##### Table of Contents

---

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB



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

For the quarterly period ended September 30, 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

THANKSGIVING COFFEE COMPANY, INC.

(Exact name of small business issuer as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|California                                                    |  | 94-2823626                         
|(State or other jurisdiction ofincorporation or organization) |  | (IRS EmployerIdentification Number)

19100 South Harbor Drive

Fort Bragg, California 95437

(Address of principal executive offices)

(Zip Code)

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

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No ̈

As of November 9, 2006, there were 1,236,744 shares outstanding of common stock
of the issuer.

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

Transitional Small Business Disclosure Format (check one):

YES ̈No  x



---



---

##### Table of Contents

THANKSGIVING COFFEE COMPANY, INC.

INDEX

PART I. FINANCIAL INFORMATION



|                                                                                         |  |                                                                                       |  |   
|---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|Item 1.                                                                                  |  | Financial Statements and Notes to Financial Statements                                |  |   
|                                                                                         | 
|Balance Sheets as of September 30, 2006 and 2005                                         |  | 12                                                                                  
|                                                                                         | 
|Statements of Income for the Three and Nine Months Ended September 30, 2006 and 2005     |  | 3                                                                                    
|                                                                                         | 
|Statements of Accumulated Deficits for the Nine Months Ended September 30, 2006 and 2005 |  | 4                                                                                    
|                                                                                         | 
|Statements of Cash Flows for the Three and Nine Months Ended September 30, 2006 and 2005 |  | 5                                                                                    
|                                                                                         | 
|Notes to Financial Statements                                                            |  | 6-17                                                                                 
|                                                                                         |  |                                                                                      
|Item 2.                                                                                  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18
|                                                                                         |  |                                                                                      
|Item 3.                                                                                  |  | Controls and Procedures                                                               |  | 25
|                                                                                        
|PART II. OTHER INFORMATION                                                              
|                                                                                         |  |                                                                                      
|Item 1.                                                                                  |  | Legal Proceedings                                                                     |  | 26
|                                                                                         |  |                                                                                      
|Item 2.                                                                                  |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 26
|                                                                                         |  |                                                                                      
|Item 3.                                                                                  |  | Defaults Upon Senior Securities                                                       |  | 26
|                                                                                         |  |                                                                                      
|Item 4.                                                                                  |  | Submission of Matters to a Vote of Security Holders                                   |  | 26
|                                                                                         |  |                                                                                      
|Item 5.                                                                                  |  | Other Information                                                                     |  | 26
|                                                                                         |  |                                                                                      
|Item 6.                                                                                  |  | Exhibits                                                                              |  | 27



---

##### Table of Contents

Financial Statements

and Other Financial Information

Thanksgiving Coffee Company, Inc.

For the Three and Nine Months Ended September 30, 2006 and 2005



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.

Balance Sheets

Unaudited



|                                       |  |               |            |   |      |   |            |  
|-------------------------------------- |  | ------------- | ---------- | - | ---- | - | ---------- | -
|                                       |  | September 30, |           
|                                       |  | 2006          |            |   | 2005 |  
|Assets                                 |  |               |            |   |      |   |            |  
|Current assets                         |  |               |            |   |      |   |            |  
|Cash                                   |  | $             | 18,175     |   |      | $ | 27,456     |  
|Accounts receivable, net of allowance  |  |               | 238,399    |   |      |   | 278,720    |  
|Inventories                            |  |               | 360,359    |   |      |   | 423,995    |  
|Prepaid expenses                       |  |               | 31,304     |   |      |   | 31,582     |  
|Deferred tax asset                     |  |               | 5,851      |   |      |   | 3,400      |  
|                                       |  |               |            |   |      |   |            |  
|Total current assets                   |  |               | 654,088    |   |      |   | 765,153    |  
|Property and equipment                 |  |               |            |   |      |   |            |  
|Property and equipment                 |  |               | 2,800,323  |   |      |   | 2,744,870  |  
|Accumulated depreciation               |  |               | (2,301,166 | ) |      |   | (2,209,023 | )
|                                       |  |               |            |   |      |   |            |  
|Total property and equipment           |  |               | 499,157    |   |      |   | 535,847    |  
|Other assets                           |  |               |            |   |      |   |            |  
|Deposits and other assets              |  |               | 43,951     |   |      |   | 60,182     |  
|Goodwill                               |  |               | 171,773    |   |      |   | 171,773    |  
|Other intangibles, net of amortization |  |               | 23,067     |   |      |   | 31,206     |  
|Deferred tax asset                     |  |               | 95,061     |   |      |   | 78,700     |  
|                                       |  |               |            |   |      |   |            |  
|Total other assets                     |  |               | 333,852    |   |      |   | 341,861    |  
|                                       |  |               |            |   |      |   |            |  
|Total assets                           |  | $             | 1,487,097  |   |      | $ | 1,642,861  |  
|                                       |  |               |            |   |      |   |            |  

See accompanying notes to financial statements



1



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.

