 30, 2004), 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 the Companys majority shareholders. |  | $ | 173,438





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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



6. Long Term Debt (continued)



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | -------
|Notes Payable and Capital Lease Obligations (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |   |        
|Working capital line of credit ($200,000 maximum), payable to Merrill Lynch, interest only installments, at 3.3% over the one month LIBOR rate
(4.66% at June 30, 2004), maturing July 31, 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 the Companys majority shareholders. |  | $ | 194,688
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|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.                                                                                                                                                                                                                                                                                                                                       |  |   | 19,919 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|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.                                                                                                                                                                                                                                                          |  |   | 1,274  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|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.                                                                                                                                                                                                                                                             |  |   | 4,814  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|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.                                                                                                                                                                                                                                                                                                                                          |  |   | 12,119 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|Capital Lease Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |   |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|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.                                                                                                                                                                                                                                                                                                                              |  |   | 28,458 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|Note payable to Manifest Leasing, payable in monthly installments of $444, including interest at 12.909% secured by equipment, final payment
due March 1, 2007.                                                                                                                                                                                                                                                                                                                                              |  |   | 12,209 



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



6. Long Term Debt (continued)



|                                                                                                                                                                               |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | -------- | -
|Capital Lease Obligations (continued)                                                                                                                                          |  |   |          |  
|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.     |  | $ | 11,177   |  
|                                                                                                                                                                               | 
|Note payable to Nationwide Funding, LLC, payable in monthly installments of $1,354.53, including interest at 16.78%, secured by equipment,
final payment due on March 1, 2009. |  |   | 52,967   |  
|                                                                                                                                                                               | 
|Note payable to Nationwide Funding, LLC payable in monthly installments of $462, including interest at 14.237%, secured by equipment, final
payment due on May 22, 2009.       |  |   | 19,518   |  
|                                                                                                                                                                               |  |   |          |  
|                                                                                                                                                                               |  |   | 530,581  |  
|Less current portion                                                                                                                                                           |  |   | (311,233 | )
|                                                                                                                                                                               |  |   |          |  
|Long term portion of notes payable                                                                                                                                             |  | $ | 219,348  |  
|                                                                                                                                                                               |  |   |          |  



Interest paid for the six months ended
June 30, 2004 was $17,874.



As of June 30, 2004, maturities of notes payable
and capital lease obligations for each of the next five years and in the aggregate were as follows:



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |  
|2004                      |  | $ | 263,244
|2005                      |  |   | 98,029 
|2006                      |  |   | 88,475 
|2007                      |  |   | 55,546 
|2008 and thereafter       |  |   | 25,287 
|                          |  |   |        
|                          |  | $ | 530,581
|                          |  |   |        



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 as of June 30, 2004 were as follows:



|                              |  |   |      |  
|----------------------------- |  | - | ---- | -
|Current tax (expense) - state |  | $ | (800 | )



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



|                                            |  |      |   
|------------------------------------------- |  | ---- | --
|Statutory income tax (expense) benefit rate |  | 15.0 | % 
|Property and equipment differences          |  | (2.1 | )%
|Nondeductible expense                       |  | (1.4 | )%
|Officers life insurance                    |  | (2.0 | )%
|Net operating loss                          |  | 0.0  | % 
|Net operating loss valuation adjustment     |  | 0.0  | % 
|Other                                       |  | (2.0 | )%
|                                            |  |      |   
|Effective income tax benefit rate           |  | 7.5  | % 
|                                            |  |      |   



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



|                                                |  |   |         |  
|----------------------------------------------- |  | - | ------- | -
|Net operating loss and tax credit carryforwards |  | $ | 93,700  |  
|Depreciation and amortization                   |  |   | (15,500 | )
|Other                                           |  |   | 5,400   |  
|                                                |  |   |         |  
|Net deferred tax asset                          |  | $ | 83,600  |  
|                                                |  |   |         |  



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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 had 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 six months
ended June 30, 2004 were $800.



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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 five to six 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
six months ended June 30, 2004 were $28,241.



9. 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. Rental expense under the lease was $51,600 for the six months ended
June 30, 2004. 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 $26,437 for the six months ended June 30, 2004.



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



9. Long Term Leases (continued)



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 were 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
|                          |  |   |        



10. Related Party Transactions



As of June 30, 2004, the Company has one interest only note payable due
on demand to Paul and Joan Katzeff (the Companys majority shareholders). The Company also leases properties from its majority shareholders (see Note 9).



