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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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(Mark One)

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

For the fiscal year ended December 31, 2006

OR



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

For the transition period from  to

Commission File No. 33-960-70-LA



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THANKSGIVING
COFFEE COMPANY, INC.

(Name of small business issuer in its charter)



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



|                                                |  |           
|----------------------------------------------- |  | ----------
|19100 South Harbor Drive Fort Bragg, California |  | 95437     
|(Address of principal executive offices)        |  | (Zip Code)

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



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



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

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

(Title of class)

(Title of class)



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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
    Yes ̈No  x

STATE ISSUERS REVENUES FOR ITS MOST RECENT FISCAL YEAR: $4,661,138

There have been two trades in the Companys Common Stock since 1999. In June 2004, 750 shares were traded at $4.50 per share. In December 2005, 400 shares were traded at $2.00 per share. See Part II, Item 5, Market for Common
Equity and Related Stockholder Matters. The aggregate market value of common equity held by non-affiliates as of March 26, 2007, using the December 2005 price per share, was $515,168.

As of March 26, 2007, there were 1,236,744 shares outstanding of common stock of the issuer.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Transitional Small Business Disclosure Format     Yes ̈No  x



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INDEX



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



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PART I

ITEM 1 BUSINESS

FORWARD LOOKING INFORMATION

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

GENERAL

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

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

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

In October 1996, the Company completed its offering of shares of Common Stock. As of March 26, 2007, 1,307 non-affiliated shareholders held shares of the Companys Common Stock, representing approximately
20.8% of the outstanding shares.

PRODUCTS

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

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

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

The Company sells its coffees and teas through a multi-channel distribution network consisting of wholesale distribution operations, the Bakery and direct marketing
operations. The Company offers complementary products through all of these channels of distribution. Products are purchased from third party vendors on an as-needed basis and resold to its customers. The Company generally provides its wholesale
customers with brewing, grinding and related equipment (leased from third party leasing companies) and product displays (designed and manufactured by the Company) at no charge if predetermined sales volumes are reached.



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Of the total fiscal 2006 revenues of $4,661,138, 84% were from roasted coffee, 13% were from the Bakery, 2% were from
resale items, and 1% was from tea products.

COFFEE INDUSTRY

Total sales of coffee in the United States are expected to grow by a compounded rate of 6.9% from 2005 to 2010, reaching $48.2 billion by 2010, according to the U.S. Market for Coffee and Ready-to-Drink Coffee, a report from market research
publisher Packaged Facts. Packaged Facts estimates that the U.S. coffee market grew to $34.5 billion in 2005, an 8.7% percent jump over 2004. Foodservice is the largest sales channel, accounting for 87.9% of the market. Half of the coffee drank
out (outside of the home) consists of regular coffee, while 42% is a specialty coffee. Retail outlets account for the remaining 12.1 percent of sales.

According to the Specialty Coffee Association of America and the Sacramento Bee research, the United States specialty coffee retail sales exceeded $11.05 billion in 2005, a 14% increase over 2004. Eighty percent of
Americans drink coffee  53% every day versus 49% in the year prior, reports the National Coffee Association. Regular coffee consumption is expected to grow 7% annually for the next three years, while sales of specialty drinks such as lattes
and cappuccinos are pegged to grow 15% annually. The operating units have increased to 21,400 in 2005 compared with 18,600 in the prior year, according to the Specialty Coffee Association data. In addition to expanding the marketplace for coffee,
many locations have added a number of new products which increased sales volume in the summer time, a historically slack period for selling coffee.

Organic coffee and tea sales have also shown strong growth. As recently as 2004, sales doubled to over $124 million. According to Spins Inc., a San Francisco-based research firm, northern California is the leading area in per capita
consumption of organic products. Total nation-wide sales of organic products rose 13.7% to an estimated $13.5 billion last year, according to the Union Tribune of San Diego. NPD, a research firm, estimates a 14 percent growth rate for 2006. Yet
market penetration is only 2.4% of total food industry sales. Sixty-six percent of all shoppers have tried organic food. This trend has spurred a new trend in supermarkets. Whole Foods, a well-known purveyor of organic food, began with one store in
1980 and has grown to approximately 180 locations. Wild Oats is another chain which began with the organic boom and now has approximately 115 stores. A number of grocery chain stores have expanded existing store space for organic items and some,
such as Dominics in Chicago, have began to create all new stores with the organic concept like Whole Foods and Wild Oats. Safeway, one of the largest chains in the country, has developed a private label brand called O, a house
brand for all of their organic products, which differentiate organic products from the rest of their private label program.

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

Packaged Facts has coined the term Conscientious Consumerism to identify a trend towards upscale and premium products with an ethical bent. Packaged Facts
estimates that retail sales of these type of products reached a total of nearly $33 billion in 2006, an increase of more than 17% over sales in 2005. Packaged Facts predicts this business will maintain double digit growth, reaching $57 billion in
2011. It also expects that the food and beverage segment of this market will be a major factor, approximating 82% of the Conscientious Consumer market.

As a backlash to free trade, Fair Trade has gained the attention of consumers in this country. TransFair USA, a certification agency, states that $208 million worth of Fair Trade coffee has been certified. Although still a small percentage
of the total coffee market, sales have tripled in the past three years and constitute a growing segment of the gourmet coffee market. Today, Fair Trade coffee is roasted by 280 U. S. companies and sold at thousands of retail outlets. Dunkin Donuts,
the number one US retailer of coffee by the cup, is rolling out a Fair Trade espresso line of drinks. Even the largest specialty coffee company in the United States offers a fair trade coffee during specified periods of the month.

MARKETING STRATEGY

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

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

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

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

4. Retail - This sales method consists of servicing the consumer through the
Companys Bakery. However, the Company is currently pursuing the sale of the Bakery.



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The first three sales methods are part of the Companys specialty coffee and tea segment and the fourth comprises
the Companys bakery segment. See Note 12, Information on Business Segments, of Notes to the Financial Statements.

ENVIRONMENTAL SENSITIVITY

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

The Company believes that its relationship with
the American Birding Association and its marketing of Song Bird Coffee have distinguished the Companys role and image in the marketplace. Song Bird Coffee sales represented 6% of the Companys packaged and bulk roasted coffee sales in
fiscal 1997 and grew to 14% in fiscal 2002, 2003, 2004 and 2005. In 2006, the sales have slipped as a percentage of total sales to 11%, but Song Bird Coffee remains an important component of the Companys sales.

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

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

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

SOCIAL RESPONSIBILITY

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

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

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

The Company believes that this niche provides a potential opportunity for growth. The Company provides educational programs,
tastings and brochures to familiarize the public with the fair trade theme. Sales of fair trade certified coffee for the year 2006 were $352,118, an increase from $315,000 for 2005, $300,000 for 2004, $228,000 in 2003, $206,000 in 2002 and $73,400
in 2000, when the Company introduced the products.

The Company entered into an exclusive arrangement with the Dian Fossey Gorilla Fund International and
the Dukunde Kawa Coop in 2004 to combine the elements of environmental sensitivity by preventing poaching of the last remaining mountain gorillas and promoting economic sustainability to the Rwandan coffee farmer and produced a product called
Gorilla Fund Coffee. This multifaceted task was accomplished by paying Fair Trade pricing to the coop and donating between 50 cents and $2.00, depending on distribution method, to the



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Dian Fossey Gorilla Fund International. Sales of the Gorilla Fund Coffee help ensure a fair price to farmers, reduce pressure on the forests resources,
support health and education advances in Rwanda and helps the Dian Fossey Gorilla Fund International operate projects intended to save the mountain gorillas. This is a collaboration between producers and consumers, punctuated by a fair and equitable
distribution of the value of raw coffee as it is converted to a value-added beverage. Sales were $60,000 in 2004, $65,000 in 2005 and $82,000 in 2006. The Rwandan coffee has become a staple in many of the Companys blends. The coffee received a
90 rating from the prestigious Coffee Review cupper Ken Davids in 2004. This project has increased awareness of Rwandan coffee in this country, and the largest specialty coffee roaster along with many other roasters have begun offering
Rwandan coffee in their lines.

In 2005, the Company began working with a cooperative in Uganda called Mirembe Kawomera or delicious peace
coffee. The cooperative is a group of 400 of small scale farmers and their families growing high quality arabica coffee on the slopes of Mt. Elgon in Mbale, Uganda. They are made up of Jewish, Christian and Muslim faiths all working together to
promote peace and harmony while harvesting excellent fair-trade certified coffee. The Company has been visiting synagogues, churches and mosques to promote the Mirembe Kawomera coffee. Sales for the products in 2005 were $32,000 and grew to $107,986
in 2006.

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

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

COMPETITION

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

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

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

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

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

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

GREEN BEAN COFFEE SUPPLY AND AVAILABILITY

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



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

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

OTHER MATTERS

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

CUSTOMERS

In fiscal 2006, one customer accounted for 12.5% of the Companys revenue. The account has purchased from the Company since 1992. The account has serving locations
and is a distributor of the Companys product. A loss of this account or any other large account, or a significant reduction in sales to any of the Companys principal customers, could have an adverse impact on the Company. See
Managements Discussion and Analysis.

INTELLECTUAL PROPERTY

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

GOVERNMENT REGULATION

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

EMPLOYEES

As of December 31, 2006, the Company had
thirty-five full-time employees and fourteen part-time employees. None of the Companys employees is covered by a collective bargaining agreement. The Company has never suffered a work stoppage due to adverse labor relations with its employees.
The Company believes that it maintains good relations with its employees.

ITEM 2 PROPERTY

The executive offices of the Company occupy approximately 14,500 square feet at 19100 South Harbor Drive,
Fort Bragg, California 95437, which address also includes a warehouse and the capacity for manufacturing operations. The Company leases an additional 1,626 square feet of storage space on the Fort Bragg waterfront. These facilities are currently
being leased for ten years under a lease signed on November 1, 2005 at a rate of approximately $8,600 per month from Joan and Paul Katzeff, who are founders, principal shareholders, officers and directors of the Company. The Company believes
this lease represents an arms-length rate and arms-length terms for comparable space in the Fort Bragg area. The lease rate has remained the same for the last ten years. See Item 12, Certain Relationships and Related Transactions
and the Auditors Report, Notes to Financial Statements Note 10 and Note 11.