Balance Sheets

Unaudited



|                                                                                                 |  |               |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------ |  | ------------- | --------- | - | ---- | - | --------- | -
|                                                                                                 |  | September 30, |          
|                                                                                                 |  | 2006          |           |   | 2005 |  
|Liabilities and shareholders equity                                                             |  |               |           |   |      |   |           |  
|Current liabilities                                                                              |  |               |           |   |      |   |           |  
|Accounts payable                                                                                 |  | $             | 481,828   |   |      | $ | 382,369   |  
|Line of credit - bank                                                                            |  |               | 21,000    |   |      |   | 22,000    |  
|Notes payable - bank                                                                             |  |               | 28,007    |   |      |   | 26,215    |  
|Notes payable - other                                                                            |  |               | 9,232     |   |      |   | 18,821    |  
|Notes payable - shareholders                                                                     |  |               | 26,986    |   |      |   | 19,918    |  
|Capital lease obligations                                                                        |  |               | 41,260    |   |      |   | 32,921    |  
|Accrued liabilities                                                                              |  |               | 43,676    |   |      |   | 44,456    |  
|                                                                                                 |  |               |           |   |      |   |           |  
|Total current liabilities                                                                        |  |               | 651,989   |   |      |   | 546,700   |  
|Long term debt                                                                                   |  |               |           |   |      |   |           |  
|Notes payable - bank                                                                             |  |               | 286,004   |   |      |   | 314,088   |  
|Notes payable - other                                                                            |  |               | 25,814    |   |      |   | 53,067    |  
|Capital lease obligations                                                                        |  |               | 86,021    |   |      |   | 67,431    |  
|                                                                                                 |  |               |           |   |      |   |           |  
|Total long term debt                                                                             |  |               | 397,839   |   |      |   | 434,586   |  
|                                                                                                 |  |               |           |   |      |   |           |  
|Total liabilities                                                                                |  |               | 1,049,828 |   |      |   | 981,286   |  
|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                                                                              |  |               | (449,147  | ) |      |   | (224,841  | )
|                                                                                                 |  |               |           |   |      |   |           |  
|Total shareholders equity                                                                       |  |               | 437,269   |   |      |   | 661,575   |  
|                                                                                                 |  |               |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                       |  | $             | 1,487,097 |   |      | $ | 1,642,861 |  
|                                                                                                 |  |               |           |   |      |   |           |  

See accompanying notes to financial statements



2



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.

Statements of Operations

Unaudited



|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|-------------------------------------------- |  | --------------------------------------- | --------- | - | -------------------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                             |  | For the Three MonthsEnded September 30, |           |   | For the Nine MonthsEnded September 30, |  
|                                             |  | 2006                                    |           |   | 2005                                   |   |           | 2006 |  |   | 2005      |  
|Income                                       |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net sales                                    |  | $                                       | 1,150,108 |   |                                        | $ | 1,273,340 |      |  | $ | 3,393,222 |   |  | $ | 3,537,453 |  
|Cost of sales                                |  |                                         | 666,336   |   |                                        |   | 685,647   |      |  |   | 1,998,820 |   |  |   | 1,942,191 |  
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Gross profit                                 |  |                                         | 483,772   |   |                                        |   | 587,693   |      |  |   | 1,394,402 |   |  |   | 1,595,262 |  
|Operating expenses                           |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Selling, general and administrative expenses |  |                                         | 473,457   |   |                                        |   | 474,694   |      |  |   | 1,514,819 |   |  |   | 1,545,257 |  
|Depreciation and amortization                |  |                                         | 33,377    |   |                                        |   | 36,102    |      |  |   | 101,601   |   |  |   | 110,028   |  
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Total operating expenses                     |  |                                         | 506,834   |   |                                        |   | 510,796   |      |  |   | 1,616,420 |   |  |   | 1,655,285 |  
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Operating loss                               |  |                                         | (23,062   | ) |                                        |   | 76,897    |      |  |   | (222,018  | ) |  |   | (60,023   | )
|Other expense                                |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Miscellaneous income/(expense)               |  |                                         | 3,884     |   |                                        |   | (1,515    | )    |  |   | 3,145     |   |  |   | (1,862    | )
|Gain/(Loss) on sale of equipment             |  |                                         | 1,399     |   |                                        |   | 2,915     |      |  |   | 1,399     |   |  |   | 962       |  
|Interest expense                             |  |                                         | (19,029   | ) |                                        |   | (12,869   | )    |  |   | (44,673   | ) |  |   | (38,966   | )
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Total other expense                          |  |                                         | (13,746   | ) |                                        |   | (11,469   | )    |  |   | (40,129   | ) |  |   | (39,866   | )
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Loss before income taxes                     |  |                                         | (36,808   | ) |                                        |   | 65,428    |      |  |   | (262,147  | ) |  |   | (99,889   | )
|Income tax expense                           |  |                                         |          |   |                                        |   |          |      |  |   | (800      | ) |  |   | (800      | )
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net loss                                     |  | $                                       | (36,808   | ) |                                        | $ | 65,428    |      |  | $ | (262,947  | ) |  | $ | (100,689  | )
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Loss per share (basic)                       |  | $                                       | (0.030    | ) |                                        | $ | 0.053     |      |  | $ | (0.213    | ) |  | $ | (0.081    | )
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Loss per share (dilutive)                    |  | $                                       | (0.030    | ) |                                        | $ | 0.053     |      |  | $ | (0.213    | ) |  | $ | (0.081    | )
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  

See accompanying notes to financial statements



3



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.

Statements of Accumulated Deficit

Unaudited



|                                                 |  |                                        |          |   |      |   |          |  
|------------------------------------------------ |  | -------------------------------------- | -------- | - | ---- | - | -------- | -
|                                                 |  | For the Nine MonthsEnded September 30, |         
|                                                 |  | 2006                                   |          |   | 2005 |  
|Accumulated deficit, January 1, 2006 and 2005    |  | $                                      | (186,200 | ) |      | $ | (124,152 | )
|Net loss                                         |  |                                        | (262,947 | ) |      |   | (100,689 | )
|                                                 |  |                                        |          |   |      |   |          |  
|Accumulated deficit, September 30, 2006 and 2005 |  | $                                      | (449,147 | ) |      | $ | (224,841 | )
|                                                 |  |                                        |          |   |      |   |          |  

See accompanying notes to financial statements



4



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.

