##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended October 2, 2006
 OR
 o
    
    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. 000-50052
 COSI, INC.
  Delaware
    
    06-1393745(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1751 Lake Cook Road
Deerfield, Illinois 60015
 (847) 597-8800
 þ o
  o þ o
 o þ




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##### 



COSI, INC.
 
  
 Page NumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets  as of October 2, 2006 and January 2, 2006
    
    
    3Consolidated Statements of Operations  Three and nine month periods ended October 2, 2006 and October 3, 2005
    
    
    4Consolidated Statement of Stockholders Equity  Nine month period ended October 2, 2006
    
    
    5Consolidated Statements of Cash Flows  Nine month periods ended October 2, 2006 and October 3, 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7-13Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14-25Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 6. Exhibits
    
    
    27SIGNATURES
    
    
    28EXHIBIT INDEX
    
    
    29CERTIFICATIONS
    
    
    30-32302 Certification of Chief Executive Officer302 Certification of Chief Financial OfficerSection 906 Certification
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Cosi, Inc.
 
 Consolidated Balance Sheets
 As of October 2, 2006 and January 2, 2006
 (in thousands, except per share data)
 October 2, 2006
    
    
    January 2, 2006(Unaudited)
    
    
    (Note 1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,951.3
    
    
    $
    1,952.3Investments
    
    
    19,678.8
    
    
    
    32,917.5Accounts receivable, net of allowances of $1.7 and $8.0, respectively
    
    
    1,441.0
    
    
    
    496.2Inventories
    
    
    988.6
    
    
    
    914.6Prepaid expenses and other current assets
    
    
    2,558.9
    
    
    
    3,672.7Total current assets
    
    
    30,618.6
    
    
    
    39,953.3Furniture and fixtures, equipment and leasehold improvements, net
    
    
    45,226.8
    
    
    
    33,502.7Intangibles, security deposits and other assets, net
    
    
    2,833.2
    
    
    
    3,088.0Total assets
    
    $
    78,678.6
    
    
    $
    76,544.0Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    2,822.3
    
    
    $
    2,689.2Accrued expenses
    
    
    10,148.0
    
    
    
    9,837.2Deferred franchise revenue
    
    
    941.2
    
    
    
    251.3Current portion of other long-term liabilities
    
    
    620.8
    
    
    
    345.0Current portion of long-term debt
    
    
    15.8
    
    
    
    18.8Total current liabilities
    
    
    14,548.1
    
    
    
    13,141.5Deferred franchise revenue
    
    
    1,928.8
    
    
    
    258.8Other long-term liabilities, net of current portion
    
    
    7,837.8
    
    
    
    6,835.4Long-term debt, net of current portion
    
    
    99.8
    
    
    
    99.9Total liabilities
    
    
    24,414.5
    
    
    
    20,335.6Commitments and contingenciesStockholders equity:Common stock  $.01 par value; 100,000,000 shares authorized,
39,674,979 and 38,478,796 shares issued and outstanding, respectively
    
    
    396.7
    
    
    
    384.8Additional paid-in capital
    
    
    270,040.5
    
    
    
    268,330.5Unearned stock compensation
    
    
    
    
    
    
    (3,866.4
    )Treasury stock, 239,543 shares at cost
    
    
    (1,197.7
    )
    
    
    (1,197.7
    )Accumulated deficit
    
    
    (214,975.4
    )
    
    
    (207,442.8
    )Total stockholders equity
    
    
    54,264.1
    
    
    
    56,208.4Total liabilities and stockholders equity
    
    $
    78,678.6
    
    
    $
    76,544.0
 The accompanying notes are an integral part of these consolidated financial statements.
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Cosi, Inc.
 
