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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 September 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 November 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                                        |  |   
|                                                                                      | 
|Balance Sheets as of September 30, 2004 and 2003                                      |  | 1-2                                                        
|                                                                                      | 
|Statements of Income for the Three and Nine Months Ended September 30, 2004 and 2003  |  | 3                                                          
|                                                                                      | 
|Statements of Retained Earnings for the Nine Months Ended September 30, 2004 and 2003 |  | 4                                                          
|                                                                                      | 
|Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003        |  | 5                                                          
|                                                                                      | 
|Notes to Financial Statements.                                                        |  | 6-17                                                       
|                                                                                      |  |                                                            
|Item 2.                                                                               |  | Managements Discussion and Analysis                        |  | 18
|                                                                                      |  |                                                            
|Item 3.                                                                               |  | Controls and Procedures                                     |  | 23
|                                                                                     
|PART II. OTHER INFORMATION                                                           
|                                                                                      |  |                                                            
|Item 1.                                                                               |  | Legal Proceedings                                           |  | 24
|                                                                                      |  |                                                            
|Item 2.                                                                               |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 24
|                                                                                      |  |                                                            
|Item 3.                                                                               |  | Defaults Upon Senior Securities                             |  | 24
|                                                                                      |  |                                                            
|Item 4.                                                                               |  | Submission of Matters to a Vote of Security Holders         |  | 24
|                                                                                      |  |                                                            
|Item 5.                                                                               |  | Other Information                                           |  | 24
|                                                                                      |  |                                                            
|Item 6.                                                                               |  | Exhibits                                                    |  | 25



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Balance Sheets

Unaudited



|                                       |  |               |            |   |      |   |            |  
|-------------------------------------- |  | ------------- | ---------- | - | ---- | - | ---------- | -
|                                       |  | September 30, |           
|                                       |  | 2004          |            |   | 2003 |  
|Assets                                 |  |               |            |   |      |   |            |  
|Current assets                         |  |               |            |   |      |   |            |  
|Cash                                   |  | $             | 17,732     |   |      | $ | 73,120     |  
|Accounts receivable                    |  |               | 288,984    |   |      |   | 270,508    |  
|Inventories                            |  |               | 409,355    |   |      |   | 1,803      |  
|Prepaid expenses                       |  |               | 44,427     |   |      |   | 440,408    |  
|Deferred tax asset                     |  |               | 39,300     |   |      |   | 59,129     |  
|                                       |  |               |            |   |      |   |            |  
|Total current assets                   |  |               | 799,798    |   |      |   | 844,968    |  
|                                       |  |              
|Property and equipment                 |  |               |            |   |      |   |            |  
|Property and equipment                 |  |               | 2,708,508  |   |      |   | 2,704,992  |  
|Accumulated depreciation               |  |               | (2,171,252 | ) |      |   | (2,124,678 | )
|                                       |  |               |            |   |      |   |            |  
|Total property and equipment           |  |               | 537,256    |   |      |   | 580,314    |  
|                                       |  |              
|Other assets                           |  |               |            |   |      |   |            |  
|Deposits and other assets              |  |               | 60,695     |   |      |   | 43,402     |  
|Goodwill                               |  |               | 171,773    |   |      |   | 171,773    |  
|Other intangibles, net of amortization |  |               | 37,528     |   |      |   | 39,747     |  
|Deferred tax asset                     |  |               | 44,300     |   |      |   | 46,333     |  
|                                       |  |               |            |   |      |   |            |  
|Total other assets                     |  |               | 314,296    |   |      |   | 301,255    |  
|                                       |  |               |            |   |      |   |            |  
|Total assets                           |  | $             | 1,651,350  |   |      | $ | 1,726,537  |  
|                                       |  |               |            |   |      |   |            |  



