**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D.C. 20549**
  **Form
10-K**
 
 **For
Annual and Transition Reports pursuant to Sections 13 or**
 **15(d)
of the Securities Exchange Act of 1934**
 **(Mark
      One)**x
    **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934****For
      the Fiscal Year Ended December 31, 2004****OR**o
    **TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**
 
 **For
the transition period from**
 **to**
 
 **Commission
File Number 000-23478**
 
 
 **TurboChef
Technologies, Inc.**
 **(Exact
name of Registrant as specified in its Charter)**
 **DELAWARE**
    
    **48-1100390****(State
      or other jurisdiction of**
      **incorporation
      or organization)**
    
    **(IRS
      employer identification number)******Six
      Concourse Parkway, Suite 1900, Atlanta,
      Georgia****
    
    **30328****(Address
      of principal executive offices)**
    
    **(Zip
      Code)****Registrant’s
      telephone number, including area code:******(678)
      987-1700******SECURITIES
      REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE
      ACT:****Title
      of Each Class**
    
    **Name
      of Each Exchange on Which Registered**None
    
    None**SECURITIES
      REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE
      ACT:****Common
      Stock, $0.01 Par Value****(Title
      of Class)**
 
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
 
 Indicate
by check mark whether the Registrant is an accelerated filer (as defined in rule
12b-2 of the Securities and Exchange Act of 1934). Yes x No o
 
 Aggregate
Market Value of voting stock held by non-affiliates of the Registrant at June
30, 2004: (the last business day of the Registrant’s most recently completed
second fiscal quarter) $143,843,016.
 
 Indicate
the number of shares outstanding of each of the Registrant’s classes of Common
Stock, as of the latest practicable date.
 
 **Title
      of Each Class**
    
    **Number
      of Shares Outstanding**
      **at
      March 1, 2005**Common
      Stock, $0.01 Par Value
    
    28,074,914
 
 
  **Part
I**
 
 **Forward-looking
Statements**
 
 Certain
statements in this Annual Report constitute “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
TurboChef Technologies, Inc. (“TurboChef” or the “Company”) to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: the Company’s history of losses and the likelihood that recent
positive financial performance may not be indicative of future performance; our
dependence on a limited number of customers; the effect of our long sales cycle;
our commercial oven products are offered to an emerging market segment requiring
significant marketing efforts to achieve market acceptance; our planned entry
into the residential oven market is subject to the risks inherent in
establishing a new business enterprise; our rapid expansion and the potential
difficulty in managing our growth; relationships with and dependence on third
parties for raw materials or components; our reliance on our senior management
team and the expertise of management personnel; the limited experience of our
senior executive officers in our industry; potential liability for personal
injury or property damage; the ability to protect our proprietary information
and the uncertainty of the outcome of legal proceedings in which we are
currently involved. Additional information and factors are set out in “Factors
that may Affect Future Performance” in Item 7 of this Annual Report. The words
“believe,” “expect,” “anticipate,” “intend,” and “plan” and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on any of these forward-looking statements, which speak only as of the
date of the statement was made. We undertake no obligation to update any
forward-looking statement.
 ****
 **Item
1.** **Business**
 **Recent
Developments**
  On
February 8, 2005, we closed a public offering of 5,000,000 shares of our common
stock at $20.50 before discounts and commissions to underwriters and other
offering expenses. Of the shares sold, 2,925,000 were sold by TurboChef and
2,075,000 were sold by certain selling stockholders. We plan to use the net
proceeds to finance the development and introduction of residential ovens, to
pursue possible acquisitions or strategic investments and for working capital
and other general corporate purposes.
  
 On
February 28, 2005, we entered into a Credit Agreement with Bank of America, N.A.
(the “Credit Agreement”). The Credit Agreement allows TurboChef to borrow up to
$10 million at any time under the revolving credit facility, based upon a
portion of TurboChef’s eligible accounts receivable. The Credit Agreement also
provides for a letter of credit facility within the credit limit. Revolving
credit loans under the Credit Agreement bear interest at a rate of the British
Bankers Association LIBOR Rate plus 3.50% unless for certain reasons Eurodollar
Rate Loans are unavailable, then at a rate in an amount of 2.50% over the higher
of the Federal Funds Rate plus 0.5% and Bank of America’s prime rate. The
Company’s obligations under the Credit Agreement would be secured by
substantially all of the assets of TurboChef and its subsidiaries. The Credit
Agreement contains customary affirmative and negative covenants and acceleration
provisions. The credit commitment expires on February 28, 2006, and any
outstanding indebtedness under the Credit Agreement would be due on that date.
We have not borrowed under the Credit Agreement.
 **General**
 
 TurboChef
Technologies, Inc. is a leading provider of equipment, technology and services
focused on the high-speed preparation of food products. Our user-friendly speed
cook ovens employ proprietary combinations of heating technologies, such as
convection, air impingement, microwave energy and other advanced methods, to
cook food products at speeds up to 12 times faster than, and to quality
standards that we believe are comparable or superior to, that of conventional
heating methods. We believe that one of our primary competitive advantages is
the strength of our research and development capabilities and the breadth and
depth of our portfolio of patents. Our staff of 14 engineers has a long history
of developing innovations in the foodservice industry. Our research and
development focus combines the development of innovative cooking technologies
with the commercialization of those technologies into finished products to meet
specific market needs.
 
 Currently,
we focus our efforts on the approximately $4.0 billion annual worldwide
commercial primary cooking equipment market with our two primary speed cook oven
models, the C3 and the Tornado. The speed, quality, compact size, ease of use
and ventless operation of our ovens provide significant advantages to a wide
range of foodservice operators, including full- and quick-service restaurants,
hotels, stadiums and convenience stores. These customers increasingly value the
ability to cook food in a quick and high quality manner with minimal employee
training. In addition, our ovens enable certain other customers to significantly
broaden their foodservice offerings. We believe the advantages of our
technologies were validated by our agreement in early 2004 to be the exclusive
supplier of speed cook ovens to the more than 22,000 Subway ® franchise locations worldwide.
 
 We offer
our customers a high level of product service and support via a centralized call
center and a network of certified third-party service technicians, which we
believe significantly differentiates us from our competitors in the commercial
cooking equipment market. In addition to our oven product and support offerings,
we offer fee-based equipment development and testing, prototype fabrication and
other services to foodservice equipment manufacturers and other members of the
foodservice industry. We also offer food preparation, menu planning and related
consulting services to help our customers develop and enhance their foodservice
offerings.
 
 We
currently sell our ovens through a broad and expanding sales organization that
includes both internal direct salespeople as well as a network of manufacturer’s
representatives and equipment distributors. In addition, we employ a flexible
manufacturing model that relies on external suppliers of components for our
ovens and utilizes a combination of our own facilities and personnel and
contract manufacturers for the final assembly of our ovens. This attractive
operating model provides a level of operating leverage and capital efficiency
within our business.
 
 In order
to leverage our success in the commercial cooking equipment market, we plan to
enter the approximately $3.7 billion annual domestic residential oven market
during 2006. Consumers increasingly value speed and convenience in home food
preparation and continue to demand higher levels of quality and functionality in
their kitchen appliances, resulting in a significant rise in the purchase of
restaurant-caliber kitchen appliances for the home in recent years. We are
refining a prototype oven for the premium segment of the residential oven market
to be introduced at a price point that we believe will be appropriate for
consumer purchase.
  2
  Our
senior management team has a successful track record of improving operating
results, building scale through organic growth and strategic acquisitions and
enhancing stockholder returns. Since joining us in October 2003, our senior
management team has led us to profitability, successfully negotiated an
agreement to supply Subway franchise restaurants with our Tornado ovens on a
system-wide basis, solidified our sales and marketing efforts, acquired Enersyst
to enhance our future product development capabilities and overseen the listing
of our common stock on the American Stock Exchange. Assuming distribution by
OvenWorks, LLLP, our majority stockholder, of shares of our common stock to its
limited partners, our executive officers collectively own approximately 14% of
our common stock, based on shares outstanding at March 1, 2005, strongly
aligning their interests with those of other stockholders. In addition, a number
of other members of our management team have significant experience in speed
cook technology and the commercial foodservice industry in
general.
 
 **Our
Technologies**
 
 Speed
cook technologies combine various heat transfer technologies, such as hot air
convection, air impingement, induction and microwave energy, to cook food
significantly faster than traditional heating methods. Our research and
development team continually designs and tests new combinations of these and
other cooking methods, and our speed cook technologies are the primary subject
of our more than 200 issued patents and patent applications
worldwide.
 
 The core
of the speed cook technology used in our currently-available commercial ovens is
a proprietary combination of high-speed forced air convection and microwave
energy. A smooth-flowing field of heated air is circulated within the oven at
speeds of up to 60 miles per hour to wrap the surface of food in a fast-moving
shroud of hot air, while the food simultaneously is cooked from the inside out
with precisely controlled bursts of microwave energy. This system creates a
unique set of temperature- and moisture-control conditions within the food that
preserves and enhances flavor. Central to this cooking technology is our
patented system of scrubbing the circulating air using a catalytic converter.
Heated air is circulated through the internal catalytic converter, instead of
being vented outside the unit, as with a conventional oven, resulting in a
ventless system. Our ovens employ this technology to cook food at high speeds
with food quality we believe to be comparable, and in many instances superior,
to both conventional methods and other speed cook methods.


Our ovens
employ a proprietary operating system, which incorporates our patented layered
logic system of user controls. This system allows for step-by-step, intuitive
operation of our ovens via a digital touchpad, enabling users to easily specify
one of up to 128 pre-programmed cooking profiles. These built-in settings allow
operators of varying culinary skill levels to easily cook a variety of menu
items in a consistent, high quality manner. In addition, our operating system
allows users to program their own custom cooking settings. This system also
tracks and records selected cooking data, allowing a commercial operator to
review cook times, production volume and other characteristics. Our commercial
ovens also incorporate our Menu-in-a-Minutetechnology,
which offers users the ability to download additional menu selections and
cooking cycles for their ovens through the use of a computer chip card.
Menu-in-a-Minute technology enables foodservice chains to make changes to their
menus and program new cook settings centrally, allowing these changes to be
implemented quickly, consistently and cost-efficiently throughout an entire
chain.

