##### Table of Contents

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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, 2005



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 12, 2005, 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



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##### Table of Contents

THANKSGIVING COFFEE COMPANY, INC.



INDEX



|                                                                                              |  |    
|--------------------------------------------------------------------------------------------- |  | ---
|PART I. FINANCIAL INFORMATION                                                                 |  |    
|                                                                                              | 
|Item 1. Financial Statements and Notes to Financial Statements                                |  |    
|                                                                                              | 
|Balance Sheets as of September 30, 2005 and 2004                                              |  | 1-2
|                                                                                              | 
|Statements of Operations for the Three and Nine Months Ended September 30, 2005 and 2004      |  | 3  
|                                                                                              | 
|Statements of Accumulated Deficits for the Nine Months Ended September 30, 2005 and 2004      |  | 4  
|                                                                                              | 
|Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004                |  | 5  
|                                                                                              | 
|Notes to Financial Statements                                                                 |  | 6  
|                                                                                              | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17 
|                                                                                              | 
|Item 3. Controls and Procedures                                                               |  | 24 
|                                                                                              | 
|PART II. OTHER INFORMATION                                                                    |  |    
|                                                                                              | 
|Item 1. Legal Proceedings                                                                     |  | 24 
|                                                                                              | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 25 
|                                                                                              | 
|Item 3. Defaults Upon Senior Securities                                                       |  | 25 
|                                                                                              | 
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 25 
|                                                                                              | 
|Item 5. Other Information                                                                     |  | 25 
|                                                                                              | 
|Item 6. Exhibits                                                                              |  | 25 



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Thanksgiving Coffee Company, Inc.



Balance Sheets

Unaudited



|                                       |  |               |            |   |      |   |            |  
|-------------------------------------- |  | ------------- | ---------- | - | ---- | - | ---------- | -
|                                       |  | September 30, |           
|                                       |  | 2005          |            |   | 2004 |  
|Assets                                 |  |               |            |   |      |   |            |  
|Current assets                         |  |               |            |   |      |   |            |  
|Cash                                   |  | $             | 27,456     |   |      | $ | 17,732     |  
|Accounts receivable net of allowance   |  |               | 278,720    |   |      |   | 288,984    |  
|Inventories                            |  |               | 423,995    |   |      |   | 409,355    |  
|Prepaid expenses                       |  |               | 31,582     |   |      |   | 44,427     |  
|Deferred tax asset                     |  |               | 3,400      |   |      |   | 39,300     |  
|                                       |  |               |            |   |      |   |            |  
|Total current assets                   |  |               | 765,153    |   |      |   | 799,798    |  
|                                       |  |              
|Property and equipment                 |  |               |            |   |      |   |            |  
|Property and equipment                 |  |               | 2,744,870  |   |      |   | 2,708,508  |  
|Accumulated depreciation               |  |               | (2,209,023 | ) |      |   | (2,171,252 | )
|                                       |  |               |            |   |      |   |            |  
|Total property and equipment           |  |               | 535,847    |   |      |   | 537,256    |  
|                                       |  |              
|Other assets                           |  |               |            |   |      |   |            |  
|Deposits and other assets              |  |               | 60,182     |   |      |   | 60,695     |  
|Goodwill                               |  |               | 171,773    |   |      |   | 171,773    |  
|Other intangibles, net of amortization |  |               | 31,206     |   |      |   | 37,528     |  
|Deferred tax asset                     |  |               | 78,700     |   |      |   | 44,300     |  
|                                       |  |               |            |   |      |   |            |  
|Total other assets                     |  |               | 341,861    |   |      |   | 314,296    |  
|                                       |  |               |            |   |      |   |            |  
|Total assets                           |  | $             | 1,642,861  |   |      | $ | 1,651,350  |  
|                                       |  |               |            |   |      |   |            |  



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##### Table of Contents



Thanksgiving Coffee Company,
Inc.