See accompanying notes to financial
statements



1



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Balance Sheets

Unaudited



|                                                                                                 |  |               |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------ |  | ------------- | --------- | - | ---- | - | --------- | -
|                                                                                                 |  | September 30, |          
|                                                                                                 |  | 2004          |           |   | 2003 |  
|Liabilities and shareholders equity                                                             |  |               |           |   |      |   |           |  
|Current liabilities                                                                              |  |               |           |   |      |   |           |  
|Accounts payable                                                                                 |  | $             | 391,466   |   |      | $ | 340,868   |  
|Line of credit - Merrill Lynch                                                                   |  |               | 186,760   |   |      |   | 139,019   |  
|Notes payable - Merrill Lynch                                                                    |  |               | 56,250    |   |      |   | 56,250    |  
|Notes payable - other                                                                            |  |               | 7,463     |   |      |   | 8,394     |  
|Notes payable - shareholders                                                                     |  |               | 19,919    |   |      |   | 25,169    |  
|Capital lease obligations                                                                        |  |               | 34,003    |   |      |   | 33,897    |  
|Accrued liabilities                                                                              |  |               | 29,194    |   |      |   | 75,255    |  
|                                                                                                 |  |               |           |   |      |   |           |  
|Total current liabilities                                                                        |  |               | 725,055   |   |      |   | 678,852   |  
|                                                                                                 |  |              
|Long term debt                                                                                   |  |               |           |   |      |   |           |  
|Notes payable - Merrill Lynch                                                                    |  |               | 103,125   |   |      |   | 159,375   |  
|Notes payable - other                                                                            |  |               | 8,165     |   |      |   |          |  
|Capital lease obligations                                                                        |  |               | 82,477    |   |      |   | 58,770    |  
|                                                                                                 |  |               |           |   |      |   |           |  
|Total long term debt                                                                             |  |               | 193,767   |   |      |   | 218,145   |  
|                                                                                                 |  |               |           |   |      |   |           |  
|Total liabilities                                                                                |  |               | 918,822   |   |      |   | 896,997   |  
|                                                                                                 |  |              
|Shareholders equity                                                                             |  |               |           |   |      |   |           |  
|Common stock, no par value, 1,960,000 shares authorized, 1,236,744 shares issued and outstanding |  |               | 861,816   |   |      |   | 861,816   |  
|Additional paid in capital                                                                       |  |               | 24,600    |   |      |   | 24,600    |  
|Accumulated deficit                                                                              |  |               | (153,888  | ) |      |   | (56,876   | )
|                                                                                                 |  |               |           |   |      |   |           |  
|Total shareholders equity                                                                       |  |               | 732,528   |   |      |   | 829,540   |  
|                                                                                                 |  |               |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                       |  | $             | 1,651,350 |   |      | $ | 1,726,537 |  
|                                                                                                 |  |               |           |   |      |   |           |  



See accompanying notes to financial
statements



2



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Statements of Operations

Unaudited



|                                             |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|-------------------------------------------- |  | ---------------------------------------- | --------- | - | --------------------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                             |  | For the Three Months Ended September 30, |           |   | For the Nine Months Ended September 30, |  
|                                             |  | 2004                                     |           |   | 2003                                    |   |           | 2004 |  |   | 2003      |  
|Income                                       |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Net sales                                    |  | $                                        | 1,295,645 |   |                                         | $ | 1,161,074 |      |  | $ | 3,542,896 |   |  | $ | 3,434,123 |  
|Cost of sales                                |  |                                          | 704,528   |   |                                         |   | 594,716   |      |  |   | 1,927,705 |   |  |   | 1,739,121 |  
|                                             |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Gross profit                                 |  |                                          | 591,117   |   |                                         |   | 566,358   |      |  |   | 1,615,191 |   |  |   | 1,695,002 |  
|                                             |  |                                          |           |  
|Operating expenses                           |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Selling, general and administrative expenses |  |                                          | 501,732   |   |                                         |   | 556,573   |      |  |   | 1,550,307 |   |  |   | 1,643,776 |  
|Depreciation and amortization                |  |                                          | 31,949    |   |                                         |   | 41,582    |      |  |   | 97,891    |   |  |   | 123,919   |  
|                                             |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Total operating expenses                     |  |                                          | 533,681   |   |                                         |   | 598,155   |      |  |   | 1,648,198 |   |  |   | 1,767,695 |  
|                                             |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Operating Income (loss)                      |  |                                          | 57,436    |   |                                         |   | (31,797   | )    |  |   | (33,007   | ) |  |   | (72,693   | )
|                                             |  |                                          |           |  
|Other income (expense)                       |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Interest income                              |  |                                          |          |   |                                         |   |          |      |  |   |          |   |  |   | 21        |  
|Miscellaneous income (expense)               |  |                                          | 1,810     |   |                                         |   | 773       |      |  |   | 2,347     |   |  |   | 1,617     |  
|Gain on sale of equipment                    |  |                                          |          |   |                                         |   |          |      |  |   | 93        |   |  |   |          |  
|Interest expense                             |  |                                          | (8,587    | ) |                                         |   | (9,272    | )    |  |   | (26,460   | ) |  |   | (28,142   | )
|                                             |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Total other income (expense)                 |  |                                          | (6,777    | ) |                                         |   | (8,499    | )    |  |   | (24,020   | ) |  |   | (26,504   | )
|                                             |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Income (Loss) before income taxes            |  |                                          | 50,659    |   |                                         |   | (40,296   | )    |  |   | (57,027   | ) |  |   | (99,197   | )
|Income tax expense                           |  |                                          |          |   |                                         |   |          |      |  |   | (800      | ) |  |   | (800      | )
|                                             |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Net income (loss)                            |  | $                                        | 50,659    |   |                                         | $ | (40,296   | )    |  | $ | (57,827   | ) |  | $ | (99,997   | )
|                                             |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Earnings (Loss) per share (basic)            |  | $                                        | 0.041     |   |                                         | $ | (0.033    | )    |  | $ | (0.047    | ) |  | $ | (0.081    | )
|                                             |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  
|Earnings (Loss) per share (dilutive)         |  | $                                        | 0.041     |   |                                         | $ | (0.033    | )    |  | $ | (0.047    | ) |  | $ | (0.081    | )
|                                             |  |                                          |           |   |                                         |   |           |      |  |   |           |   |  |   |           |  



