##### 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 June 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 of incorporation or organization) |  | (IRS Employer Identification Number)

19100 South Harbor Drive

Fort Bragg, California 95437

(Address of principal executive offices)

(Zip Code)

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

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

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

Yes  x            No ̈

As of August 11, 2006, there were 1,236,744 shares
outstanding of common stock of the issuer.

Transitional Small Business Disclosure Format (check one):

Yes ̈No  x



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##### Table of Contents

THANKSGIVING COFFEE COMPANY, INC.

INDEX



|                                                                                                      |  |     
|----------------------------------------------------------------------------------------------------- |  | ----
|PART I.             FINANCIAL INFORMATION                                                             |  |     
|                                                                                                      | 
|Item 1.        Financial Statements and Notes to Financial Statements                                 |  |     
|                                                                                                      | 
|Balance Sheets as of June 30, 2006 and 2005                                                           |  | 4-5 
|                                                                                                      | 
|Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005                        |  | 6   
|                                                                                                      | 
|Statements of Accumulated Deficit for the Six Months Ended June 30, 2006 and 2005                     |  | 7   
|                                                                                                      | 
|Statements of Cash Flows for the Three and Six Months Ended June 30,2006 and 2005                     |  | 8   
|                                                                                                      | 
|Notes to Financial Statements                                                                         |  | 9-20
|                                                                                                      | 
|Item 2.        
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 21  
|                                                                                                      | 
|Item 3.        
Controls and Procedures                                                               |  | 28  
|                                                                                                      | 
|PART II.             OTHER INFORMATION                                                                |  |     
|                                                                                                      | 
|Item 1.        
Legal Proceedings                                                                     |  | 28  
|                                                                                                      | 
|Item 2.        
Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 29  
|                                                                                                      | 
|Item 3.        
Defaults Upon Senior Securities                                                       |  | 29  
|                                                                                                      | 
|Item 4.        
Submission of Matters to a Vote of Security Holders                                   |  | 29  
|                                                                                                      | 
|Item 5.        
Other Information                                                                     |  | 29  
|                                                                                                      | 
|Item 6.        
Exhibits                                                                              |  | 29  



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##### Table of Contents

Financial Statements

and Other Financial Information

Thanksgiving Coffee Company, Inc.

For the Six Months Ended June 30, 2006 and 2005



3



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Balance Sheets

Unaudited



|                                       |  |          |            |   |      |   |            |  
|-------------------------------------- |  | -------- | ---------- | - | ---- | - | ---------- | -
|                                       |  | June 30, |           
|                                       |  | 2006     |            |   | 2005 |  
|Assets                                 |  |          |            |   |      |   |            |  
|Current assets                         |  |          |            |   |      |   |            |  
|Cash                                   |  | $        | 49,751     |   |      | $ | 49,066     |  
|Accounts receivable, net of allowance  |  |          | 232,696    |   |      |   | 207,516    |  
|Inventories                            |  |          | 355,546    |   |      |   | 438,492    |  
|Prepaid expenses                       |  |          | 20,314     |   |      |   | 21,299     |  
|Deferred tax asset                     |  |          | 5,851      |   |      |   | 3,400      |  
|                                       |  |          |            |   |      |   |            |  
|Total current assets                   |  |          | 664,158    |   |      |   | 719,773    |  
|Property and equipment                 |  |          |            |   |      |   |            |  
|Property and equipment                 |  |          | 2,832,677  |   |      |   | 2,747,198  |  
|Accumulated depreciation               |  |          | (2,299,944 | ) |      |   | (2,191,897 | )
|                                       |  |          |            |   |      |   |            |  
|Total property and equipment           |  |          | 532,733    |   |      |   | 555,301    |  
|Other assets                           |  |          |            |   |      |   |            |  
|Deposits and other assets              |  |          | 60,778     |   |      |   | 59,932     |  
|Goodwill                               |  |          | 171,773    |   |      |   | 171,773    |  
|Other intangibles, net of amortization |  |          | 24,522     |   |      |   | 32,660     |  
|Deferred tax asset                     |  |          | 95,061     |   |      |   | 78,700     |  
|                                       |  |          |            |   |      |   |            |  
|Total other assets                     |  |          | 352,134    |   |      |   | 343,065    |  
|                                       |  |          |            |   |      |   |            |  
|Total assets                           |  | $        | 1,549,025  |   |      | $ | 1,618,139  |  
|                                       |  |          |            |   |      |   |            |  