Balance Sheets

Unaudited



|                                                                                                 |  |               |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------ |  | ------------- | --------- | - | ---- | - | --------- | -
|                                                                                                 |  | September 30, |          
|                                                                                                 |  | 2005          |           |   | 2004 |  
|Liabilities and shareholders equity                                                             |  |               |           |   |      |   |           |  
|Current liabilities                                                                              |  |               |           |   |      |   |           |  
|Accounts payable                                                                                 |  | $             | 382,369   |   |      | $ | 391,466   |  
|Line of credit - bank                                                                            |  |               | 22,000    |   |      |   | 186,760   |  
|Notes payable - bank                                                                             |  |               | 26,215    |   |      |   | 56,250    |  
|Notes payable - other                                                                            |  |               | 18,821    |   |      |   | 7,463     |  
|Notes payable - shareholders                                                                     |  |               | 19,918    |   |      |   | 19,919    |  
|Capital lease obligations                                                                        |  |               | 32,921    |   |      |   | 34,003    |  
|Accrued liabilities                                                                              |  |               | 44,456    |   |      |   | 29,194    |  
|                                                                                                 |  |               |           |   |      |   |           |  
|Total current liabilities                                                                        |  |               | 546,700   |   |      |   | 725,055   |  
|Long term debt                                                                                   |  |               |           |   |      |   |           |  
|Notes payable - bank                                                                             |  |               | 314,088   |   |      |   | 103,125   |  
|Notes payable - other                                                                            |  |               | 53,067    |   |      |   | 8,165     |  
|Capital lease obligations                                                                        |  |               | 67,431    |   |      |   | 82,477    |  
|                                                                                                 |  |               |           |   |      |   |           |  
|Total long term debt                                                                             |  |               | 434,586   |   |      |   | 193,767   |  
|                                                                                                 |  |               |           |   |      |   |           |  
|Total liabilities                                                                                |  |               | 981,286   |   |      |   | 918,822   |  
|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                                                                              |  |               | (224,841  | ) |      |   | (153,888  | )
|                                                                                                 |  |               |           |   |      |   |           |  
|Total shareholders equity                                                                       |  |               | 661,575   |   |      |   | 732,528   |  
|                                                                                                 |  |               |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                       |  | $             | 1,642,861 |   |      | $ | 1,651,350 |  
|                                                                                                 |  |               |           |   |      |   |           |  



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Thanksgiving Coffee Company, Inc.



Statements of Operations

Unaudited



|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|-------------------------------------------- |  | --------------------------------------- | --------- | - | -------------------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                             |  | For the Three MonthsEnded September 30, |           |   | For the Nine MonthsEnded September 30, |  
|                                             |  | 2005                                    |           |   | 2004                                   |   |           | 2005 |  |   | 2004      |  
|Income                                       |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net sales                                    |  | $                                       | 1,273,340 |   |                                        | $ | 1,295,645 |      |  | $ | 3,537,453 |   |  | $ | 3,542,896 |  
|Cost of sales                                |  |                                         | 685,647   |   |                                        |   | 704,528   |      |  |   | 1,942,191 |   |  |   | 1,927,705 |  
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Gross profit                                 |  |                                         | 587,693   |   |                                        |   | 591,117   |      |  |   | 1,595,262 |   |  |   | 1,615,191 |  
|Operating expenses                           |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Selling, general and administrative expenses |  |                                         | 474,694   |   |                                        |   | 501,732   |      |  |   | 1,545,257 |   |  |   | 1,550,307 |  
|Depreciation and amortization                |  |                                         | 36,102    |   |                                        |   | 31,949    |      |  |   | 110,028   |   |  |   | 97,891    |  
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Total operating expenses                     |  |                                         | 510,796   |   |                                        |   | 533,681   |      |  |   | 1,655,285 |   |  |   | 1,648,198 |  
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Operating income (loss)                      |  |                                         | 76,897    |   |                                        |   | 57,436    |      |  |   | (60,023   | ) |  |   | (33,007   | )
|Other income (expense)                       |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Miscellaneous income (expense)               |  |                                         | (1,515    | ) |                                        |   | 1,810     |      |  |   | (1,862    | ) |  |   | 2,347     |  
|Gain (loss) on sale of equipment             |  |                                         | 2,915     |   |                                        |   |          |      |  |   | 962       |   |  |   | 93        |  
|Interest expense                             |  |                                         | (12,869   | ) |                                        |   | (8,587    | )    |  |   | (38,966   | ) |  |   | (26,460   | )
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Total other income (expense)                 |  |                                         | (11,469   | ) |                                        |   | (6,777    | )    |  |   | (39,866   | ) |  |   | (24,020   | )
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Earnings/(Loss) before income taxes          |  |                                         | 65,428    |   |                                        |   | 50,659    |      |  |   | (99,889   | ) |  |   | (57,027   | )
|Income tax expense                           |  |                                         |          |   |                                        |   |          |      |  |   | (800      | ) |  |   | (800      | )
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net Earnings/(Loss)                          |  | $                                       | 65,428    |   |                                        | $ | 50,659    |      |  | $ | (100,689  | ) |  | $ | (57,827   | )
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Earnings/(Loss) per share (basic)            |  | $                                       | 0.053     |   |                                        | $ | 0.041     |      |  | $ | (0.081    | ) |  | $ | (0.047    | )
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Earnings/(Loss) per share (dilutive)         |  | $                                       | 0.053     |   |                                        | $ | 0.041     |      |  | $ | (0.081    | ) |  | $ | (0.047    | )
|                                             |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  



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Thanksgiving Coffee Company, Inc.