See accompanying notes to financial
statements



3



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Thanksgiving Coffee Company, Inc.



Statements of Accumulated Deficit

Unaudited



|                                                 |  |               |          |   |      |   |         |  
|------------------------------------------------ |  | ------------- | -------- | - | ---- | - | ------- | -
|                                                 |  | September 30, |         
|                                                 |  | 2004          |          |   | 2003 |  
|Retained earnings (deficit), beginning of period |  | $             | (96,061  | ) |      | $ | 43,121  |  
|Net loss                                         |  |               | (57,827  | ) |      |   | (99,997 | )
|                                                 |  |               |          |   |      |   |         |  
|Accumulated deficit, end of period               |  | $             | (153,888 | ) |      | $ | (56,876 | )
|                                                 |  |               |          |   |      |   |         |  



See accompanying notes to financial
statements



4



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Thanksgiving Coffee Company, Inc.

Statements of Cash Flows

Unaudited



|                                                                           |  |                                        |          |   |      |   |          |  
|-------------------------------------------------------------------------- |  | -------------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                           |  | For the Nine Months EndedSeptember 30, |         
|                                                                           |  | 2004                                   |          |   | 2003 |  
|Operating activities                                                       |  |                                        |          |   |      |   |          |  
|Net loss                                                                   |  | $                                      | (57,827  | ) |      | $ | (99,997  | )
|Adjustments to reconcile net loss to cash flows from operating activities: |  |                                        |          |   |      |   |          |  
|Depreciation and amortization                                              |  |                                        | 113,599  |   |      |   | 139,827  |  
|(Increase) decrease in:                                                    |  |                                        |          |   |      |   |          |  
|Receivables                                                                |  |                                        | 54,068   |   |      |   | 40,622   |  
|Inventories                                                                |  |                                        | 343      |   |      |   | (61,530  | )
|Prepaid expenses                                                           |  |                                        | 5,083    |   |      |   | (30,177  | )
|Deposits and other assets                                                  |  |                                        | 2,258    |   |      |   | (5,830   | )
|Deferred income taxes                                                      |  |                                        |         |   |      |   | 25,074   |  
|Increase (decrease) in:                                                    |  |                                        |          |   |      |   |          |  
|Accounts payable                                                           |  |                                        | 43,864   |   |      |   | 37,964   |  
|Accrued liabilities                                                        |  |                                        | (34,174  | ) |      |   | 20,456   |  
|                                                                           |  |                                        |          |   |      |   |          |  
|Net cash provided by operating activities                                  |  |                                        | 127,214  |   |      |   | 66,409   |  
|                                                                           |  |                                       
|Investing activities                                                       |  |                                        |          |   |      |   |          |  
|Purchases of property and equipment                                        |  |                                        | (107,942 | ) |      |   | (76,554  | )
|Proceeds from sale of equipment/disposal                                   |  |                                        | (22,233  | ) |      |   |         |  
|Loan fees - intangibles                                                    |  |                                        |         |   |      |   | (2,000   | )
|                                                                           |  |                                        |          |   |      |   |          |  
|Net cash used in investing activities                                      |  |                                        | (130,175 | ) |      |   | (78,554  | )
|                                                                           |  |                                       
|Financing activities                                                       |  |                                        |          |   |      |   |          |  
|Proceeds from notes payable and capital leases                             |  |                                        | 79,107   |   |      |   | 380,662  |  
|Repayments of notes payable and capital leases                             |  |                                        | (98,877  | ) |      |   | (360,571 | )
|                                                                           |  |                                        |          |   |      |   |          |  
|Net cash provided by financing activities                                  |  |                                        | (19,770  | ) |      |   | 20,091   |  
|                                                                           |  |                                       
|Net increase (decrease) in cash                                            |  |                                        | (22,731  | ) |      |   | 7,946    |  
|Cash at beginning of period                                                |  |                                        | 40,463   |   |      |   | 65,174   |  
|                                                                           |  |                                        |          |   |      |   |          |  
|Cash at end of period                                                      |  | $                                      | 17,732   |   |      | $ | 73,120   |  
|                                                                           |  |                                        |          |   |      |   |          |  