Statements of Cash Flows

Unaudited



|                                                                                    |  |                                   |         |   |                                 |   |         |      |  |   |          |   |  |   |          |  
|----------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ------------------------------- | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                                    |  | For the Three MonthsSeptember 30, |         |   | For the Nine MonthsSeptember 30 |  
|                                                                                    |  | 2006                              |         |   | 2005                            |   |         | 2006 |  |   | 2005     |  
|Operating activities                                                                |  |                                   |         |   |                                 |   |         |      |  |   |          |   |  |   |          |  
|Net income (loss)                                                                   |  | $                                 | (36,808 | ) |                                 | $ | 65,428  |      |  | $ | (262,947 | ) |  | $ | (100,689 | )
|Adjustments to reconcile net income (loss) to cash flows from operating activities: |  |                                   |         |   |                                 |   |         |      |  |   |          |   |  |   |          |  
|Depreciation and amortization                                                       |  |                                   | 24,750  |   |                                 |   | 41,105  |      |  |   | 101,601  |   |  |   | 125,940  |  
|Allowance for bad debts                                                             |  |                                   | 2,036   |   |                                 |   | 3,184   |      |  |   | (1,355   | ) |  |   | 739      |  
|(Gain) loss on disposition of equipment                                             |  |                                   | 1,399   |   |                                 |   | (2,915  | )    |  |   | 1,399    |   |  |   | (962     | )
|(Increase) decrease in:                                                             |  |                                   |         |   |                                 |   |         |      |  |   |          |   |  |   |          |  
|Accounts receivable                                                                 |  |                                   | (7,739  | ) |                                 |   | (74,388 | )    |  |   | 51,068   |   |  |   | 1,606    |  
|Inventories                                                                         |  |                                   | (4,366  | ) |                                 |   | 14,496  |      |  |   | 83,998   |   |  |   | 28,542   |  
|Prepaid expenses                                                                    |  |                                   | (10,989 | ) |                                 |   | (10,283 | )    |  |   | 434      |   |  |   | 8,969    |  
|Deposits and other assets                                                           |  |                                   | 16,827  |   |                                 |   | (249    | )    |  |   | 15,981   |   |  |   |         |  
|Increase (decrease) in:                                                             |  |                                   |         |   |                                 |   |         |      |  |   |          |   |  |   |          |  
|Accounts payable                                                                    |  |                                   | 37,267  |   |                                 |   | 9,438   |      |  |   | 49,504   |   |  |   | (39,625  | )
|Accrued liabilities                                                                 |  |                                   | (31,362 | ) |                                 |   | (27,454 | )    |  |   | (42,682  | ) |  |   | (25,292  | )
|                                                                                    |  |                                   |         |   |                                 |   |         |      |  |   |          |   |  |   |          |  
|Net cash provided by (used in) operating activities                                 |  |                                   | (8,985  | ) |                                 |   | 18,362  |      |  |   | (2,999   | ) |  |   | (772     | )
|Investing activities                                                                |  |                                   |         |   |                                 |   |         |      |  |   |          |   |  |   |          |  
|Purchases of property and equipment                                                 |  |                                   | (3,996  | ) |                                 |   | (23,682 | )    |  |   | (102,515 | ) |  |   | (56,192  | )
|Proceeds from sale of equipment/disposal                                            |  |                                   | 1,500   |   |                                 |   | 6,400   |      |  |   | 1,500    |   |  |   | 13,897   |  
|                                                                                    |  |                                   |         |   |                                 |   |         |      |  |   |          |   |  |   |          |  
|Net cash used in investing activities                                               |  |                                   | (2,496  | ) |                                 |   | (17,282 | )    |  |   | (101,015 | ) |  |   | (42,295  | )
|Financing activities                                                                |  |                                   |         |   |                                 |   |         |      |  |   |          |   |  |   |          |  
|Proceeds from notes payable and capital leases                                      |  |                                   |        |   |                                 |   |        |      |  |   | 79,353   |   |  |   | 24,000   |  
|Payments of notes receivable                                                        |  |                                   | 10,074  |   |                                 |   |        |      |  |   | 10,074   |   |  |   |         |  
|Repayments of notes payable and capital leases                                      |  |                                   | (30,169 | ) |                                 |   | (22,690 | )    |  |   | (80,623  | ) |  |   | (61,821  | )
|                                                                                    |  |                                   |         |   |                                 |   |         |      |  |   |          |   |  |   |          |  
|Net cash provided by (used in) financing activities                                 |  |                                   | (20,095 | ) |                                 |   | (22,690 | )    |  |   | 8,804    |   |  |   | (37,821  | )
|Decrease in cash                                                                    |  |                                   | (31,576 | ) |                                 |   | (21,610 | )    |  |   | (95,210  | ) |  |   | (84,100  | )
|Cash at July 1, 2006 and 2005 and January 1, 2006 and 2005                          |  |                                   | 49,751  |   |                                 |   | 49,066  |      |  |   | 113,385  |   |  |   | 111,556  |  
|                                                                                    |  |                                   |         |   |                                 |   |         |      |  |   |          |   |  |   |          |  
|Cash at September 30, 2006 and 2005                                                 |  | $                                 | 18,175  |   |                                 | $ | 27,456  |      |  | $ | 18,175   |   |  | $ | 27,456   |  
|                                                                                    |  |                                   |         |   |                                 |   |         |      |  |   |          |   |  |   |          |  

See accompanying notes to financial statements



5



---

##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements

September 30, 2006 and 2005

1. Summary of
Significant Accounting Policies

Nature of Operations

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

Basis of Presentation

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

Concentration of Credit Risk

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

Inventories

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

Property and Equipment

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



6



---

##### Table of Contents

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.

Stock
Based Compensation

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



7



---

##### Table of Contents

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 accompanying 2006 and 2005 financial statements.

Intangible assets are amortized over the following estimated useful lives using primarily 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.

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.



8



---

##### Table of Contents

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
$12,600 as of September 30, 2006, 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 nine months ended September 30, 2006 the Company did not engage in any direct response advertising that
would require capitalization. Advertising costs charged to expense was $12,021 for the nine months ended September 30, 2006.

Use of Estimates

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

Revenue Recognition

The Company adopted Securities and Exchange Commission Staff Accounting Bulletins No. 101
(SAB101). Revenue Recognition in Financial Statements in 2002, retroactive to November 1, 2000. No restatement of the financials was necessary since the financials were already in conformity with the revenue recognition
principles and no material transactions were effected by this adoption.