The Bakery, located at 10438 Lansing Street in Mendocino,
California, is approximately 1,617 square feet and is leased from an unaffiliated third party. The Company currently pays rent of approximately $4,179 per month for the Bakery pursuant to a lease that expires September 30, 2011.

Through the end of 2006, the Company leased a 1,100 square foot facility in Santa Rosa, CA for $948 per month for the purpose of repairing its brewers and grinders that
it lends to foodservice accounts. The Company did not renew this lease when it expired on January 31, 2007.

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



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ITEM 3 LEGAL PROCEEDINGS

No legal matters in which the Company is a party or of which its property is the subject are
pending at this time.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

During fiscal 1999, the Company was aware of only four trades of the Companys Common Stock totaling 2,350 shares of Common Stock. All
transactions were individually negotiated between the buyer and seller through Mutual Securities as intermediary. The average price of these transactions per Mutual Securities was $4.74 for all of fiscal 1999. The first three trades were for 2,200
shares at $5.00 per share and took place in the first three quarters. The final trade for 150 shares took place in the last quarter and was for $1.00 per share. No trades took place in 2000, 2001, 2002 or 2003. In 2004, one trade was made for 750
shares at $4.50 per share in June of that year. In December 2005, 400 shares were traded at $2.00 per share.

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

As of December 31, 2006, there were 1,307 holders of record of the Companys Common Stock.

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

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

SUMMARY

Sales of the Company have continued to erode over the last four
years, primarily due to declines in the direct distribution sales method of the Companys business (i.e., delivery by Company truck). Additional competition, customers that have gone out of business, and customers that have begun roasting
coffee beans for their own use have all had a negative impact on the Companys sales. The Company has tried a number of strategies that have not proven effective in abating these declines. In 2004, it began changing its method of distribution
to rely less on direct distribution by Company owned or leased trucks and instead to use independent distributors or shipping direct (via UPS or other common carrier). This change did result in a reduction in expenses. However, the Bakery was closed
for over three weeks in February and March of 2006, during which time no sales were made and resulting in a drop in volume that the Bakery never recovered. If, the Company cannot stop the decline in its sales volume, it may not be able to achieve
profitability in future years.

The Company enjoyed favorable margins in 2000-2003 because of a decline in the price of green beans. Although the Company
pays substantially more for its product than the market price, because of quality, organic nature of many of its lines and the fact that it uses fair-traded coffees, it still was able to purchase green beans at lower prices in those years. During
the last six months of 2004, however, the world price of coffee more than doubled, eroding margins, and the price of green beans continued to rise through 2005 and 2006. If the rise in green bean prices should continue as a consequence of inclement
weather in a major producing area or any other event that effects coffee pricing, it would have a negative impact on the Company and its margins.

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



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##### Table of Contents

RESULTS OF OPERATIONS

2006
Compared to 2005



|                              |  |             |          |    |             |       |   
|----------------------------- |  | ----------- | -------- | -- | ----------- | ----- | --
|Consolidated                  |  | $ Inc/(Dec) |          |    | % Inc/(Dec) |      
|Net Sales                     |  | $           | (222,483 | )  |             | (4.6  | )%
|Cost of Sales                 |  | $           | (50,349  | )  |             | (1.8  | )%
|Gross Margin                  |  |             | (1.6     | )% |             | (3.6  | )%
|Selling, G & A Expense        |  | $           | (67,745  | )  |             | (3.3  | )%
|Depreciation and Amortization |  | $           | (9,085   | )  |             | (6.3  | )%
|Other Income/ (Expense)       |  | $           | 85,943   |    |             | 240.6 | % 
|Pretax Income/ (Loss)         |  | $           | (181,247 | )  |             |      | % 
|Net Income/(loss)             |  | $           | (300,971 | )  |             |      | % 

REVENUES. Consolidated net sales for the year ended December 31, 2006 were $4,661,138, down 4.6% or over
$222,000 compared to sales of $4,883,621 for the year ended December 31, 2005.

Distribution revenues (e.g. revenues generated on the Companys
truck distribution) were flat for the year ended December 31, 2006 when compared to the same period in 2005.

National revenues (e.g. revenues not
derived by mail order and direct truck distribution) were down $65,000 for the year ended December 31, 2006 when compared to the same period in 2005. Sales to a major chain account dropped when the Company would not lower its price to the
customer; however, one of their divisions is still purchasing coffee from the Company.

Mail order revenue (e.g. revenues generated from product sold
directly to the consumer either through print media or the Internet) increased nearly $40,000 or 4.5% for the year ended December 31, 2006 when compared to the same period in 2005. The increase in revenues was a result of a new web store
installed in July of 2006. Sales in the non-profit fund raising portion of the business also increased with several new partners using the program to raise funds and awareness for their environmental and social causes.

Bakery revenues were down for 2006 by nearly $200,000 or 25% for 2006 compared to the same period in 2005. The decline began in February and March of 2006 when the
Bakery was closed for major repairs to the facility. After the reopening, sales continued to lag throughout the year when compared to the prior year.

COST
OF SALES. Consolidated cost of sales for the year ended December 31, 2006 was $2,675,370 a decrease of over $50,000 or 1.8% when compared to cost of sales of $2,725,719 for the year ended December 31, 2005. The decrease was a result of the
lower sales volume as the cost of green beans increased during the year.

GROSS MARGIN. Consolidated gross margin (gross profit as a percentage of net
sales) for the year ended December 31, 2006 was 42.6%, a decline of 1.6% when compared to the gross margin of 44.2% for the year ended December 31, 2005. The decline in gross margin was a result of the higher cost of green beans. Average
per pound cost of green beans for 2006 was $1.89, versus cost of $1.71 for the year ended December 31, 2005, or an aggregate increase of over $125,000 for the year. If the Company cannot offset the higher cost of green beans by raising the
price of its product in the marketplace or finding lower cost quality beans, there can be no assurances that the Company can be profitable in any future periods.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Consolidated selling, general and administrative expenses were $1,989,863 for the year ended December 31, 2006, a nearly $68,000 drop or 3.3% when compared to selling general and
administrative expense of $2,057,608 for the year ended December 31, 2005. The decline was a result of a $30,000 reduction in promotions and trade show expense and a nearly $40,000 reduction in wage expense following the elimination of two
staff positions.

DEPRECIATION AND AMORTIZATION. Consolidated depreciation and amortization expenses for the year ended December 31, 2006 were
$135,555, a decrease of over $9,000 or 6.3% when compared to depreciation and amortization of $144,640 for the year ended December 31, 2005. The decrease was a result of a number of assets that were fully depreciated during the year.

OTHER INCOME/EXPENSE. Consolidated other expense for the year ended December 31, 2006 was $121,658, an increase of over $85,000 or 240.6% when
compared to other expense of $35,715 for December 31, 2005. The increase was a result of writing off nearly $26,000 of value of artwork that was determined to be impaired. In addition, the Company wrote off over $41,000 in goodwill from the
purchase of the Bakery after it performed a test of impairment at December 31, 2006. Interest expense was over $2,000 higher because of higher interest rates for the year.

INCOME TAX EXPENSE/BENEFIT. Consolidated income tax expense for the year ended December 31, 2006 was $101,712, an increase of nearly $120,000 when compared to an income tax benefit of $18,012 for the year ended
December 31, 2005. The significant change from a tax benefit to a tax expense was a result of eliminating the current and long-term deferred tax assets on the Companys books because the Company has had three successive years of losses and
the prospect of ever using the tax loss carryforwards and other tax preferences items are in question.



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##### Table of Contents

NET INCOME/(LOSS). Because of the foregoing factors, the Company had a consolidated net loss for the year ended
December 31, 2006 of $363,020 compared to a loss of $62,049 for the year ended December 31, 2005. Because of the losses in each of three successive years together with the increased cost of beans and the decline in sales volume, there can
be no assurances that the Company will be profitable in any future period.

2005 Compared to 2004



|                              |  |             |         |    |             |      |   
|----------------------------- |  | ----------- | ------- | -- | ----------- | ---- | --
|Consolidated                  |  | $ Inc/(Dec) |         |    | % Inc/(Dec) |     
|Net Sales                     |  | $           | (8,371  | )  |             | (0.2 | )%
|Cost of Sales                 |  | $           | 92,398  |    |             | 3.5  | % 
|Gross Margin                  |  |             | (2.0    | %) |             | (4.3 | )%
|Selling, G & A Expense        |  | $           | (54,459 | )  |             | (2.6 | )%
|Depreciation and Amortization |  | $           | 8,088   |    |             | 5.9  | % 
|Other Income/ (Expense)       |  | $           | (127    | )  |             | (0.5 | )%
|Net Income/ (Loss)            |  | $           | (33,959 | )  |             |     | % 

REVENUES. Consolidated net sales for the year ended December 31, 2005 were $4,883,621, down 0.2%, or
approximately $9,000 compared to sales of $4,891,992 for December 31, 2004.

Distribution revenues (e.g. revenues generated on the Companys
truck distribution) were down over $59,000 for the year ended December 31, 2005, or a 4% drop when compared to the same period in 2004. Part of the decline was a result of the Company dropping another route in its distribution system and
replacing it with an outside distributor. The Company also lost three accounts in the San Francisco market that accounted for approximately $30,000 in 2004 sales. The Company believes that a substantial portion of the decline has been offset by an
increase in the Companys national revenue which includes shipments to distributors. There can be no assurances that reducing the direct delivery system and replacing it with outside distributors will be successful and the failure of such
approach may have a negative effect on the Companys prospects.

National revenues (e.g. revenues not derived by mail order and direct truck
distribution) increased $19,000, or 1.3% for the year 2005 compared to the same period in 2004. Revenues increased by $48,000 from distributors and other direct accounts offset by a $28,000 decline in sales to direct bird store accounts and
distributors to bird stores. The drop was due to a lack of new programs for this portion of the Companys business. A new person has been assigned to this portion of business to stimulate volume. There can be no assurances that the new person
will be successful in adding new volume.