Supplemental disclosure of cash
flow information:



Interest paid for the nine month periods ended
September 30, 2004 and 2003 was $33,004 and $28,142 respectively.



See
accompanying notes to financial statements



5



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements



September 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.



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)



Property and Equipment



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



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



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



The Company 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 September 30, 2004 financial
statements.



7



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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 have ever been made.



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 $1,200 as of September 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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##### Table of Contents

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 nine months ended September 30, 2004 the Company did not engage in any direct response advertising that would require capitalization. Advertising
costs charged to expense were $21,141 for the nine months ended September 30, 2004 and encompass primarily 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 September 30, 2004 consisted of the following:



|                                      |  |   |         |  
|------------------------------------- |  | - | ------- | -
|Accounts receivable                   |  | $ | 296,054 |  
|Due from employees                    |  |   | 62      |  
|                                      |  |   |         |  
|                                      |  |   | 296,116 |  
|Less: Allowance for doubtful accounts |  |   | (7,132  | )
|                                      |  |   |         |  
|                                      |  | $ | 288,984 |  
|                                      |  |   |         |  



9



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##### Table of Contents

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 nine months ended September 30, 2004 was $3,396.



3. Inventories



Inventories at September 30, 2004 consisted of
the following:



|                                                        |  |   |        
|------------------------------------------------------- |  | - | -------
|Coffee                                                  |  |   |        
|Unroasted                                               |  | $ | 107,748
|Roasted                                                 |  |   | 92,174 
|Tea                                                     |  |   | 16,091 
|Packaging, supplies and other merchandise held for sale |  |   | 193,342
|                                                        |  |   |        
|Total inventory                                         |  | $ | 409,355
|                                                        |  |   |        



4. Property and Equipment



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



|                                      |  |   |            |  
|------------------------------------- |  | - | ---------- | -
|Equipment                             |  | $ | 1,517,775  |  
|Furniture and fixtures                |  |   | 282,207    |  
|Leasehold improvements                |  |   | 421,811    |  
|Transportation equipment              |  |   | 130,146    |  
|Marketing equipment                   |  |   | 162,661    |  
|Capitalized website development costs |  |   | 14,077     |  
|Property held under capital leases    |  |   | 179,831    |  
|                                      |  |   |            |  
|Total property and equipment          |  |   | 2,708,508  |  
|Accumulated depreciation              |  |   | (2,171,252 | )
|                                      |  |   |            |  
|Property and equipment, net           |  | $ | 537,256    |  
|                                      |  |   |            |  



Depreciation expense for the nine
months ended September 30, 2004 was $112,839.



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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 Assetsas of January 1, 2002, the Company no
longer amortizes goodwill. The Company performed a test of impairment on goodwill which resulted in no impairment loss as of December 31, 2003. Consequently, there was no change in the carrying value of goodwill in the nine months ended September
30, 2004.