Statements of Accumulated Deficit

Unaudited



|                                         |  |               |          |   |      |   |          |  
|---------------------------------------- |  | ------------- | -------- | - | ---- | - | -------- | -
|                                         |  | September 30, |         
|                                         |  | 2005          |          |   | 2004 |  
|Accumulated deficit, beginning of period |  | $             | (124,152 | ) |      | $ | (96,061  | )
|Net loss                                 |  |               | (100,689 | ) |      |   | (57,827  | )
|                                         |  |               |          |   |      |   |          |  
|Accumulated deficit, end of period       |  | $             | (224,841 | ) |      | $ | (153,888 | )
|                                         |  |               |          |   |      |   |          |  



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Thanksgiving Coffee Company, Inc.



Statements of Cash Flows

Unaudited



|                                                                           |  |                                        |          |   |      |   |          |  
|-------------------------------------------------------------------------- |  | -------------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                           |  | For the Nine MonthsEnded September 30, |         
|                                                                           |  | 2005                                   |          |   | 2004 |  
|Operating activities                                                       |  |                                        |          |   |      |   |          |  
|Net loss                                                                   |  | $                                      | (100,689 | ) |      | $ | (57,827  | )
|Adjustments to reconcile net loss to cash flows from operating activities: |  |                                        |          |   |      |   |          |  
|Depreciation and amortization                                              |  |                                        | 125,940  |   |      |   | 113,599  |  
|Allowance for bad debts                                                    |  |                                        | 739      |   |      |   |         |  
|Loss on disposition of equipment                                           |  |                                        | (962     | ) |      |   |         |  
|(Increase) decrease in:                                                    |  |                                        |          |   |      |   |          |  
|Accounts receivable                                                        |  |                                        | (1,606   | ) |      |   | 54,068   |  
|Inventories                                                                |  |                                        | 28,542   |   |      |   | 343      |  
|Prepaid expenses                                                           |  |                                        | 8,969    |   |      |   | 5,083    |  
|Deposits and other assets                                                  |  |                                        |         |   |      |   | 2,258    |  
|Increase (decrease) in:                                                    |  |                                        |          |   |      |   |          |  
|Accounts payable                                                           |  |                                        | (39,625  | ) |      |   | 43,864   |  
|Accrued liabilities                                                        |  |                                        | (25,292  | ) |      |   | (34,174  | )
|                                                                           |  |                                        |          |   |      |   |          |  
|Net cash provided by (used in) operating activities                        |  |                                        | (3,984   | ) |      |   | 127,214  |  
|Investing activities                                                       |  |                                        |          |   |      |   |          |  
|Purchases of property and equipment                                        |  |                                        | (56,192  | ) |      |   | (107,942 | )
|Proceeds from sale of equipment/disposal                                   |  |                                        | 13,897   |   |      |   | (22,233  | )
|                                                                           |  |                                        |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                        |  |                                        | (42,295  | ) |      |   | (130,175 | )
|Financing activities                                                       |  |                                        |          |   |      |   |          |  
|Proceeds from notes payable and capital leases                             |  |                                        | 24,000   |   |      |   | 79,107   |  
|Repayments of notes payable and capital leases                             |  |                                        | (61,821  | ) |      |   | (98,877  | )
|                                                                           |  |                                        |          |   |      |   |          |  
|Net cash provided by (used in) financing activities                        |  |                                        | (37,821  | ) |      |   | (19,770  | )
|Decrease in cash                                                           |  |                                        | (84,100  | ) |      |   | (22,731  | )
|Cash at beginning of period                                                |  |                                        | 111,556  |   |      |   | 40,463   |  
|                                                                           |  |                                        |          |   |      |   |          |  
|Cash at end of period                                                      |  | $                                      | 27,456   |   |      | $ | 17,732   |  
|                                                                           |  |                                        |          |   |      |   |          |  



Supplemental disclosure of cash
flow information:



Interest paid for the nine month periods ended
September 30, 2005 and 2004 were $51,910 and $33,004, respectively.



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Thanksgiving Coffee Company, Inc.



Notes
to Financial Statements



September 30, 2005 and 2004



|1. | Summary of Significant Accounting Policies
|-- | ------------------------------------------



Nature of Operations



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



Basis of Presentation



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



Concentration of Credit Risk



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



Inventories



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



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



Property and Equipment



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



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



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



The Company adopted Emerging Issues Tax Force (EITF) No. 00-2, Accounting for Web Site DevelopmentCosts, in 2001. This accounting rule provides guidance regarding
capitalization or expense of certain website development costs. Accordingly, website development costs incurred in the operation phase that will result in future added functionality are capitalized and expenditures for training, administration and
maintenance of an existing website are expensed as incurred.



For income tax
purposes, depreciation is computed using the accelerated cost recovery system and the modified cost recovery system.