See accompanying notes to financial statements



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Balance Sheets

Unaudited



|                                                                                                 |  |          |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------ |  | -------- | --------- | - | ---- | - | --------- | -
|                                                                                                 |  | June 30, |          
|                                                                                                 |  | 2006     |           |   | 2005 |  
|Liabilities and shareholders equity                                                             |  |          |           |   |      |   |           |  
|Current liabilities                                                                              |  |          |           |   |      |   |           |  
|Accounts payable                                                                                 |  | $        | 444,561   |   |      | $ | 372,931   |  
|Line of credit - bank                                                                            |  |          | 21,000    |   |      |   | 24,000    |  
|Notes payable - bank                                                                             |  |          | 27,530    |   |      |   | 21,710    |  
|Notes payable - other                                                                            |  |          | 9,031     |   |      |   | 19,422    |  
|Notes payable - shareholders                                                                     |  |          | 39,986    |   |      |   | 19,918    |  
|Capital lease obligations                                                                        |  |          | 39,641    |   |      |   | 35,985    |  
|Accrued liabilities                                                                              |  |          | 75,893    |   |      |   | 71,910    |  
|                                                                                                 |  |          |           |   |      |   |           |  
|Total current liabilities                                                                        |  |          | 657,642   |   |      |   | 565,876   |  
|Long term debt                                                                                   |  |          |           |   |      |   |           |  
|Notes payable - bank                                                                             |  |          | 293,245   |   |      |   | 324,860   |  
|Notes payable - other                                                                            |  |          | 28,195    |   |      |   | 57,729    |  
|Capital lease obligations                                                                        |  |          | 95,865    |   |      |   | 73,526    |  
|                                                                                                 |  |          |           |   |      |   |           |  
|Total long term debt                                                                             |  |          | 417,305   |   |      |   | 456,115   |  
|                                                                                                 |  |          |           |   |      |   |           |  
|Total liabilities                                                                                |  |          | 1,074,947 |   |      |   | 1,021,991 |  
|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                                                                              |  |          | (412,338  | ) |      |   | (290,268  | )
|                                                                                                 |  |          |           |   |      |   |           |  
|Total shareholders equity                                                                       |  |          | 474,078   |   |      |   | 596,148   |  
|                                                                                                 |  |          |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                       |  | $        | 1,549,025 |   |      | $ | 1,618,139 |  
|                                                                                                 |  |          |           |   |      |   |           |  

See accompanying notes to financial statements



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Statements of Operations

Unaudited



|                                             |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|-------------------------------------------- |  | ---------------------------------- | --------- | - | -------------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                             |  | For the Three Months EndedJune 30, |           |   | For the Six Months EndedJune 30, |  
|                                             |  | 2006                               |           |   | 2005                             |   |           | 2006 |  |   | 2005      |  
|Income                                       |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Net sales                                    |  | $                                  | 1,117,582 |   |                                  | $ | 1,130,347 |      |  | $ | 2,243,114 |   |  | $ | 2,264,113 |  
|Cost of sales                                |  |                                    | 634,093   |   |                                  |   | 617,392   |      |  |   | 1,332,484 |   |  |   | 1,256,544 |  
|                                             |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Gross profit                                 |  |                                    | 483,489   |   |                                  |   | 512,955   |      |  |   | 910,630   |   |  |   | 1,007,569 |  
|Operating expenses                           |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Selling, general and administrative expenses |  |                                    | 505,425   |   |                                  |   | 551,261   |      |  |   | 1,041,362 |   |  |   | 1,070,563 |  
|Depreciation and amortization                |  |                                    | 37,502    |   |                                  |   | 35,931    |      |  |   | 68,224    |   |  |   | 73,926    |  
|                                             |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Total operating expenses                     |  |                                    | 542,927   |   |                                  |   | 587,192   |      |  |   | 1,109,586 |   |  |   | 1,144,489 |  
|                                             |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Operating loss                               |  |                                    | (59,438   | ) |                                  |   | (74,237   | )    |  |   | (198,956  | ) |  |   | (136,920  | )
|Other expense                                |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Miscellaneous expense                        |  |                                    | 1,373     |   |                                  |   | 740       |      |  |   | (738      | ) |  |   | (347      | )
|Loss on sale of equipment                    |  |                                    |          |   |                                  |   | (195      | )    |  |   |          |   |  |   | (1,953    | )
|Interest expense                             |  |                                    | (13,311   | ) |                                  |   | (12,925   | )    |  |   | (25,644   | ) |  |   | (26,097   | )
|                                             |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Total other expense                          |  |                                    | (11,938   | ) |                                  |   | (12,380   | )    |  |   | (26,382   | ) |  |   | (28,397   | )
|                                             |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Loss before income taxes                     |  |                                    | (71,376   | ) |                                  |   | (86,617   | )    |  |   | (225,338  | ) |  |   | (165,317  | )
|Income tax expense                           |  |                                    |          |   |                                  |   |          |      |  |   | (800      | ) |  |   | (800      | )
|                                             |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Net loss                                     |  | $                                  | (71,376   | ) |                                  | $ | (86,617   | )    |  | $ | (226,138  | ) |  | $ | (166,117  | )
|                                             |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Loss per share (basic)                       |  | $                                  | (0.058    | ) |                                  | $ | (0.070    | )    |  | $ | (0.182    | ) |  | $ | (0.134    | )
|                                             |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  
|Loss per share (dilutive)                    |  | $                                  | (0.058    | ) |                                  | $ | (0.070    | )    |  | $ | (0.182    | ) |  | $ | (0.134    | )
|                                             |  |                                    |           |   |                                  |   |           |      |  |   |           |   |  |   |           |  