Mail order revenue (e.g. revenues generated from product sold directly to the consumer either through print media
or the Internet) decreased $10,000 or 1% for 2005 compared to the same period in 2004. The decline in revenues was a result of lower sales in the non-profit fund raising portion of the business. The Company has added staff to develop programs and
improve sales through this venue. However, there can be no assurances that additional volume will be generated through such staff additions.

Sales for the
Companys Bakery were up $30,000, or 4.2% for the year.

COST OF SALES. Consolidated cost of sales for the year ended December 31, 2005 were
$2,725,719, an increase of nearly $93,000, or 3.5% when compared to cost of sales of $2,633,321 for December 31, 2004. The increase was a result of the increase in green beans for the year of nearly $154,000. The higher cost of green beans was
offset somewhat by a price increase during the year.

GROSS MARGIN. Consolidated gross margin (gross profit as a percentage of net sales) for the year
ended December 31, 2005 was 44.2%, a decline of 4.3%, when compared to the gross margin of 46.2% for the year ended December 31, 2004. The decline in gross margin was a result of higher cost of green beans as mentioned above. Per pound
cost of green beans for the Company went from $1.51 in the beginning of the year to $1.85 at the end of the year. If the Company cannot raise the price of its products in the marketplace, there can be no assurances that the Company can be profitable
in any future periods.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Consolidated selling, general and administrative expenses were $2,057,608 for the year
ended December 31, 2005, a nearly $55,000 drop, or 2.6% when compared to selling general and administrative expense of $2,112,067 for the year ended December 31, 2004. The decline was a result of the savings of $31,000 from the elimination
of one route during the year and termination of a retainer to a broker of $24,000.

DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expenses for the year ended December 31, 2006 were $144,640, an increase of over $8,000, or 5.9% compared to depreciation and amortization of $136,552 for the year ended December 31, 2004. The increase was a result of capital
expenditures added during 2004 that had a full year of depreciation for 2005 plus the additions for this year. (See Liquidity and Capital Resources)



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##### Table of Contents

OTHER INCOME/EXPENSE. Consolidated other income/expense for the year ended December 31, 2005 was $35,715, a decrease
of $127, or 0.5% when compared to other income/expense for December 31, 2004. The decrease was a result of higher interest of $14,000 offset by a gain from an involuntary conversion of a vehicle that was wrecked in an accident. Higher interest
expense was a result of a full year interest at prime rate plus 3% in 2005 compared to one month in 2004 and the rising interest rates during the year. The Company refinanced its Merrill Lynch debt in November of 2004 with a new term facility with
the Savings Bank of Mendocino. The Merrill Lynch debt had an interest rate of 3% over LIBOR while the Savings Bank rate has an interest rate of 3% over prime rate.

NET INCOME/(LOSS). Because of the foregoing factors, the Company had a consolidated net loss for the year the year ended December 31, 2005 of $62,049 compared to a loss of $28,090 for the year ended December 31, 2004. Because of
the losses in each of three successive years together with the increased cost of beans and the decline in volume, there can be no assurances that the Company will be profitable in any future period.

LIQUIDITY AND CAPITAL RESOURCES

Working capital as of December 31, 2006 was $66,905 as compared to working capital of $252,994 as of December 31, 2005. The decrease in working capital is a result of decrease in inventories, receivables and
cash and an increase in payables primarily because of the rent payable in arrears to the majority shareholders of $47,300. From time to time beginning in May 2006, the majority shareholders, who lease the main office, production and warehouse
facilities to the Company, have accepted the deferment of the rent for the facility when the Company did not have sufficient cash on hand to make the payment. The amount in payables represents approximately 5 1/2months rent.

Cash provided by operating activities was $96,441 for the year ended December 31, 2006, compared to cash provided in operating activities of $107,159 for the same period in 2005. The decline in cash provided by operating activities was
a result of an increase in the net loss of over $300,000 offset by the write down of the deferred tax assets, the reduction in the value of artwork, the decrease in receivables, inventories and the increase in payables.

Cash used in investing activities for the year ended December 31, 2006 was $117,790, compared to cash used in investing activities of $38,644 during the same period
in 2005. Capital expenditures made during the year included $23,000 for upgrade of computer and software, $20,000 for an auto and truck replacements, $60,000 for brewers, grinders and display fixtures and $20,000 for production equipment
replacement.

Net cash used in financing activities for the year ended December 31, 2005 was $15,062 as compared to net cash used by financing
activities for the same period in 2005 of $66,686.

Cash as of December 31, 2006 was $76,974, a decrease of nearly $36,411 when compared to cash of
$113,385 as of the same date in 2005.

In November 2004, the Company secured a term note with the Savings Bank of Mendocino. This note is amortized over
ten years and is payable in five years with a balloon payment on December 1, 2009 at 3% over the prime rate. The rate was 11.0% at December 31, 2006. The note is collateralized by a security interest of first priority in all accounts
receivable, inventory, equipment, instruments, general intangibles and contract rights. This new note is personally guaranteed by the Companys majority shareholders.

The Company also has a $25,000 line of credit with the Savings Bank of Mendocino. The credit line is interest only payments renewable annually at 3% over the prime rate. The note was renewed by the Savings Bank of
Mendocino on November 17, 2006. The prime rate was 11% at December 31, 2006. The credit line is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles and
contract rights. The line of credit is personally guaranteed by the Companys majority shareholders. As of December 31, 2006, there was $20,000 borrowed on this line.

The Companys debt at December 31, 2006 was $510,532 for all term debt and obligations under capital leases, down over $15,000 from $525,595 due at December 31, 2005. Of the total, nearly $122,000 is
due in fiscal 2007. Of the total borrowings, $327,117 is due to Savings Bank of Mendocino. See Notes to the Financial Statements Note 7.

The Company
has one note payable to the majority shareholders, due on demand after June 30, 1996 for $19,919, uncollateralized. See Notes to the Financial Statements Note 7.

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



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##### Table of Contents

A summary of the Companys principal contractual obligations and other commitments as of December 31, 2006 is
shown in the following table:



|                        |  |                        |           |                    |   |           |  |           |         |               |   |         |  |   |        
|----------------------- |  | ---------------------- | --------- | ------------------ | - | --------- |  | --------- | ------- | ------------- | - | ------- |  | - | -------
|                        |  | Payments Due By Period
|Contractual Obligations |  | Total                  |           | Less than One year |   | 1-3 years |  | 4-5 years |         | After 5 years
|Long Term Debt          |  | $                      | 510,532   |                    | $ | 121,505   |  | $         | 380,457 |               | $ | 8,570   |  |   |       
|Operating Leases        |  |                        | 38,659    |                    |   | 21,373    |  |           | 15,307  |               |   | 1,979   |  |   |       
|Real Estate Leases      |  |                        | 1,184,088 |                    |   | 152,988   |  |           | 311,490 |               |   | 306,810 |  | $ | 412,800
|Total Cash Obligations  |  | $                      | 1,733,279 |                    | $ | 295,866   |  | $         | 707,254 |               | $ | 317,359 |  | $ | 412,800

SEASONALITY AND OTHER FACTORS AFFECTING PERFORMANCE

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

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

INDEMNIFICATION MATTERS

The Companys Bylaws
provide that the Company may indemnify its directors, officers, employees and other agents to the fullest extent permitted by California law. The Company believes that indemnification under its Bylaws also permits the Company to secure insurance on
behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether California law would permit indemnification. The Company maintains such liability insurance for its
directors and certain officers and employees.

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

OFF-BALANCE SHEET ARRANGEMENTS

None.

ITEM 7 FINANCIAL STATEMENTS

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

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

As is explained in greater
detail in the Companys Current Report on Form 8-K filed on December 1, 2006, the Company changed auditors in 2006. The Company has engaged the registered public accounting firm of Schumacher & Associates, Inc. as the
Companys new independent auditor.



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##### Table of Contents

ITEM 8A CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the
Companys management, including the Chief Executive Officer, the President and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and procedures as of December 31, 2006. Based on that evaluation, the
Companys management, including the Chief Executive Officer, the President and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective. In connection with such evaluation, the Company did not
identify any changes in the Companys internal control over financial reporting during the fourth quarter of 2006 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial
reporting.

ITEM 8B OTHER INFORMATION

On November 17, 2006, the Company executed a Promissory Note in favor of the Savings Bank
of Mendocino County. The Promissory Note provides the Company with a $25,000 revolving line of credit permitting interest-only payments and renewable annually at 3% over the prime interest rate. As of December 31, 2006, the Company had borrowed
$20,000 on the line of credit.

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

PART III

ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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



|             |  |     |  |                                    |  | 
|------------ |  | --- |  | ---------------------------------- |  | 
|Name         |  | Age |  | Position with the Company          |  | 
|Paul Katzeff |  | 69  |  | Chief Executive Officer & Director |  | 
|Joan Katzeff |  | 57  |  | President and Director             |  | 
|Roy Doughty  |  | 57  |  | Director                           |  | 
|Sam Kraynek  |  | 59  |  | Chief Financial Officer            |  | 

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

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

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

Sam Kraynek has served as the Companys Chief Financial Officer since December 2004. Before assuming the position of Chief Financial Officer, Mr. Kraynek was the Companys Chief Operating Officer.
Mr. Kraynek has been in the food business for nearly 40 years. He has been President and General Manager of the Rosarita Mexican Food Division of Beatrice Companies, General Manager of the Bakery Distribution Division of International
Multifoods and Vice President of Sales and Marketing for Bay State Milling Company. Mr. Kraynek has a B.S. in accounting and started his career in public accounting. Mr. Kraynek has been with the Company for ten years.



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

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

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

ITEM 10 EXECUTIVE COMPENSATION

The following table provides certain information concerning the compensation paid to the
Companys Chief Executive Officer and President for fiscal 2004, 2005 and 2006. Each other Executive Officer received less than $100,000 in total compensation in fiscal 2006.