Goodwill and Other Intangible Assets



As of January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (FASB) No. 142, Goodwill and Other Intangibles.
Goodwill is assigned to a specific reporting unit and is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the reporting units carrying amount is greater
than its fair value. Intangible assets with definite lives are amortized over their useful economic lives. Financial condition and results of operations in accordance with FASB Statement No. 142 are reflected in accompanying 2005 and 2004
financial statements.



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



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



7



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



Income Taxes



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



Retirement Plan



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



Compensated Absences



Employees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of
service, and other factors. The Companys policy is that fully vested vacation is accrued at each quarter end. The accrued liability for vacation pay was $8,700 as of September 30, 2005 and such amount is included in accrued liabilities.
Carryover paid sick days are not available, nor ever considered vested.



Advertising



Advertising costs are expensed as incurred,
except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of mail order solicitation and catalog costs. For the nine months ended
September 30, 2005 the Company did not engage in any direct response advertising that would require capitalization. Advertising costs charged to expense were $17,239 for the nine months ended September 30, 2005.



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.



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##### Table of Contents

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



Revenue Recognition



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



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



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



Accounts receivable at September 30, 2005 consisted of the following:



|                                      |  |   |         |  
|------------------------------------- |  | - | ------- | -
|Accounts receivable                   |  | $ | 286,595 |  
|Less: allowance for doubtful accounts |  |   | (7,875  | )
|                                      |  |   |         |  
|Net Accounts Receivable               |  | $ | 278,720 |  
|                                      |  |   |         |  



The Company utilizes a percentage
method to establish the allowance for doubtful accounts. The estimated allowance ranges from 1% to 10% of outstanding receivables. The change in allowance for bad debts for the nine months ended September 30, 2005 was $739.



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



Inventories at September 30, 2005 consisted of the following:



|                                                        |  |   |        
|------------------------------------------------------- |  | - | -------
|Coffee                                                  |  |   |        
|Unroasted                                               |  | $ | 100,779
|Roasted                                                 |  |   | 108,465
|Tea                                                     |  |   | 12,638 
|Packaging, supplies and other merchandise held for sale |  |   | 202,113
|                                                        |  |   |        
|Total inventories                                       |  | $ | 423,995
|                                                        |  |   |        



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##### Table of Contents

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



Property and equipment at September 30, 2005 consisted of the following:



|                                      |  |   |            |  
|------------------------------------- |  | - | ---------- | -
|Equipment                             |  | $ | 1,471,884  |  
|Furniture and fixtures                |  |   | 259,613    |  
|Leasehold improvements                |  |   | 424,553    |  
|Transportation equipment              |  |   | 167,875    |  
|Marketing equipment                   |  |   | 166,162    |  
|Capitalized website development costs |  |   | 14,077     |  
|Property held under capital leases    |  |   | 240,706    |  
|                                      |  |   |            |  
|Total property and equipment          |  |   | 2,744,870  |  
|Accumulated depreciation              |  |   | (2,209,023 | )
|                                      |  |   |            |  
|Property and equipment, net           |  | $ | 535,847    |  
|                                      |  |   |            |  



Depreciation expense for the nine
months ended September 30, 2005 was $120,953



|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 December 31, 2004. Consequently, there was no change in the carrying value of goodwill in the nine months
ended September 30, 2005.



Intangible assets subject to amortization
consisted as of September 30, 2005 of the following:



|                                       |  |   |         |  
|-------------------------------------- |  | - | ------- | -
|Leasehold value                        |  | $ | 67,000  |  
|Trademarks                             |  |   | 5,127   |  
|                                       |  |   |         |  
|Total intangible assets                |  |   | 72,127  |  
|Accumulated amortization               |  |   | (40,921 | )
|                                       |  |   |         |  
|Other intangibles, net of amortization |  | $ | 31,206  |  
|                                       |  |   |         |  



Amortization expense for the nine
months ended September 30, 2005 was $4,987.



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##### 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 (9.75% at September 30, 2005), 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 Companys majority shareholders. |  | $ | 340,302
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
|Note payable to Savings Bank of Mendocino, interest payable in monthly installments at 3% over prime rate beginning January 1, 2005 (9.75% at September 30, 2005). The note payable 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 companys majority shareholders.                                                      |  |   | 22,000 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
|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. Shareholders note is
subordinated to all other notes payable.                                                                                                                                                                                                                                            |  |   | 19,918 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
|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.                                                                                                                                                                                                                                                                                                             |  |   | 28,881 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
|Note payable to Chase Manhattan Bank, payable in monthly installments of $304, including interest at 9.90% secured by a vehicle, final payment due on November 16, 2005. The note is
personally guaranteed by the Companys majority shareholders.                                                                                                                                                                                                                              |  |   | 607    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
|Note payable to Chrysler financing, payable in monthly installments of $335, including interest at 6.00% secured by vehicle, final payment due October 30, 2007.                                                                                                                                                                                                                                                                                                                |  |   | 7,857  