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



|                         |  |   |         |  
|------------------------ |  | - | ------- | -
|Leasehold value          |  | $ | 67,000  |  
|Trademarks               |  |   | 5,127   |  
|Refinance cost           |  |   | 4,500   |  
|                         |  |   |         |  
|Total intangible assets  |  |   | 76,627  |  
|Accumulated amortization |  |   | (39,099 | )
|                         |  |   |         |  
|Intangible assets, net   |  | $ | 37,528  |  
|                         |  |   |         |  



Amortization expense for the nine
months ended September 30, 2004 was $760.



6. Long Term Debt



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------
|Notes Payable and Capital Lease Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |   |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|Note payable to Merrill Lynch, monthly installments of $4,687 plus interest at 3.3% over the one month LIBOR rate beginning August 1, 2003 (5.088% at September 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. |  | $ | 159,375



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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 (5.088% at September 30, 2004), maturing November
30, 2004. The credit line and the Companys note payable are collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles and contract rights along with a personal
guarantee of up to $150,000 by the Companys majority shareholders. |  | $ | 186,760
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|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.                                                                                                                                                                                                                                                                    |  |   | 322    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|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.                                                                                                                                                                                                                                                                       |  |   | 4,013  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|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.                                                                                                                                                                                                                                                                                                                                                    |  |   | 11,293 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|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.                                                                                                                                                                                                                                                                                                                                        |  |   | 24,931 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|Note payable to Manifest Leasing, payable in monthly installments of $444, including interest at 12.909%, secured by equipment, final payment due on March 1, 2007.                                                                                                                                                                                                                                                                                                                                                    |  |   | 11,239 



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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.     |  | $ | 10,392   |  
|                                                                                                                                                                               | 
|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. |  |   | 51,100   |  
|                                                                                                                                                                               | 
|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.       |  |   | 18,818   |  
|                                                                                                                                                                               |  |   |          |  
|                                                                                                                                                                               |  |   | 498,162  |  
|Less current portion                                                                                                                                                           |  |   | (304,395 | )
|                                                                                                                                                                               |  |   |          |  
|Long term portion of notes payable                                                                                                                                             |  | $ | 193,767  |  
|                                                                                                                                                                               |  |   |          |  



Interest paid for the nine months
ended September 30, 2004 was $30,958.



As of September 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                      |  | $ | 233,962
|2005                      |  |   | 94,862 
|2006                      |  |   | 88,475 
|2007                      |  |   | 55,546 
|2008 and thereafter       |  |   | 25,287 
|                          |  |   |        
|                          |  | $ | 498,131
|                          |  |   |        



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



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Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



7. Income Taxes (continued)



The components of the provision for income tax as of September 30, 2004 are 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 September 30, 2004 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 OperatingLoss |   | 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, |  | ManufacturersInvestment Credit |        | Contributions |   | Net OperatingLoss |  | 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 nine months
ended September 30, 2004 were $800.



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##### Table of Contents

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 September 30, 2004, minimum annual lease payments due under these
agreements for each of the next five years and in the aggregate were:



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |  
|2004                      |  | $ | 10,298 
|2005                      |  |   | 49,329 
|2006                      |  |   | 36,964 
|2007                      |  |   | 14,725 
|2008 and thereafter       |  |   | 1,590  
|                          |  |   |        
|                          |  | $ | 112,906
|                          |  |   |        



Total operating lease payments for the
nine months ended September 30, 2004 were $42,362.



9. Real Estate 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 $68,800 for the nine months ended
September 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 $39,656 for the nine months ended September 30, 2004.



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



9. Real Estate Leases (continued)



As of September 30, 2004, 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                      |  | $ | 39,811 
|2005                      |  |   | 149,791
|2006                      |  |   | 151,110
|2007                      |  |   | 153,420
|2008 and thereafter       |  |   | 236,475
|                          |  |   |        
|                          |  | $ | 730,607
|                          |  |   |        



10. Related Party Transactions



As of September 30, 2004, the Company has one interest only note payable
due on demand, payable 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 nine months ended
September 30, 2004 were as follows:



|                   |  |   |       
|------------------ |  | - | ------
|Principal on notes |  | $ | 21,000
|Interest expense   |  | $ | 2,631 
|Rent expense       |  | $ | 68,800



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##### Table of Contents

THANKSGIVING COFFEE COMPANY, INC.