See accompanying notes to financial statements



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Thanksgiving Coffee Company, Inc.

Statements of Accumulated Deficit

Unaudited



|                                              |  |                                  |          |   |      |   |          |  
|--------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | -
|                                              |  | For the Six Months EndedJune 30, |         
|                                              |  | 2006                             |          |   | 2005 |  
|Accumulated deficit, January 1, 2006 and 2005 |  | $                                | (186,200 | ) |      | $ | (124,151 | )
|Net loss                                      |  |                                  | (226,138 | ) |      |   | (166,117 | )
|                                              |  |                                  |          |   |      |   |          |  
|Accumulated deficit, June 30, 2006 and 2005   |  | $                                | (412,338 | ) |      | $ | (290,268 | )
|                                              |  |                                  |          |   |      |   |          |  

See accompanying notes to financial statements



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Thanksgiving Coffee Company, Inc.

Statements of Cash Flows

Unaudited



|                                                                           |  |                                     |         |   |                                   |   |         |      |  |   |          |   |  |   |          |  
|-------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | --------------------------------- | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                           |  | For the Three Months Ended
June 30, |         |   | For the Six Months Ended June 30, |  
|                                                                           |  | 2006                                |         |   | 2005                              |   |         | 2006 |  |   | 2005     |  
|Operating activities                                                       |  |                                     |         |   |                                   |   |         |      |  |   |          |   |  |   |          |  
|Net loss                                                                   |  | $                                   | (71,376 | ) |                                   | $ | (86,617 | )    |  | $ | (226,138 | ) |  | $ | (166,117 | )
|Adjustments to reconcile net loss to cash flows from operating activities: |  |                                     |         |   |                                   |   |         |      |  |   |          |   |  |   |          |  
|Depreciation and amortization                                              |  |                                     | 41,832  |   |                                   |   | 43,579  |      |  |   | 76,851   |   |  |   | 84,835   |  
|Allowance for bad debts                                                    |  |                                     | (1,289  | ) |                                   |   | (243    | )    |  |   | (3,391   | ) |  |   | (2,445   | )
|Loss on disposition of equipment                                           |  |                                     |        |   |                                   |   | 1,953   |      |  |   |         |   |  |   | 1,953    |  
|(Increase) decrease in:                                                    |  |                                     |         |   |                                   |   |         |      |  |   |          |   |  |   |          |  
|Accounts receivable                                                        |  |                                     | 11,652  |   |                                   |   | 16,281  |      |  |   | 58,806   |   |  |   | 72,782   |  
|Inventories                                                                |  |                                     | 62,631  |   |                                   |   | (32,951 | )    |  |   | 88,364   |   |  |   | 14,046   |  
|Prepaid expenses                                                           |  |                                     | (4,951  | ) |                                   |   | 8,184   |      |  |   | 11,423   |   |  |   | 19,252   |  
|Deposits and other assets                                                  |  |                                     | (846    | ) |                                   |   | 400     |      |  |   | (846     | ) |  |   | 249      |  
|Increase (decrease) in:                                                    |  |                                     |         |   |                                   |   |         |      |  |   |          |   |  |   |          |  
|Accounts payable                                                           |  |                                     | (3,802  | ) |                                   |   | 25,986  |      |  |   | 12,237   |   |  |   | (49,063  | )
|Accrued liabilities                                                        |  |                                     | 26,181  |   |                                   |   | 19,839  |      |  |   | (11,320  | ) |  |   | 2,162    |  
|                                                                           |  |                                     |         |   |                                   |   |         |      |  |   |          |   |  |   |          |  
|Net cash provided by (used in) operating activities                        |  |                                     | 60,032  |   |                                   |   | (3,589  | )    |  |   | 5,986    |   |  |   | (22,346  | )