The summary of payments made to Paul and Joan Katzeff in connection with these related party transactions for the six months ended June 30, 2004 was as follows:



|                   |  |   |       
|------------------ |  | - | ------
|Principle on notes |  | $ | 21,000
|Interest expense   |  | $ | 1,750 
|Rent expense       |  | $ | 51,600





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##### Table of Contents

THANKSGIVING COFFEE COMPANY, INC.



MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



FORWARD LOOKING STATEMENTS



In addition
to historical information, this Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Words
such as believe, anticipate, expect, intend, plan, will, may, and other similar expressions identify forward-looking statements. 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, sources of liquidity and capital (see Liquidity and Capital Resources).
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 beans, increased competition within the Companys
businesses, variances from budgeted sales mix and growth rate, 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, including without limitation the ability to obtain credit on favorable terms, natural disasters, civil unrest in countries which produce coffee and tea, weather and other risks identified herein. Readers are cautioned
not to place undue reliance on these forward-looking statements that speak only as of the date of this Quarterly Report on Form 10-QSB.



SUMMARY



Sales of the Company have eroded over the last four years due to increased competition, customer attrition and customers roasting green beans for their own use. The Company has made several changes during the year in
the hope of reversing this negative trend. The Company has gone from its own route distribution to outside distributors and direct shipment to customers. This has reduced costs and the distributors have begun to add customers. The Company has
recently acquired a number of new locations from a major California retailer that we believe will make the Companys product available in more locations. These potential new locations will be serviced by an outside distributor. The
Companys Internet sales and mail order business are up this year because of increased interest in the Companys new products such as Gorilla Fund coffee. This product has been promoted in partnership with the Dian Fosse Gorilla Fund
International, Inc. The product was featured recently in a New York Times article. The Company has also received recognition by Coffee Review for its outstanding tasting Nicaraguan coffees. There can be no assurances, however, that any of these
programs or publicity will yield any increase whether short term or sustained in sales of the Company.



The Company has enjoyed favorable margins during 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. During the last quarter, the cost of green beans has begun to rise
along with other costs of doing business. The Company has implemented a price increase that will become effective in August of 2004. To date, the increase has not caused any customer to drop the companys products and its major national
retailer has continued to purchase at historical levels. There can be no assurances that the price increase will not have a negative effect on volume or that further increases in green bean prices as a consequence of inclement weather in a major
producing area or any other event that effects coffee pricing will not reduce the Companys margins.



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##### Table of Contents

The Company is in negotiations with Merrill Lynch to replace its line of credit that terminates as of July 30, 2004 with
a term loan. If these negotiations are not successful or the Company cannot find another lender to refinance the Merrill Lynch debt, the stability of the Companys business would be in question.



Three Months Ended June 30, 2004 Compared With Three Months Ended June 30, 2003



|                              |  |                     |         |    |                |       |   
|----------------------------- |  | ------------------- | ------- | -- | -------------- | ----- | --
|Consolidated                  |  | Increase (Decrease) |         |    | Percent Change |      
|Net Sales                     |  | $                   | (8,753  | )  |                | (.8   | )%
|Cost of Sales                 |  | $                   | 61,367  |    |                | 10.4  | % 
|Gross Margin                  |  |                     | (5.27   | )% |                | (11.3 | )%
|Selling, G&A Expense          |  | $                   | (36,772 | )  |                | (6.8  | )%
|Depreciation And Amortization |  | $                   | (9,919  | )  |                | (23.5 | )%
|Interest Expense              |  | $                   | (3,277  | )  |                | (37.3 | )%
|Net Income(Loss)              |  | $                   | (22,820 | )  |                |       |   



Consolidated net sales for the three
months ended June 30, 2004 were $1,151,982, down .8% or $8,753 when compared with net sales of $1,160,735 for the same period in fiscal 2003.



Distribution revenues (e.g., revenues generated on our own truck distribution) were down $100,000, or 20%, for the three month period ended June 30, 2004 when compared
with the same period in fiscal 2003. This decline was a result of dropping two routes and replacing them with direct shipments and two distributors. The Company believes that a substantial portion of the decline is now offset by in the increase in
the Companys national revenues. The Company continues to test the concept of direct delivery and the use of distributors in its existing truck distribution.



National revenues (e.g., revenues not derived by mail order and direct truck distribution) were up $90,000, or 24%, when compared to sales
for the same period in 2003. The increase was attributable to switching two routes from Company truck delivery to UPS and outside distributors. The Company believes that the increase in the national revenues did not equal the decline in distribution
revenues because of a decrease in sales for the quarter of the Companys specialty Song Bird products sold primarily in bird stores.



Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) increased nearly $5,000 or 6.7%, for
the three months ended June 30, 2004 when compared to the same period in 2003. The increase in revenue for mail order reflects the addition of the Companys Cornucopia program, an extension of the existing mail order business that
is designed to provide an avenue for non-profit organizations to raise money by selling the Companys coffee to their constituencies. The traditional mail order catalog business was up $5,000 while Internet sales were up $8,000 or 18% for the
quarter when compared to the same period last year. Some of the increase in the Internet sales reflects the ongoing migration of traditional mail order customers to the Companys website and Internet store.



Consolidated cost of sales for the three months ended June 30, 2004 were $652,490, up 10.4%
when compared with the cost of sales of $591,123 for the same period in 2003. This increase was a result of an increase in green bean prices of 6.3% or $48,000 for the quarter and increase in workers compensation and health insurance of
$12,000.



Consolidated gross margin (gross profit as a percentage of net sales)
for the three months ended June 30, 2004 was 43.8%, down 5.27% when compared with gross margin of 49.07% for the same period in 2003. Higher per pound green bean costs together with higher benefits insurance costs resulted in lower gross margins.
There can be no assurances that the Company will be able to obtain lower per pound bean costs or insurance costs in the future.



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Consolidated selling, general and administrative expenses were $506,922 for the three months ended June 30, 2004, a 6.8%
decrease when compared with the selling, general and administrative expenses of $543,694 for the same period in 2003. The decrease was due to a $9,000 reduction in bad debt expense because of fewer write-offs and a reduction in route expenses of
$28,000 because of the previously discussed changes in our methods of distribution.



Depreciation and amortization expenses for the three months ended June 30, 2004 were $32,290, a 23.5% reduction, or nearly $10,000, when compared to depreciation and amortization expenses of $42,209 for the same
period in 2003. The decline was a result of fewer depreciable assets when compared to the same quarter last year.



Interest expense for the three months ended June 30, 2004 was $8,751, a 37.3% decline from interest of $12,028 for the same period in 2003. The decrease in interest was a
result of lower interest rates. The interest rates due Merrill Lynch were over 3% less than the rates charged by Wells Fargo the same period in 2003.



As a result of the foregoing factors, the Company had a consolidated net loss of $49,862 for the three months ended June 30, 2004, compared to a $27,042 consolidated net
loss for the same period in 2003. Because of the increase in per pound bean costs as well as other factors noted herein, there can be no assurances that the Company will be profitable in any future period.



Six Months Ended June 30, 2004 Compared With Six Months Ended June 30, 2003





|                              |  |                     |         |    |                |      |   
|----------------------------- |  | ------------------- | ------- | -- | -------------- | ---- | --
|Consolidated                  |  | Increase (Decrease) |         |    | Percent Change |     
|Net Sales                     |  | $                   | (25,798 | )  |                | (1.1 | )%
|Cost of Sales                 |  | $                   | 78,772  |    |                | 6.9  | % 
|Gross Margin                  |  |                     | (3.71   | )% |                | (7.5 | )%
|Selling, G&A Expense          |  | $                   | (38,628 | )  |                | (3.6 | )%
|Depreciation And Amortization |  | $                   | (16,395 | )  |                | (20  | )%
|Interest Expense              |  | $                   | (997    | )  |                | (5.3 | )%
|Net Income (Loss)             |  | $                   | (48,785 | )  |                |      |   



Consolidated net sales for the six
months ended June 30, 2004 were $2,247,251 down 1.1% or nearly $26,000 when compared with net sales of $2,273,049 for the same period in 2003.



Distribution revenues (e.g., revenues generated on our own truck distribution) declined by $200,000, or 17%, when compared to the same period during 2003. As noted above,
this was a result of dropping two routes and replacing them with direct shipments and two distributors. The increase in national revenues reflects this change in the distribution method.



National revenues (e.g., revenues not derived by mail order and direct truck distribution) increased by $190,000, or 26%, when compared to
the same period in 2003. This increase is a result of switching two routes from Company truck delivery to UPS and outside distributors. The shortfall between the decrease in route distribution and the increase in national revenues reflect the
previously-mentioned drop in sales in bird stores.



Mail order revenues (e.g.,
revenues generated from product sold directly to the consumer either through print media or the Internet) increased nearly $8,000 or 4.2 % for the six months ended June 30, 2004 when compared to the same period in 2003. The increase in revenue for
mail order reflects the addition of the Companys Cornucopia program, an extension of the mail order business that is designed to provide an avenue for non-profit organizations to raise money by selling the Companys coffee to
their constituency. The traditional mail order catalog business was up



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##### Table of Contents

$7,500 while Internet sales were up nearly $16,000 or 17.6% for the six months compared to the same period last year.
Some of the increase in the Internet sales reflects the ongoing migration of traditional mail order customers to the Companys website and Internet store.