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##### Table of Contents

|                                                                                                                                                                               |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | -------- | -
|Capital Lease Obligations                                                                                                                                                      |  |   |          |  
|                                                                                                                                                                               | 
|Note payable to National Financial Services, payable in monthly installments of $1,414, including interest at 10.512%, secured by equipment, final payment due on May 10, 2006 |  | $ | 9,859    |  
|                                                                                                                                                                               | 
|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.            |  |   | 7,047    |  
|                                                                                                                                                                               | 
|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 2009.       |  | $ | 34,544   |  
|                                                                                                                                                                               | 
|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.     |  |   | 42,804   |  
|                                                                                                                                                                               | 
|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.          |  |   | 24,881   |  
|                                                                                                                                                                               | 
|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.       |  |   | 15,761   |  
|                                                                                                                                                                               |  |   |          |  
|                                                                                                                                                                               |  |   | 554,461  |  
|Less current portion                                                                                                                                                           |  |   | (119,875 | )
|                                                                                                                                                                               |  |   |          |  
|Long term portion of notes payable                                                                                                                                             |  | $ | 434,586  |  
|                                                                                                                                                                               |  |   |          |  



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##### Table of Contents

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



As of September 30, 2005, 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, |  |  
|2005                      |  | $ | 58,580 
|2006                      |  |   | 79,014 
|2007                      |  |   | 71,286 
|2008                      |  |   | 74,164 
|2009                      |  |   | 271,417
|Thereafter                |  |   |       
|                          |  |   |        
|                          |  | $ | 554,461
|                          |  |   |        



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 for the nine months ended September 30, 2005 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 |  | $ | 104,700 |  
|Depreciation and amortization                   |  |   | (22,000 | )
|Other                                           |  |   | (600    | )
|                                                |  |   |         |  
|Net deferred tax asset                          |  | $ | 82,100  |  
|                                                |  |   |         |  



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##### Table of Contents

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



At September 30, 2005 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 EndingDecember 31, |  | Contributions |        | Loss |   | Total  
|2005                     |  | $             | 12,067 |      | $ |        |  | $ | 12,067 
|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 
|                         |  |               |        |      |   |         |  |   |        
|                         |  | $             | 21,887 |      | $ | 565,367 |  | $ | 587,254
|                         |  |               |        |      |   |         |  |   |        



|                         |  |                                |        |               |   |                   |  |       |         |  |   |        
|------------------------ |  | ------------------------------ | ------ | ------------- | - | ----------------- |  | ----- | ------- |  | - | -------
|California               |  |                                |        |               |   |                   |  |      
|Years EndingDecember 31, |  | ManufacturersInvestment Credit |        | Contributions |   | Net OperatingLoss |  | Total
|2005                     |  | $                              |       |               | $ | 12,051            |  | $     | 64,341  |  | $ | 76,392 
|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 
|                         |  |                                |        |               |   |                   |  |       |         |  |   |        
|                         |  | $                              | 13,330 |               | $ | 20,357            |  | $     | 113,382 |  | $ | 147,069
|                         |  |                                |        |               |   |                   |  |       |         |  |   |        



Income taxes paid for the nine months
ended September 30, 2005 were $800.



|8. | Operating Leases
|-- | ----------------



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



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##### Table of Contents

|8. | Operating Leases (continued)
|-- | ----------------------------



As of September 30, 2005, minimum annual lease payments due under these agreements for each of the next five
years and in the aggregate were:



|                          |  |   |       
|------------------------- |  | - | ------
|Years Ending December 31, |  |  
|2005                      |  | $ | 25,928
|2006                      |  |   | 39,490
|2007                      |  |   | 18,238
|2008                      |  |   | 5,104 
|2009                      |  |   | 705   
|Thereafter                |  |   |      
|                          |  |   |       
|                          |  | $ | 89,465
|                          |  |   |       



Total operating lease payments for the
nine months ended September 30, 2005 were $42,859.



|9. | Long Term Leases
|-- | ----------------



The Company leases its corporate headquarters, warehouse and waterfront facilities from Paul and Joan Katzeff (the Companys majority shareholders). The lease is classified as an operating lease and provides for
monthly rental payments of $8,600. The Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The lease provides for periodic cost of living increases during the term of the lease, including the
option periods. The Company exercised an option to renew for one five-year term on March 31, 1995. The lease has been extended for successive one-year terms since March 31, 2000. The Company continues to hold options to renew the lease for
three successive five-year renewal periods. Rental expense under the lease was $77,400 for the nine months ended September 30, 2005. The Company intends to exercise all options under the terms of this lease.