|                                                                           |  |                                     |         |  
|Investing activities                                                       |  |                                     |         |   |                                   |   |         |      |  |   |          |   |  |   |          |  
|Purchases of property and equipment                                        |  |                                     | (49,691 | ) |                                   |   | (22,799 | )    |  |   | (98,519  | ) |  |   | (32,510  | )
|Proceeds from sale of equipment/disposal                                   |  |                                     |        |   |                                   |   | 5,632   |      |  |   |         |   |  |   | 7,497    |  
|                                                                           |  |                                     |         |   |                                   |   |         |      |  |   |          |   |  |   |          |  
|Net cash used in investing activities                                      |  |                                     | (49,691 | ) |                                   |   | (17,167 | )    |  |   | (98,519  | ) |  |   | (25,013  | )
|                                                                           |  |                                     |         |  
|Financing activities                                                       |  |                                     |         |   |                                   |   |         |      |  |   |          |   |  |   |          |  
|Proceeds from notes payable and capital leases                             |  |                                     | 47,621  |   |                                   |   | 24,000  |      |  |   | 79,353   |   |  |   | 24,000   |  
|Repayments of notes payable and capital leases                             |  |                                     | (28,440 | ) |                                   |   | (20,111 | )    |  |   | (50,454  | ) |  |   | (39,131  | )
|                                                                           |  |                                     |         |   |                                   |   |         |      |  |   |          |   |  |   |          |  
|Net cash provided by (used in) financing activities                        |  |                                     | 19,181  |   |                                   |   | 3,889   |      |  |   | 28,899   |   |  |   | (15,131  | )
|                                                                           |  |                                     |         |  
|Decrease in cash                                                           |  |                                     | 29,522  |   |                                   |   | (16,867 | )    |  |   | (63,634  | ) |  |   | (62,490  | )
|Cash at April 1, 2006 and 2005 and January 1, 2006 and 2005                |  |                                     | 20,229  |   |                                   |   | 65,933  |      |  |   | 113,385  |   |  |   | 111,556  |  
|                                                                           |  |                                     |         |   |                                   |   |         |      |  |   |          |   |  |   |          |  
|Cash at June 30, 2006 and 2005                                             |  | $                                   | 49,751  |   |                                   | $ | 49,066  |      |  | $ | 49,751   |   |  | $ | 49,066   |  
|                                                                           |  |                                     |         |   |                                   |   |         |      |  |   |          |   |  |   |          |  

See accompanying notes to financial statements



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##### Table of Contents

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements

June 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:



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



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



Property and Equipment (continued)

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

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

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

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 employees or others.



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##### 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.



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



Compensated Absences

Employees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. The Companys policy is that fully vested vacation is accrued at each
quarter end. The accrued liability for vacation pay was $14,700 as of June 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 six months ended June 30, 2006 the
Company did not engage in any direct response advertising that would require capitalization. Advertising costs charged to expense was $19,016 for the six months ended June 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.



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

Accounts
receivable consist of the following:



|                                      |  |   |         |  
|------------------------------------- |  | - | ------- | -
|Accounts receivable                   |  | $ | 237,849 |  
|Less: allowance for doubtful accounts |  |   | (5,153  | )
|                                      |  |   |         |  
|Net accounts receivable               |  | $ | 232,696 |  
|                                      |  |   |         |  

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 (recovery) for the six months ended June 30, 2006, was $0.