Among our
other technologies are our various air impingement cooking systems, some of
which employ a proprietary combination of air impingement and microwave energy.
Ovens manufactured by our licensees employ our air impingement technologies
which utilize specially-placed nozzles that force high-velocity jets of heated
air from above and below food to produce faster and more consistent cooking than
conventional methods. In addition to these commercially-available technologies,
we also have developed other proprietary speed cook technologies, incorporating
various combinations of hot air convection, air impingement, microwave energy
and other heating methods. We continue to refine and develop these technologies,
and to explore ways in which they can be used for commercial and residential
applications.


**Our
Products and Services**
 
 ***Our
Commercial Ovens***
 
 We have
two primary models, our C3 oven and our Tornado oven:
 
 •
    
    *The
      TurboChef C3.*The
      C3 model uses a patented combination of high-speed forced air convection
      heating and microwave energy to cook up to 10 times faster than
      conventional methods. The C3 bakes, browns, broils and roasts with food
      quality that we believe to be comparable or superior to that of
      traditional cooking. The primary benefit of the C3 is its versatile
      capability to cook a wide spectrum of food, from dense proteins like filet
      mignon to delicate soufflés. Because it is certified by Underwriter’s
      Laboratory (UL®)
      to be operated in a ventless environment, the C3 does not require a hood,
      ventilation or a fire suppression system. Its preprogrammed, digital
      touchpad makes operation and training simple for any operator or
      chef.•
    
    *The
      TurboChef Tornado.*Our
      more recently developed Tornado oven has many of the same operational
      benefits as our C3, but is specifically designed to cook, toast and brown
      sandwiches, pizzas, appetizers and similar food products. The Tornado
      combines our patented ventless speed cook technology with a conventional
      wire baking rack and independently-controlled infrared browning element to
      cook up to 12 times faster than conventional methods with food quality
      that we believe to be comparable or superior to that of traditional
      cooking. Like the C3, the Tornado is UL certified to be operated in a
      ventless environment. We believe the Subway system’s adoption of the
      Tornado as its exclusive speed cook oven validates the oven and its
      underlying technologies. To date we have primarily sold our Tornado ovens
      to Subway franchisees; however, we have made the Tornado available for
      sale to other commercial customers in the first quarter of 2005, and we
      have announced that we have entered into a Master Purchase Agreement with
      Starbucks Corporation to supply speed cook ovens for a market test. Any
      additional purchases under that agreement would be subject to the success
      of Starbucks' hot food initiative and its
discretion.
 ***Performance
Characteristics of Our Commercial Ovens***
 
 We
believe the key performance characteristics of our C3 and Tornado ovens provide
a unique value proposition to our customers. These key performance
characteristics include:
 
 •
    
    *Speed.*Our
      C3 and Tornado ovens cook up to 10 and 12 times faster, respectively, than
      conventional ovens, and each are capable of cooking diverse items together
      or consecutively with no lag time. This capability results in
      significantly increased food throughput for users of our
      ovens.
  
 3
 •
    
    *Quality
      and Versatility.*We
      believe that our ovens produce food that is comparable, and in many cases
      superior, in quality to conventional and other speed cook methods.
      Additionally, our ovens are able to bake, brown, broil or roast, allowing
      them to be used in a broad spectrum of venues, including fine dining
      establishments, quick-service restaurants, hotels, movie theaters, theme
      parks, stadiums and convenience stores.
 
 •
    
    *Ventless
      Cooking.*During
      the cooking process, air in our C3 and Tornado ovens is circulated through
      an air-scrubbing catalytic converter that breaks down fume and grease
      by-products of food, enabling the ovens to operate without venting these
      by-products into the air. This ventless system eliminates the need for
      commercial kitchen hood systems, allows our ovens to be installed in
      almost any location, and significantly reduces flavor-transfer and
      odor-transfer between different products cooked together or consecutively
      in the oven.
 
 •
    
    *Ease
      of Use.*Our
      layered logic operating system allows for step-by-step, intuitive
      operation of our ovens via a digital touchpad, allowing users to easily
      specify one of up to 128 pre-preprogrammed cooking profiles. These
      built-in settings allow operators of varying culinary skill levels to
      easily cook a variety of menu items in a consistent, high quality manner.
      In addition, our operating system allows users to program their own custom
      cook settings. Our Menu-in-a-Minute technology allows users to download
      menu selections and cooking cycles for their ovens. This technology
      enables foodservice chains to make changes to their menus and program new
      cook settings centrally, allowing these changes to be implemented quickly,
      consistently and cost-efficiently throughout an entire
    chain.
 
 
 ***Future
Oven Products***
 
 We
continue to develop new technologies and augment our existing technologies, and
we are in various stages of development of new commercial ovens based on these
technologies. We anticipate releasing a new commercial oven, the “H Batch” in
the second quarter of 2005. Additionally, we are refining a prototype oven for
the premium segment of the residential oven market that incorporates our
state-of-the-art speed cook technology. We expect to introduce our residential
ovens to the market during 2006.
 
 ***Licensing
and Technologies***
 
 Certain
of our patented technologies are the subject of exclusive or non-exclusive
licenses to third parties who have produced, and may continue to produce,
commercial and residential ovens based on our technologies. Although we do not
intend to continue to actively seek licensees for our technologies, these
existing licenses will continue to provide a source of revenue for us until they
expire or are terminated.
 
 ***Fee-Based
Consulting Services***
 
 Our
trained culinary experts offer food preparation, menu planning and analysis and
related consulting services to help our customers develop and enhance their
foodservice offerings. This allows us to provide an integrated offering of
products and consulting services to better serve our customers and generate
cross-selling opportunities.
 
 We also
offer fee-based equipment development and testing, prototype fabrication and
other services to foodservice equipment manufacturers and other members of the
foodservice industry. Our foodservice experts design and develop foodservice
equipment and technologies for food processing plants, restaurants, convenience
stores, kiosks, vending machines and home applications, assist in the custom
fabrication of heating and cooling equipment prototypes, and analyze and
evaluate foodservice equipment capabilities, design and capacity.
 
 ***Other
Products and Services***
 
 In
addition to the primary products and services described above, we offer certain
consumables related to our ovens, such as ceramic platters, cooking utensils and
proprietary oven cleaners, and replacement parts for our ovens, in each case to
support our customers’ use of our ovens. To date, such sales have not provided a
material source of revenue.
 
 **Our
Strategy**
 
 Our goal
is to be the world leader in speed cook equipment, technology and services for
both the commercial cooking and residential markets. The following are our
principal strategies to achieve this goal.
 
 ***Penetrate
Top Foodservice Chains***
 
 We are
actively engaged in discussions or negotiations with, or our ovens are in
various stages of testing by, more than 30 of the top 100 foodservice chains.
Based on the experience we gained from our relationship with the Subway system,
we believe that we have the capability to provide customized cooking solutions
and to manage the large-scale product roll-outs necessary to meet the needs of
large foodservice chains. We intend to build upon the success of our
relationship with the Subway system to market our integrated product and service
offerings to these potential customers. Our ovens offer these large foodservice
chains a high-quality, cost-efficient and easy-to-use alternative cooking method
that can increase volume and revenue through faster preparation of existing menu
items. Additionally, the space-conserving and ventless operation of our ovens
will allow these foodservice chains to enhance or expand their existing menus,
and will permit those with limited or cold food offerings to offer new heated or
toasted food items. We believe that the enhanced or new food offerings
facilitated by our ovens can help these chains increase same store sales by
producing new sources of revenue.
 
 ***Enter
Residential Oven Market***
 
 We intend
to use our state-of-the-art speed cook technologies, our experience and success
in the commercial cooking equipment market and our product marketing expertise
to enter the residential oven market. We estimate that the domestic market for
residential ovens is
  4
  approximately
$3.7 billion annually, and the global market is approximately $15.0 billion
annually. Consumers continue to demand higher levels of quality and
functionality in their kitchen appliances, and are willing to pay a premium for
them, resulting in a significant rise in restaurant-caliber kitchen appliances
being purchased for home use in recent years. In addition, consumers value the
ability to shorten food preparation time in today’s increasingly busy society.
In order to capitalize on these trends, we continue to refine our prototype oven
for the premium segment of the residential oven market to be introduced at a
price point that we believe will be appropriate for that market. We also are
working to develop an appropriate distribution network and marketing campaign
for the residential oven market and a customer support infrastructure to meet
the anticipated demands of residential customers.
 
 ***Further
Develop Our Commercial Product Portfolio and Proprietary
Technologies***
 
 We
continue to develop new commercial products and technologies to augment our
existing portfolio of products and proprietary technologies. Our staff of
experienced research engineers includes several of the original developers of
speed cook technology, with an average of over 20 years of experience in speed
cooking. By acquiring Enersyst and combining its proprietary technology with our
existing intellectual property portfolio, we believe we are better positioned to
develop the most technologically advanced speed cook products. We currently have
a number of potential new products at multiple stages of development that
utilize a variety of speed cook technologies.
 
 ***Leverage
Our Global Distribution Network***
 
 In
addition to supporting our marketing efforts with top foodservice chains, we
believe that our global network of manufacturer’s representatives and equipment
distributors can provide new business opportunities from their relationships
with potential customers. While we will continue to handle our sales efforts to
major foodservice chains through our senior executives and corporate level sales
staff, we will continue to rely on our distribution partners to service the
remainder of the over 800,000 potential domestic foodservice venues that make up
the commercial market for speed cook products, including approximately 250,000
quick-service restaurant locations, 240,000 full-service restaurant locations,
55,000 hotels and resorts, and other venues such as convenience stores,
limited-service hotels, movie theaters, and bars and taverns. Our global network
of representatives and distributors gives us increased access to the potential
customers operating these venues, including smaller foodservice operators and
operators of venues that are less efficient to target with company-level sales
efforts.
 
 ***Provide
High-Quality Customer Service and Support***
 
 We
believe that providing high-quality customer service and support gives us a
competitive advantage and is an important element of our business strategy. Our
experience has shown that our customers value the ongoing service that we
provide beyond the point of purchase. To that end, we have developed an
extensive service network that utilizes modern call center technologies,
highly-trained service representatives and certified third-party technicians. We
expect our high service standards to enhance our marketing efforts with new
customers and to result in both positive word-of-mouth referrals and repeat
business from our existing customers.
 