The Company also leases a bakery establishment in Mendocino, California and warehouse
premises in Santa Rosa, California under operating leases expiring in 2011 and 2009, respectively. Rental expense under these operating leases was $32,814 for the nine months ended September 30, 2005.



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##### Table of Contents

|9. | Long Term Leases (continued)
|-- | ----------------------------



As of September 30, 2005, minimum future rental payments under non-cancelable facilities operating leases for
each of the next five years and in the aggregate were as follows:



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |  
|2005                      |  | $ | 56,172 
|2006                      |  |   | 151,110
|2007                      |  |   | 153,420
|2008                      |  |   | 78,450 
|2009                      |  |   | 55,200 
|Thereafter                |  |   | 102,825
|                          |  |   |        
|                          |  | $ | 597,177
|                          |  |   |        



|10. | Related Party Transactions
|--- | --------------------------



As of September 30, 2005, the Company has one interest-only note payable due on demand, payable to Paul and Joan Katzeff (the Companys majority shareholders).
The Company also leases properties from its majority shareholders (see Note 9).



The summary of payments made to Paul and Joan Katzeff in connection with these related party transactions for the nine months ended September 30, 2005 were as follows:



|                 |  |   |       
|---------------- |  | - | ------
|Interest expense |  | $ | 1,973 
|Rent expense     |  | $ | 77,400



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



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##### Table of Contents



THANKSGIVING COFFEE COMPANY, INC.



MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



FORWARD LOOKING STATEMENTS



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



SUMMARY



Sales of the Company have eroded over the last four years due to increased competition, customer attrition and customers roasting green beans for their own use. The
Company made several changes in 2004 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 2005 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.



The Company has enjoyed favorable margins through the
middle of 2004, because of the low 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 low prices. During the last six months of 2004, the world price of coffee more than doubled, eroding margins. The price has continued to rise in 2005, but not as dramatically as 2004. In addition to raising
prices, the Company has cut back hours of all employees to



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##### Table of Contents

seven hours per day for the summer months in an effort to reduce costs. 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 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.



Results of Operations



Three months ended September 30, 2005 versus September 30, 2004



|                              |  |                    |         |   |               |      |   
|----------------------------- |  | ------------------ | ------- | - | ------------- | ---- | --
|Consolidated                  |  | Increase(Decrease) |         |   | PercentChange |     
|Net Sales                     |  | $                  | (22,305 | ) |               | (1.8 | )%
|Cost of Sales                 |  | $                  | (18,881 | ) |               | (2.7 | )%
|Gross Margin                  |  |                    | .6      | % |               | 1.3  | % 
|Selling, G&A Expense          |  | $                  | (27,038 | ) |               | (5.4 | )%
|Depreciation And Amortization |  | $                  | 4,153   |   |               | 13   | % 
|Interest Expense              |  | $                  | 4,282   |   |               | 50   | % 
|Net Income (Loss)             |  | $                  | 14,769  |   |               | 29.1 | % 



Consolidated net sales for the three
months ended September 30, 2005 were $1,273,340 down 1.8% or $22,305 when compared with net sales of $1,295,645 for the same period in fiscal 2004.



Distribution revenues (e.g., revenues generated on our own truck distribution) were, flat for the three month period ended September 30, 2005 when compared with the
same period in fiscal 2004. The Company continues to test the concept of direct delivery and the use of distributors on its existing truck distribution.



National revenues (e.g., revenues not derived by mail order and direct truck distribution) were down $16,000, or 5%, when compared to sales for the same period in 2004.
The decrease was caused by a decline in volume to existing customers and distributors of bird stores. A change in account management has been made to attempt to reverse this trend in the bird stores. No assurances can be made that this trend can be
reversed.



Mail order revenues (e.g., revenues generated from product sold
directly to the consumer either through print media or the Internet) decreased nearly $4,000 or 4%, for the three months ended September 30, 2005 when compared to the same period in 2004.



Sales of the Company bakery were flat for the quarter.



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##### Table of Contents

Consolidated cost of sales for the three months ended September 30, 2005 were $685,647, down 2.7% or nearly $19,000
when compared with the cost of sales of $704,528 for the same period in 2004. This decrease was a result of lower sales of $22,000, and a drop in workers compensation of $8,000.



Consolidated gross margin (gross profit as a percentage of net sales) for the three months ended September 30, 2005 was 46.2%, up .6%
when compared with gross margin of 45.6% for the same period in 2004. The drop in labor costs have resulted in improved margins for the three month period. There can be no assurances that the Company will be able to maintain higher margins in the
future.



Consolidated selling, general and administrative expenses were
$474,694 for the three months ended September 30, 2005, a drop of 5.4% or more than $27,000 when compared with the selling, general and administrative expenses of $501,732 for the same period in 2004. The decrease was due to a $27,000 drop in
non-manufacturing wages as a result of a reduction in staff hours during the July and August months.