SUMMARY COMPENSATION TABLE



|                            |  |      |  |           |         |          |   |                             |   |                          |   |                              |   |                |   |                          |         
|--------------------------- |  | ---- |  | --------- | ------- | -------- | - | --------------------------- | - | ------------------------ | - | ---------------------------- | - | -------------- | - | ------------------------ | --------
|Name and Principal Position |  | Year |  | Salary($) |         | Bonus($) |   | Other AnnualCompensation($) |   | RestrictedStockAwards($) |   | SecuritiesUnderlyingOpts.($) |   | LTIPPayouts($) |   | All OtherCompensation($)
|Paul Katzeff                |  | 2006 |  | $         | 95,804  |          |  |                             |  |                          |  |                              |  |                |  |                          | (1), (2)
|CEO and                     |  | 2005 |  | $         | 95,804  |          |  |                             |  |                          |  |                              |  |                |  |                          | (1), (2)
|Director                    |  | 2004 |  | $         | 95,804  |          |  |                             |  |                          |  |                              |  |                |  |                          | (1), (2)
|Joan Katzeff                |  | 2006 |  | $         | 100,000 |          |  |                             |  |                          |  |                              |  |                |  |                          | (2)     
|President and               |  | 2005 |  | $         | 100,000 |          |  |                             |  |                          |  |                              |  |                |  |                          | (2)     
|Director                    |  | 2004 |  | $         | 100,000 |          |  |                             |  |                          |  |                              |  |                |  |                          | (2)     

---

|(1) | Mr. Katzeff receives use of a company car, which he uses primarily for business purposes. The aggregate incremental cost to the Company is less than $10,000 per year.
Mr. Katzeff voluntarily reduced his compensation in October 2004 to offset the increased cost incurred by the Company in financing a new vehicle to replace his prior company car. The salary reduction equals the additional cost of the new loan
compared to the cost of the prior vehicle. See Note 7 of Notes to Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The Company pays the annual premiums for life insurance policies for Paul Katzeff and Joan Katzeff. The aggregate incremental cost to the Company of each policy is less than $2,000.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

EQUITY COMPENSATION

The Company has never
granted equity compensation, such as options, restricted stock awards or stock appreciation rights to any of the above named executive officers. The Company does not have a long-term incentive plan.

COMPENSATION OF DIRECTORS

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

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

The following
table sets forth certain information regarding beneficial ownership of the Companys Common Stock as of December 31, 2006, (i) by each person (or group of affiliated persons) who is known by the Company to own beneficially more than
five per cent of the Companys Common Stock, (ii) by each of the named executive officers, (iii) by each of the Companys directors and nominees, and (iv) by all directors and executive officers as a group. The Company
believes that the person and entities named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws, where applicable. The Company does not
have an equity compensation plan.



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##### Table of Contents

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

---

|(1) | Shares are jointly owned by Joan Katzeff and Paul Katzeff.
|--- | ----------------------------------------------------------

ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In November 2005, the Company signed a new lease for its corporate
headquarters, warehouse and waterfront facilities from Joan and Paul Katzeff, who own the facility and are directors, executive officers and the majority shareholders of the Company (the Katzeffs). The new lease is for ten years and ends
May 31, 2015. The lease provides for monthly payments of $8,600 in fiscal 2004, 2005 and 2006. The Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The Company also has an
uncollateralized interest only note due on demand to the Katzeffs. See Note 7 and Note 10 of Notes to Financial Statements. The Katzeffs also guaranteed personally the Companys note and line of credit with the Savings
Bank of Mendocino. See Liquidity and Capital Resources.

Global Insights, of which Mr. Doughty, a director of the Company, is a principal,
was party to a oneyear consulting agreement that commenced January 1, 2006 for the provision of specific business functions to the Company, including a provision of shareholder relation services for $18,000 per year. Global Insights also
received an additional $8,250 during fiscal 2004 for similar services provided outside the agreement. The Company has not renewed the contract with Global Insights for the 2007 year.

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

In April of 2006, the Company executed an uncollateralized note for $29,067 with the majority shareholders to obtain financing for the purpose of making
major improvements to the interior of the bakery facility. The note was repaid in weekly installments of $1,000 plus interest at 10% with the final payment made in October of 2006. See Note 12 of Notes to Financial Statements.

ITEM 13 EXHIBITS



|      |  |                                                                                                                                                
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|3.1   |  | Restated Articles of Incorporation of the Company.+                                                                                            
|      | 
|3.2   |  | Bylaws of the Company.+                                                                                                                        
|      | 
|3.2.1 |  | Amendment No. 1 to Bylaws of the Company, dated June 3, 1996.++                                                                                
|      | 
|10.3  |  | Lease Agreement for the Companys Bakery in Mendocino.+++                                                                                      
|      | 
|10.4  |  | Sample Coffee Purchase Agreement.+                                                                                                             
|      | 
|10.5  |  | Promissory Note issued by the Company to Joan and Paul Katzeff dated as of April 17, 1996.+++                                                  
|      | 
|10.10 |  | License Agreement between the Company and the American Birding Association, Inc.**                                                             
|      | 
|10.11 |  | Promissory Note issued by the Company to the Savings Bank of Mendocino County, dated November 19, 2004.**                                      
|      | 
|10.13 |  | Lease agreement for the Companys headquarters and manufacturing and storage facility dated November 1, 2005.***                               
|      | 
|10.15 |  | Promissory Note issued by the Company to the Savings Bank of Mendocino, dated November 17, 2006.                                               
|      | 
|14.1  |  | Code of Ethics*                                                                                                                                
|      | 
|31.1  |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
|      | 
|31.2  |  | Certification of President Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         



15



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##### Table of Contents

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

---

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

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

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

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

|** | Incorporated by reference to the exhibits to the Companys Form 10-KSB for the year ended December 31, 2004.
|-- | ------------------------------------------------------------------------------------------------------------

|*** | Incorporated by reference to the exhibits to the Companys Form 10-KSB for the year ended December 31, 2005.
|--- | ------------------------------------------------------------------------------------------------------------

ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES

The Company has engaged the firm of Schumacher & Associates, Inc.
to perform its annual audit for the year ended December 31, 2006. This is the first audit that the firm has performed for the Company. Consequently, the Company has not yet made any payments to the firm. Sallmann, Yang & Alameda (SYA)
previously performed the Companys annual audit and performed its quarterly reviews through the third quarter of 2006. SYA will continue to prepare the Companys federal and state tax returns. SYA billed, and the Company paid, the
following fees to SYA in 2005 and 2006:

AUDIT FEES



|     |  |   |       
|---- |  | - | ------
|2005 |  | $ | 42,925
|2006 |  | $ | 45,193

AUDIT-RELATED FEE

None

TAX FEES



|     |  |   |      
|---- |  | - | -----
|2005 |  | $ | 5,000
|2006 |  | $ | 5,000

ALL OTHER FEES

None

There were no fees paid for and no work authorized other than for audit, quarterly reviews and tax services. Historically, SYA has provided a proposal to
the Company for audit services and tax compliance, advice and planning services, including the proposed fees, which was discussed by the Board of Directors and with the shareholders at the annual meeting prior to ratification of the selection of SYA
as the Companys auditors. The Company anticipates that the same procedures will be followed with the new firm of Schumacher & Associates for audit services.



16



---

##### Table of Contents

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

THANKSGIVING COFFEE COMPANY, INC.



|                              |  |                                                                    |  |              
|----------------------------- |  | ------------------------------------------------------------------ |  | -------------
|Name                          |  | Title                                                              |  | Date         
|                              |  |                                                                   
|/s/ Paul Katzeff Paul
Katzeff |  | Chief Executive Officer (Principal Executive
Officer) and Director |  | April 2, 2007
|                              |  |                                                                   
|/s/ Joan Katzeff Joan
Katzeff |  | President and Director                                             |  | April 2, 2007
|                              |  |                                                                   
|/s/ Roy Doughty Roy
Doughty   |  | Director                                                           |  | April 2, 2007
|                              |  |                                                                   
|/s/ Sam Kraynek Sam
Kraynek   |  | Chief Financial Officer (Principal Financial
Officer)              |  | April 2, 2007



17



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##### Table of Contents

Financial Statements

Thanksgiving Coffee Company, Inc.

For the Years Ended December 31, 2006 and 2005

with Reports of Independent Registered

Public Accounting Firms



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.

Audited Financial Statements

For the Years Ended December 31, 2006 and 2005

Table of Contents



|                                                          |  |  
|--------------------------------------------------------- |  | -
|Report                                                    |  |  
|                                                          | 
|Reports of Independent Registered Public Accounting Firms |  | 1
|                                                          | 
|Audited Financial Statements                              |  |  
|                                                          | 
|Balance Sheets                                            |  | 3
|Statements of Operations                                  |  | 5
|Statement of Shareholders Equity                         |  | 6
|Statements of Cash Flows                                  |  | 7
|Notes to Financial Statements                             |  | 8



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Thanksgiving Coffee Company, Inc.

We have audited the accompanying balance
sheet of Thanksgiving Coffee Company, Inc., as of December 31, 2006, and the related Statements of Operations, Shareholders Equity, and Cash Flows for the year ended December 31, 2006. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the companys internal control over financial reporting. Accordingly, we
express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion.

In our
opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Thanksgiving Coffee Company, Inc. as of December 31, 2006, and the results of its operations and cash flows for the year
ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

/s/ SCHUMACHER &
ASSOCIATES, INC.

Denver, Colorado

March 23, 2007



1



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

To The Board of Directors and Shareholders of

Thanksgiving Coffee Company,
Inc.