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



9



---

##### Table of Contents

2. Accounts Receivable

Accounts receivable consist of the following:



|                                      |  |   |         |  
|------------------------------------- |  | - | ------- | -
|Accounts receivable                   |  | $ | 244,918 |  
|Less: allowance for doubtful accounts |  |   | (6,519  | )
|                                      |  |   |         |  
|Net accounts receivable               |  | $ | 238,399 |  
|                                      |  |   |         |  

The Company utilizes a percentage method to establish the allowance for doubtful accounts. The estimated allowance
ranges from 1% to 10% of outstanding receivables. Bad debt expense for the nine months ended September 30, 2006, was $2,933.

3. Inventories

Inventories consist of the following:



|                                                        |  |   |        
|------------------------------------------------------- |  | - | -------
|Coffee                                                  |  |   |        
|Unroasted                                               |  | $ | 102,263
|Roasted                                                 |  |   | 70,300 
|Tea                                                     |  |   | 6,803  
|Packaging, supplies and other merchandise held for sale |  |   | 180,993
|                                                        |  |   |        
|Total inventories                                       |  | $ | 360,359
|                                                        |  |   |        



10



---

##### Table of Contents

4. Property and Equipment

Property and equipment consist of the following:



|                                      |  |   |            |  
|------------------------------------- |  | - | ---------- | -
|Equipment                             |  | $ | 1,453,279  |  
|Furniture and fixtures                |  |   | 263,113    |  
|Leasehold improvements                |  |   | 461,830    |  
|Transportation equipment              |  |   | 164,045    |  
|Marketing equipment                   |  |   | 166,162    |  
|Capitalized website development costs |  |   | 14,077     |  
|Property held under capital leases    |  |   | 277,817    |  
|                                      |  |   |            |  
|Total property and equipment          |  |   | 2,800,323  |  
|Accumulated depreciation              |  |   | (2,301,166 | )
|                                      |  |   |            |  
|Property and equipment, net           |  | $ | 499,157    |  
|                                      |  |   |            |  

Depreciation expense for the nine months ended September 30, 2006 was
$95,220.

5. Goodwill and Other Intangible Assets

As
part of the adoption of Statement of Financial Accounting Standards (FASB) No. 142, Goodwill and Other Tangible Assetsas of January 1, 2002, the Company no longer amortizes goodwill. The Company performed a test of impairment on
goodwill that resulted in no impairment loss as of September 30, 2006. Consequently, there was no change in the carrying value of goodwill in the nine months ended September 30, 2006.

Intangible assets subject to amortization consist of the following:



|                                       |  |   |         |  
|-------------------------------------- |  | - | ------- | -
|Leasehold value                        |  | $ | 67,000  |  
|Trademarks                             |  |   | 5,127   |  
|                                       |  |   |         |  
|Total intangible assets                |  |   | 72,127  |  
|Accumulated amortization               |  |   | (49,060 | )
|                                       |  |   |         |  
|Other intangibles, net of amortization |  | $ | 23,067  |  
|                                       |  |   |         |  

Amortization expense for the nine months ended September 30, 2006 was $6,381.



11



---

##### Table of Contents

6. Long Term Debt



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------
|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, 2005 (11% at September 30, 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. |  | $ | 314,011
|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 September 30, 2006). 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.                                                |  |   | 21,000 
|Note payable to majority shareholders, Paul and Joan Katzeff, payable in monthly installments of interest only at 12%, with balance due on
demand after June 30, 1996.                                                                                                                                                                                                                                                                                                                 |  |   | 19,919 
|Note payable to majority shareholders, Paul and Joan Katzeff, payable in weekly installments of $1,000 with interest at 12%, paid monthly due
December 15, 2006.                                                                                                                                                                                                                                                                                                                       |  |   | 7,067  
|Note payable to Mercedes-Benz, payable in monthly installments of $691, including interest at 6.99%, secured by a vehicle, final payment due
on September 24, 2009.                                                                                                                                                                                                                                                                                                                    |  |   | 22,397 
|Note payable to Chrysler Financing, payable in monthly installments of $329, including interest at 15.492%, secured by a vehicle, final
payment due on January 24, 2011.                                                                                                                                                                                                                                                                                                               |  |   | 12,649 



12



---

##### Table of Contents

6. Long Term Debt (continued)



|                                                                                                                                                                                         |  |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------- | -
|Capital Lease Obligations                                                                                                                                                                |  |   |          |  
|Note payable to Manifest Leasing, payable in monthly installments of $444, including interest at 12.203%, secured by equipment, final payment
due on March 1, 2007.                      |  |   | 2,315    |  
|Note payable to Nationwide Funding, LLC, payable in monthly installments of $1,355, including interest at 16.78%, secured by equipment, final
payment due on March 1, 2009.              |  |   | 33,002   |  
|Note payable to Nationwide Funding, LLC payable in monthly installments of $462, including interest at 14.237%, secured by equipment, final
payment due on May 22, 2009.                 |  |   | 12,238   |  
|Note payable to Avaya Financial Services, payable in monthly installments of $824, including interest at 5.855%, secured by equipment, final
payment due on August 1, 2009.              |  |   | 26,461   |  
|Note payable to Axis Capital, payable in monthly installments of $709, including interest at 15.473% secured by store fixtures, final payment
due September 14, 2009.                    |  |   | 19,875   |  
|Note payable to US Bancorp Manifest Funding Services payable in monthly installments of $533, including interest at 22.239%, secured by
equipment, final payment due on January 1, 2010. |  |   | 15,424   |  
|Note payable to Marlin Leasing payable in monthly installments of $522, including interest at 17.172%, secured by equipment, final payment due
on June 1, 2010.                          |  |   | 17,966   |  
|                                                                                                                                                                                         |  |   |          |  
|                                                                                                                                                                                         |  |   | 524,324  |  
|Less current portion                                                                                                                                                                     |  |   | (126,485 | )
|                                                                                                                                                                                         |  |   |          |  
|Long term portion of notes payable                                                                                                                                                       |  | $ | 397,839  |  
|                                                                                                                                                                                         |  |   |          |  



13



---

##### Table of Contents

6. Long Term Debt (continued)

Interest paid for the nine months ended September 30, 2006 was $44,673.