Depreciation and amortization expenses for the three months ended September 30, 2005 were $36,102, a 13% increase, or over $4,000, when compared to depreciation and amortization expenses of $31,949 for the same
period in fiscal 2004. The higher expenses were a result of the depreciable assets that were added during last year.



Interest expense for the three months ended September 30, 2005 was $12,869, a 50% increase from interest of $8,587 for the same period in 2004. The increase in
interest expense is a result of refinancing the debt of the Company from Merrill Lynch to the Savings Bank of Mendocino. The interest rate went from 3% over LIBOR to 3% over prime rate. This difference resulted in an increase percentage of
approximately 3%. Additionally, interest rates have risen from 6.75% to 9.75% during the year. Debt levels were slightly higher in 2005 when compared to 2004.



As a result of the foregoing factors, the Company had a consolidated net profit of $65,428 for the three months ended September 30, 2005, compared to a $50,659
consolidated net profit for the same period in 2004. Although there was a profit in the quarter, because of the decline in revenues, there can be no assurances that the Company will be profitable in any future period.



Nine Months Ended September 30, 2005 Compared With Nine Months Ended
September 30, 2004



|                              |  |                    |         |    |               |      |   
|----------------------------- |  | ------------------ | ------- | -- | ------------- | ---- | --
|Consolidated                  |  | Increase(Decrease) |         |    | PercentChange |     
|Net Sales                     |  | $                  | (5,443  | )  |               | (.2  | )%
|Cost of Sales                 |  | $                  | 14,486  |    |               | .8   | % 
|Gross Margin                  |  |                    | (.5     | )% |               | (1.1 | )%
|Selling, G&A Expense          |  | $                  | (5,050  | )  |               | (.3  | )%
|Depreciation And Amortization |  | $                  | 12,137  |    |               | 12.4 | % 
|Interest Expense              |  | $                  | 12,506  |    |               | 47.3 | % 
|Net Income (Loss)             |  | $                  | (42,862 | )  |               |      |   



19



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##### Table of Contents

Consolidated net sales for the nine months ended September 30, 2005 were $3,537,453 down .2% or over $5,000 when
compared with net sales of $3,542,896 for the same period in 2004.



Distribution revenues (e.g., revenues generated on our own truck distribution) were flat when compared to the same period during 2004. Sales from new distributors and new business have nearly offset the drop in company routes. The Company
has dropped three of its own routes since the first quarter of 2004. The Company has continued to pursue this strategy for routes outside of its surrounding counties.



National revenues (e.g., revenues not derived by mail order and direct truck distribution) decreased by $50,000, or 5%, when compared to the
same period in 2004. This decrease is a result of a major chain not purchasing until their new coffee bag was available (which came in the last part of the third quarter) and the decline of sales to existing customers and distributors of bird
stores.



Mail order revenues (e.g., revenues generated from product sold
directly to the consumer either through print media or the Internet) decreased nearly $11,000 or 4 % for the nine months ended September 30, 2005 when compared to the same period in 2004. The decrease in revenue reflects the promotional
activity last year with the Guerilla coffee in the New York Times and other media that was not available this year.



Sales attributable to the Companys bakery were up $52,000 for the nine months ended September 30, 2005 or 10% when compared to the same period in 2004.
Improved customer count in the first half of the year resulted in higher sales for the year.



Consolidated cost of sales for the nine months ended September 30, 2005 were $1,942,191, up .8%, or nearly $15,000 when compared with the cost of sales of $1,927,705 for the same period in 2004. Green bean costs
have risen this year from $1.51 per pound at the beginning of the year to $1.68 average for the year. These costs have been offset somewhat by lower workers compensation insurance costs.



Consolidated gross margin (gross profit as a percentage of net sales) for the nine months
ended September 30, 2005 was 45.1%, or down .5% when compared with gross margin of 45.6% for the same period in 2004. This was a result of the higher bean prices offset by lower insurance costs as mentioned above.



Consolidated selling, general and administrative expenses were $1,545,257 for the nine months
ended September 30, 2005, a .3% decrease, or over $5,000, when compared with selling, general and administrative expenses of $1,550,307 for the same period in 2004. The decrease was attributable to lower non-manufacturing wages because of
reduced hours in July and August.



Depreciation and amortization expenses for
the nine months ended September 30, 2005 were $110,028, an increase of 12.4%, or over $12,000, when compared with depreciation and amortization expenses of $97,891 for the same period in 2004. The increase in depreciation and amortization was a
result of a large number of depreciable assets purchased by the Company during 2004.