Fort Bragg, California

We have audited the accompanying
balance sheets of Thanksgiving Coffee Company, Inc. (a California Corporation) as of December 31, 2005 and the related statements of income, accumulated deficit and cash flows for each of the years in the two-year period ended December 31,
2005. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Thanksgiving Coffee Company, Inc. at
December 31, 2005 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

Sallmann, Yang & Alameda

/s/ SALLMANN,
YANG & ALAMEDA

An Accountancy Corporation

Pleasanton, California

February 23, 2006



2



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Balance Sheets



|                                       |  |              |            |   |      |   |            |  
|-------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                       |  | December 31, |           
|                                       |  | 2006         |            |   | 2005 |  
|Assets                                 |  |              |            |   |      |   |            |  
|Current assets                         |  |              |            |   |      |   |            |  
|Cash                                   |  | $            | 76,974     |   |      | $ | 113,385    |  
|Accounts receivable                    |  |              | 253,209    |   |      |   | 288,111    |  
|Inventories                            |  |              | 370,205    |   |      |   | 443,910    |  
|Prepaid expenses                       |  |              | 30,856     |   |      |   | 31,738     |  
|Deferred tax asset                     |  |              |           |   |      |   | 5,851      |  
|                                       |  |              |            |   |      |   |            |  
|Total current assets                   |  |              | 731,244    |   |      |   | 882,995    |  
|                                       |  |             
|Property and equipment                 |  |              |            |   |      |   |            |  
|Property and equipment                 |  |              | 2,760,812  |   |      |   | 2,734,158  |  
|Accumulated depreciation               |  |              | (2,271,747 | ) |      |   | (2,228,020 | )
|                                       |  |              |            |   |      |   |            |  
|Total property and equipment           |  |              | 489,065    |   |      |   | 506,138    |  
|                                       |  |             
|Other assets                           |  |              |            |   |      |   |            |  
|Deposits and other assets              |  |              | 18,151     |   |      |   | 59,932     |  
|Goodwill                               |  |              | 130,406    |   |      |   | 171,773    |  
|Other intangibles, net of amortization |  |              | 21,696     |   |      |   | 29,448     |  
|Deferred tax asset                     |  |              |           |   |      |   | 95,061     |  
|                                       |  |              |            |   |      |   |            |  
|Total other assets                     |  |              | 170,253    |   |      |   | 356,214    |  
|                                       |  |              |            |   |      |   |            |  
|Total assets                           |  | $            | 1,390,562  |   |      | $ | 1,745,347  |  
|                                       |  |              |            |   |      |   |            |  

See accompanying notes and auditors report



3



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Balance Sheets



|                                                                                                 |  |              |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------ |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                                                                 |  | December 31, |          
|                                                                                                 |  | 2006         |           |   | 2005 |  
|Liabilities and shareholders equity                                                             |  |              |           |   |      |   |           |  
|Current liabilities                                                                              |  |              |           |   |      |   |           |  
|Accounts payable                                                                                 |  | $            | 469,786   |   |      | $ | 432,324   |  
|Notes payable - bank                                                                             |  |              | 48,872    |   |      |   | 45,959    |  
|Notes payable - other                                                                            |  |              | 9,418     |   |      |   | 6,598     |  
|Notes payable - shareholders                                                                     |  |              | 19,919    |   |      |   | 19,919    |  
|Capital lease obligations                                                                        |  |              | 43,296    |   |      |   | 37,988    |  
|Accrued liabilities                                                                              |  |              | 73,048    |   |      |   | 87,213    |  
|                                                                                                 |  |              |           |   |      |   |           |  
|Total current liabilities                                                                        |  |              | 664,339   |   |      |   | 630,001   |  
|                                                                                                 |  |             
|Long term debt                                                                                   |  |              |           |   |      |   |           |  
|Notes payable - bank                                                                             |  |              | 278,245   |   |      |   | 308,960   |  
|Notes payable - other                                                                            |  |              | 23,401    |   |      |   | 20,704    |  
|Capital lease obligations                                                                        |  |              | 87,381    |   |      |   | 85,466    |  
|                                                                                                 |  |              |           |   |      |   |           |  
|Total long term debt                                                                             |  |              | 389,027   |   |      |   | 415,130   |  
|                                                                                                 |  |              |           |   |      |   |           |  
|Total liabilities                                                                                |  |              | 1,053,366 |   |      |   | 1,045,131 |  
|                                                                                                 |  |             
|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)                                                                            |  |              | (549,220  | ) |      |   | (186,200  | )
|                                                                                                 |  |              |           |   |      |   |           |  
|Total shareholders equity                                                                       |  |              | 337,196   |   |      |   | 700,216   |  
|                                                                                                 |  |              |           |   |      |   |           |  
|Total liabilities and shareholders' equity                                                       |  | $            | 1,390,562 |   |      | $ | 1,745,347 |  
|                                                                                                 |  |              |           |   |      |   |           |  

See accompanying notes and auditors report



4



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Statements of Operations



|                                              |  |                                  |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------- |  | -------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                              |  | For the Years Ended December 31, |          
|                                              |  | 2006                             |           |   | 2005 |   |           | 2004 | 
|Income                                        |  |                                  |           |   |      |   |           |      |  |   |           |  
|Net sales                                     |  | $                                | 4,661,138 |   |      | $ | 4,883,621 |      |  | $ | 4,891,992 |  
|Cost of sales                                 |  |                                  | 2,675,370 |   |      |   | 2,725,719 |      |  |   | 2,633,321 |  
|                                              |  |                                  |           |   |      |   |           |      |  |   |           |  
|Gross profit                                  |  |                                  | 1,985,768 |   |      |   | 2,157,902 |      |  |   | 2,258,671 |  
|Operating expenses                            |  |                                  |           |   |      |   |           |      |  |   |           |  
|Selling, general and administrative expenses  |  |                                  | 1,989,863 |   |      |   | 2,057,608 |      |  |   | 2,112,067 |  
|Depreciation and amortization                 |  |                                  | 135,555   |   |      |   | 144,640   |      |  |   | 136,552   |  
|                                              |  |                                  |           |   |      |   |           |      |  |   |           |  
|Total operating expenses                      |  |                                  | 2,125,418 |   |      |   | 2,202,248 |      |  |   | 2,248,619 |  
|                                              |  |                                  |           |   |      |   |           |      |  |   |           |  
|Operating income (loss)                       |  |                                  | (139,650  | ) |      |   | (44,346   | )    |  |   | 10,052    |  
|Other income (expense)                        |  |                                  |           |   |      |   |           |      |  |   |           |  
|Goodwill impairment                           |  |                                  | (41,367   | ) |      |   |          |      |  |   |          |  
|Asset impairment                              |  |                                  | (25,800   | ) |      |   |          |      |  |   |          |  
|Miscellaneous income (expense)                |  |                                  | (2,422    | ) |      |   | 3,915     |      |  |   | 1,461     |  
|Gain on sale of equipment                     |  |                                  | 1,399     |   |      |   | 11,814    |      |  |   | 93        |  
|Interest expense                              |  |                                  | (53,468   | ) |      |   | (51,444   | )    |  |   | (37,396   | )
|                                              |  |                                  |           |   |      |   |           |      |  |   |           |  
|Total other income (expense)                  |  |                                  | (121,658  | ) |      |   | (35,715   | )    |  |   | (35,842   | )
|                                              |  |                                  |           |   |      |   |           |      |  |   |           |  
|Loss before income taxes                      |  |                                  | (261,308  | ) |      |   | (80,061   | )    |  |   | (25,790   | )
|Income tax (expense) benefit                  |  |                                  | (101,712  | ) |      |   | 18,012    |      |  |   | (2,300    | )
|                                              |  |                                  |           |   |      |   |           |      |  |   |           |  
|Net loss                                      |  | $                                | (363,020  | ) |      | $ | (62,049   | )    |  | $ | (28,090   | )
|                                              |  |                                  |           |   |      |   |           |      |  |   |           |  
|Loss per share (basic)                        |  | $                                | (0.29     | ) |      | $ | (0.05     | )    |  | $ | (0.02     | )
|                                              |  |                                  |           |   |      |   |           |      |  |   |           |  
|Loss per share (dilutive)                     |  | $                                | (0.29     | ) |      | $ | (0.05     | )    |  | $ | (0.02     | )
|                                              |  |                                  |           |   |      |   |           |      |  |   |           |  
|Weighted average number of shares outstanding |  |                                  | 1,236,744 |   |      |   | 1,236,744 |      |  |   | 1,236,744 |  

See accompanying notes and auditors report



5



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Statement of Shareholders Equity

For the Period from January 1, 2005 through December 31, 2006



|                             |  |              |  |                          |         |                      |   |        |       |   |          |   |  |   |          |  
|---------------------------- |  | ------------ |  | ------------------------ | ------- | -------------------- | - | ------ | ----- | - | -------- | - |  | - | -------- | -
|                             |  | Common Stock |  | Additionalpaid-incapital |         | Accumulated(Deficit) |   |        | Total |  
|                             |  | Shares       |  | Amount                   |         |                      |  
|Balance at December 31, 2004 |  | 1,236,744    |  | $                        | 861,816 |                      | $ | 24,600 |       | $ | (124,151 | ) |  | $ | 762,265  |  
|Net loss                     |  |             |  |                          |        |                      |   |       |       |   | (62,049  | ) |  |   | (62,049  | )
|                             |  |              |  |                          |         |                      |   |        |       |   |          |   |  |   |          |  
|Balance at December 31, 2005 |  | 1,236,744    |  |                          | 861,816 |                      |   | 24,600 |       |   | (186,200 | ) |  |   | 700,216  |  
|Net loss                     |  |             |  |                          |        |                      |   |       |       |   | (363,020 | ) |  |   | (363,020 | )
|                             |  |              |  |                          |         |                      |   |        |       |   |          |   |  |   |          |  
|Balance at December 31, 2006 |  | 1,236,744    |  | $                        | 861,816 |                      | $ | 24,600 |       | $ | (549,220 | ) |  | $ | 337,196  |  
|                             |  |              |  |                          |         |                      |   |        |       |   |          |   |  |   |          |  