As of September 30, 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, |  |  
|2006                      |  | $ | 68,567 
|2007                      |  |   | 80,362 
|2008                      |  |   | 86,123 
|2009                      |  |   | 285,444
|2010 and Thereafter       |  |   | 3,828  
|                          |  |   |        
|                          |  | $ | 524,324
|                          |  |   |        

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

7. Income Taxes

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



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

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



|                                                |  |   |         |  
|----------------------------------------------- |  | - | ------- | -
|Net operating loss and tax credit carryforwards |  | $ | 112,260 |  
|Depreciation and amortization                   |  |   | (19,909 | )
|Other                                           |  |   | 8,561   |  
|                                                |  |   |         |  
|Net deferred tax asset                          |  | $ | 100,912 |  
|                                                |  |   |         |  



14



---

##### Table of Contents

7. Income Taxes (continued)

At September 30, 2006 the Company had available unused contributions, manufacturers investment credit, and net operating loss carryforwards that may provide future tax benefits and that expire as follows:



|                                  |  |                                |        |               |   |                   |  |       |         |  |   |        
|--------------------------------- |  | ------------------------------ | ------ | ------------- | - | ----------------- |  | ----- | ------- |  | - | -------
|Federal Years Ending December 31, |  |                                |        | Contributions |   | Net OperatingLoss |  | Total
|2006                              |  |                                |        |               | $ | 758               |  | $     |        |  | $ | 758    
|2008                              |  |                                |        |               |   | 3,767             |  |       |        |  |   | 3,767  
|2009                              |  |                                |        |               |   | 5,295             |  |       |        |  |   | 5,295  
|2017                              |  |                                |        |               |   |                  |  |       | 290,210 |  |   | 290,210
|2018                              |  |                                |        |               |   |                  |  |       | 128,576 |  |   | 128,576
|2023                              |  |                                |        |               |   |                  |  |       | 96,867  |  |   | 96,867 
|2024                              |  |                                |        |               |   |                  |  |       | 49,714  |  |   | 49,714 
|2025                              |  |                                |        |               |   |                  |  |       | 17,613  |  |   | 17,613 
|                                  |  |                                |        |               |   |                   |  |       |         |  |   |        
|                                  |  |                                |        |               | $ | 9,820             |  | $     | 582,980 |  | $ | 592,800
|                                  |  |                                |        |               |   |                   |  |       |         |  |   |        
|                                  |  |                                |        |              
|California                        |  |                                |        |               |   |                   |  |       |         |  |   |        
|                                  |  |                                |        |              
|Years Ending December 31,         |  | ManufacturersInvestmentCredit |        | Contributions |   | Net OperatingLoss |  | Total
|2006                              |  | $                              | 5,609  |               | $ |                  |  | $     |        |  | $ | 5,609  
|2008                              |  |                                | 4,382  |               |   | 3,767             |  |       |        |  |   | 8,149  
|2009                              |  |                                | 306    |               |   | 4,539             |  |       |        |  |   | 4,845  
|2010                              |  |                                | 1,082  |               |   |                  |  |       |        |  |   | 1,082  
|2011                              |  |                                | 1,892  |               |   |                  |  |       |        |  |   | 1,892  
|2012                              |  |                                | 59     |               |   |                  |  |       |        |  |   | 59     
|2013                              |  |                                |       |               |   |                  |  |       | 49,041  |  |   | 49,041 
|2014                              |  |                                |       |               |   |                  |  |       | 69,544  |  |   | 69,544 
|                                  |  |                                |        |               |   |                   |  |       |         |  |   |        
|                                  |  | $                              | 13,330 |               | $ | 8,306             |  | $     | 118,585 |  | $ | 140,221
|                                  |  |                                |        |               |   |                   |  |       |         |  |   |        

Income taxes paid for the nine months ended September 30, 2006, was $800.



15



---

##### Table of Contents

8. Operating Leases

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

As of September 30, 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, |  |  
|2006                      |  |   | 40,647
|2007                      |  |   | 21,373
|2008                      |  |   | 9,853 
|2009                      |  |   | 5,454 
|2010 and thereafter       |  |   | 1,979 
|                          |  |   |       
|                          |  | $ | 79,306
|                          |  |   |       

Total operating lease payments for the nine months ended September 30, 2006, was $44,046.

9. Long Term Leases

The Company leases its corporate headquarters,
warehouse and waterfront facilities from Paul and Joan Katzeff (the Companys majority shareholders). The lease is classified as an operating lease and provides for monthly rental payments of $8,600. The Company is responsible for all real
estate taxes, insurance and maintenance costs related to the facilities. The renegotiated lease is a ten-year term commencing May 31, 2005 and ending May 31, 2015. Rental expense under the lease was $77,400 for the nine months ended
September 30, 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. Rental expense under these operating leases was $43,002 for the nine months ended September 30, 2006.



16



---

##### Table of Contents

9. Long Term Leases (continued)

As of September 30, 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, |  |  
|2006                      |  | $ | 163,015  
|2007                      |  |   | 153,477  
|2008                      |  |   | 154,470  
|2009                      |  |   | 157,020  
|2010                      |  |   | 159,690  
|Thereafter                |  |   | 499,720  
|                          |  |   |          
|                          |  | $ | 1,287,392
|                          |  |   |          

10. Related Party Transactions

As of September 30, 2006, the Company has an interest only note payable due on demand and (ii) a principal and interest note, in each case payable to Paul and Joan Katzeff (the Companys majority
shareholders). The Company also leases properties from its majority shareholders.