20



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##### Table of Contents

Interest expense for the nine months ended September 30, 2005 was $38,966 a 47.3% increase, or over $12,500 when
compared with interest expense of $26,460 for the same period in 2004. This increase in interest expense was a result of slightly higher loan balances and higher interest rates. The Savings Bank of Mendocino, from which the Company currently has a
term note and a line of credit, uses the Prime Rate while Merrill Lynch, from which the Company obtained financing through the third quarter of 2004, used LIBOR rates, representing a difference of about three percent.



As a result of the foregoing factors, the Company had a consolidated net loss of $100,689 for
the nine months ended September 30, 2005, compared to a consolidated net loss of $57,827 for the same period in 2004. 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.



21



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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



As of September 30, 2005, the Company had working capital of $196,957 versus working capital of $74,743 as of September 30, 2004.
The increase in working capital is due to a decrease in current debt because of the refinancing of the Merrill Lynch line of credit, which was reported as a current liability at September 30, 2004, to a long-term note with the Savings Bank of
Mendocino in November of 2004 of over $200,000.



Net cash used in operating
activities was $(3,984) for the nine months ended September 30, 2005 compared to net cash provided by operating activities for the nine months ended September 30, 2004 was $127,214. The decrease in net cash provided by operating activities
in the first nine months of 2005 was the result of an increase in the loss this year compared to the same period in fiscal 2004 of nearly $43,000 and over a $39,000 decrease in payables and a $25,000 decrease in accrued liabilities offset by over a
$25,000 increase in inventories.



Cash used in investing activities was $42,295
for the nine months ended September 30, 2005 compared to $130,175 used in the same period in 2004. Capital additions for the first nine months of 2005 include $38,000 for brewers, grinders and fixtures, $5,000 in production equipment, $2,000 in
computer equipment and $2,000 in leasehold improvements.



Net cash used in
financing activities for the nine months ended September 30, 2005 was $37,821 compared to cash used by financing activities of $19,770 during the same period in 2004. The cash used during this year was a result of repayment of debt for previous
capital equipment purchases offset by accessing the credit line of $24,000 (See below and Note 6 of Notes to Financial Statements).



Because of lower cash generated by the operating loss and pay down of debt, cash at September 30, 2005 was $27,456 lower than January 1, 2005 cash balance but
higher than cash at September 30, 2004 of $17,732.



In November 2004, the
Company refinanced its note and credit line with Merrill Lynch by securing a term note with the Savings Bank of Mendocino. This new 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 9.75% at September 30, 2005. The new 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)



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 9.75% at September 30, 2005
with an outstanding balance on the line of $22,000. 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)



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The Company had a loan outstanding for $19,918 at September 30, 2005, 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. (See Note 6 of Notes to Financial Statements)



At September 30, 2005, the Company had total borrowings of $554,461 including $362,302 owing to the Savings Bank of Mendocino. This compares to total borrowings
of $498,162 as of September 30, 2004, including $380,527 outstanding to Merrill Lynch at that time.



The Company feels that it has sufficient cash reserves to satisfy cash requirements for the next twelve months if the Savings Bank of Mendocino renews the credit line due at November 18, 2005.



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 thanOne year |   | 1-3 years |  | 4-5 years |         | After 5years
|Long Term Debt          |  | $                      | 554,461   |                   | $ | 58,580    |  | $         | 150,300 |              | $ | 345,581 |  | $ |       
|Operating Leases        |  |                        | 89,465    |                   |   | 25,928    |  |           | 57,728  |              |   | 5,809   |  |   |        
|Real Estate Leases      |  |                        | 597,177   |                   |   | 56,172    |  |           | 304,530 |              |   | 133,650 |  |   | 102,825
|                        |  |                        |           |                   |   |           |  |           |         |              |   |         |  |   |        
|Total Cash Obligations  |  | $                      | 1,241,104 |                   | $ | 140,680   |  | $         | 512,558 |              | $ | 485,040 |  | $ | 102,825
|                        |  |                        |           |                   |   |           |  |           |         |              |   |         |  |   |        



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



RELATED PARTY TRANSACTIONS



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



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SEASONALITY AND OTHER FACTORS AFFECTING PERFORMANCE



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



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, 2005. 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 2005 that have materially affected or are reasonably likely to affect the Companys internal controls over
financial reporting.



Part II  Other Information



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



-None-



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



- None 



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



- None 



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



- None -



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



- None 



|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).  



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SIGNATURES



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



THANKSGIVING COFFEE COMPANY, INC.



|                             |  |                         |  |                  
|---------------------------- |  | ----------------------- |  | -----------------
|Name                         |  | Title                   |  | Date             
|                             |  |                        
|/s/ Paul KatzeffPaul Katzeff |  | Chief Executive Officer |  | November 12, 2005
|                             |  |                        
|/s/ Joan KatzeffJoan Katzeff |  | President               |  | November 12, 2005



26