See accompanying notes and auditors report



6



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Statements of Cash Flows



|                                                                           |  |                                  |          |   |      |   |         |      |  |   |          |  
|-------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                           |  | For the Years ended December 31, |         
|                                                                           |  | 2006                             |          |   | 2005 |   |         | 2004 | 
|Operating activities                                                       |  |                                  |          |   |      |   |         |      |  |   |          |  
|Net loss                                                                   |  | $                                | (363,020 | ) |      | $ | (62,049 | )    |  | $ | (28,090  | )
|Adjustments to reconcile net loss to cash flows from operating activities: |  |                                  |          |   |      |   |         |      |  |   |          |  
|Depreciation and amortization                                              |  |                                  | 152,689  |   |      |   | 164,608 |      |  |   | 157,931  |  
|Impairment                                                                 |  |                                  | 67,167   |   |      |   |         |      |  |   |          |  
|Allowance for bad debts                                                    |  |                                  | (623     | ) |      |   |        |      |  |   | (13,974  | )
|Gain on sale of equipment                                                  |  |                                  |         |   |      |   | (11,814 | )    |  |   | (93      | )
|Deferred income tax expense (benefit)                                      |  |                                  | 100,912  |   |      |   | (18,812 | )    |  |   | 1,500    |  
|(Increase) decrease in:                                                    |  |                                  |          |   |      |   |         |      |  |   |          |  
|Accounts receivable                                                        |  |                                  | 35,525   |   |      |   | (10,257 | )    |  |   | 79,173   |  
|Inventories                                                                |  |                                  | 73,705   |   |      |   | 8,627   |      |  |   | (42,839  | )
|Prepaid expenses                                                           |  |                                  | 882      |   |      |   | 8,813   |      |  |   | 152      |  
|Deposits and other assets                                                  |  |                                  | 5,907    |   |      |   | 249     |      |  |   | (5,706   | )
|Increase (decrease) in:                                                    |  |                                  |          |   |      |   |         |      |  |   |          |  
|Accounts payable                                                           |  |                                  | 37,462   |   |      |   | 10,329  |      |  |   | 75,730   |  
|Accrued liabilities                                                        |  |                                  | (14,165  | ) |      |   | 17,465  |      |  |   | 8,350    |  
|                                                                           |  |                                  |          |   |      |   |         |      |  |   |          |  
|Net cash provided by operating activities                                  |  |                                  | 96,441   |   |      |   | 107,159 |      |  |   | 232,134  |  
|Investing activities                                                       |  |                                  |          |   |      |   |         |      |  |   |          |  
|Purchases of property and equipment                                        |  |                                  | (127,864 | ) |      |   | (44,720 | )    |  |   | (235,390 | )
|Payments of notes receivable                                               |  |                                  | 10,074   |   |      |   |         |      |  |   |          |  
|Proceeds from sale of equipment                                            |  |                                  |         |   |      |   | 6,076   |      |  |   |         |  
|                                                                           |  |                                  |          |   |      |   |         |      |  |   |          |  
|Net cash (used in) investing activities                                    |  |                                  | (117,790 | ) |      |   | (38,644 | )    |  |   | (235,390 | )
|Financing activities                                                       |  |                                  |          |   |      |   |         |      |  |   |          |  
|Proceeds from notes payable and capital leases                             |  |                                  | 96,038   |   |      |   | 21,000  |      |  |   | 533,497  |  
|Repayments of notes payable and capital leases                             |  |                                  | (111,100 | ) |      |   | (87,686 | )    |  |   | (459,148 | )
|                                                                           |  |                                  |          |   |      |   |         |      |  |   |          |  
|Net cash provided by (used in) financing activities                        |  |                                  | (15,062  | ) |      |   | (66,686 | )    |  |   | 74,349   |  
|Net increase (decrease) in cash                                            |  |                                  | (36,411  | ) |      |   | 1,829   |      |  |   | 71,093   |  
|Cash at beginning of year                                                  |  |                                  | 113,385  |   |      |   | 111,556 |      |  |   | 40,463   |  
|                                                                           |  |                                  |          |   |      |   |         |      |  |   |          |  
|Cash at end of year                                                        |  | $                                | 76,974   |   |      | $ | 113,385 |      |  | $ | 111,556  |  
|                                                                           |  |                                  |          |   |      |   |         |      |  |   |          |  
|Supplemental Cash Flow Information:                                        |  |                                  |          |   |      |   |         |      |  |   |          |  
|Cash paid for interest:                                                    |  | $                                | 53,468   |   |      | $ | 51,444  |      |  | $ | 37,326   |  
|Cash paid for income taxes:                                                |  | $                                | 800      |   |      | $ | 800     |      |  | $ | 800      |  

See accompanying notes and auditors report



7



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements

December 31, 2006 and 2005

1. Summary of
Significant Accounting Policies

This summary of significant accounting policies of the Company is presented to assist in understanding the
Companys financial statements. The financial statements and notes are representations of the Companys management who are responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting
principles in the United States of America and have been consistently applied in the preparation of the financial statements.

Nature of Operations

Thanksgiving Coffee Company, Inc. (the Company), was incorporated in California in 1985. The Company purchases and roasts whole bean coffees and sells
them to restaurants, grocery stores and other retail outlets. Additionally, the Company produces and sells a line of 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. Sales volume for the coffee division was approximately $4,100,000 for the year ended December 31, 2006. Additionally, the Company operates a sandwich and baked goods store in
Mendocino, California with sales volume of approximately $600,000 for the year ended December 31, 2006.

Basis of Presentation

The Company has prepared the financial statements in accordance with generally accepted accounting principles in the United States of America.

Certain amounts for prior years have been reclassified to conform with the 2006 presentation.

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. In fiscal 2006, one customer accounted for 12.5% of the
Companys revenue. The account has purchased from the Company since 1992. The account has serving locations and is a distributor of the Companys product. A loss of this account or any other large account, or a significant reduction in
sales to any of the Companys principal customers, could have an adverse impact on the Company.

Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of cash and cash equivalents. At December 31, 2006, the Company had no cash or cash equivalents in excess of amounts insured by agencies of the U.S. Government.

Cash and Cash Equivalents

Cash equivalents include highly liquid
instruments with original maturities of 90 days or less. Due to the short maturity of these instruments, the carrying value on our consolidated balance sheet approximates fair value.

Inventories

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

Property and Equipment

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



8



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)

Property and Equipment (continued)



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

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

The Company 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.

Loss per
Share

The Company computes net loss per common share using SFAS No. 128 Earnings Per Share. Basic loss per common share is
computed based on the weighted average number of shares outstanding for the period. Diluted loss per share is computed by dividing net loss by the weighted average shares outstanding assuming all dilutive potential common shares were issued. There
were no dilutive potential common shares at December 31, 2006. The Company has incurred a net loss and has no potentially dilutive common shares; therefore, basic and diluted loss per share is the same. Additionally, for the purposes
of calculating diluted loss per share, there were no adjustments to net loss.

Stock Based Compensation

Effective January 1, 2006, the Company adopted FAS No. 123(R), Share-Based Payments, and the related SEC rules included in Staff Accounting Bulletin
No. 107. Under this method, compensation cost is recognized for costs related to 1) all share-based payments (stock options and restricted stock awards) granted before but not yet vested as of January 1, 2006 based on the grant-date
fair value estimated under the original provisions of FAS No. 123, Accounting for Stock-Based Compensation, and 2) all share-based payments (stock options and restricted stock units) granted after December 31, 2005 based on the
grant-date fair value estimated under the provisions of FAS No. 123(R). During the years ended December 31, 2006 and 2005, no options were granted. At December 31, 2006, there were no outstanding stock options and the Company has no
plans to offer stock based compensation to its employees or others.



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements

In July 2006, the Financial
Accounting Standards Board (FASB) issued Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, which is effective January 1, 2007. The purpose of FIN 48 is to clarify and set forth consistent rules for accounting for
uncertain income tax positions in accordance with FAS 109, Accounting for Income Taxes. The cumulative effect of applying the provisions of this interpretation, which is required to be reported separately as an adjustment to our opening
balance of retained earnings in 2007, is currently not expected to have a material impact on our results of operation, financial position or cash flows.

There were various other accounting standards and interpretations issued during 2006 and 2005, none of which are expected to have a material impact on the Companys financial position, operations or cash flows.

Fair Value of Financial Instruments

Fair value estimates discussed
herein are based upon certain market assumptions and pertinent information available to management. The Companys financial instruments include cash, accounts receivable, accounts payable, accrued expenses, other current liabilities and
long-term debt. Except for long-term debt, the carrying value of financial instruments approximated fair value due to their short maturities.

The carrying
value of long-term debt approximated fair value because stated interest rates on these instruments are similar to quoted rates for instruments with similar risks.

Segment Reporting

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, changed the
way public companies report information about segments of their business in their financial statements. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and
reports revenues and its major customers. See Note 12.



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)

Goodwill and Other Intangible Assets

As of January 1, 2002, the
Company adopted the provisions of Statement of Financial Accounting Standards (FASB) No. 142, Goodwill and Other Intangibles. Goodwill is assigned to a specific reporting unit and is reviewed for possible impairment at least annually or
more frequently upon the occurrence of an event or when circumstances indicate that the reporting units carrying amount is greater than its fair value. Intangible assets with definite lives are amortized over their useful economic lives.
Financial condition and results of operations in accordance with FASB Statement No. 142 are reflected in the accompanying 2006 and 2005 financial statements.

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



|                |  |              
|--------------- |  | -------------
|                |  | Life in Years
|Leasehold value |  | 14           
|Trademark       |  | 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.

A
valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

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.



11



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)

Compensated Absences

Employees of the Company are entitled to paid
vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. The Companys policy is that fully vested vacation is accrued at each quarter end. The accrued liability for vacation pay was
$14,550 and $16,000 as of December 31, 2006 and 2005, and such amount is included in accrued liabilities. Carryover paid sick days are not available, or ever considered vested.

Advertising

Advertising costs are expensed as incurred, except for direct-response advertising, which is capitalized
and amortized over its expected period of future benefits. Direct-response advertising consists primarily of mail order solicitation and catalog costs. For the twelve months ended December 31, 2006 and 2005, the Company did not engage in any
direct response advertising that would require capitalization. Advertising costs charged to expense were $14,486, $20,659 and $26,879 for the twelve months ended December 31, 2006, 2005 and 2004.

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, Revenue Recognition in Financial Statements, in 2002, retroactive to November 1, 2000. No restatement of the financials was
necessary since the financial statements 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.