 Consolidated Statements of Operations
 For the Three and Nine Month Periods Ended October 2, 2006 and October 3, 2005
 (in thousands, except per share data)
 Three Months Ended
    
    Nine Months EndedOctober 2,
    
    October 3,
    
    October 2,
    
    October 3,2006
    
    2005
    
    2006
    
    2005(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited)Revenues:Restaurant net sales
    
    $
    32,756.1
    
    
    $
    30,778.4
    
    
    $
    94,592.4
    
    
    $
    88,550.5Franchise fees and royalties
    
    
    194.9
    
    
    
    25.0
    
    
    
    513.1
    
    
    
    77.8Total revenues
    
    
    32,951.0
    
    
    
    30,803.4
    
    
    
    95,105.5
    
    
    
    88,628.3Costs and expenses:Cost of food and beverage
    
    
    7,470.5
    
    
    
    7,254.2
    
    
    
    21,738.8
    
    
    
    21,275.3Restaurant labor and related benefits
    
    
    11,038.6
    
    
    
    10,340.3
    
    
    
    31,235.6
    
    
    
    29,678.8Occupancy and other restaurant operating expenses
    
    
    8,727.3
    
    
    
    7,308.3
    
    
    
    23,953.0
    
    
    
    21,014.227,236.4
    
    
    
    24,902.8
    
    
    
    76,927.4
    
    
    
    71,968.3General and administrative expenses
    
    
    5,658.1
    
    
    
    5,480.9
    
    
    
    16,000.0
    
    
    
    15,614.7Stock-based compensation expense
    
    
    894.1
    
    
    
    1,124.5
    
    
    
    3,825.5
    
    
    
    2,429.5Depreciation and amortization
    
    
    1,997.1
    
    
    
    1,868.1
    
    
    
    5,670.8
    
    
    
    5,483.6Restaurant pre-opening expenses
    
    
    399.6
    
    
    
    300.6
    
    
    
    1,318.1
    
    
    
    439.0Provision for losses on asset impairments
and disposals
    
    
    7.4
    
    
    
    
    
    
    
    7.4
    
    
    
    49.7Lease termination expense (benefit)
    
    
    1.5
    
    
    
    (69.1
    )
    
    
    19.2
    
    
    
    (67.8
    )Total costs and expenses
    
    
    36,194.2
    
    
    
    33,607.8
    
    
    
    103,768.4
    
    
    
    95,917.0Operating loss
    
    
    (3,243.2
    )
    
    
    (2,804.4
    )
    
    
    (8,662.9
    )
    
    
    (7,288.7
    )Interest income
    
    
    333.1
    
    
    
    342.0
    
    
    
    1,079.5
    
    
    
    426.6Interest expense
    
    
    (2.3
    )
    
    
    (7.6
    )
    
    
    (7.0
    )
    
    
    (31.4
    )Allowance for notes receivable from
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (261.1
    )Other income
    
    
    57.0
    
    
    
    43.6
    
    
    
    57.8
    
    
    
    66.4Net loss
    
    $
    (2,855.4
    )
    
    $
    (2,426.4
    )
    
    $
    (7,532.6
    )
    
    $
    (7,088.2
    )Per Share Data:Net loss per share, basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.20
    )
    
    $
    (0.21
    )Weighted average shares outstanding
    
    
    38,355,027
    
    
    
    37,570,756
    
    
    
    38,124,113
    
    
    
    33,616,991
 The accompanying notes are an integral part of these consolidated financial statements.
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Cosi, Inc.
 
 Consolidated Statement of Stockholders Equity
 For the Nine Months Ended October 2, 2006
 (unaudited)
 (in thousands, except share data)
 Common StockAdditional
    
    
    Unearned
    
    

Treasury StockNumber of
    
    
    
    
    
    
    Paid In
    
    
    Stock
    
    
    Number of
    
    
    
    
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Shares
    
    
    Amount
    
    
    Deficit
    
    
    TotalBalance, January 2, 2006
    
    
    38,478,796
    
    
    $
    384.8
    
    
    $
    268,330.5
    
    
    $
    (3,866.4
    )
    
    
    239,543
    
    
    $
    (1,197.7
    )
    