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

Inventories consist
of the following:



|                                                        |  |   |        
|------------------------------------------------------- |  | - | -------
|Coffee                                                  |  |   |        
|Unroasted                                               |  | $ | 71,624 
|Roasted                                                 |  |   | 89,303 
|Tea                                                     |  |   | 10,436 
|Packaging, supplies and other merchandise held for sale |  |   | 184,183
|                                                        |  |   |        
|Total inventories                                       |  | $ | 355,546
|                                                        |  |   |        



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

Property
and equipment consist of the following:



|                                      |  |   |            |  
|------------------------------------- |  | - | ---------- | -
|Equipment                             |  | $ | 1,486,445  |  
|Furniture and fixtures                |  |   | 263,113    |  
|Leasehold improvements                |  |   | 461,830    |  
|Transportation equipment              |  |   | 164,045    |  
|Marketing equipment                   |  |   | 166,162    |  
|Capitalized website development costs |  |   | 14,076     |  
|Property held under capital leases    |  |   | 277,006    |  
|                                      |  |   |            |  
|Total property and equipment          |  |   | 2,832,677  |  
|Accumulated depreciation              |  |   | (2,299,944 | )
|                                      |  |   |            |  
|Property and equipment, net           |  | $ | 532,733    |  
|                                      |  |   |            |  

Depreciation expense for the six months ended June 30, 2006 was $71,924.



|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 June 30, 2006. Consequently, there was no change in the carrying value of goodwill as of June 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               |  |   | (47,605 | )
|                                       |  |   |         |  
|Other intangibles, net of amortization |  | $ | 24,522  |  
|                                       |  |   |         |  

Amortization expense for the three months ended June 30, 2006 was $4,927.



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|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, 2006 (11% at June 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. |  | $ | 320,776
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|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 June 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. Shareholders note is subordinated to all other notes payable.                                                                                                                                                                                                                                              |  |   | 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.                                                                                                                                                                                                                                                                                                                   |  |   | 20,067 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|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.                                                                                                                                                                                                                                                                                                               |  |   | 24,061 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|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.                                                                                                                                                                                                                                                                                                          |  |   | 13,165 



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|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.                      |  |   | 3,552    |  
|                                                                                                                                                                                         | 
|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.              |  |   | 35,608   |  
|                                                                                                                                                                                         | 
|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.                 |  |   | 13,166   |  
|                                                                                                                                                                                         | 
|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.              |  |   | 28,526   |  
|                                                                                                                                                                                         | 
|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.                    |  |   | 21,199   |  
|                                                                                                                                                                                         | 
|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. |  |   | 16,216   |  
|                                                                                                                                                                                         | 
|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.                          |  |   | 17,238   |  
|                                                                                                                                                                                         |  |   |          |  
|                                                                                                                                                                                         |  |   | 554,493  |  
|Less current portion                                                                                                                                                                     |  |   | (137,188 | )
|                                                                                                                                                                                         |  |   |          |  
|Long term portion of notes payable                                                                                                                                                       |  | $ | 417,305  |  
|                                                                                                                                                                                         |  |   |          |  



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##### Table of Contents

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



Interest paid for the six months ended June 30, 2006 was $25,644.

As of June 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                      |  | $ | 98,735 
|2007                      |  |   | 80,362 
|2008                      |  |   | 86,123 
|2009                      |  |   | 69,486 
|2010                      |  |   | 35,010 
|Thereafter                |  |   | 184,777
|                          |  |   |        
|                          |  | $ | 554,493
|                          |  |   |        

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) benefit 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 |  
|                                                |  |   |         |  



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##### Table of Contents

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



At June 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 |   | NetOperatingLoss |  | 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 |   | NetOperatingLoss |  | 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 six months ended June 30, 2006, was $800.



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|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 June 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                      |  |   | 19,745
|2007                      |  |   | 18,238
|2008                      |  |   | 5,104 
|2009                      |  |   | 705   
|Thereafter                |  |   |      
|                          |  |   |       
|                          |  | $ | 43,792
|                          |  |   |       

Total operating lease payments for the six months ended June 30, 2006, was $28,572.



|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 $51,600 for the six months ended
June 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 $34,357 for the six months ended June 30, 2006.