MANAGEMENT DISCUSSION AND ANALYSIS



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. In 2004, the Company has reduced
distribution routes serviced by its own trucks from eight to five and has increased its use of outside distributors and direct shipment to customers. This has reduced costs, and the distributors have begun to add customers. The Company has recently
installed fixtures in a number of new locations from a major California retailer and anticipates commencing to sell its products in those locations in November and December of 2004. 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. and has received favorable national publicity. 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 enjoyed favorable margins in 2000-2003, because of the decline in
the price of green beans. Although the Company pays substantially more for its product than the market price because of the quality, organic nature of many of its lines and the fact that it uses fair-traded coffees, it still was able to purchase
green beans at lower prices than in prior years. In 2004, however, the cost of green beans has risen along with other costs of doing business. The Company implemented a price increase 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 sales volume or any other event that
affects coffee pricing will not reduce the Companys margins.



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##### Table of Contents

The Company is in negotiations with another lender to replace its line of credit with Merrill Lynch that terminates as of
November 30, 2004 and the Merrill Lynch term note. 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 September 30, 2004 Compared With Three Months Ended
September 30, 2003



|                              |  |                     |         |    |                |       |   
|----------------------------- |  | ------------------- | ------- | -- | -------------- | ----- | --
|Consolidated                  |  | Increase (Decrease) |         |    | Percent Change |      
|Net Sales                     |  | $                   | 134,571 |    |                | 12    | % 
|Cost of Sales                 |  | $                   | 109,812 |    |                | 18.5  | % 
|Gross Margin                  |  |                     | (3.17   | )% |                | (6.5  | )%
|Selling, G&A Expense          |  | $                   | (54,841 | )  |                | (9.9  | )%
|Depreciation And Amortization |  | $                   | (9,633  | )  |                | (23.2 | )%
|Interest Expense              |  | $                   | (685    | )  |                | (7.4  | )%
|Net Income(Loss)              |  | $                   | 90,955  |    |                |       |   



Consolidated net sales for the three
months ended September 30, 2004 were $1,295,645 up 12% or $134,571 when compared with net sales of $1,161,074 for the same period in fiscal 2003.



Distribution revenues (e.g., revenues generated on our own truck distribution) were down $32,000 or 5%, for the three month period ended September 30, 2004 when compared
with the same period in fiscal 2003. This decline was a result of our having dropped three truck distribution routes this year, including one in the three month period ended September 30, 2004, and replacing these routes with direct shipments and
two distributors. The Company believes that a substantial portion of the decline is now offset by in the increase in the Companys national revenues. The Company continues to test the concept of direct delivery and the use of
distributors.



National revenues (e.g., revenues not derived by mail
order and direct truck distribution) were up $150,000, or 42%, when compared to sales for the same period in 2003. The increase was attributable to switching three routes from Company truck delivery to UPS and outside distributors. The Company
believes that the increase in the national revenues exceeded the decline in distribution revenues because of the growth in sales by a national chain that carries the product and the growth of our southern California distributor.



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 6.2%, for the three months ended September 30, 2004 when compared to the same period in 2003. The Company believes the increase in revenue for mail order reflects favorable
national publicity for the Companys Gorilla Fund coffee product. The traditional mail order catalog business was up $3,000 while Internet sales were up $19,000 or 36% 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.



19



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##### Table of Contents

Sales at the Companys bakery operation were up $6,000 or 3% for the quarter ended September 30, 2004 when compare
to the same period last year.



Consolidated cost of sales for the three
months ended September 30, 2004 were $704,528, up 18.5% when compared with the cost of sales of $594,716 for the same period in 2003. This increase was a result of an increase in green bean prices of 20.5% or $57,000 for the quarter, an increase in
workers compensation and health insurance of $12,000 and lower prices to distributors that increased the cost of sales as a percentage of total sales by $40,000.



Consolidated gross margin (gross profit as a percentage of net sales) for the three months ended September 30, 2004 was 45.62%, down 3.17%
when compared with gross margin of 48.79% for the same period in 2003. Higher per pound green bean costs together with higher benefits insurance costs and lower prices to distributors 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.