    $
    (207,442.8
    )
    
    $
    56,208.4Exercises of options
    
    
    340,529
    
    
    
    3.4
    
    
    
    1,280.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,284.1Adoption of FAS 123R
    
    
    
    
    
    
    
    
    
    
    (3,866.4
    )
    
    
    3,866.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuances of restricted stock
    
    
    621,000
    
    
    
    6.2
    
    
    
    (6.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    11,376
    
    
    
    0.1
    
    
    
    3,861.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,861.3Exercises of warrants
    
    
    223,278
    
    
    
    2.2
    
    
    
    440.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    442.9Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,532.6
    )
    
    
    (7,532.6
    )Balance, October 2, 2006
    
    
    39,674,979
    
    
    $
    396.7
    
    
    $
    270,040.5
    
    
    $
    
    
    
    
    239,543
    
    
    $
    (1,197.7
    )
    
    $
    (214,975.4
    )
    
    $
    54,264.1
 The accompanying notes are an integral part of this consolidated financial statement.
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Cosi, Inc.
 
 Consolidated Statements of Cash Flows
 For the Nine Month Periods Ended October 2, 2006 and October 3, 2005
 (dollars in thousands)
 October 2, 2006
    
    
    October 3, 2005(Unaudited)
    
    
    (Unaudited)Cash flows from operating activities:Net loss
    
    $
    (7,532.6
    )
    
    $
    (7,088.2
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activitiesDepreciation and amortization
    
    
    5,670.8
    
    
    
    5,483.6Non-cash portion of asset disposals
    
    
    17.6
    
    
    
    1.4Provision (recovery) for bad debts
    
    
    6.3
    
    
    
    (20.8
    )Stock-based compensation expense
    
    
    3,861.3
    
    
    
    2,771.6Reserve on notes receivable from stockholders
    
    
    
    
    
    
    261.1Changes in operating assets and liabilities:Accounts receivable
    
    
    (949.0
    )
    
    
    45.8Inventories
    
    
    (74.0
    )
    
    
    27.4Prepaid expenses and other current assets
    
    
    1,113.8
    
    
    
    186.9Other assets
    
    
    233.2
    
    
    
    (299.4
    )Accounts payable and accrued expenses
    
    
    (2,537.0
    )
    
    
    (1,776.5
    )Deferred Revenue
    
    
    2,360.0
    
    
    
    (1,464.9
    )Other liabilities
    
    
    2,593.4
    
    
    
    (529.6
    )Net cash provided by (used in) operating activities
    
    
    4,763.8
    
    
    
    (2,401.6
    )Cash flows from investing activities:Capital expenditures
    
    
    (15,739.6
    )
    
    
    (4,888.8
    )Purchases of investments
    
    
    (172,505.7
    )
    
    
    (82,735.8
    )Redemptions of investments
    
    
    185,744.4
    
    
    
    57,828.9Net redemptions (payments) of security deposits
    
    
    21.6
    
    
    
    (50.6
    )Net cash used in investing activities
    
    
    (2,479.3
    )
    
    
    (29,846.3
    )Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    1,717.5
    
    
    
    36,696.7Principal payments on long-term debt
    
    
    (3.0
    )
    
    
    (220.6
    )Net cash provided by financing activities
    
    
    1,714.5
    
    
    
    36,476.1Net increase in cash and cash equivalents
    
    
    3,999.0
    
    
    
    4,228.2Cash and cash equivalents, beginning of period
    
    
    1,952.3
    
    
    
    1,089.7Cash and cash equivalents, end of period
    
    $
    5,951.3
    
    
    $
    5,317.9Supplemental disclosures of cash flow information:Cash paid for:Interest
    
    $
    
    
    
    $
    14.0Corporate franchise and income taxes
    
    $
    29.3
    
    
    $
    130.7
 The accompanying notes are an integral part of these consolidated financial statements.
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COSI, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Note 1  Basis of Presentation
      Note 2  Investments
 Accounting for Certain Investments in Debt and Equity
Securities
  UnrealizedPre-TaxCost Basis
    