Sales attributable to the Companys bakery were down $20,000 for the six months ended June 30, 2004 or 5% when compared to the same period in 2003. The bakery was
closed this spring for repairs for nearly a full week, resulting in lower sales than the previous year.



Consolidated cost of sales for the six months ended June 30, 2004 were $1,223,177, up 6.9%, or more than $78,000 when compared with the cost of sales of $1,144,405 for the same period in 2003. The increase was a
result of higher per pound bean cost of $50,000, an increase in workers compensation of $15,000 and an increase in health insurance costs of $10,000.



Consolidated gross margin (gross profit as a percentage of net sales) for the six months ended June 30, 2004 was 45.81%, a decrease of 7.5 % when compared with gross
margin of 49.52% for the same period in 2003. The decrease in gross margin was a result of the previously mentioned increases in the per pound price of green beans and higher insurance costs.



Consolidated selling, general and administrative expenses were $1,048,575 for the six months
ended June 30, 2004, a 3.6% decrease, or nearly $39,000, when compared with selling, general and administrative expenses of $1,087,203 for the same period in 2003. Lower bad debt expense of $9,000 and lower route costs of $28,000 resulted in the
lower selling, general and administrative expenses in 2004.



Depreciation and
amortization expenses for the six months ended June 30,2004 were $65,942, a decrease of 20%, or over $16,000, when compared with depreciation and amortization expenses of $82,337 for the same period in 2003. The decrease in depreciation and
amortization was a result of a decline in depreciable assets of the Company when compared to the same period last year.



Interest expense for the six moths ended June 30, 2004 was $17,873 nearly a 5% drop, or nearly $1,000. This decline was a result of lower interest costs offset somewhat
by higher borrowings. At June 30, 2004, total borrowings were $530,581, versus borrowings at the same time in 2003 of $488,104.



As a result of the foregoing factors, the Company had a consolidated net loss of $108,486 for the six months ended June 30, 2004, compared to a consolidated net loss of
$59,701 for the same period in 2003. Because of the decline in gross margin, as well as other factors noted herein, there can be no assurances that the Company will be profitable in any future period.



LIQUIDITY AND CAPITAL RESOURCES



As of June 30, 2004, the Company had working capital of $24,355 versus working capital of
$179,339 as of June 30, 2003. This decrease in working capital is due to an increase in debt initiated in June 2003 by the addition of a working capital line of credit.



Net cash provided by operating activities was $68,600 for the six months ended June 30, 2004 compared to $46,631 provided by operating
activities for the six months ended June 30, 2003. The increase in net cash provided by operating activities in the first six months of 2004 was the result of a larger loss this year compared to the same period in fiscal 2003 of nearly $48,000 and
offset by lower inventories of nearly $25,000 and receivables of nearly $31,000 as well as an increase in payables of nearly $55,000.



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Cash used by investing activities was $92,144 for the six months ended June 30, 2004 compared to $52,544 used in the same
period in 2003. Capital additions for the first six months of 2004 include $20,000 for brewers and grinders, $50,000 for a new after burner to control emissions from the Companys coffee bean roaster and $20,000 on a portion control packing
machine that will allow the company to pack office coffee product and sample sizes.



Net cash provided by financing activities for the six months ended June 30, 2004 was $12,650 compared to cash provided of $27,321 during the same period in 2003. The cash provided during this year was a result of adding additional financing
for equipment higher than debt repayment (See below and Note 6 of Notes to Financial Statements).



Because of higher investing activities plus lower cash generated by the operating loss and a lower cash balance at January 1, 2004, cash at June 30, 2004 was $29,569 compared to cash at June 30, 2003 of $86,582.



In June 2003, the Company refinanced its debt with Well Fargo by securing a
term note with Merrill Lynch for $225,000. This note is payable over four years at 3.3% over the LIBOR (London Interbank Offering Rate) rate. At June 30, 2004 the rate was 4.66%. This note extended the period for repayment of the loan over four
years rather than two and reduced the interest rate from 7.25% (3% over prime rate) to 4.66%. The cost of the loan facility was $2,000. In addition to the term loan, the Company negotiated a line of credit for $200,000. This line is renewable
annually, with an interest rate of 3.3% above the LIBOR rate at a cost of $2,000. At June 30, 2004, the credit line had a loan balance of $194,688. Merrill Lynch has decided not to extend the credit line beyond its current renewal term that
terminates July 31, 2004. The Company is in negotiations with Merrill Lynch to replace the credit line with a term note. The Companys accounts receivable, inventory, equipment, fixtures and improvements secure the borrowings. The
Companys majority shareholders have guaranteed $150,000 of the debt and the two vehicle related Chase Manhattan notes (See Note 6 of Notes to the Financial Statements).