Consolidated selling, general and administrative expenses were $501,732 for the three months ended September 30, 2004, a 9.9% decrease when compared with the selling, general and administrative expenses of $556,573
for the same period in 2003. The decrease was due to a $3,000 reduction in bad debt expense because of fewer write-offs, a reduction in truck route distribution expenses of $30,000 because of the previously discussed changes in the Companys
method of distribution and a $20,000 reduction in travel expenses and trade show costs



Depreciation and amortization expenses for the three months ended September 30, 2004 were $31,949, a 23.2% reduction, or nearly $10,000, when compared to depreciation and amortization expenses of $41,582 for the same
period in fiscal 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 September 30, 2004 was $8,587, a 7.4% decline from interest of $9,272 for the same period in 2003. The decrease in interest
was a result of slightly lower interest rates.



As a result of the foregoing
factors, the Company had a consolidated net profit of $50,659 for the three months ended September 30, 2004, compared to a $40,296 consolidated net loss for the same period in 2003. Because of the increase in cost of sales as well as other factors
noted herein, there can be no assurances that the Company will be profitable in any future period.



Nine Months Ended September 30, 2004 Compared With Nine Months Ended September 30, 2003



|                              |  |                     |         |    |                |      |   
|----------------------------- |  | ------------------- | ------- | -- | -------------- | ---- | --
|Consolidated                  |  | Increase (Decrease) |         |    | Percent Change |     
|Net Sales                     |  | $                   | 108,773 |    |                | 3.2  | % 
|Cost of Sales                 |  | $                   | 188,584 |    |                | 10.8 | % 
|Gross Margin                  |  |                     | (3.7    | )% |                | (8.4 | )%
|Selling, G&A Expense          |  | $                   | (93,469 | )  |                | (5.7 | )%
|Depreciation And Amortization |  | $                   | (26,028 | )  |                | (21  | )%
|Interest Expense              |  | $                   | (1,682  | )  |                | (5.3 | )%
|Net Income (Loss)             |  | $                   | 42,170  |    |                | 43.2 | % 



20



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##### Table of Contents

Consolidated net sales for the nine months ended September 30, 2004 were $3,542,896 up 3.2% or over $108,000 when
compared with net sales of $3,434,123 for the same period in 2003.



Distribution revenues (e.g., revenues generated on our own truck distribution) declined by $180,000, or 11.1%, when compared to the same period during 2003. As noted above, this was a result of dropping three 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 $270,000, or 30%, when compared to the same period in 2003. This
increase is a result of switching three routes from Company truck delivery to UPS and outside distributors; the growth in sales by a national retail account and growth of our distributor in southern California.



Mail order revenues (e.g., revenues generated from product sold directly to the consumer
either through print media or the Internet) increased nearly $13,000 or 4.1 % for the nine months ended September 30, 2004 when compared to the same period in 2003. The Company believes the increase in revenue for mail order reflects primarily
favorable national publicity for the Companys Gorilla Fund product. The traditional mail order catalog business was up $11,000 while Internet sales were up nearly $42,000 or 25% for the nine 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 $3,000 for the nine months ended September 30, 2004 when compared to the same period in 2003.



Consolidated cost of sales for the nine months ended June 30, 2004 were $1,927,705 up 10.8%,
or more than $188,000 when compared with the cost of sales of $1,739,121 for the same period in 2003. The increase was a result of higher per pound bean cost of $60,000, an increase in workers compensation of $25,000, an increase in health
insurance costs of $20,000 and lower prices to distributors that increased the cost of sales as a percentage of total sales by $80,000.



Consolidated gross margin (gross profit as a percentage of net sales) for the nine months ended September 30, 2004 was 45.6%, a decrease of 3.7% when compared with gross
margin of 49.4% 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, higher insurance costs and lower prices to distributors.



Consolidated selling, general and administrative expenses were $1,550,307 for the nine months
ended June 30, 2004, a 5.7% decrease, or more than $93,000 when compared with selling, general and administrative expenses of $1,643,776 for the same period in 2003. Lower bad debt expense of $13,000 and lower route costs of $80,000 resulted in
lower selling, general and administrative expenses in 2004.