    
    Net Gains
    
    
    Fair Value(in thousands)Debt securities issued by the U.S. Treasury and
other U.S. government corporations and agencies
    
    $
    19,678.8
    
    
    $
    
    
    
    $
    19,678.8$
    19,678.8
    
    
    $
    
    
    
    $
    19,678.8
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COSI, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
 Note 3  Stock-Based Compensation
  For the Three Months Ended
    
    
    For the Nine Months Ended(in thousands)
    
    
    (in thousands)October 2,
    
    
    October 3,
    
    
    October 2,
    
    
    October 3,2006
    
    
    2005
    
    
    2006
    
    
    2005Stock options variable accounting
    
    $
    
    
    
    $
    1,040.7
    
    
    $
    
    
    
    $
    1,182.1Stock option compensation expense
    
    
    273.6
    
    
    
    
    
    
    
    826.8
    
    
    
    Restricted stock compensation expense
    
    
    631.4
    
    
    
    348.0
    
    
    
    3,034.5
    
    
    
    1,589.5Total non-cash stock compensation expense
    
    
    905.0
    
    
    
    1,388.7
    
    
    
    3,861.3
    
    
    
    2,771.6Non-cash compensation included in labor and related benefits
    
    
    10.9
    
    
    
    264.2
    
    
    
    35.8
    
    
    
    342.1Separately captioned stock compensation expense
    
    $
    894.1
    
    
    $
    1,124.5
    
    
    $
    3,825.5
    
    
    $
    2,429.5
  Share-Based Payments Accounting for Stock-Based Compensation
  8




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COSI, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 continued
 Three Months Ended
    
    
    Nine Months EndedOctober 3, 2005
    
    
    October 3, 2005(in thousands except
    
    
    (in thousands exceptper share data)
    
    
    per share data)Net loss as reported
    
    $
    (2,426.4
    )
    
    $
    (7,088.2
    )Add: stock-based compensation expense included in
reported net loss
    
    
    1,388.7
    
    
    
    2,771.5Deduct: Total stock-based employee compensation
expense determined under the fair value based
method for all awards
    
    
    (796.8
    )
    
    
    (3,057.4
    )Pro forma net loss
    
    $
    (1,834.5
    )
    
    $
    (7,374.1
    )Net loss per common share, basic and dilutedAs reported
    
    $
    (0.06
    )
    
    $
    (0.21
    )Pro forma
    
    $
    (0.05
    )
    
    $
    (0.22
    )
     9




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COSI, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 continued
    NOTE 4
 Warrants
    10




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COSI, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
  NOTE 5  Inventories
  NOTE 6  Furniture and Fixtures, Equipment, and Leasehold Improvements
  As of
    
    
    As ofOctober 2,
    
    
    January 2,(in
thousands)
    
    2006
    
    
    2006Leasehold improvements
    
    $
    46,994.8
    
    
    $
    38,213.4Furnitue and fixtures
    
    
    12,349.4
    
    
    
    10,130.0Restaurant equipment
    
    
    18,152.1
    
    
    
    14,017.4Computer and telephone equipment
    
    
    10,492.4
    
    
    
    9,321.3Construction in progress
    
    
    1,950.7
    
    
    
    1,250.8Vehicles
    
    
    29.7
    
    
    
    89,969.1
    
    
    
    72,932.9Less: accumulated drepreciation
and amortization
    
    
    (44,742.3
    )
    
    
    (39,430.2
    )Net furniture and fixtures, equipment
and leasehold improvements
    
    $
    45,226.8
    
    
    $
    33,502.7
 Note 7  Accrued Expenses
  October 2,
    
    
    January 2,(in thousands)
    
    2006
    
    
    2006Payroll and related benefits and taxes
    
    $
    2,333.6
    
    
    $
    2,933.3Professional and legal costs
    
    
    442.4
    
    
    