12



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



2. Accounts Receivable

Accounts receivable consist of the following:



|                                      |  |      |         |   |      |   |         |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                      |  | 2006 |         |   | 2005 |  
|Accounts receivable                   |  | $    | 261,130 |   |      | $ | 296,655 |  
|Less: allowance for doubtful accounts |  |      | (7,921  | ) |      |   | (8,544  | )
|                                      |  |      |         |   |      |   |         |  
|Net accounts receivable               |  | $    | 253,209 |   |      | $ | 288,111 |  
|                                      |  |      |         |   |      |   |         |  

The Company utilizes a percentage method to establish the allowance for doubtful accounts. The estimated allowance
ranges from 1% to 10% of outstanding receivables based on factors pertaining to the credit risk of specific customers, historical trends and other information. Delinquent accounts are written off when it is determined that amounts are uncollectible.
Bad debt expense (recovery) for the twelve months ended December 31, 2006, 2005 and 2004 was $3,297, $1,408 and ($2,773), respectively.

3.
Inventories

Inventories consist of the following:



|                                                        |  |      |         |      |   |        
|------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                        |  | 2006 |         | 2005
|Coffee                                                  |  |      |         |      |   |        
|Unroasted                                               |  | $    | 98,260  |      | $ | 122,191
|Roasted                                                 |  |      | 81,755  |      |   | 101,309
|Tea                                                     |  |      | 5,296   |      |   | 14,680 
|Packaging, supplies and other merchandise held for sale |  |      | 184,894 |      |   | 205,730
|                                                        |  |      |         |      |   |        
|Total inventories                                       |  | $    | 370,205 |      | $ | 443,910
|                                                        |  |      |         |      |   |        



13



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



4. Property and Equipment

Property and equipment consist of the following:



|                                      |  |      |            |   |      |   |            |  
|------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                      |  | 2006 |            |   | 2005 |  
|Equipment                             |  | $    | 1,392,820  |   |      | $ | 1,478,386  |  
|Furniture and fixtures                |  |      | 263,113    |   |      | $ | 260,214    |  
|Leasehold improvements                |  |      | 461,830    |   |      | $ | 424,553    |  
|Transportation equipment              |  |      | 169,795    |   |      | $ | 150,060    |  
|Marketing equipment                   |  |      | 166,162    |   |      | $ | 166,162    |  
|Capitalized website development costs |  |      | 14,076     |   |      | $ | 14,077     |  
|Property held under capital leases    |  |      | 293,016    |   |      |   | 240,706    |  
|                                      |  |      |            |   |      |   |            |  
|Total property and equipment          |  |      | 2,760,812  |   |      |   | 2,734,158  |  
|Accumulated depreciation              |  |      | (2,271,747 | ) |      |   | (2,228,020 | )
|                                      |  |      |            |   |      |   |            |  
|Property and equipment, net           |  | $    | 489,065    |   |      | $ | 506,138    |  
|                                      |  |      |            |   |      |   |            |  

Depreciation expense for the twelve months ended December 31, 2006, 2005 and 2004 was $145,339 $157,864 and
$155,835 respectively.

5. Goodwill and Other Intangible Assets

As part of the adoption of Statement of Financial Accounting Standards (FASB) No. 142, Goodwill and Other Tangible Assetsas of January 1, 2002, the Company no longer amortizes goodwill. At December 31, 2006 the
Company performed a test of impairment on goodwill that resulted in a write down of approximately $41,000 in the value as of December 31, 2006, and is included in goodwill impairment on the Statement of Operations for the year ended
December 31, 2006.

Intangible assets subject to amortization consist of the following:



|                                       |  |      |         |   |      |   |         |  
|-------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                       |  | 2006 |         |   | 2005 |  
|Leasehold value                        |  | $    | 67,000  |   |      | $ | 67,000  |  
|Trademarks                             |  |      | 5,127   |   |      |   | 5,127   |  
|                                       |  |      |         |   |      |   |         |  
|Total intangible assets                |  |      | 72,127  |   |      |   | 72,127  |  
|Accumulated amortization               |  |      | (50,431 | ) |      |   | (42,679 | )
|                                       |  |      |         |   |      |   |         |  
|Other intangibles, net of amortization |  | $    | 21,696  |   |      | $ | 29,448  |  
|                                       |  |      |         |   |      |   |         |  

Amortization expense for the twelve months ended December 31, 2006, 2005 and 2004 was $7350, $6,744 and
$2,095 respectively.



14



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



6. Deposits and Other Assets

Included in Other Assets is artwork that was developed for the labels for the tea program. It was recorded at its original cost of $27,800. At December 31, 2006, the Company performed a test of impairment that
has resulted in a write down of nearly $26,000 in the value of the artwork and is included in the Statement of Operations as asset impairment as of December 31, 2006.



15



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



7. Long Term Debt



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |      |         |      |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 2006 |         | 2005
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |     
|Notes Payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |      |         |      |   |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |     
|Note payable to Savings Bank of Mendocino, payable in monthly installments of $4,307 plus interest at 3% over prime rate beginning
January 1, 2006 (11% at December 31, 2006), final payment is due on December 1, 2009. The note payable is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general
intangibles and contract rights along with a personal guarantee from the Companys majority shareholders.              |  | $    | 307,117 |      | $ | 333,919
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |     
|Line of credit to Savings Bank of Mendocino, payable in monthly installments of interest only at 3% over prime rate beginning January 1,
2006 (11% at December 31, 2006). The note payable for the line of credit is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangible and contract rights along with
a personal guarantee from the Companys majority shareholders. The line is for a maximum of $25,000. |  |      | 20,000  |      |   | 21,000 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |     
|Note payable to majority shareholders, Paul and Joan Katzeff, uncollateralized, payable in monthly installments of interest only at 12%, with
balance due on demand after June 30, 1996.                                                                                                                                                                                                                                                                                                           |  |      | 19,919  |      |   | 19,919 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |     
|Note payable to Mercedes-Benz, payable in monthly installments of $691, including interest at 6.99%, collateralized by a vehicle, final
payment due on September 24, 2009.                                                                                                                                                                                                                                                                                                                         |  |      | 20,705  |      |   | 27,302 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |     
|Note payable to Chrysler Financing, payable in monthly installments of $329, including interest at 15.492%, collateralized by a vehicle, final
payment due on January 24, 2011                                                                                                                                                                                                                                                                                                                     |  |      | 12,114  |      |   | 0      



16



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



7. Long Term Debt (continued)



|                                                                                                                                                                                                |  |        |  |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ |  | ------
|                                                                                                                                                                                                |  | 2006   |  | 2005  
|                                                                                                                                                                                                |  |       
|Capital Lease Obligations                                                                                                                                                                       |  |        |  |       
|                                                                                                                                                                                                |  |       
|Note payable to Manifest Leasing, payable in monthly installments of $444, including interest at 12.203%, collateralized by equipment, final
payment due on March 1, 2007.                      |  | 1,040  |  | 5,918 
|                                                                                                                                                                                                |  |       
|Note payable to G.E. Capital, payable in monthly installments of $1,355, including interest at 16.78%, collateralized by equipment, final
payment due on March 1, 2009.                         |  | 30,286 |  | 40,504
|                                                                                                                                                                                                |  |       
|Note payable to Avaya Financial Services, payable in monthly installments of $824, including interest at 12.00%, collateralized by equipment,
final payment due on August 1, 2009.              |  | 24,365 |  | 32,567
|                                                                                                                                                                                                |  |       
|Note payable to Axis Capital, payable in monthly installments of $709, including interest at 15.473%, collateralized by store fixtures, final
payment due September 14, 2009.                   |  | 18,499 |  | 23,701
|                                                                                                                                                                                                |  |       
|Note payable to US Bancorp Manifest Funding Services payable in monthly installments of $533, including interest at 22.239%, collateralized by
equipment, final payment due on January 1, 2010. |  | 11,277 |  | 14,926
|                                                                                                                                                                                                |  |       
|Note payable to US Bancorp Manifest Funding Services payable in monthly installments of $522, including interest at 17.172%, collateralized by
equipment, final payment due on June 1, 2010.    |  | 16,956 |  | 0     
|                                                                                                                                                                                                |  |       
|Note payable to Marlin Leasing payable in monthly installments of $428, including interest at 18.00%, collateralized by equipment, final
payment due on October 1, 2010.                        |  | 13,666 |  | 0     
|                                                                                                                                                                                                |  |       
|Note payable to National Financial Services, payable in monthly installments of $1,414, including interest at 10.512%, collateralized by
equipment, final payment due on May 10, 2006.          |  |       |  | 5,838 



17



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



7. Long Term Debt (continued)



|                                                                                                                                                                                               |  |      |          |   |      |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                               |  | 2006 |          |   | 2005 |  
|Capital Lease Obligations                                                                                                                                                                      |  |      |          |   |      |   |          |  
|                                                                                                                                                                                               |  |     
|Note payable to US Bancorp Manifest Funding Services payable in monthly installments of $533, including interest at 22.24%, collateralized by
equipment, final payment due on January 10, 2010 |  | $    | 14,590   |   |      | $ |         |  
|                                                                                                                                                                                               |  |      |          |   |      |   |          |  
|                                                                                                                                                                                               |  |     
|                                                                                                                                                                                               |  |      | 510,532  |   |      |   | 525,594  |  
|                                                                                                                                                                                               |  |     
|Less current portion                                                                                                                                                                           |  |      | (121,505 | ) |      |   | (110,464 | )
|                                                                                                                                                                                               |  |      |          |   |      |   |          |  
|                                                                                                                                                                                               |  |     
|Long term portion of notes payable                                                                                                                                                             |  | $    | 389,027  |   |      | $ | 415,130  |  
|                                                                                                                                                                                               |  |      |          |   |      |   |          |  

Interest paid for the twelve months ended December 31, 2006, 2005 and 2004 was $53,468, $51,444 and $37,326,
respectively.