Depreciation and
amortization expenses for the nine months ended September 30, 2004 were $97,891, a decrease of 21%, or over $26,000, when compared with depreciation and amortization expenses of $123,919 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 nine months ended September 30, 2004 was $26,460 nearly a 5.3% drop, or over $1,600 compared to interest expense of $28,142 for the same period
last year. This decline was a result of somewhat lower interest rates on borrowings compared to last year. At September 30, 2004, total borrowings were $498,162, versus borrowings at the same time in 2003 of $480,874.



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As a result of the foregoing factors, the Company had a consolidated net loss of $57,827 for the nine months ended
September 30, 2004, compared to a consolidated net loss of $99,997 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 September 30, 2004, the Company had working capital of $74,743 versus working capital
of $166,116 as of September 30, 2003. This decrease in working capital is due to an increase in debt initiated by the addition of a working capital line of credit in June 2003 that the Company began to utilize in the third quarter of 2003 and
increased its utilization of in the fourth quarter of 2003.



Net cash provided
by operating activities was $127,214 for the nine months ended September 30, 2004 compared to $66,409 provided by operating activities for the nine months ended September 30, 2003. The increase in net cash provided by operating activities in the
first nine months of 2004 was the result of a reduced loss this year compared to the same period in fiscal 2003 of over $42,000 and higher receivables and payables offset by lower depreciation and accrued liabilities.



Cash used by investing activities was $130,175 for the nine months ended September 30, 2004
compared to $78,554 used in the same period in 2003. Capital additions for the first nine months of 2004 include $15,000 for brewers and grinders, $57,000 for a new after burner to control emissions from the Companys coffee bean roaster and
$18,000 on a portion control packing machine that will allow the company to pack office coffee product and sample sizes, $10,000 for plates and artwork for package labels, $5,000 for artwork and decals for trucks and vans, $5,000 for office
equipment.



Net cash used by financing activities for the nine months ended
September 30, 2004 was $19,770 compared to cash provided by financing activities of $20,091 during the same period in 2003. The change in cash used by financing activities during this year was a result of repayment of debt (See below and Note 6 of
Notes to Financial Statements).



Because of higher investing activities plus a
lower cash balance at January 1, 2004, cash at September 30, 2004 was $17,732 compared to cash at September 30, 2003 of $73,120.



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 September 30, 2004 the rate was 5.088%. 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
5.088%. 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
September 30, 2004, the credit line had a loan balance of $186,760. Merrill Lynch has extended the credit line to November 30, 2004. The Company is in negotiations with another lender to replace the credit line and the Merrill Lynch term note. 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s accounts receivable, inventory, equipment,
fixtures and improvements secure the borrowings. The Companys majority shareholders have guaranteed $150,000 of the Merrill Lynch debt and the two vehicle related Chase Manhattan notes (See Note 6 of Notes to the Financial Statements).



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The Company had a loan outstanding for $19,919 at September 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 September 30, 2004, the Company had total borrowings of $498,162 including $346,135 owing to Merrill Lynch. This compares to total borrowings of $480,874 as of September 30, 2003, including $354,644 outstanding to
Merrill Lynch at that time.



For long term debt, see Note 6 of the Notes to
Financial Statements. For operating leases, see Note 8 of the Notes to Financial Statements. For real estate leases, see Note 9 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          |  | $                      | 498,132   |                    | $ | 233,962   |  | $         | 183,337 |               | $ | 80,833  |  | $ |      
|Operating Leases        |  |                        | 112,906   |                    |   | 10,298    |  |           | 86,293  |               |   | 16,315  |  |   |       
|Real Estate Leases      |  |                        | 730,607   |                    |   | 39,811    |  |           | 300,901 |               |   | 311,445 |  |   | 78,450
|                        |  |                        |           |                    |  
|Total Cash Obligations  |  | $                      | 1,341,645 |                    | $ | 284,071   |  | $         | 570,531 |               | $ | 408,593 |  | $ | 78,450



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.



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 September 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,



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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 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 July 1, 2004 through September 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. UNREGISTERED SALES OF EQUITY 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 



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ITEM 6. 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)              
|     | 
|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).  



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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 |  | November 12, 2004
|/s/ Paul Katzeff                  |  |                         |  |                  
|Paul Katzeff                      |  |                         |  |                  
|                                  |  | President               |  | November 12, 2004
|/s/ Joan Katzeff                  |  |                         |  |                  
|Joan Katzeff                      |  |                         |  |                  



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