    453.6Taxes payable
    
    
    894.1
    
    
    
    673.6Rent obligations
    
    
    505.8
    
    
    
    529.7Gift cards/certificates
    
    
    419.6
    
    
    
    438.9Utilities
    
    
    658.9
    
    
    
    649.9New restaurant construction
    
    
    2,626.9
    
    
    
    954.0Insurance
    
    
    20.0
    
    
    
    1,235.5Unearned revenue
    
    
    571.4
    
    
    
    601.2Other
    
    
    1,675.3
    
    
    
    1,367.5Accrued expenses
    
    $
    10,148.0
    
    
    $
    9,837.2
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COSI, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
 Note 8  Long-Term Debt
  NOTE 9  Earnings Per Share
  NOTE 10  Lease Termination Costs
   NOTE 11  Contingencies
  NOTE 12  Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
 12




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COSI, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  continued
 
 13




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Item 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 The following discussion and analysis of our financial condition and results of operations
for the fiscal periods ended October 2, 2006, and October 3, 2005, should be read in
conjunction with Selected Consolidated Financial Data and our audited consolidated
financial statements and the notes to those statements that are in our fiscal 2005 Annual
Report on Form 10-K . Our discussion contains forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could differ materially
from those anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under Cautionary Note Regarding Forward-Looking
Statements below and elsewhere in this Quarterly Report.
 OVERVIEW
  For the Three Months EndedOctober 2, 2006
    
    October 3, 2005Company-
    
    
    
    
    
    
    
    
    
    Company-Owned
    
    Franchise
    
    Total
    
    Owned
    
    Franchise
    
    TotalRestaurants at beginning of period
    
    
    103
    (a)
    
    
    6
    
    
    
    109
    
    
    
    92
    
    
    
    2
    
    
    
    94New restaurants opened
    
    
    6
    
    
    
    2
    
    
    
    8
    
    
    
    1
    
    
    
    
    
    
    
    1Restaurants permanently closed
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Restaurants at end of period
    
    
    108
    
    
    
    8
    
    
    
    116
    
    
    
    93
    
    
    
    2
    
    
    
    95
 
 (a)
    
    Includes two company-owned locations that remained closed as a result of Hurricane Wilma. For the Nine Months EndedOctober 2, 2006
    
    October 3, 2005Company-
    
    
    
    
    
    
    
    
    
    Company-Owned
    
    Franchise
    
    Total
    
    Owned
    
    Franchise
    
    TotalRestaurants at beginning of period
    
    
    96
    (a)
    
    
    5
    
    
    
    101
    
    
    
    92
    (a)
    
    
    
    
    
    
    92New restaurants opened
    
    
    17
    
    
    
    3
    
    
    
    20
    
    
    
    2
    
    
    
    2
    
    
    
    4Restaurants permanently closed
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    1
    
    
    
    
    
    
    
    1Restaurants at end of period
    
    
    108
    
    
    
    8
    
    
    
    116
    
    
    
    93
    
    
    
    2
    
    
    
    95
 
 (a)
    
    Includes two company-owned locations that remained closed as a result of Hurricane Wilma.    14




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CRITICAL ACCOUNTING POLICIES
   Long lived assets Accounting for
the Impairment or Disposal of Long Lived Assets
 15




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##### Table of Contents



Lease termination costs
 Accounting for Costs Associated
with Exit or Disposal Activities,
 Stock options Share-Based Payments Accounting for Stock-Based Compensation
 Accounting for Lease Obligations: Accounting for Operating Leases with Scheduled Rent Increases
 Landlord Allowances Issues Relating to Accounting for Leases
 Income taxes
 Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
 16




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##### Table of Contents



Restaurant Net Sales.
 Franchise Fees and Royalties.
 Gift Card Sales
    Cost of food and beverage.
 Restaurant labor and related benefits.
 Occupancy and other restaurant operating expenses.
 General and administrative expenses.
 Stock compensation expense.
 Depreciation and amortization.
 Restaurant pre-opening expenses.
 17