 ***Enhance
Brand Awareness***
 
 We are
implementing a cohesive program designed to create a strong brand identity for
TurboChef and to leverage the success and recognition we have received in the
market related to our relationship with the Subway system. We advertise
frequently in trade magazines, exhibit and demonstrate our products at trade
shows, and regularly distribute print and electronic mailings to potential
customers highlighting the benefits of our products. We continue to seek
opportunities for media and public relations exposure and have built and refined
our website to further this effort. Through these marketing programs we will
continue to stress the benefits of our products and services and believe that
these efforts will result in increased acceptance of speed cook technology,
thereby expanding our potential customer base.
 
 ***Pursue
Strategic Alliances and Acquisitions***
 
 We intend
to consider strategic alliances and continue to selectively pursue acquisitions
in order to, among other things, increase our sales, marketing and distribution
capabilities and augment our technologies. Management has had significant
experience in successfully identifying, executing and implementing strategic
acquisitions in other industries and believes it can leverage that experience in
the commercial cooking equipment market and residential oven market. For
example, in May 2004, we acquired Enersyst and its technologies which
significantly expanded our research and development capabilities, positioning us
well to continue to develop technologically advanced speed cook
products.
 
 **Sales
and Marketing**
 
 ***Sales***
 
 Currently,
we focus on sales of our products to commercial foodservice operators. Our
relationships with major foodservice chains typically are developed and
maintained through an integrated effort of senior executives and corporate level
sales management to best service these customers’ needs. To target other
potential customers, we also have recently implemented a three-tiered global
sales and marketing network consisting of our internal corporate-level sales
team, our external network of manufacturer’s representatives and foodservice
equipment distributors, and those representatives’ and distributors’ sales
personnel. We utilize customer relationship management software applications
that provide our sales force with tools for lead tracking, customer base
forecasting and sales forecasting. Our primary sales office is located in
Dallas, Texas, and we have a sales office located in The
Netherlands.
 
 
 Our
corporate-level sales and marketing staff consists of 16 employees, including
six regional directors, three of whom are each responsible for a different
domestic region, and one each in Europe, South America and Australia/New
Zealand. Each of our regional directors manages a network of manufacturer’s
representatives and foodservice equipment distributors within his region.
Currently, our domestic regional directors manage a total of 25 manufacturer’s
representatives and equipment distributors, and our European regional director
manages 19 different non-exclusive foodservice equipment distributors. In turn,
each manufacturer’s representative and equipment distributor employs its own
force of individual sales representatives. Currently, our manufacturer’s
representatives and equipment distributors engage approximately 170 sales
representatives globally.
  5
  All
members of our direct sales force, as well as selected representatives from our
domestic manufacturer’s representatives and our international foodservice
equipment distributors attend “TurboChef University” in Detroit, Michigan, or
“TurboChef Academy” in Amsterdam, The Netherlands, to receive extensive training
in the operation and service of our ovens and education in the overall benefits
of our ovens. Attendees of these programs see our ovens operate in a full
spectrum of venues and are instructed on the numerous ways that our ovens can
efficiently and cost-effectively provide high quality, speed cook alternatives
to our potential customers. We believe that a sales force that is highly
knowledgeable about our ovens and service offerings will be more effective in
targeting its sales efforts to our various potential customers.
 
  We intend
to continue to expand this sales and marketing network, including our
relationships with manufacturer’s representatives and equipment distributors
worldwide and to expand our direct sales efforts worldwide. We plan to continue
to target foodservice operators in a number of different venues and to consider
strategic marketing alliances with certain third parties, particularly food
manufacturers, who have established relationships with mutual prospective
customers.
 
 ***Marketing***
 
 We are
committed to developing a strong, consistent brand identity for TurboChef.
Through our marketing program, we will continue to educate the commercial, and
later seek to educate the residential, markets about the benefits of speed
cooking and our position as a global leader in speed cook equipment, technology
and services. To that end, we are committed to seeking opportunities for media
and public relations exposure, including advertising in trade magazines,
developing our website, and engaging in targeted print and electronic mail
campaigns. In addition, we brand our oven products with the TurboChef name, and
we will use the TurboChef name in connection with all trade shows, seminars and
other expositions. We also recognize that providing potential customers with a
first-hand experience of speed cooking is an important part of educating the
market about speed cooking and the capabilities of our products. Therefore, we
attend numerous trade shows and seek other opportunities to conduct
demonstrations of our speed cook technologies. Our participation at trade shows
allows us to market to other industry professionals, including equipment
distributors, foodservice equipment manufacturers and foodservice industry
consultants.
 
 **Research
and Development**
 
 We
believe that one of our competitive strengths is our highly capable research and
development staff, which is comprised of 14 of our 115 employees, with an
average of over 20 years of experience in the industry. Our research and
development staff has a proven history of developing leading technological
innovations in the foodservice industry.
 
 The
scientists and foodservice experts that comprise our research and development
staff focus on enhancing our existing speed cook technologies, developing new
speed cook technologies, and the practical application of our existing and new
technologies to the commercial cooking equipment market and residential oven
markets. Specifically, our research and development staff continually tests our
existing products and technology against those of our competitors in the market
and regularly communicates with our customers, our customer service and support
staff and our sales representatives to ensure that our products and technologies
continue to meet evolving market demands. We plan to continue to devote
substantial resources on an ongoing basis to our research and development
efforts.
 
 In
addition, other of our culinarians and food scientists provide fee-based
consulting services to food manufacturers and foodservice operators. These
professionals assist food manufacturers in the development of recipes using
their products and provide advice on strategically aligning those products to
meet customer needs. We also offer a fully-equipped, state-of-the-art test
kitchen facility available to clients for product demonstrations.
 
 **Our
Production Model**
 
 We employ
a flexible production model by outsourcing the manufacturing of components and
using our own facilities to assemble our commercially available ovens (and to
create prototypes of potential new ovens), as well as maintaining relationships
with contract manufacturers for additional oven assembly, as needed. Our
internal assembly operations rely primarily on hourly employees and require
minimal fixed overhead costs, affording us the flexibility to efficiently scale
our operations to the required production needs. We purchase raw materials, such
as fabricated stainless steel, and components, such as circuit boards and wiring
harnesses, for our ovens from a number of different vendors. We believe that
current trends in pricing of our raw materials, primarily increases in stainless
steel, could impact our costs by 3-4% but can largely be offset by savings in
other component pricing. We believe that there are multiple sources for each of
our supply needs, and we do not maintain long-term agreements with our
suppliers. We will continue our efforts to identify and ensure availability from
alternative suppliers, particularly for components that come from a more limited
number of sources.
 
 We
require that our manufacturing partners follow generally accepted industry
standard quality control procedures. In addition, we employ our own quality
assurance personnel and testing capabilities to assist our manufacturing
partners with their respective quality programs, and we perform routine audits
both of our assembly line and finished products to ensure high quality and
reliability. We believe that we have good relationships with our contract
manufacturers and consider our sources of supply and assembly to be adequate for
present and anticipated future requirements.
 
 **Backlog**
 
 Backlog
generally is not considered a significant factor in our business as relatively
short delivery periods and rapid inventory turnover are characteristic of our
current products.
 
 **Our
Customers**
 
 Our
commercial ovens are used by a diverse base of foodservice operators, including
quick-service and full-service restaurants, hotels, stadiums, movie theaters and
convenience stores. While we often sell directly to operators in the foodservice
industry, many of our sales are made through foodservice distributors, equipment
dealers and foodservice industry consultants. We also license our proprietary
technology and provide fee-based consulting services to restaurants, foodservice
equipment manufacturers and other members of the foodservice
industry.
  6
  In
addition to the Subway system, some of the users of our ovens
include:
 
 Hotels
      and Resorts
    Hilton
      Hotels Corporation
      Starwood
      Hotels & Resorts Worldwide, Inc.Foodservice
      and Concessions
    Compass
      Group
      HMSHost
      CorporationMovie
      Theaters
    Loews
      Cineplex Entertainment CorporationTheme
      Parks
    The
      Walt Disney CompanyStadiums
    Lambeau
      Field (Green Bay, Wisconsin)
      Petco
      Park (San Diego, California)
 
 
 ***Subway
Relationship***
 
 After a
comprehensive evaluation process, Doctor’s Associates, Inc., the franchisor of
the Subway sandwich restaurant concept, and Independent Purchasing Cooperative,
Inc., the purchasing cooperative owned by the Subway franchisees, agreed in
March 2004 to name us as the exclusive supplier of speed cook ovens to Subway
franchise restaurants worldwide. We are currently producing and delivering
Tornado ovens to Subway franchisees both domestically and internationally.
According to Subway’s website, there are over 22,000 Subway locations in 78
countries worldwide and approximately 2,250 additional locations projected to be
opened in 2005.
 
 Our
agreement with the Subway system generally restricts us from selling the Tornado
oven to quick-service restaurant chains that are primarily engaged in the
business of selling submarine-style sandwiches which are marketed or sold
substantially in the same manner as Subway brand sandwiches. We are otherwise
free to sell our Tornado ovens to quick-service restaurants and chains that are
primarily engaged in selling other types of food, such as hamburgers, chicken
and pizza (even if such establishments have submarine-style sandwiches on their
menus).
 
 **Service
and Support**
 
 We
consider service and support for end-users of our ovens to be a top priority,
and we believe that our service and support platform will set new standards in
the commercial foodservice equipment industry, significantly differentiating
TurboChef from its competitors. We also believe that our high level of service
and support will be an important attribute in our planned entry into the
residential oven market.
 
 We have
established a three-tiered service network to provide what we believe to be the
fastest response time in our industry. At the corporate level, our 15-person
customer service staff is responsible for overseeing our customer service and
support functions. Our customer service staff manages a network of over 100
independent service organizations throughout the United States and Canada, who
in turn supervise approximately 500 employed or affiliated service technicians.
Through this network we provide live response seven days a week.
 