The summary of payments made to Paul and Joan Katzeff in connection with
these related party transactions for the nine months ended September 30, 2006, is as follows:



|                   |  |   |       
|------------------ |  | - | ------
|Interest payments  |  | $ | 1,100 
|Rent payments      |  | $ | 34,400
|Principal payments |  | $ | 13,000

The Companys majority shareholders also guarantee certain notes payable for the Company (See Note 6).



17



---

##### Table of Contents

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Words such as believe, anticipate, expect, intend, plan, will,
may, and other similar expressions identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.
These statements relate to, among other things, sources of liquidity and capital (see Liquidity and Capital Resources). Any such statements should be considered in light of various risks and uncertainties that could cause results to differ
materially from expectations, estimates or forecasts expressed. The various risks and uncertainties include, but are not limited to: changes in general economic conditions, changes in business conditions in the coffee industry, fluctuations in
consumer demand for coffee products and in the availability and costs of green beans, increased competition within the Companys businesses, variances from budgeted sales mix and growth rate, inability to hire, train and retain qualified
personnel, concentration of production and sales in Northern California, the loss of one or more major customers, inability to successfully implement its business plan, including without limitation the ability to obtain credit on favorable terms,
natural disasters, civil unrest in countries which produce coffee and tea, weather and other risks identified herein. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date of this
Quarterly Report on Form 10-QSB.

SUMMARY

Sales of the
Company have eroded over the last four years due to increased competition, customer attrition and customers roasting green beans for their own use. The Company made several changes in an effort to reverse this negative trend, including reducing
distribution routes serviced by its own trucks and increasing its use of outside distributors and direct shipment to customers (via UPS or other common carriers). It has also added a northern California chain as a customer serviced by a distributor.
Nonetheless, the effect of these changes on the Companys business in the first nine months of 2006 was extremely limited. Because of the limited impact of these changes, as well as the increase in cost of sales and other factors noted herein,
there can be no assurances that the Company will be profitable in any future period, and, as a consequence, the Company is considering various strategic alternatives.

Green bean prices have continued to rise in 2005 and 2006. The impact of rising prices has been especially onerous on the Company because of its use of fair-trade, organic and shade grown beans in many of its coffees.
These beans are more expensive than the market price for green coffee. If green bean prices do not decline or continue to rise, whether as a consequence of inclement weather in a major producing area or any other event that affects coffee pricing,
it would have a negative impact on the Company and its margins.



18



---

##### Table of Contents

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.

Results of Operations

Three months ended September 30, 2006 versus September 30, 2005



|                              |  |                    |          |    |               |      |   
|----------------------------- |  | ------------------ | -------- | -- | ------------- | ---- | --
|Consolidated                  |  | Increase(Decrease) |          |    | PercentChange |     
|Net Sales                     |  | $                  | (123,232 | )  |               | (9.7 | )%
|Cost of Sales                 |  | $                  | (19,311  | )  |               | (2.8 | )%
|Gross Margin                  |  |                    | (4.1     | )% |               | (8.9 | )%
|Selling, G&A Expense          |  | $                  | (1,237   | )  |               | (.3  | )%
|Depreciation And Amortization |  | $                  | (2,725   | )  |               | (7.5 | )%
|Interest Expense              |  | $                  | 6,160    |    |               | 47.9 | % 
|Net Income (Loss)             |  | $                  | 102,236  |    |               |     |   

Consolidated net sales for the three months ended September 30, 2006 were $1,150,108 down 9.7% or $123,232
when compared with net sales of $1,273,340 for the same period in fiscal 2005.

Distribution revenues (e.g., revenues generated on the Companys own
truck distribution) were down $20,000 or 3%, for the three month period ended September 30, 2006 when compared with the same period in fiscal 2005. The Company had not lost any accounts. It appears the reduction was a result of lower sales in
existing accounts during the third quarter.

National revenues (e.g., revenues not derived by mail order and direct truck distribution) were down $40,000,
or 5%, in 2006 when compared to sales for the same period in 2005. The decrease was a result of the loss of nearly $60,000 in sales from a national retailer that declined to continue to purchase for a segment of their stores when the Company
increased their price. Part of the chain is still purchasing from the Company. It also includes a drop in volume of $12,000 from a chain in northern California which eliminated the Companys products in some of their remodeled stores.

Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) were flat for the
three months ended September 30, 2006 when compared to the same period in 2005.

Sales of the Company bakery were down $40,000 or 8%, for the quarter
ended September 30, 2006 versus the same period in 2005. The bakery sales continue to lag when compared to sales last year since the operation was closed for over three weeks earlier in the year. Customer count has been below last year since
the closure.



19



---

##### Table of Contents

Consolidated cost of sales for the three months ended September 30, 2006 were $666,336, down 2.8% or over $19,000
when compared with the cost of sales of $685,647 for the same period in 2005. This decrease was a result of the effect of lower sales of $71,000 offset by higher bean costs of nearly $50,000.

Consolidated gross margin (gross profit as a percentage of net sales) for the three months ended September 30, 2006 was 42.1%, down 4.1% or nearly 9% when compared
with gross margin of 46.2% for the same period in 2005. The drop in gross margin can be directly attributed to higher green bean costs. The cost of green beans has increased to $1.89 per pound in the third quarter of 2006 versus $1.75 in the same
period of 2005. There can be no assurances that the Company will be able to secure less expensive beans in the future.

Consolidated selling, general and
administrative expenses were $473,457 for the three months ended September 30, 2006, a drop of .3% or more than $1,200 when compared with the selling, general and administrative expenses of $474,694 for the same period in 2005.

Depreciation and amortization expenses for the three months ended September 30, 2006 were $33,377, a 7.5% decrease, or over $2,700, when compared to depreciation
and amortization expenses of $36,102 for the same period in fiscal 2005.