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##### Table of Contents



RESULTS OF OPERATIONS
  Three Months Ended
    
    Nine Months EndedOctober 2,
    
    October 3,
    
    October 2,
    
    October 3,2006
    
    2005
    
    2006
    
    2005Revenues:Restaurant net sales
    
    
    99.4
    %
    
    
    99.9
    %
    
    
    99.5
    %
    
    
    99.9
    %Franchise fees and royalties
    
    
    0.6
    
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.1Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of food and beverage (1)
    
    
    22.8
    
    
    
    23.6
    
    
    
    23.0
    
    
    
    24.0Restaurant labor and related benefits (1)
    
    
    33.7
    
    
    
    33.6
    
    
    
    33.0
    
    
    
    33.5Occupancy and other restaurant operating expenses (1)
    
    
    26.6
    
    
    
    23.7
    
    
    
    25.3
    
    
    
    23.783.1
    
    
    
    80.9
    
    
    
    81.3
    
    
    
    81.2General and
administative expenses
    
    
    17.2
    
    
    
    17.8
    
    
    
    16.8
    
    
    
    17.6Stock compensation expense
    
    
    2.7
    
    
    
    3.7
    
    
    
    4.0
    
    
    
    2.7Depreciation and amortization
    
    
    6.1
    
    
    
    6.1
    
    
    
    6.0
    
    
    
    6.2Restaurant pre-opening expenses
    
    
    1.2
    
    
    
    1.0
    
    
    
    1.4
    
    
    
    0.5Provision for losses on asset impairments and disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Lease termination expense (benefit)
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.1
    )Total costs and expenses
    
    
    110.3
    
    
    
    109.3
    
    
    
    109.5
    
    
    
    108.2Operating loss
    
    
    (9.8
    )
    
    
    (9.1
    )
    
    
    (9.1
    )
    
    
    (8.2
    )Other income (expense):Interest income
    
    
    1.0
    
    
    
    1.1
    
    
    
    1.1
    
    
    
    0.5Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allowance for stockholders notes receivables
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.3
    )Other income
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    Net loss
    
    
    (8.6
    )%
    
    
    (7.9
    )%
    
    
    (7.9
    )%
    
    
    (8.0
    )%
 
 (1)
    
    As a percentage of restaurant net sales Restaurant Net Sales
   18




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##### Table of Contents



Franchise Fees and Royalties
   Costs and Expenses
 Cost of food and beverage
  Restaurant labor and related benefits.
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Occupancy and other restaurant operating expenses
  General and administrative costs
  Stock-based compensation expense. Share-Based Payment, , Accounting for Stock-Based
Compensation, Accounting for Stock Issued to Employees
 Share-Based Payment, , Accounting for
Stock-Based Compensation,
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##### Table of Contents



Accounting for Stock Issued to
Employees
 Depreciation and amortization
  Restaurant pre-opening expenses
  Lease termination costs
 Interest income and expense
 Other income
 21




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LIQUIDITY AND CAPITAL RESOURCES
        22




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##### Table of Contents



Contractual Obligations:
 Payments Due by Period (in thousands)Due4th
    
    
    Due
    
    
    Due
    
    
    DueTotal
    
    
    Quarter
    
    
    Fiscal 2007
    
    
    Fiscal 2009
    
    
    AfterDescription
    
    Obligations
    
    
    Fiscal 2006
    
    
    to Fiscal 2008
    
    
    to Fiscal 2010
    
    
    Fiscal 2010Long-term debt (1)
    
    $
    150.0
    
    
    $
    25.0
    
    
    $
    50.0
    
    
    $
    50.0
    
    
    $
    25.0Operating leases (2) (3)
    
    
    88,286.2
    
    
    
    3,657.3
    
    
    
    28,574.9
    
    
    
    24,625.8
    
    
    
    31,428.2Purchase obligations (4)
    
    
    1,470.6
    
    
    