 We
generally provide purchasers a one-year limited warranty covering each oven’s
workmanship and materials, during which period we or one of our authorized
service representatives will make repairs and replace defective parts.
Components furnished to us by our suppliers and manufacturers are generally
covered by a one-year limited warranty, and contract manufacturers furnish a
limited warranty for any of their manufacturing or assembly defects. In
addition, we have incorporated a state-of-the-art online customer service
program to manage service requests and to assist our service partners and
customers. Service calls are entered into the system, where they are processed
and ultimately assigned to our authorized service representatives if an on-site
visit is required. The system tracks all aspects of the service relationship,
including call time to response time, and allows us to have real-time access to
the status of all service calls. The system also allows our customers real-time
online access to track the status of service calls and parts orders, and allows
our service partners to order replacement parts and view part
specifications.
 
 **Intellectual
Property**
 
 The
growth, protection and maintenance of our intellectual property portfolio,
especially our patent portfolio, are important to our business. Including
patents developed by Enersyst, we have more than 200 issued patents and patent
applications worldwide, primarily covering our speed cook technologies. We
believe that, in breadth and scope, our patent portfolio is larger than that of
any competitor in the speed cook sector of the commercial cooking equipment
market, which provides us with a competitive advantage in our market. Our
patents cover the fundamental aspects of our speed cook technologies, and we
have issued patents and pending patent applications in over 25 countries
(including the United States, Japan and various countries of the European
Union). Our currently issued United States patents will expire at various dates
between 2006 and 2020.
 
 We
believe that product and brand name recognition is an important competitive
factor in our market. Accordingly, we actively promote our brand names, and will
actively promote our future brand names, in connection with our marketing
activities. We hold registrations of our trademark TurboChef ® in the
United States, the United Kingdom, and the Republic of Ireland, and have applied
for registration of the trademark TornadoTM in the United States. In certain
countries in Europe, we license the TurboChef name from a third party. We also
rely on trade secrets and proprietary know-how outside of published patents, and
typically enter into confidentiality agreements with our employees, suppliers
and manufacturers, as appropriate, to protect the concepts, ideas and
documentation relating to our proprietary technologies.
 
 **Our
Industry**
  ***Commercial
Cooking Equipment Market***





According
to the 2002 *Size
and Shape of the Industry Study* conducted by the North American Association of Food Equipment Manufacturers
(“NAFEM”), the North American market for commercial primary cooking equipment
(including ovens, broilers, grills, toasters, and fryers) is approximately $1.5
billion annually. The oven component of this market is approximately $600
million annually. NAFEM estimates that the annual global market for commercial
primary cooking equipment is 2.5 to 2.8 times the North American market, or
approximately $4.0 billion. This market is driven in large part by the trends
and growth of the restaurant foodservice industry. The National Restaurant
Association (“NRA”) estimates that domestic restaurant industry sales will reach
$440 billion in 2004, an increase of 4.4% over 2003, marking the 13 th consecutive year of real sales growth
for the restaurant industry. The NRA defines the restaurant industry as all
meals and snacks prepared away from home (including all takeout meals and
beverages), and includes both commercial and institutional foodservice
providers. Over the past 20 years, the restaurant industry has grown at a
compound annual growth rate of 5.1%. According to the


7





NRA,
sales at full-service restaurants are projected to reach $158 billion in 2004,
and sales at quick-service restaurants are projected to reach $124 billion in
2004. It is estimated that there are nearly 500,000 full-service and
quick-service restaurant locations in the U.S. The balance of the restaurant
industry consists of operations where food is not the primary source of the
operation’s revenues, including convenience stores, lodging places, bars and
taverns, recreation venues (such as movie theaters) and other institutions (such
as military and educational facilities). It is estimated that there are between
300,000 and 400,000 such locations in the U.S.





The
restaurant industry is projected to continue this growth primarily as a result
of population growth and consumer desire for food quality and convenience.
Consumer demand for convenience, speed and product quality is shaping
foodservice and operating model trends, resulting in concept growth in new
venues and specifically in the fast-casual niche, a sub-sector of the
full-service restaurant segment. This continued industry growth drives
foodservice equipment sales based on new location openings and remodelings, new
venues and concepts, menu and operational modifications and equipment
obsolescence. Several industry trends are anticipated to have a favorable impact
on speed cooking, including the increasing demand by consumers for speed and
convenience without a loss of food quality and the rapidly growing integration
by foodservice providers of new technologies into their businesses in order to
improve efficiency, throughput and consistency of product. We
believe that we are well-positioned to benefit from the following equipment
trends in the commercial cooking equipment industry as highlighted by
foodservice operators according to a NAFEM survey:





•
    
    multi-functional,
      multi-tasking equipment that fits in a small footprint, is easy to clean,
      and is fully mobile;





•
    
    energy
      efficient with minimal heat and fume
emission;





•
    
    programmable
      via integrated memory storage devices or connected remotely by a
      modem;





•
    
    easy
      to train new employees to use, given high industry turnover rates and
      increasing number of non-English speaking
employees;





•
    
    improved
      quality of equipment service; and





•
    
    accelerated
      cooking using specialized heat concentration
technology.





In
addition, we believe that speed cook technology is further expanding the market
for primary cooking equipment beyond domestic full-service and quick-service
restaurants to include other domestic foodservice venues such as convenience
stores, bars and taverns, stadiums, schools and movie theaters. These other
establishments now have the option to expand their food selection to encompass
foods that previously took too long to cook for their time-constrained
customers, and foods that were previously cooked in a conventional microwave
oven at the expense of the food’s optimal flavor. Our speed cook ovens offer
these other operations a cooking platform that provides an additional revenue
source while requiring little, if any, additional investment in kitchen
infrastructure, staff or training.





***Residential
Oven Market***





We
believe that the residential oven market represents a large untapped opportunity
for our business. According to industry sources, the domestic oven market
(excluding microwaves) is approximately $3.7 billion annually, representing
approximately 8.0 million units. The global market for residential ovens is
approximately $15.0 billion.







The
domestic market for premium residential ovens has been growing at a faster rate
than the overall residential oven market, which growth is driven by several
trends, including:





•
    
    consumer
      desire for speed and convenience in food preparation at
    home;





•
    
    increased
      demand for higher-end kitchen equipment driven by increases in the size of
      the average American home, new home construction and remodeling
      trends;





•
    
    emergence
      of premium kitchen equipment as a status symbol;
and





•
    
    increasing
      consumer comfort with using technology in virtually every part of their
      daily lives.





We
believe that by leveraging the advantages of our speed cook technologies,
including our high cooking speed and food quality and our user-friendly
operating system, as well as our marketing expertise, we are well-positioned to
capitalize on these market trends.





**Competition**





***Commercial
Cooking Equipment Market***





The speed
cook oven sector of the commercial cooking equipment market is characterized by
intense competition. Our speed cook ovens compete with conventional cooking
systems, such as commercial ovens, grills and fryers, as well as equipment that
cooks through the use of conduction, convection, induction, air impingement,
infrared, halogen and/or microwave heating methods or combinations thereof, sold
by numerous well-established manufacturers and suppliers. In addition, we are
aware that other industry participants are developing, and in some cases have
introduced, commercial ovens based on speed cook methods and
technologies.





8





Our
principal methods of competing in the commercial cooking equipment market are
through our product performance, our research and development capabilities, our
service and warranty offerings, and our ability to provide fee-based consulting
services. We do not believe there are any competitive products currently being
marketed which are functionally equivalent to our cooking system (i.e., products
that have the same capabilities to cook a variety of food items to the same high
quality standards and at comparable speeds). Among our
major competitors in the commercial cooking equipment market are:





•
    
    Amana
      (Maytag Corporation);





•
    
    Duke
      Manufacturing Company;





•
    
    Fujimak
      Corporation;





•
    
    Groen,
      Inc. (Dover Corporation);





•
    
    MerryChef
      and Lincoln Foodservice Products (Enodis,
LLP);





•
    
    The
      Middleby Corporation; and





•
    
    Vulcan-Hart
      Corporation (Illinois Tool Works, Inc.).





We
currently license certain technologies to some of these competitors who are
currently producing, and may in the future produce, products that may be
competitive with our speed cook ovens.





***Residential
Oven Market***





Although
we currently do not sell a residential speed cook oven, we are refining a
prototype residential oven and plan to enter the residential oven market.
Competition is growing in the emerging residential speed cook sector of the
residential oven market. However, we do not believe there are any speed cook
products currently being sold in the residential oven market that possess the
same combination of speed and quality as our prototype residential speed cook
oven.





Certain
companies have introduced speed cook residential ovens, including the General
Electric Advantium ® and
Trivection TM ovens
(utilizing microwave and halogen light technology), the Whirlpool
g2microven TM SpeedCook Appliance (utilizing convection, microwave and halogen light
technology) and the Amana Lightwave TM (utilizing microwave and infrared light technology). In addition, other
competitive products are scheduled to be launched in the near future including
the GE Rapid Cook Wall Oven TM (utilizing microwave and other heat transfer technology).





**Regulation
and Accreditation**





We are
subject to regulations administered by various federal, state, local and
international authorities, such as the United States Food and Drug
Administration, the Federal Communication Commission, the European Community
Council and the Japan Ministry of International Trade (including those
regulations limiting radiated emissions from our cooking system products), which
impose significant compliance burdens on us. Failure to comply with these
regulatory requirements may subject us to civil and criminal sanctions and
penalties. We test our ovens, from time to time, in order to confirm continued
compliance with applicable regulatory requirements. We believe that compliance
with these laws and regulations will not require substantial capital
expenditures or have a material adverse effect on our future
operations.





New
legislation and regulations, as well as revisions to existing laws and
regulations (at the federal, state and local levels, in the United States and/or
in foreign markets), affecting the commercial foodservice equipment and
residential oven markets may be proposed in the future. Such proposals could
affect our operations, result in material capital expenditures, affect the
marketability of our existing products and technologies and/or could limit or
create opportunities for us with respect to modifications of our existing
products or with respect to our new or proposed products or technologies. In
addition, an expanded level of operations by us in the future could require us
to modify or alter our methods of operation at costs which could be substantial
and could subject us to increased regulation, and expansion of our operations
into additional foreign markets may require us to comply with additional
regulatory requirements.