The Company had a loan outstanding for $19,919 at June 30, 2004, payable to the majority shareholders Joan and Paul Katzeff in monthly
installments of interest only at 12%, with balance due on demand after June 30, 1996.



At June 30, 2004, the Company had total borrowings of $530,581 including $368,125 owing to Merrill Lynch. This compares to total borrowings of $488,104 as of June 30, 2003, including $334,675 outstanding to Merrill Lynch at that time.



For long term debt, see Note 6 and Note 12 of the Notes to Financial
Statements. For operating leases, see Note 8 of the Notes to Financial Statements. For real estate leases, see Note 11 and Note 12 of the Notes to Financial Statements.



|                        |  |                        |           |                    |   |           |  |           |         |               |   |         |  |   |        
|----------------------- |  | ---------------------- | --------- | ------------------ | - | --------- |  | --------- | ------- | ------------- | - | ------- |  | - | -------
|                        |  | Payments Due By Period
|Contractual Obligations |  | Total                  |           | Less than One year |   | 1-3 years |  | 4-5 years |         | After 5 years
|Long Term Debt          |  | $                      | 530,581   |                    | $ | 263,244   |  | $         | 186,504 |               | $ | 80,833  |  | $ |       
|                        |  |                        |           |                    |  
|Operating Leases        |  |                        | 155,208   |                    |   | 54,924    |  |           | 85,583  |               |   | 14,701  |  |   |        
|                        |  |                        |           |                    |  
|Real Estate Leases      |  |                        | 848,441   |                    |   | 157,645   |  |           | 300,901 |               |   | 231,870 |  |   | 158,025
|                        |  |                        |           |                    |  
|Total Cash Obligations  |  | $                      | 1,534,230 |                    | $ | 475,813   |  | $         | 572,988 |               | $ | 327,404 |  | $ | 158,025



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The Company is in negotiations with Merrill Lynch to replace its line of credit that terminates as of July 31, 2004 with
a term loan. If these negotiations are not successful or the Company cannot find another lender to refinance the Merrill Lynch debt, the stability of the Companys business would be in question.



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 finance its working capital needs. 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 stability of the Companys business would be in question.



RELATED PARTY TRANSACTIONS



From time to time, the Company enters into various transactions with its majority shareholders, Paul and Joan Katzeff. See note 12  Related Party
Transactions in the Notes to the Financial Statements.



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.



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, officer, 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.



CONTROLS AND PROCEDURES



Management has performed,
with the participation of the Companys principal executive and principal financial officers, an evaluation of the effectiveness of the Companys disclosure controls and procedures as June 30, 2004. Based upon this evaluation, management
has concluded that information required to be disclosed by the Company in reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Management also has concluded that the



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Companys controls and procedures designed to ensure that information required to be disclosed is accumulated and
communicated to management, including the Companys principal executive and principal financial officers, as appropriate to allow for timely decisions regarding disclosures. Management also has evaluated, with the participation of the
Companys principal executive and principal financial officers, the Companys internal controls over financial reporting and has concluded that no change in such controls occurred during the period from April 1, 2004 through June 30, 2004
that has materially affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.



Part II  Other Information



ITEM 1. LEGAL PROCEEDINGS



-None-



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



- None 



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



-
None 



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



- None -



ITEM 5. OTHER INFORMATION



- None 



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | a. | Exhibits
| | -- | --------



|     |  |                                                                                                                                                      
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 (Chief Executive Officer).
|     | 
|31.2 |  | Certification pursuant to Rule 13a-14 (a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (President)                



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|     |  |                                                                                                                                                     
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|31.3 |  | Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 (Chief Financial Officer)
|     | 
|32.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).   
|     | 
|32.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (President).                 
|     | 
|32.3 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).   



| | b. | Form 8-K
| | -- | --------



No reports on Form 8-K were filed during the quarterly period ended June 30, 2004



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SIGNATURES



In accordance with the requirements 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           
|                 |  | Chief Executive Officer |  | August 12, 2004
|/s/ Paul Katzeff |  |                         |  |                
|Paul Katzeff     |  |                         |  |                
|                 |  |                        
|                 |  | President               |  | August 12, 2004
|/s/ Joan Katzeff |  |                         |  |                
|Joan Katzeff     |  |                         |  |                



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