As of December 31, 2006, 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, |  |  
|2007                      |  | $ | 121,505
|2008                      |  |   | 90,161 
|2009                      |  |   | 290,296
|2010                      |  |   | 8,245  
|2011                      |  |   | 325    
|Thereafter                |  |   |       
|                          |  |   |        
|                          |  | $ | 510,532
|                          |  |   |        

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



18



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



8. Income Taxes

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



|                                       |  |      |          |   |      |   |        |      |  |   |        |  
|-------------------------------------- |  | ---- | -------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                       |  | 2006 |          |   | 2005 |   |        | 2004 | 
|Current tax (expense) - state          |  | $    | (800     | ) |      | $ | (800   | )    |  | $ | (800   | )
|                                       |  |      |          |   |      |   |        |      |  |   |        |  
|                                       |  |      |         
|Deferred tax (expense) benefit         |  |      |          |   |      |   |        |      |  |   |        |  
|Federal                                |  |      | 23,769   |   |      |   | 24,995 |      |  |   | (4,170 | )
|State                                  |  |      | 44,614   |   |      |   | (6,183 | )    |  |   | 2,670  |  
|                                       |  |      |          |   |      |   |        |      |  |   |        |  
|                                       |  |      |         
|Total deferred tax benefit             |  |      | 68,383   |   |      |   | 18,812 |      |  |   | (1,500 | )
|                                       |  |      |          |   |      |   |        |      |  |   |        |  
|                                       |  |      |         
|Less valuation allowance               |  |      | (169,295 | ) |      |   |        |      |  |   |        |  
|                                       |  |      |          |   |      |   |        |      |  |   |        |  
|                                       |  |      |         
|Net benefit (expense) for income taxes |  | $    | (101,712 | ) |      | $ | 18,012 |      |  | $ | (2,300 | )
|                                       |  |      |          |   |      |   |        |      |  |   |        |  

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



|                                            |  |      |   |  |       |   |  |       |  
|------------------------------------------- |  | ---- | - |  | ----- | - |  | ----- | -
|                                            |  | 2006 |   |  | 2005  |   |  | 2004  |  
|Statutory income tax (expense) benefit rate |  | 15.0 | % |  | -15.0 | % |  | 15.0  | %
|Property and equipment differences          |  | -7.8 | % |  | -7.3  | % |  | 3.8   | %
|Nondeductible expense                       |  | 0.0  | % |  | -2.6  | % |  | 1.3   | %
|Officers life insurance                    |  | -1.4 | % |  | 3.8   | % |  | -11.7 | %
|Net operating loss                          |  | 28.0 | % |  | 0.0   | % |  | 8.9   | %
|Net operating loss valuation adjustment     |  | 7.8  | % |  | -3.5  | % |  | -7.0  | %
|Other                                       |  | -2.7 | % |  | 2.1   | % |  | -1.4  | %
|                                            |  |      |   |  |       |   |  |       |  
|                                            |  |      |  
|Effective income tax benefit rate           |  | 38.9 | % |  | -22.5 | % |  | 8.9   | %
|                                            |  |      |   |  |       |   |  |       |  

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



|                                                |  |      |          |   |      |   |         |  
|----------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | -
|                                                |  | 2006 |          |   | 2005 |  
|Net operating loss and tax credit carryforwards |  | $    | 194,938  |   |      | $ | 112,260 |  
|Depreciation and amortization                   |  |      | (47,673  | ) |      |   | (19,909 | )
|Other                                           |  |      | 22,030   |   |      |   | 8,561   |  
|Less valuation allowance                        |  |      | (169,295 | ) |      |   |        |  
|                                                |  |      |          |   |      |   |         |  
|                                                |  |     
|Net deferred tax asset                          |  | $    |         |   |      | $ | 100,912 |  
|                                                |  |      |          |   |      |   |         |  

At December 31, 2006, deferred taxes consisted of a net tax asset of $169,295, due to operating loss
carryforwards and other temporary differences, which was fully allowed for in the valuation allowance of $169,295. The valuation allowance offsets the net deferred tax asset for which there is no assurance of recovery. The change in the valuation
allowance for the year ended December 31, 2006 totaled $169,295.



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



The valuation allowance will be evaluated at the end of each year, considering positive and negative evidence about
whether the asset will be realized. At that time, the allowance will either be increased or reduced.

Should the Company undergo an ownership change as
defined in Section 382 of the Internal Revenue Code, the Companys tax net operating loss carryforwards generated prior to the ownership change will be subject to an annual limitation, which could reduce or defer the utilization of these
losses.

Income taxes paid for the years ended December 31, 2006, 2005, and 2004 were $800 respectively.



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



9. Operating Leases

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

As of December 31, 2006, minimum annual lease payments due under these agreements for each of the next five years and in the aggregate were:



|                          |  |   |       
|------------------------- |  | - | ------
|Years Ending December 31, |  |  
|2007                      |  |   | 21,373
|2008                      |  |   | 9,853 
|2009                      |  |   | 5,454 
|2010                      |  |   | 1,979 
|                          |  |   |      
|                          |  |   |       
|                          |  | $ | 38,659
|                          |  |   |       

Total operating lease payments for the twelve months ended December 31, 2006, 2005, and 2004 were $40,647,
$51,486 and $53,178 respectively.

10. Long Term Leases

The Company leases its corporate headquarters, warehouse and waterfront facilities from Paul and Joan Katzeff (the Companys majority shareholders). The lease is classified as an operating lease and provides for monthly rental payments
of $8,600. The Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The ten-year lease term ends May 31, 2015. Rental expense under the lease was $103,200 for the twelve months ended
December 31, 2006.

The Company also leases a bakery establishment in Mendocino, California and warehouse premises in Santa Rosa, California under
operating leases expiring September 30, 2011 and January 31, 2007, respectively. The Company did not renew the lease for the Santa Rosa facility when it expired in January of 2007. Rental expense under these operating leases was $57,907
for the twelve months ended December 31, 2006.



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



10. Long Term Leases (continued)

As of December 31, 2006, minimum future rental payments under noncancelable facilities operating leases for each of the next five years and in the aggregate are as follows:



|                          |  |   |          
|------------------------- |  | - | ---------
|Years Ending December 31, |  |  
|2007                      |  | $ | 152,988  
|2008                      |  |   | 154,470  
|2009                      |  |   | 157,020  
|2010                      |  |   | 159,690  
|2011                      |  |   | 147,120  
|Thereafter                |  |   | 412,800  
|                          |  |   |          
|                          |  | $ | 1,184,088
|                          |  |   |          

11. Related Party Transactions

As of December 31, 2006, the Company has an 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.

The summary of payments made to Paul and Joan Katzeff in connection with these related party transactions for the twelve months
ended December 31, 2006, is as follows:



|                   |  |   |       
|------------------ |  | - | ------
|Interest expense   |  | $ | 3,655 
|Rent expense       |  | $ | 51,600
|Principal payments |  | $ | 29,067

The Companys majority shareholders also guarantee certain notes payable of the Company (See
Note 7).

An entity, of which a director of the Company is a principal, was party to a one-year consulting agreement that commenced January , 2006 for
the provision of specific business functions to the Company, including a provision of shareholder relation services for $18,000 per year. The entity also received an additional $8,250 during fiscal 2004 for similar services provided outside the
agreement. The Company has not renewed the contract with this entity for the 2007 year.

12. Information on Business Segments

As noted in Note 1 in the Notes to the financial statements, the Company operates in two different business segments: the specialty coffee business and the retail bakery
business. The specialty coffee



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)



business, although primarily based in California, sells to grocery stores, serving locations and other retail outlets throughout the United States and some
international business. The bakery sells exclusively on the north coast of California in Mendocino and Fort Bragg.

Selected financial data by business
segment



|                              |  |      |           |   |      |   |           |      |  |   |           |  
|----------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                              |  | 2006 |           |   | 2005 |   |           | 2004 | 
|Net Sales                     |  |      |           |   |      |   |           |      |  |   |           |  
|Specialty Coffee              |  | $    | 4,115,156 |   |      | $ | 4,176,717 |      |  | $ | 4,203,682 |  
|Bakery                        |  |      | 594,834   |   |      |   | 760,579   |      |  |   | 729,924   |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Total                         |  | $    | 4,709,990 |   |      | $ | 4,937,296 |      |  | $ | 4,933,606 |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Intersegment Sales            |  |      |           |   |      |   |           |      |  |   |           |  
|Specialty Coffee              |  | $    | 48,852    |   |      | $ | 53,675    |      |  | $ | 41,614    |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Total Sales                   |  | $    | 4,661,138 |   |      | $ | 4,883,621 |      |  | $ | 4,891,992 |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Operating Profit (loss)       |  |      |           |   |      |   |           |      |  |   |           |  
|Specialty Coffee              |  | $    | (96,808   | ) |      | $ | (74,509   | )    |  | $ | (2,880    | )
|Bakery                        |  |      | (42,842   | ) |      |   | 30,163    |      |  |   | 12,932    |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Total                         |  | $    | (139,650  | ) |      | $ | (44,346   | )    |  | $ | 10,052    |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Depreciation and Amortization |  |      |           |   |      |   |           |      |  |   |           |  
|Specialty Coffee              |  | $    | 117,893   |   |      | $ | 132,075   |      |  | $ | 130,956   |  
|Bakery                        |  |      | 17,662    |   |      |   | 12,565    |      |  |   | 5,596     |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Total                         |  | $    | 135,555   |   |      | $ | 144,640   |      |  | $ | 136,552   |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Interest Expense              |  |      |           |   |      |   |           |      |  |   |           |  
|Specialty Coffee              |  | $    | 52,444    |   |      | $ | 51,444    |      |  | $ | 37,396    |  
|Bakery                        |  |      | 1,024     |   |      |   | 0         |      |  | $ | 70        |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Total                         |  | $    | 53,468    |   |      | $ | 51,444    |      |  | $ | 37,396    |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Assets                        |  |      |           |   |      |   |           |      |  |   |           |  
|Specialty Coffee              |  | $    | 1,138,160 |   |      | $ | 1,471,394 |      |  | $ | 1,557,542 |  
|Bakery                        |  |      | 252,402   |   |      |   | 273,953   |      |  |   | 288,746   |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Total                         |  | $    | 1,390,562 |   |      | $ | 1,745,347 |      |  | $ | 1,846,288 |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Fixed Assets (000s omitted)  |  |      |           |   |      |   |           |      |  |   |           |  
|Specialty Coffee              |  | $    | 417,657   |   |      | $ | 460,272   |      |  | $ | 565,272   |  
|Bakery                        |  |      | 71,408    |   |      |   | 45,866    |      |  |   | 48,273    |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|Total                         |  | $    | 489,065   |   |      | $ | 506,138   |      |  | $ | 613,545   |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  



23