Interest expense for the three months ended September 30, 2006 was $19,029,
a nearly 48% increase from interest of $12,869 for the same period in 2005. The increase in interest expense is a result of interest on the debt to the principle shareholders for the financing of the improvements at the bakery and higher interest
rates in 2006 to the Savings Bank of Mendocino as compared to the same period in 2005. Interest rates have risen from 9.75% from last year to11% during 2006.

As a result of the foregoing factors, the Company had a consolidated net loss of $36,808 for the three months ended September 30, 2006, compared to a $65,428 consolidated net profit for the same period in 2005. Because of the decline
in revenues and the increase in the cost of green beans there can be no assurances that the Company will be profitable in any future period.

Nine
Months Ended September 30, 2006 Compared With Nine Months Ended September 30, 2005



|                              |  |                    |          |    |               |      |   
|----------------------------- |  | ------------------ | -------- | -- | ------------- | ---- | --
|Consolidated                  |  | Increase(Decrease) |          |    | PercentChange |     
|Net Sales                     |  | $                  | (144,231 | )  |               | (4.1 | )%
|Cost of Sales                 |  | $                  | 56,629   |    |               | 2.9  | % 
|Gross Margin                  |  |                    | (4.0     | )% |               | (8.9 | )%
|Selling, G&A Expense          |  | $                  | (30,438  | )  |               | (2.0 | )%
|Depreciation And Amortization |  | $                  | (8,427   | )  |               | (7.7 | )%
|Interest Expense              |  | $                  | 5,707    |    |               | 14.6 | % 
|Net Income (Loss)             |  | $                  | (162,258 | )  |               |     |   



20



---

##### Table of Contents

Consolidated net sales for the nine months ended September 30, 2006 were $3,393,222 down 4.1% or over $144,000 when
compared with net sales of $3,537,453 for the same period in 2005.

Distribution revenues (e.g., revenues generated on the Companys own truck
distribution) for the nine months ended September 30, 2006 were up $15,000 or 1%, when compared to the same period during 2005. The increase appears to have resulted from higher volume from existing accounts.

National revenues (e.g., revenues not derived by mail order and direct truck distribution) for the nine months ended September 30, 2006 were flat, when compared to
the same period in 2005. The decline in revenue from a national account has been offset by higher sales to the distributor in southern California.

Mail
order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) increased nearly $5,000 or 5 % for the nine months ended September 30, 2006 when compared to the same period in
2005. The increase in revenue was a result of new non-profit partners that used the Companys coffee to raise funds for their organizations.

Sales
attributable to the Companys bakery were down $160,000 for the nine months ended September 30, 2006 or 35% when compared to the same period in 2005. The bakery was closed for over three weeks earlier in the year and the customer count has
not returned to last year levels since the closure.

Consolidated cost of sales for the nine months ended September 30, 2006 were $1,998,820, up 2.9%,
or over $56,000 when compared with the cost of sales of $1,942,191 for the same period in 2005. Green bean costs have risen to $1.89 per pound in 2006 from $1.68 per pound average for the same period in 2005 accounting for this increase.

Consolidated gross margin (gross profit as a percentage of net sales) for the nine months ended September 30, 2006 was 41.1%, or down 4% when compared with gross
margin of 45.1% for the same period in 2005. This was a result of the higher bean prices.

Consolidated selling, general and administrative expenses were
$1,514,819 for the nine months ended September 30, 2006, a 2% decrease, or over $30,000, when compared with selling, general and administrative expenses of $1,545,257 for the same period in 2005. The decrease was attributable to lower
non-manufacturing wages for the year.

Depreciation and amortization expenses for the nine months ended September 30, 2006 were $101,601, a decrease
of 7.7%, or over $8,000, when compared with depreciation and amortization expenses of $110,028 for the same period in 2005. The decrease in depreciation was a result of lower net fixed assets this year compared to the same period in 2005.



21



---

##### Table of Contents

Interest expense for the nine months ended September 30, 2006 was $44,673 a 14.6% increase or nearly $6,000, when
compared with interest expense of $38,966 for the same period in 2005. This increase in interest expense was a result of higher interest rates and the additional debt that was needed to repair the bakery.

As a result of the foregoing factors, the Company had a consolidated net loss of $262,947 for the nine months ended September 30, 2006, compared to a consolidated
net loss of $100,689 for the same period in 2005. Because of the decline in gross margin, as well as other factors noted herein, there can be no assurances that the Company will be profitable in any future period.



22



---

##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2006, the Company had working capital of $2,099 versus working capital of $218,453 as of September 30, 2005. The decrease in working capital is due primarily to an increase in the
accounts payable primarily to the majority shareholders and the forward billing by a green bean supplier. The payable to the majority shareholders in 2006 is in excess of $45,000 and is primarily attributed to rent that has been expensed but is not
paid since April of 2006. The forward billing of green bean purchases for a major customer from one of the Companys green bean suppliers of $40,000 was done this year to secure certain lots of green beans. In 2005, there was only $8,000
due to the majority shareholders and there were no forward purchases of green beans. In 2006, there was also a reduction of accounts receivable and inventories of nearly $110,000. The Company has maintained a one weeks supply of green beans in
inventory in 2006 versus a two week inventory in 2005. In 2006, the Company has had more cash sales and more customers with 1% ten day terms and fewer with net thirty day terms.

Net cash used in operating activities was $2,999 for the nine months ended September 30, 2006 compared to net cash used in operating activities for the nine months ended September 30, 2005 of $772. The
decrease in net cash used in operating activities in the first nine months of 2006 was the result of an increase in the loss this year compared to the same period in fiscal 2005 of over $162,000 offset by a decrease in inventories and receivables of
nearly $134,000 and a net decrease in payables and accrued liabilities of $7,000.

Cash used in investing activities was $101,015 for the nine months ended
September 30, 2006 compared to $42,295 used in the same period in 2005. Capital additions for the first nine months of 2006 include $36,000 for a new floor in the bakery, $23,000 for brewers, grinders and fixtures, $17,000 for an upgrade of the
computer network, $14,500 for a used car to replace the Company car that was in an accident last year and $13,000 in production equipment.