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



As of June 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                      |  | $ | 81,347   
|2007                      |  |   | 155,491  
|2008                      |  |   | 157,110  
|2009                      |  |   | 160,065  
|2010                      |  |   | 162,450  
|Thereafter                |  |   | 500,755  
|                          |  |   |          
|                          |  | $ | 1,217,218
|                          |  |   |          



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

As of June 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 six months ended June 30, 2006, is
as follows:



|                   |  |   |       
|------------------ |  | - | ------
|Interest expense   |  | $ | 1,169 
|Rent expense       |  | $ | 25,800
|Principal payments |  | $ | 9,000 

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 five 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. The effect of these changes on the Companys business in the first six
months of 2006 was growth of nearly $103,000 or 5%. However, the bakery sales declined by nearly $124,000 because the bakery was closed for twenty-three days in February and March 2006 to make major repairs to the floor and also due to slower than
previous years customer count once it reopened. Because of the limited impact of the sales changes at the coffee operation and the lower volume at the bakery, as well as the increases 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. See Results of Operations.

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,



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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 2006. The Company has raised prices on some items and instituted a surcharge on delivered and shipped
product to offset some of the increase in green bean prices. 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. See Results of Operations.

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 June 30, 2006 versus June 30, 2005



|                              |  |                    |         |    |               |      |   
|----------------------------- |  | ------------------ | ------- | -- | ------------- | ---- | --
|Consolidated                  |  | Increase(Decrease) |         |    | PercentChange |     
|Net Sales                     |  | $                  | (12,765 | )  |               | (1.2 | )%
|Cost of Sales                 |  | $                  | 16,701  |    |               | 2.7  | % 
|Gross Margin                  |  |                    | (2.1    | )% |               | (4.6 | )%
|Selling, G&A Expense          |  | $                  | (45,836 | )  |               | (8.3 | )%
|Depreciation And Amortization |  | $                  | 1,571   |    |               | 4.4  | % 
|Interest Expense              |  | $                  | 386     |    |               | 3.0  | % 
|Net Income (Loss)             |  | $                  | 15,241  |    |               |     |   

Consolidated net sales for the three months ended June 30, 2006 were $1,117,582, down 1.2% or $12,765 when
compared with net sales of $1,130,347 for the same period in fiscal 2005.

Distribution revenues (e.g., revenues generated on our own truck distribution)
were up $6,000, or 1%, for the three months ended June 30, 2006 when compared with the same period in fiscal 2005. There were no new customers added to the routes during the period. Existing customers purchased more during the second quarter of
2006. The Company continues to test the concept of direct delivery and the use of distributors in its existing truck distribution.

National revenues
(e.g., revenues not derived by mail order and direct truck distribution) were up $18,000, or 6% for the three months ended June 30, 2006 when compared to sales for the same period in 2005. The increase in volume for this method of distribution
was an increase in volume to the distributor in Southern California and a new foodservice customer in Northern California being serviced by an outside distributor.

Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) increased nearly $5,000 or 10%, for the three months ended June 30, 2006



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when compared to the same period in 2005. The increase in mail order was a result of an increase in pricing in May 2006 as average order price increased by
nearly 8% and growth in the Cornucopia Program (this is a fundraising program that non-profit organizations can utilize to assist in fundraising with their members when they purchase coffee).

Sales for the Company bakery were down $42,000 in the three months ended June 30, 2006 when compared to the same period in 2005. The bakery was closed at the end of
the first quarter to repair the floor. This resulted in a slow start to the second quarter as customers were slow to return. Customer counts were lower in the second quarter of 2006 when compared to 2005 even after the bakery reopened.

Consolidated cost of sales for the three months ended June 30, 2006 were $634,093, up 2.7% or $16,701 when compared with the cost of sales of $617,392 for the
same period in 2005. This increase was a result of higher green bean costs of $35,000 as the average price of green went from $1.69 in the second quarter of 2005 to $1.90 for the same quarter in 2006. This increase was offset somewhat by a decrease
in workers compensation insurance of $15,000 and lower repair and maintenance costs in the plant of $3,000.

Consolidated gross margin (gross profit
as a percentage of net sales) for the three months ended June 30, 2006 was 43.3%, down 2.1% when compared with gross margin of 45.4% for the same period in 2005. The increase in green bean costs have resulted in lower margins for the three
month period. There can be no assurances that the Company will be able to improve margins in the future.