    1,470.6
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash
obligations
    
    $
    89,906.8
    
    
    $
    5,152.9
    
    
    $
    28,624.9
    
    
    $
    24,675.8
    
    
    $
    31,453.2
 
 (1)
    
    Amounts shown include aggregate scheduled interest payments of $0.03 million.(2)
    
    Amounts shown are net of an aggregate $0.9 million of sublease rental income due
under non-cancelable subleases.(3)
    
    Includes approximately an aggregate $0.7 million of obligations on leases for restaurants
that are closed as of October 2, 2006.(4)
    
    Primarily contractual obligations related to new restaurant construction.  PURCHASE COMMITMENTS
    23




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##### Table of Contents



CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
  
    
    the cost of our principal food products and supply and delivery shortages or interruptions;
    
    labor shortages or increased labor costs;
    
    changes in demographic trends and consumer tastes and preferences, including
changes resulting from concerns over nutritional or safety aspects of beef, poultry,
and other foods or the effects of food-borne illnesses such as mad cow disease and
avian influenza or bird flu;
    
    competition in our markets, both in our business and locating suitable restaurant sites;
    
    our operation and execution in new and existing markets;
    
    expansion into new markets;
    
    our ability to attract and retain qualified franchisees;
    
    our ability to locate suitable restaurant sites in new and existing markets and
negotiate acceptable lease terms;
    
    the rate of our internal growth, and our ability to generate increased revenue from our existing restaurants;
    
    our ability to generate positive cash flow from existing and new restaurants;
    
    fluctuations in our quarterly results due to seasonality;
    
    increased government regulation and our ability to secure required governmental approvals and permits;
    
    our ability to create customer awareness of our restaurants in new markets;
    
    the reliability of our customer and market studies;
    
    cost effective and timely planning, design and build-out of new restaurants;
    
    our ability to recruit, train and retain qualified corporate and restaurant personnel and management;
    
    market saturation due to new restaurant openings;
    
    inadequate protection of our intellectual property;
    
    adverse weather conditions which impact customer traffic at our restaurants; and
    
    adverse economic conditions.
 24




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
   
 Part II. OTHER INFORMATION
 
 Item 1: LEGAL PROCEEDINGS
  
 Item 1A: RISK FACTORS
  Health concerns relating to the consumption of beef, poultry or other food products could
adversely affect the
 25




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##### Table of Contents



price and availability of beef, poultry and other food products, consumer preferences and our
results of operations and stock price.
   Seasonality, inclement weather and other variable factors may adversely affect our sales and
results of operations and would adversely impact our quarterly operating results, resulting
in a decline in our stock price.
  We hold significant amounts of illiquid assets and may have to dispose of them on unfavorable
terms.
  We have a new management team that does not have proven success with the Company.
  
    
    Chief Financial Officer, joined Cosi in August 2004 as Controller and appointed
Chief Financial Officer in August 2005;
    
    Vice President of People joined Cosi in November 2005;
    
    Vice President of Construction, joined Cosi in May 2005; and
    
    Executive Vice President and Chief Marketing Officer, joined Cosi in May 2006.
  26




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##### Table of Contents



General economic conditions and the effects of war or terrorism may cause a decline in
discretionary consumer spending, which would negatively affect our business.
  Fluctuations in coffee prices could adversely affect our operating results.
  
 Item 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 6: EXHIBITS
 Exhibits
 Exhibit Number
    
    DescriptionExhibit 31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 27




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##### Table of Contents



SIGNATURES
  COSI, INC.
 Date: November 7, 2006
    
    By:
    
    /s/ KEVIN ARMSTRONGKevin ArmstrongChief Executive OfficerDate: November 7, 2006
    
    By:
    
    /s/ WILLIAM KOZIELWilliam KozielChief Financial Officer (chief accounting officer)Treasurer and Secretary
 28




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##### Table of Contents



EXHIBIT INDEX
 Exhibit 31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 29