We have
received certification under UL accreditation standards relating to product
safety and under the National Sanitation Federation accreditation standards
regarding sanitation and the ability of our ovens to be cleaned. These agencies
have established certain standards for a variety of categorized products and can
be engaged to inspect a manufacturer’s products for compliance with the
applicable standards. Certification by each agency authorizes the marking of any
such product with the agency’s labels, which indicates that the product is
approved by the agency for such use. Such certifications, which require periodic
renewal, only represent compliance with established standards and are not
legally required. However, failure by us to comply with these accreditation
standards in the future could have a material adverse effect on our marketing
efforts. In addition, we have met the requirements necessary to apply the “CE”
mark (which indicates compliance with the European Community Council directive
relating to electromagnetic compatibility and low voltage) to our C3 oven. Our
Tornado oven received CE accreditation this year. As an equipment manufacturer,
we are allowed to “self-certify” compliance with this directive and we have had
an independent third party, TÜV America, a
leading technical service company, attest to the results. We are required by law
to meet this European Community Council directive in order to apply the “CE”
mark and thereby sell our cooking systems in the European Union.





**Employees**





As of
March 1, 2005 we employed 115 persons, including 6 executive officers and 6
senior managers. Of our employees, 21 are engaged in technological support
and development, 34 in manufacturing, procurement and logistics, 20 in
administration, and 28 in sales, marketing, and customer service. None of
our employees are represented by labor unions. We consider relations with our
employees to be good.





**Available
Information**





We make
available free of charge on or through our Internet website our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the SEC. Our
Internet address is www.turbochef.com





9





**Item
2.** **Properties**





We own no
real estate. We currently lease two facilities in Dallas, Texas; one in Atlanta,
Georgia, one in New York City and one in Weert, Netherlands. In Dallas, we
occupy approximately 20,000 square feet of space at 10500 Metric Drive and
approximately 12,000 square feet of space at 2051 Valley View Lane, which we use
collectively for administrative offices, technology development, limited
assembly and other purposes. The lease agreements for these properties provide
for aggregate annual base rentals of approximately $295,000 and both will
terminate approximately April 30, 2005. We have recently entered into a lease
agreement for new facilities for our Dallas operations. This lease is for
approximately 61,000 square feet, has a term of 7.5 years and an average annual
base rental of approximately $550,000 over its term.





We also
lease office space in Atlanta, Georgia for our executive offices and
headquarters and we lease office space in New York. The Atlanta lease includes
approximately 7,000 square feet, the lease runs until 2009 and has annual base
rental of approximately $140,000. The New York lease includes approximately
3,000 square feet, runs until 2009 and has annual base rental of $180,000. We
also maintain offices in Weert, Netherlands under terms of a lease including
approximately 3,900 square feet of space, an annual base rental of $48,000 and
expiring 2005.





We
believe that our facilities are generally well maintained, in good operating
condition and adequate for our current needs.







**Item
3.** **Legal
Proceedings**





*Maytag
Corporation*





We filed
for arbitration against Maytag Corporation in Dallas, Texas, on February 2,
2001, in connection with a series of contracts for research, development and
commercialization of certain technology through a joint, strategic relationship.
After a stay of the proceedings pending settlement discussions, our third
amended claim was submitted on May 6, 2004 and our fourth amendment on March 4,
2005. Our amended claims include claims for substantial damages for breach of
those contracts, specific performance of those contracts, fraud, theft of trade
secrets, breach of fiduciary duty, usurpation of corporate opportunity,
correction of inventorship, punitive damages and attorneys’ fees. They also seek
an injunction and equitable assignment of ownership which would require Maytag
to return all rights in all intellectual property owned by us under those
contracts.





Maytag
has not yet responded to our amended claims. Earlier, on July 17, 2002, Maytag
filed an answer and counterclaim in response to our second amended claim, in
which Maytag denied our allegations. In its July 17, 2002 counterclaim, Maytag
alleges breach of the above-referenced contracts and fraud, and seeks damages in
excess of $35 million. We believe that these counterclaims by Maytag are without
merit, and we intend to vigorously defend against Maytag’s allegations. The
arbitrators issued a scheduling order that contemplates a final hearing on all
claims in late May and June 2005.





In May
2002, Maytag filed a complaint in Iowa federal court seeking, among other
things, to require that two of our claims originally filed and pending in the
Texas arbitration be decided only in a separate arbitration proceeding in
Boston, Massachusetts. Maytag’s complaint in the Iowa proceeding also alleges
that in a January 2002 press release (and in certain other unidentified
statements) we publicized false and misleading statements about Maytag’s use of
our intellectual property in its residential appliances. Based upon this
allegation, Maytag asserts claims that we caused false advertising with respect
to Maytag’s goods and services, that we have intentionally interfered with
Maytag’s prospective business, that we have defamed Maytag and that we have
unfairly competed with Maytag. Unlike Maytag’s counterclaims in the Texas
arbitration proceeding, its complaint in the Iowa proceeding does not specify
the dollar amount of damages sought. In July 2002, we filed a motion to dismiss
the Maytag complaint or, in the alternative, stay the Iowa proceeding pending
resolution of the Texas arbitration. On July 30, 2002, Maytag filed a Motion for
Leave to File First Amended Complaint adding a claim that we failed to pay a
promissory note in the amount of $327,478. On January 6, 2003, the Federal Court
in the Iowa proceeding granted a summary judgment against us on the claim
related to the promissory note, in the amount of $359,372. In March 2004, we
tendered full payment of the amount of the summary judgment. In addition, on
December 23, 2002, the Federal Court issued an order staying indefinitely the
remainder of Maytag’s claims in the Iowa proceeding, pending the final
resolution of the Texas arbitration. Thus, we do not expect further prosecution
of the Iowa proceeding until after the Texas arbitration is
concluded.





Maytag
has also initiated arbitration against us in Boston, claiming damages in excess
of $1.3 million for failure to pay for ovens. Our financial statements include
accounts payable of approximately $1.4 million in connection with this claim. We
have filed a counterclaim alleging that Maytag breached its warranty and
committed fraud and that we have been damaged in an amount in excess of $1.5
million. We believe that these claims by Maytag are without merit, and we intend
to vigorously defend against Maytag’s allegations. We have agreed to a
scheduling order with Maytag that contemplates a hearing in the Boston
arbitration sometime after the hearing on the Texas arbitration, in
2005.





*Duke
Manufacturing Co.*





Our
subsidiary, Enersyst Development Center, LLC, was engaged in arbitration with
Duke Manufacturing Co. relating to Enersyst’s termination of Duke’s license to
use Enersyst technology as a result of Duke’s failure to make required payments
under the license agreement. Duke was seeking reinstatement of the license
agreement and related monetary damages. The final arbitration hearing has been
conducted, and the arbitration panel has rejected Duke’s claims, upheld
Enersyst’s termination of the license and awarded Enersyst approximately $66,000
in damages.





Additionally,
on January 26, 2005, Duke filed a complaint against TurboChef in federal
district court in St. Louis, Missouri, but we have not been served. The
complaint seeks a declaration that Duke’s speed cook oven products do not
violate two of our patents relating to the use of catalytic converters, and that
those patents are invalid. Duke’s complaint provides no substantiation for its
claims, and we therefore are unable to evaluate the factual or legal basis for
them. We intend to vigorously defend against these claims if and when properly
served. An adverse outcome could have an adverse effect on our operating
results, future operations and competitive position. The outcome of this
proceeding is uncertain, and an unfavorable outcome could have an adverse effect
on our operating results and future operations. Because the outcome of this
proceeding is uncertain, we have made no corresponding adjustments to our
financial statements.


We also
are party to other legal proceedings that have arisen in the ordinary course of
our business, but we believe an unfavorable outcome of which would not have a
material adverse affect on our operating results or future
operations.





10





**Item
4.** **Submission
of Matters to a Vote of Security Holders**





On
November 30, 2004, the holder of 38,353,000 shares of the Company’s common
stock, representing approximately 53% of the outstanding voting shares,
delivered a consent approving an amendment to the Company’s Restated Certificate
of Incorporation. The amendment would give effect to a one-for-three reverse
stock split of the Company’s outstanding common stock. No other approval of the
Company’s stockholders was required or sought.





**Part
II**





**Item
5.** **Market
for Registrant’s Common Equity and Related Stockholder
Matters**





On
November 2, 2004, our common stock commenced trading on the American Stock
Exchange under the trading symbol “TCF”. The table below sets forth the high and
low sales prices for our common stock for the periods indicated, as reported by
NASDAQ, quoted through the OTC Bulletin Board or as reported by the American
Stock Exchange. The per share quotations for the periods in which our common
stock was traded in the over-the-counter market represent inter-dealer prices
without adjustment for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions. All sales prices have been adjusted
retroactively to reflect the one-for-three reverse stock split completed
December 27, 2004.


**Price
      Range of Common Stock(1)****Period**
    
    
    **High**
    
    
    **Low****Year
      Ended December 31, 2003**First
      Quarter
    
    $
    2.82
    
    $
    1.08Second
      Quarter
    
    
    1.80
    
    
    0.75Third
      Quarter
    
    
    3.15
    
    
    0.60Fourth
      Quarter
    
    
    11.07
    
    
    2.58**Year
      Ended December 31, 2004**First
      Quarter
    
    $
    15.81
    
    $
    9.00Second
      Quarter
    
    
    14.85
    
    
    8.55Third
      Quarter
    
    
    14.76
    
    
    11.10Fourth
      Quarter
    
    
    27.45
    
    
    12.57





(1)
    
    On
      November 2, 2004, our common stock commenced trading on the American Stock
      Exchange under the trading symbol “TCF”. From March 1, 1999 until July 11,
      2001, our common stock traded in the over-the-counter market through the
      NASDAQ National Market under the symbol “TRBO”. From July 12, 2001 until
      April 21, 2003 our common stock was quoted on the NASDAQ Small Cap Market.
      On April 22, 2003, our common stock was delisted from NASDAQ, and until
      November 2, 2004, our common stock was traded in the over-the-counter
      market and quoted through the OTC Bulletin Board under the symbol
      “TRBO.OB”.





On
December 27, 2004, we combined our outstanding shares in a one-for-three reverse
stock split. Any holder who otherwise would have held a fractional share as a
result of the reverse split instead only held a right to be paid a cash amount
for that fraction. We paid approximately $1,400 in exchange for fractional share
rights.