Consolidated selling, general and administrative
expenses were $505,425 for the three months ended June 30, 2006, a decrease of 8.3% or nearly $46,000 when compared with the selling, general and administrative expenses of $551,261 for the same period in 2005. The decrease was due to a $14,000
drop in wages as the company discontinued its equipment service department, a $12,000 reduction in show expense and a decline of $20,000 in promotion expense as the Company did not renew its coupon effort with a northern California food store.

Depreciation and amortization expenses for the three months ended June 30, 2006 were $37,502, a 4.4% increase, or $1,571, when compared to
depreciation and amortization expenses of $35,931 for the same period in fiscal 2005. The higher expenses were a result of the depreciable assets that were added during the period.

Interest expense for the three months ended June 30, 2006 was $13,311, a 3% increase from interest of $12,925 for the same period in 2005. The increase in interest expense is a result of higher interest rates
from 8.75% at June 30, 2005 to 11% at June 30, 2006. Loan balances as of June 30, 2006 were $554,493 compared to $577,150 for the same period in 2005.

As a result of the foregoing factors, the Company had a consolidated net loss of $71,376 for the three months ended June 30, 2006, compared to a consolidated net loss of $86,617 for the same period in 2005.
Because of the decline in volume at the Bakery and the higher cost of green beans resulting in lower gross margins, there can be no assurances that the Company will be profitable in any future period.



23



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##### Table of Contents

Six Months Ended June 30, 2006 Compared With Six Months Ended June 30, 2005



|                              |  |                    |         |    |               |      |   
|----------------------------- |  | ------------------ | ------- | -- | ------------- | ---- | --
|Consolidated                  |  | Increase(Decrease) |         |    | PercentChange |     
|Net Sales                     |  | $                  | (20,999 | )  |               | (0.9 | )%
|Cost of Sales                 |  | $                  | 75,940  |    |               | 6.0  | % 
|Gross Margin                  |  |                    | (3.9    | )% |               | (8.8 | )%
|Selling, G&A Expense          |  | $                  | (29,201 | )  |               | (2.7 | )%
|Depreciation And Amortization |  | $                  | (5,702  | )  |               | (7.7 | )%
|Interest Expense              |  | $                  | (453    | )  |               | (1.7 | )%
|Net Income (Loss)             |  | $                  | (60,021 | )  |               |      |   

Consolidated net sales for the six months ended June 30, 2006 were $2,243,114 down .9% or nearly $21,000 when
compared with net sales of $2,264,113 for the same period in 2005.

Distribution revenues (e.g., revenues generated on our own truck distribution) in the
six months ended June 30, 2006 increased by $39,000, or 3.5%, when compared to the same period during 2005. This increase is a result of selling additional product to existing accounts as no significant accounts have been added during the
period.

National revenues (e.g., revenues not derived by mail order and direct truck distribution) increased in the six months ended 2006 by $53,000, or
6.5%, when compared to the same period in 2005. This growth is a result of increased volume to the southern California distributor and a new foodservice customer in northern California serviced by an outside distributor.

Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) increased $11,000 or 5 % for
the six months ended June 30, 2006 when compared to the same period in 2005. The increase in revenue reflects a price increase in the existing mail order business and new non-profit organizations in the Cornucopia program.

Sales attributable to the Companys bakery were down $124,000, or 33% for the six months ended June 30, 2006 when compared to the same period in 2005. In
addition to the closure of the bakery for twenty-three days during February and March 2006, the customer count did not return to last year levels further reducing sales for 2006.

Consolidated cost of sales for the six months ended June 30, 2006 were $1,332,484, up $75,940, or 6% when compared with the cost of sales of $1,256,544 for the same period in 2005. Green beans have increased to
an average cost per pound of $1.88 at June 30, 2006 compared to $1.43 average for the same period in 2005 accounting for all of the increase in cost of sales.



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Consolidated gross margin (gross profit as a percentage of net sales) for the six months ended June 30, 2006 was
40.6%, a decrease of 8.8 % when compared with gross margin of 44.5% for the same period in 2005. The decrease in gross margin was a result of the previously mentioned increases in the per pound price of green beans. There can be no assurances
that the cost of green beans will decline or that the Company will be able to increase it prices to recover the higher costs and consequently the Companys results would continue to be negatively effected.