Net cash
provided by financing activities for the nine months ended September 30, 2006 was $8,804 compared to cash used by financing activities of $37,821 during the same period in 2005. The cash provided by financing activities during this year was a
result of debt acquired for capital equipment purchases offset by repayment of existing debt. (See below and Note 6 of Notes to Financial Statements).

Because of the operating loss and purchases of property and equipment, cash at September 30, 2006 was $95,210 lower than the January 1, 2006 cash balance and lower than cash at September 30, 2005 of $27,456.

In November of 2004, the Company refinanced a note and a credit line formerly with Merrill Lynch with a term note with the Savings Bank of Mendocino. The note is
amortized over ten years and is payable in five years with a balloon payment on December 1, 2009 at 3% over prime rate. The rate was 11% at September 30, 2006 with an outstanding balance on the note at that time of $314,011. The note is
collateralized by the Companys accounts receivable, inventory, equipment, instruments, general intangibles and contract rights. This note is personally guaranteed by the Companys majority shareholders. (See Note 6 of Notes to the
Financial Statements)



23



---

##### Table of Contents

The Company also has a $30,000 line of credit with the Savings Bank of Mendocino. The credit line is interest only
payments renewable annually at 3% over the prime rate. Prime rate was 11% at September 30, 2006 with an outstanding balance on the line of $21,000. 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. (See Note 6 of Notes to Financial Statements)

The Company had a loan outstanding for $19,919 at September 30, 2006, payable to the majority shareholders, Joan and Paul Katzeff, in monthly installments of
interest only at 12%, with balance due on demand after June 30, 1996. In May 2006, the company obtained financing for capital improvements to the bakery with a note payable to the majority shareholders for $29,067, on an unsecured basis,
payable in weekly installments of $1,000, interest to be paid monthly at 12% due in December of 2006. The balance of the note at September 30, 2006 is $7,067. (See Note 6 of Notes to Financial Statements)

At September 30, 2006, the Company had total borrowings of $524,324 including $335,011 owing to the Savings Bank of Mendocino. This compares to total borrowings of
$554,461 as of September 30, 2005, including $362,303 outstanding to the Savings Bank of Mendocino at that time.

For long-term debt, see Note 6 and
Note 10 of the Notes to Financial Statements. For operating leases, see Note 8 of the Notes to Financial Statements. For real estate leases, see Note 9 of the Notes to Financial Statements.



|                        |  |                        |           |                    |   |           |  |           |         |              |   |         |  |   |        
|----------------------- |  | ---------------------- | --------- | ------------------ | - | --------- |  | --------- | ------- | ------------ | - | ------- |  | - | -------
|                        |  | Payments Due By Period
|Contractual Obligations |  | Total                  |           | Less than One year |   | 1-3 years |  | 4-5 years |         | After 5years
|Long Term Debt          |  | $                      | 524,324   |                    | $ | 68,567    |  | $         | 166,485 |              | $ | 285,444 |  | $ | 3,828  
|Operating Leases        |  |                        | 79,306    |                    |   | 40,647    |  |           | 31,226  |              |   | 5,454   |  |   | 1,979  
|Real Estate Leases      |  |                        | 1,287,392 |                    |   | 163,015   |  |           | 307,947 |              |   | 316,710 |  |   | 499,720
|Total Cash Obligations  |  | $                      | 1,891,022 |                    | $ | 272,229   |  | $         | 505,658 |              | $ | 607,608 |  | $ | 505,527

The Company is dependent on successfully executing its business plan to achieve profitable operations, obtaining
additional sources of borrowings (including normal trade credit) and securing favorable financing arrangements (including lease financing) to finance its working capital needs. There can be no assurance that the Company will be successful in this
regard. If the Company is not able to meet its credit obligations the stability of the Companys business would be in question.



24



---

##### Table of Contents

RELATED PARTY TRANSACTIONS

From time to time, the Company enters into various transactions with its majority shareholders, Paul and Joan Katzeff. See note 10  Related Party Transactions in the Notes to the Financial Statements.

SEASONALITY AND OTHER FACTORS AFFECTING PERFORMANCE

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

INDEMNIFICATION MATTERS

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

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

CONTROLS AND PROCEDURES

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 September 30, 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. There have been no changes in the Companys Disclosure controls
over financial reporting during the third quarter of 2006 that have materially affected or are reasonably likely to affect the Companys internal controls over financial reporting.



25



---

##### Table of Contents

Part II  Other Information



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

-None-



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

- None 



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

- None 



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

At the
Companys annual meeting held in Mendocino at 10:00 A. M. on September 29, 2006, the Company submitted for a vote of security holders the reelection of all three members of the board of directors. Below is a summary of the results:



|             |  |            |  |                  |  |        
|------------ |  | ---------- |  | ---------------- |  | -------
|Name         |  | Shares for |  | Against/Withheld |  | Abstain
|Paul Katzeff |  | 980,210    |  | 0                |  | 0      
|Joan Katzeff |  | 980,210    |  | 0                |  | 0      
|Roy Doughty  |  | 980,210    |  | 0                |  | 0      



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

- None




26



---

##### Table of Contents

|ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K
|------- | --------------------------------

a.
Exhibits



|     |  |                                                                                                                                                    
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
|     | 
|31.2 |  | Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (President).              
|     | 
|31.3 |  | Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
|     | 
|32.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).  
|     | 
|32.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (President).                
|     | 
|32.3 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).  



27



---

##### Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

THANKSGIVING COFFEE COMPANY, INC.



|                              |  |                         |  |                 
|----------------------------- |  | ----------------------- |  | ----------------
|Name                          |  | Title                   |  | Date            
|                              |  |                        
|/s/ Paul Katzeff Paul
Katzeff |  | Chief Executive Officer |  | November 9, 2006
|                              |  |                        
|/s/ Joan Katzeff Joan
Katzeff |  | President               |  | November 9, 2006



28