The
number of record holders of our common stock as of March 7, 2005 was 146
(excluding individual participants in nominee security position listings).





**Dividends**





We have
not paid cash dividends on our common stock since our organization, and we do
not expect to pay any cash dividends on the common stock in the foreseeable
future. Rather, we intend to use all available funds for our operations and
planned expansion of our business. The payment of any future cash dividends is
at the discretion of our Board of Directors and will depend on our future
earnings, capital requirements and financial condition and other factors deemed
relevant by the Board of Directors. In
addition, our current credit agreement with Bank of America prohibits us from
paying cash dividends.






**Equity
Compensation Plan Table**





See Item
12 in Part III.





**Item
6.** **Selected
Financial Data**





The
following selected financial data as of December 31, 2004 and 2003, and for each
of the fiscal years ended December 31, 2004, 2003 and 2002 has been derived from
the Company’s audited financial statements, and should be read in conjunction
with those statements, which are included in this Form 10-K. The following
selected financial data as of December 31, 2002, 2001 and 2000, and for each of
the fiscal years ended December 31, 2001 and 2000, has been derived from the
Company’s audited financial statements, and should be read in conjunction with
those statements, which are not included in this Form 10-K. The selected
financial data should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the financial
statements and notes thereto which are included elsewhere in this Form
10-K.





11




**Year
      Ended December 31,****2004(1)**
    
    
    **2003**
    ****
    ****
    **2002**
    ****
    ****
    **2001**
    ****
    ****
    **2000****(In
      thousands except share and per share data)****Statements
      of Operations Data:**Revenues
    
    $
    70,894
    
    $
    3,690
    
    $
    5,655
    
    $
    3,230
    
    $
    7,846Costs and expenses:Cost
      of product sales
    
    
    44,047
    
    
    1,946
    
    
    3,474
    
    
    1,592
    
    
    3,846Research
      and development expenses
    
    
    1,202
    
    
    897
    
    
    413
    
    
    774
    
    
    3,554Selling,
      general and administrative
    expenses
    
    
    15,826
    
    
    6,523
    
    
    8,481
    
    
    6,890
    
    
    8,120Compensation
      and severance expenses related to termination of former officers and
      directors
    
    
    —
    
    
    7,585
    
    
    —
    
    
    —
    
    
    —Total
      costs and expenses
    
    
    61,075
    
    
    16,951
    
    
    12,368
    
    
    9,256
    
    
    15,520Operating
      income (loss)
    
    
    9,819
    
    
    (13,261
    )
    
    (6,713
    )
    
    (6,026
    )
    
    (7,674
    )Interest
      expense (2)
    
    
    (8
    )
    
    (1,105
    )
    
    (226
    )
    
    (195
    )
    
    (677
    )Interest
      and other income (expense), net
    
    
    169
    
    
    17
    
    
    255
    
    
    190
    
    
    191Gain
      on the sale of purchased put option, net of amortization  of
      premium
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    4,428Total
      other income (expense)
    
    
    161
    
    
    (1,088
    )
    
    29
    
    
    (5
    )
    
    3,942Income
      (loss) before taxes
    
    
    9,980
    
    
    (14,349
    )
    
    (6,684
    )
    
    (6,031
    )
    
    (3,732
    )Provision
      for income taxes
    
    
    301
    
    
    —
    
    
    —
    
    
    —
    
    
    —Net
      income (loss)
    
    
    9,679
    
    
    (14,349
    )
    
    (6,684
    )
    
    (6,031
    )
    
    (3,732
    )Preferred
      stock dividends
    
    
    —
    
    
    (195
    )
    
    (270
    )
    
    (305
    )
    
    (57
    )Beneficial
      conversion feature of preferred stock (3)
    
    
    —
    
    
    (12,605
    )
    
    —
    
    
    (380
    )
    
    —Net
      income (loss) applicable to common stockholders
    
    $
    9,679
    
    $
    (27,149
    )
    $
    (6,954
    )
    $
    (6,716
    )
    $
    (3,789
    )Net
      income (loss) per share applicable to common stockholders:Basic
    
    $
    0.79
    
    $
    (3.99
    )
    $
    (1.10
    )
    $
    (1.24
    )
    $
    (0.73
    )Diluted
    
    
    0.37
    
    
    (3.99
    )
    
    (1.10
    )
    
    (1.24
    )
    
    (0.73
    )Weighted
      Average Numberof
      Shares Outstanding:Basic
    
    
    12,256,686
    
    
    6,797,575
    
    
    6,301,236
    
    
    5,402,269
    
    
    5,200,737Diuted
    
    
    26,142,101
    
    
    6,797,575
    
    
    6,301,236
    
    
    5,402,269
    
    
    5,200,737**As
      of December 31,****2004(1)**
    
    
    **2003**
    ****
    ****
    **2002**
    ****
    ****
    **2001**
    ****
    ****
    **2000****(In
      thousands)****Balance
      Sheet Data:**Cash
      and cash equivalents
    
    $
    12,942
    
    $
    8,890
    
    $
    629
    
    $
    4,498
    
    $
    1,417Working
      capital (deficit)
    
    $
    17,399
    
    $
    (5,685
    )
    $
    (1,567
    )
    $
    4,485
    
    $
    846Total
      assets
    
    $
    50,756
    
    $
    11,420
    
    $
    5,387
    
    $
    8,672
    
    $
    5,722Total
      liabilities, including mezzanine equity (3)
    
    $
    16,977
    
    $
    18,155
    
    $
    6,646
    
    $
    3,645
    
    $
    4,054Accumulated
      deficit
    
    $
    (52,277
    )
    $
    (61,956
    )
    $
    (47,412
    )
    $
    (40,458
    )
    $
    (33,742
    )Total
      stockholders’ equity (deficit)
    
    $
    33,779
    
    $
    (6,735
    )
    $
    (1,259
    )
    $
    5,027
    
    $
    1,668


(1)
    
    During
      the year ended December 31, 2004, we completed the acquisition of Enersyst
      Development Center, L.L.C. in a transaction accounted for as a purchase.
      The results of operations of Enersyst have been included in our
      consolidated results of operations since the May 21, 2004 purchase
      date.(2)
    
    Amount
      for 2003 primarily represents $1.1 million of debt extinguishment costs
      incurred in 2003.(3)
    
    During
      2003, we incurred a one-time, non-cash charge of $12.6 million to record a
      deemed dividend in recognition of the beneficial conversion feature
      intrinsic in the terms of our Series D onvertible Preferred Stock. The
      Series D Convertible Preferred was considered redeemable until July 19,
      2004 when shareholders approved an amendment to increase the number of
      authorized shares of our common stock to 100,000,000 and a sufficient
      number of shares of common stock were subsequently reserved to permit the
      conversion of all outstanding shares of our Series D Convertible Preferred
      Stock into shares of common stock. As of October 28, 2004, all shares of
      Series D Convertible Preferred Stock had been converted to shares of
      common stock.


****


**Item
7.** **Management’s
Discussion and Analysis of Financial Condition and Results of
Operations**





The
following discussion and analysis provides information which management believes
is relevant to an assessment and understanding of the Company’s results of
operations and financial condition. The discussion should be read in conjunction
with the “Selected Financial Data” and the financial statements and notes
thereto contained elsewhere in this annual report. The following discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ from those discussed in these
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and elsewhere
in this annual report.





12





**Overview**





TurboChef
Technologies, Inc. is a leading provider of equipment, technology and services
focused on the high-speed preparation of food products for the speed cook sector
of the commercial cooking equipment market. Our user-friendly speed cook ovens
employ proprietary combinations of heating technologies such as convection, air
impingement, microwave energy and other advanced methods to cook food products
at high speeds with food quality that we believe to be comparable or superior to
that of conventional heating methods. We currently offer two commercial ovens,
our C3 oven and our Tornado oven, and are developing various new ovens for the
commercial cooking equipment market and residential oven market. Our primary
markets for our commercial ovens are with commercial foodservice operators
throughout North America, Europe and Asia. We currently sell our ovens in North
America through our internal sales force and through a direct sales force of
manufacturer’s representatives, and in Europe and Asia through a network of
equipment distributors. We also are working to expand the market for our
commercial ovens in Latin America and Australia. In addition, we offer fee-based
equipment development and testing, prototype fabrication and other services, and
food preparation, menu planning and analysis and related consulting services to
foodservice equipment manufacturers and other members of the foodservice
industry. We believe that we operate in one primary business
segment.


During 2004, our new management team focused on strengthening our
operating systems and infrastructure, solidifying our sales and marketing
efforts, performing under our supply agreement with the Subway system,
integrating our Enersyst acquisition and developing our strategy for the
residential oven market. Sales to Subway franchisees resulted in a material
increase in revenues and income in the quarters ended September 30, 2004 and
December 31, 2004 and are expected to continue to represent a significant
portion of our income and revenue in 2005, albeit to a lesser extent after March
31, 2005, the date by which the North American roll-out is expected to be
substantially complete. The Subway relationship should continue to be a
meaningful contributor to future revenues as we undertake delivery of ovens to
international Subway locations, new Subway restaurants are opened and existing
restaurants assess their needs for additional ovens. During 2005, our focus will
be on generating revenues from other foodservice establishments, introducing new
commercial products and developing our residential oven products and
strategies.


**Restatement
of Financial Statements**





The
Company restated its financial statements for the years ended December 31, 2003
and 2002. The following management’s discussion and analysis takes into account
the effects of the restatement with respect to any 2003 or 2002
comparisons.





**Application
of Critical Accounting Policies**





Below is
a discussion of our critical accounting policies. For a complete discussion of
our significant accounting policies, see the footnotes to the financial
statements included in this annual report and discussion throughout this
document. These policies are critical to the portrayal of our financial
condition and/or are dependent on subjective or complex judgments, assumptions
and estimates. If actual results differ significantly from management’s
estimates and projections, then there could be a significant impact on the
financial statements. The impact of changes in key assumptions may not be
linear. Our management has reviewed the application of these policies with the
audit committee of our board of directors.