Consolidated selling, general and administrative expenses were $1,041,362 for the six months ended June 30, 2006, a 2.7% decrease or, $29,201 when compared with
selling, general and administrative expenses of $1,070,563 for the same period in 2005. The decrease is a result of reducing the number of shows that the Company attends and not dropping a coupon with a northern California chain as was the case last
year.

Depreciation and amortization expenses for the six months ended June 30, 2006 were $68,224, a decrease of 7.7%, or $5,702 when compared with
depreciation and amortization expenses of $73,926 for the same period in 2005. The decrease in depreciation and amortization was a result of drop in net assets for the first six months of 2006.

Interest expense for the six months ended June 30, 2006 was $25,644 a 1.7% decrease, or $453 when compared with interest expense of $26,097 for the same period in
2005. This decrease in interest expense was a result of slightly lower loan balances offset by higher interest rates as noted above.

As a result of the
foregoing factors, the Company had a consolidated net loss of $226,138 for the six months ended June 30, 2006, compared to a consolidated net loss of $166,117 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.



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LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2006, the Company had working capital of $6,516 versus working capital of $153.897 as of June 30, 2005. The decrease in working capital is due to a decrease in inventories of nearly $83,000
and an increase in payables and accruals of over $75,000 offset somewhat by an increase in receivables.

Net cash provided by operating activities was
$5,986 for the six months ended June 30, 2006 compared to net cash used by operating activities for the six months ended June 30, 2005 was $22,346. The increase in net cash provided by operating activities in the first six months of 2006
was the result of a decrease in accounts receivable of over $58,000 and inventories of over $88,000 offset by a larger loss of $60,000 when compared to the same period in fiscal 2005.

Cash used by investing activities was $98,519 for the six months ended June 30, 2006 compared to $25,013 used in the same period in 2005. Capital additions for the first six months of 2006 include $14,500 for a
used car to replace one in an accident last year, $18,000 for brewers, grinders and bins for fixtures, $17,000 for an upgrade of the computer network and programs, $36,000 for a new floor in the bakery and $13,000 for production equipment.

Net cash provided by financing activities for the six months ended June 30, 2006 was $28,899 compared to cash used in financing activities of $15,131
during the same period in 2005. (See below and Note 6 of Notes to Financial Statements).

Because of the changes in cash as discussed above, the cash usage
and the cash position at June 30, 2006 was $63,634 and $49,751 respectively and similar to the cash usage and cash position in the same period in 2005 of $62,490 and $49,066.

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 11% at June 30, 2006. 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 11% at June 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 has a loan outstanding for $19,918 at June 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 of 2006, the Company secured a note with the majority shareholders for
$29,066.84, on an unsecured basis, payable in weekly installments of $1,000, due in December of 2006,



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interest at 12% paid monthly. As of June 30, 2006 the principal amount of $20,067 remained outstanding on such loan. (See Note 6 of Notes to Financial
Statements)

At June 30, 2006, the Company had total borrowings of $554,493 including $341,776 owing to the Savings Bank of Mendocino. This compares
to total borrowings of $577,150 as of June 30, 2005, including $370,570 outstanding 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          |  | $                      | 554,494   |                    | $ | 98,736    |  | $         | 166,485 |              | $ | 104,496 |  | $ | 184,777
|Operating Leases        |  |                        | 43,792    |                    |   | 19,745    |  |           | 23,342  |              |   | 705     |  |   |        
|Real Estate Leases      |  |                        | 1,217,218 |                    |   | 81,347    |  |           | 312,601 |              |   | 322,515 |  |   | 500,755
|Total Cash Obligations  |  | $                      | 1,815,504 |                    | $ | 199,828   |  | $         | 502,428 |              | $ | 427,716 |  | $ | 685,532

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 June 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 first six months of 2006 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
| | -- | --------



|      |  |                                                                                                                                                    
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.15 |  | Promissory Note issued by the Company to Paul and Joan Katzeff, the principal shareholders                                                         
|      | 
|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 Katzeff Paul
Katzeff |  | Chief Executive Officer |  | August 14, 2006
|                              |  |                        
|/s/ Joan Katzeff Joan
Katzeff |  | President               |  | August 14, 2006
|                              |  |                        
|/s/ Sam Kraynek Sam
Kraynek   |  | Chief Financial Officer |  | August 14, 2006



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