***Revenue
Recognition***





Revenue
from product sales is recognized when title and risk of loss are transferred to
the customer, substantially all obligations relating to a sale are completed,
prices are fixed or determinable and collection of the related receivable is
reasonably assured. If the terms of a sale require installation, the revenue
cycle is substantially complete after installation has occurred; therefore,
revenue is recognized upon installation. For sales where the customer has
assumed the installation responsibility and sales to designated agents,
substantially all obligations are completed at the time of shipment to the
customer or the customer’s designated agent; therefore, revenue is recognized
upon shipment. Revenue for sales of replacement parts and accessories is
recognized upon shipment to the customer. Royalty revenues are recognized based
on the sales dates of licensees’ products, and services revenues are recorded
based on attainment of scheduled performance milestones.





We
provide for returns on product sales based on historical experience and adjust
such reserves as considered necessary. To date, there have been no significant
sales returns. We have deferred approximately $2.7 million of revenue and
approximately $1.6 million of costs of product sales related to ovens sold in
2002 and 2003 to franchisees of a major restaurant chain under a proposal which
offered a future exchange for a new oven contingent on completion of a
franchise-wide sale and roll-out of our new ovens.





***Product
Warranty***





We
warrant our ovens against defects in material and workmanship for a period of
one year from the date of installation. Anticipated future warranty costs are
estimated based upon historical experience and are recorded in the periods ovens
are sold. Periodically, our warranty reserve is reviewed to determine if the
reserve is sufficient to cover the repair costs associated with the remaining
ovens under warranty. At this time, we believe that, based upon historical data,
the current warranty reserve is sufficient to cover the associated costs. If
warranty costs trend higher, we would need to record a higher initial reserve as
well as reserve the estimated amounts necessary to cover all ovens remaining
under warranty. For example, if the costs of actual product warranty were 10%
higher than we expected, our provision for warranties would have been higher and
net income would have been lower by approximately $302,000 for the year ended
December 31, 2004. Any such additional reserves would be charged to cost of
goods sold and could have a material effect on our financial
statements.





13





***Goodwill
and Other Intangible Assets***





Goodwill
represents the excess purchase price of net tangible and intangible assets
acquired in business combinations over their estimated fair values. Statement of
Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets,* requires
goodwill and other acquired intangible assets that have an indefinite useful
life to no longer be amortized; however, these assets must undergo an impairment
test at least annually. We completed our annual goodwill impairment test in
October 2004 and determined that the carrying amount of goodwill was not
impaired. We will continue to perform our goodwill impairment review annually or
more frequently if facts and circumstances warrant a review.





SFAS No.
142 also requires that intangible assets with definite lives be amortized over
their estimated useful life and reviewed for impairment in accordance with SFAS
No. 144, *Accounting
for the Impairment or Disposal of Long-Lived Assets* . We are
currently amortizing acquired developed technology using the straight line
method over an estimated useful life of 10 years.





***Stock-Based
Compensation and Other Equity Instruments***





We follow
Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees* , and
related interpretations, in accounting for our stock-based compensation plans,
rather than the alternative fair value accounting method provided for under SFAS
No. 123, *Accounting for Stock-Based Compensation* , as
amended. Accordingly, we have not recorded stock-based compensation expense for
stock options issued to employees in fixed amounts with exercise prices at least
equal to the fair value of the underlying common stock on the date of grant. In
the notes to our financial statements we provide pro forma disclosures in
accordance with SFAS No. 123 and related pronouncements.





In
December 2004, the FASB issued SFAS No. 123R (Revised 2004), *Share-Based
Payment* , which
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements based on alternative fair value models.
The share-based compensation cost will be measured based on the fair value of
the equity or liability instruments issued. We currently disclose pro forma
compensation expense quarterly and annually by calculating the stock option
grants' fair value using the Black-Scholes model and disclosing the impact on
net income and net income per share in a Note to the Consolidated Financial
Statements. Upon adoption of SFAS No. 123R, pro forma disclosure will no longer
be an alternative. The table in Note 2 to the Consolidated Financial Statements
reflects the estimated impact such adoption would have had on our net income and
net income per share if it had been in effect during the three years ended
December 31, 2004. SFAS No. 123R also requires the benefits of tax deductions in
excess of recognized compensation cost be reported as a financing cash flow
rather than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While we cannot estimate what those amounts
will be in the future, there were no such amounts recognized in 2004. We will
begin to apply SFAS No. 123R using the most appropriate fair value model as of
the interim reporting period ending September 30, 2005.





We
account for transactions in which services are received in exchange for equity
instruments issued based on the fair value of such services received from
non-employees or of the equity instruments issued, whichever is more reliably
measured, in accordance with SFAS No. 123 and Emerging Issues Task Force
(“EITF”) Issue No. 96-18, *Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services* . We
account for transactions in which we issue convertible securities in accordance
with EITF Issues No. 98-5, *Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios* and No.
00-27, *Application of Issue No. 98-5 to Certain Convertible
Instruments* and SFAS
No. 150, *Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity* . The two
factors which most affect charges or credits to operations related to
stock-based compensation are the fair value of the underlying equity instruments
and the volatility of such fair value. We believe our prior and current
estimates of these factors have been reasonable.





***Foreign
Exchange***





For the
year ended December 31, 2004, less than 10% of our revenues were derived from
sales outside of the United States. For the years ended December 31, 2003 and
2002, 43% and 37% of our revenues were derived from sales outside of the United
States, respectively. These sales and subsequent accounts receivable and less
than 10% of selling, general and administrative expenses for the year ended
December 31, 2004 and 12% for the years ended December 31, 2003 and 2002,
respectively, are also denominated in foreign currencies, principally in Euros.
At this time, we do not engage in any foreign exchange hedging
activities.





***Deferred
Income Taxes***





In
preparing our financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves
estimating actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and financial
reporting purposes. These differences result in deferred income tax assets and
liabilities. In addition, for the year ended December 31, 2004, we utilized net
operating loss carryforwards (“NOLs”) of approximately $9.4 million to reduce
2004 income tax expense. As of December 31, 2004, after utilization of these
NOLs, we have remaining NOLs of approximately $38.6 million, all of which are
subject to annual limitations resulting from the change in control provisions in
Section 382 of the Internal Revenue Code. These NOLs begin to expire in 2009.
Additionally, we have $3.2 million in income tax deductions related to stock
option exercises, the tax effect of which will be reflected as a credit to
additional paid-in capital when realized. A valuation allowance is recorded to
reduce our net deferred income tax assets to the amount that is more likely than
not to be realized. Based on our previous history of losses, we have recorded a
valuation allowance as of December 31, 2004, equal to the full amount of our net
deferred income tax assets including those related to our NOLs. Future
profitable operations would permit recognition of these net deferred income tax
assets, which would have the effect of reducing our income tax expense. Future
operations could also demonstrate a return to profitability sufficient to
warrant a reversal of the valuation allowance which would positively impact our
financial statements.





***Commitments
and Contingencies***





We
evaluate contingent liabilities including threatened or pending litigation in
accordance with SFAS No. 5, *Accounting for Contingencies* , and
record accruals when the outcome of these matters is deemed probable and the
liability is reasonably estimable. We make these assessments based on facts and
circumstances and in some instances based in part on the advice of outside legal
counsel.





The
Company terminated an agreement with a manufacturing outsourcing partner in
December 2004 and is in the process of negotiating a final settlement related to
certain outstanding matters. The Company is unable to determine the outcome of
such negotiations at this time. However the Company does not believe it will
result in a significant negative impact to the results of operations, when
settled.




14





**Enersyst
Acquisition**





On May
21, 2004, we acquired Enersyst Development Center, L.L.C., a leading provider
and source of innovations to the foodservice industry. Historically, Enersyst
researched, developed and licensed its proprietary foodservice technologies to
foodservice equipment manufacturers, and provided fee-based consulting services
to members of the foodservice industry to test and develop products for the
foodservice market. Enersyst holds more than 180 issued patents and patent
applications worldwide related to heat transfer, air impingement and associated
food technologies. As a result of this acquisition, we believe we are better
positioned to deliver the most advanced speed cook equipment, technology and
services to customers worldwide. The results of Enersyst’s operations have been
included in our consolidated financial statements since the acquisition
date.





Total
consideration for this transaction, $14.0 million, consisted of $7.7 million
cash, including transaction costs, and $6.3 million equity in the form of
Enersyst preferred membership units exchangeable in the future, at the
discretion of the holders, for approximately 611,000 shares of our common stock.
As of March 1, 2005, approximately 518,000 shares had been exchanged. The cash
portion of the acquisition was funded by a May 2004 private placement of common
stock. Total goodwill recorded was $5.8 million, none of which is deductible for
income tax purposes.





**Results
of Operations**





***Year
Ended December 31, 2004 Compared to the Year Ended December 31,
2003***




Total
revenues for 2004 were $70.9 million, an increase of $67.2 million, compared to
revenues of $3.7 million for 2003. This increase was due primarily to increased
oven revenues of $64.4 million substantially attributable to sales of our
Tornado model oven to Subway franchisees. Of the remaining increase, $1.2
million represented royalty and services revenue related to the Enersyst
acquisition and the remainder was due to increased consumable and other
revenues.





Cost of
product sales for 2004 was $44.0 million, an increase of $42.1 million, compared
to $1.9 million for 2003. The increase in cost of product sales was due
primarily to the increase in ovens sold. As a percentage of related product
sales, cost of product sales increased due to the lower margin experienced on
sales to Subway franchisees.





Cost of
product sales is calculated based upon the actual cost of the oven, the cost of
any accessories supplied with the oven, an allocation of cost for freight,
duties and taxes for the ovens imported and a reserve for warranty. Cost of
product sales does not include any cost allocation for administrative and
support services required to deliver or install the oven or an allocation of
costs associated with the ongoing quality control of our manufacturers. These
costs are recorded within selling, general and administrative expenses. Cost of
product sales also does not attribute any allocation of compensation or general
and administrative expenses to royalty and services revenues.





Gross
profit on product sales for 2004 was $25.7 million, an increase of $24.0
million, compared to gross profit on product sales of $1.7 million for 2003. The
increase in gross profit for 2004 was due primarily to the increase in unit
sales. Gross profit on product sales as a percentage of product sales revenue
decreased due to volume pricing on sales to Subway franchisees.





Research
and development expenses for 2004 were $1.2 million, an increase of $305,000,
compared to $897,000 for 2003. These increases relate primarily to the expanded
scope of research activities brought about by the Enersyst acquisition and
initial expenses in prototype development for new oven models.





Selling,
general and administrative expenses, including depreciation and amortization,
for 2004 were $15.8 million, an increase of $9.3 million, compared to $6.5
million for 2003. These increases were due to the required expansion of
operations to support the previously noted increased level of sales activity
stemming from the Subway relationship. The more significant items of increase
included payroll and related expenses of $4.1 million, including incentive pay
of $1.1 million related to 2004 performance, travel and related expenses of $1.1
million and marketing and related expenses of $1.1 million. Additionally, legal
and professional fees increased $1.8 million primarily attributable to the
Maytag litigation and professional fees associated with our Sarbanes-Oxley
compliance. Rent and occupancy costs increased $363,000 attributable to our new
offices in Atlanta and New York. Non-employee compensation related to charges
for stock-based compensation decreased $297,000. Additionally, we recorded a
charge of $735,000 in the fourth quarter of 2003 to provide for the potential
uncollectibility of a receivable from Maytag which is part of our pending
litigation. The Enersyst acquisition added selling, general and administrative
expenses of $1.8 million related to the costs of additional personnel and
facilities and increased amortization related to acquired intangibles.
Depreciation and amortization expense also increased, to a lesser extent,
related to tooling and other equipment purchases made to support activity from
the Subway relationship and leasehold improvements in the new facilities. The
2003 amounts were also reflective of a curtailment of activity in the business
early in the year as financial resources became scarce.





Concurrent
with the private placement of our Series D Preferred Stock in October 2003 and
the election of new officers and board members, we terminated four former
officers and/or directors. In this regard, we entered into various settlement
and release and severance agreements with these individuals under which cash was
given, common stock and/or options were issued and/or previously issued equity
instruments were modified. In connection with this, we recorded $7.6 million in
compensation charges in 2003. Of this amount, $200,000 represented cash
severance and the balance was related to estimated fair value computations
applied to equity instruments received and/or modified.





Net other
income (expense) for 2004 was $161,000 as compared to $(1.1) million for 2003.
The 2003 amount related primarily to debt extinguishment costs incurred to
retire a note payable.





Our
provision for income taxes in 2004 was $301,000 and consists of estimated
Federal Alternative Minimum Tax and estimated state and local taxes. This tax
provision is an effective tax rate of 3% and reflects utilization of
approximately $9.4 million in operating losses carried forward from prior years
(NOLs) which reduced our taxable income in 2004. As of December 31, 2004, we
have available approximately $38.6 million in remaining NOL carryforwards, all
of which are subject to annual limitations resulting from the change in control
provisions in Section 382 of the Internal Revenue Code. These NOLs begin to
expire in 2009. Additionally, we have $3.2 million in income tax deductions
related to





15





stock
option exercises, the tax effect of which will be reflected as a credit to
additional paid-in capital when realized. As described in Note 8 to the
Consolidated Financial Statements, a valuation allowance has been recorded to
reduce our net deferred income tax assets to the amount that is more likely than
not to be realized. Based on our previous history of losses, we have recorded a
valuation allowance as of December 31, 2004, equal to the full amount of our net
deferred income tax assets including those related to our NOLs. Future
profitable operations would permit recognition of these net deferred income tax
assets, which would have the effect of reducing our income tax expense. Future
operations could also demonstrate a return to profitability sufficient to
warrant a reversal of the valuation allowance, which would positively impact our
financial statements





Preferred
stock dividends for 2004 were nil due to the conversion of our Series B and C
Preferred Stock into common stock in October 2003. In 2003, we recorded a
one-time, non-cash charge of $12.6 million to recognize as a deemed dividend the
beneficial conversion feature related to our Series D Convertible Preferred
Stock, all of which converted into common stock by October 28, 2004.





As a
result of the foregoing, we generated net income applicable to common
stockholders of $9.7 million for 2004 compared to a net loss applicable to
common stockholders of $(27.1) million for 2003.





***Year
Ended December 31, 2003 Compared to the Year Ended December 31,
2002***





Revenues
for the year ended December 31, 2003 were $3.7 million, compared to revenues of
$5.7 million for the year ended December 31, 2002. This decrease is primarily
attributable to a 38% decrease in the unit sales of ovens during fiscal 2003.
This decline in unit sales is reflective of our cash and liquidity position for
much of 2003 which led to a significant curtailment of operations. The average
selling price per unit increased approximately 1% from the previous period. This
slight increase in the average selling price of ovens is due in large part to
moderation of the number of units sold to Subway franchisees during 2003. Subway
franchisees benefited from a favorable price as part of a major order initiated
in 2002 and sales to Subway franchisees represented 22% of recognized sales in
2002 compared to 8% of sales in 2003. Additionally, in the years ended December
31, 2003 and 2002, Subway franchisees purchased approximately 400 ovens as part
of a market test of certain new product initiatives. The revenue and related
cost of sales totaling $2.7 million and $1.6 million, respectively, have been
deferred due to the terms of sale on these ovens offering a future exchange
provision for a new oven contingent on completion of a franchise-wide sale and
roll-out of our ovens.





Cost of
product sales for the year ended December 31, 2003 were $1.9 million compared to
$3.5 million for cost of sales for the year ended December 31, 2002. The
decrease is principally due to the 38% decrease in the number of ovens sold
during the year. The average unit cost per oven decreased approximately 5% in
2003. The decline resulted from favorable purchasing of components coupled with
a slight shift in mix between ovens sold in the U.S. versus Europe where the
ovens are slightly more costly to produce. Cost of product sales for 2002 also
included a $190,000 increase in the warranty reserve for a
customer.





Gross
profit on product sales for the year ended December 31, 2003 decreased $440,000
to $1.7 million, when compared to gross profit on product sales of $2.2 million
during the year ended December 31, 2002. This decrease is due primarily to the
significant decrease in the number of ovens sold during the year ended December
31, 2003, partially offset by an increase in the average margin per
unit.





Research
and development expenses for the year ended December 31, 2003 increased $484,000
to $897,000, as compared to $413,000 for the year ended December 31, 2002. The
increase in research and development expense principally relates to an increase
in payroll and related expenses of $312,000, an increase of $133,000 related to
the development of the next generation oven prototypes and an increase in
freight charges of $30,000.





Selling,
general and administrative expenses for the year ended December 31, 2003
decreased $2.0 million to $6.5 million from comparable expenses of $8.5 million
for the year ended December 31, 2002. This decrease is due primarily to a
decrease in sales and marketing related expenses of $1.4 million, including
decreased payroll expenses of $668,000, travel expenses of $472,000, trade show
expenses of $197,000 and advertising expenses of $30,000. In addition, general
and administrative expenses decreased by $629,000 net, including decreased
payroll expenses of $331,000 and lower occupancy costs of $387,000, reductions
in consulting services of $309,000, a $266,000 decrease in depreciation and
amortization charges, and decreases in insurance expense, printing and other
administrative expenses aggregating approximately $238,000. These decreases were
partially offset by an increase in compensation expense for stock and option
awards of $208,000 and a charge of $735,000 recorded in the fourth quarter of
2003 to provide for the potential uncollectibility of a receivable from Maytag
which is part of our pending litigation. The reductions in selling, general and
administrative expenses were due principally to concerted efforts to reduce
expenses in light of our cash and liquidity position through much of 2003. These
efforts included reductions in staff and closure of the Company’s offices in New
York and the United Kingdom.





Concurrent
with the private placement of our Series D Convertible Preferred Stock in
October 2003 and the election of new officers and board members, we terminated
four former officers and/or directors. In this regard, we entered into various
settlement and release and severance agreements with these individuals which
included the payment of cash, issuance of common stock and options, and
modification of previously issued equity instruments. In connection with this,
we recorded $7.6 million in compensation charges. Of this amount, $200,000
represents cash severance and the balance is related to estimated fair value
computations applied to equity instruments received and/or
modified.





Net other
(expense) income was ($1.1) million for the year ended December 31, 2003,
compared to $29,000 for the year ended December 31, 2002. The increase in other
expense was principally due to $1.1 million in interest expense and debt
extinguishment costs related to a settlement reached with Grand Cheer Company
Limited, holder of a note payable from us, and $100,000 in foreign exchange
losses for 2003 as compared to ($226,000) and $108,000, respectively for these
items in 2002. Interest expense in 2002 included a non-cash financing charge of
$200,000 associated with the loan from Grand Cheer.





Charges
related to preferred stock dividends decreased by $75,000 for the year ended
December 31, 2003, as compared to the year ended December 31, 2002. This was due
to the conversion of our Series B and C Preferred Stock into common stock in
October 2003.





During
2003, we incurred a one-time, non-cash charge of $12.6 million to record a
deemed dividend in recognition of the beneficial conversion feature intrinsic in
the terms of conversion of our Series D Convertible Preferred Stock. These
securities were immediately convertible into common stock at the option of the
holders without additional consideration and the fair value of the underlying
common stock into which they were convertible exceeded the total proceeds from
the Series D Convertible Preferred Stock issuance.





16





Net loss
applicable to common stockholders increased by $20.1 million to $27.1 million
for the year ended December 31, 2003, as compared to $7.0 million for the year
ended December 31, 2002. The net loss per share increased to $3.99 from $1.10 a
share, based on the weighted average number of shares outstanding of 6,797,575
and 6,301,236 for the years ended December 31, 2003 and 2002, respectively. The
increase in the net loss is due principally to the beneficial conversion feature
of the Series D Convertible Preferred Stock, the compensation and severance
related to termination of former officers and directors, together with the
decrease in oven sales during 2003. The decrease in margin from oven sales was
offset by a decrease in selling, general and administrative costs.


**Liquidity
and Capital Resources**





Our
capital requirements in connection with our product and technology development
and marketing efforts have been and will continue to be significant. Additional
capital will be required to expand our operations. Prior to the quarter ended
September 30, 2004, we had, from inception, incurred significant operating
losses.





On
October 28, 2003 we completed a private placement of our Series D Convertible
Preferred Stock to OvenWorks, LLLP and to certain other investors for whom
OvenWorks served as nominee. At the time of issuance, the shares of Series D
Convertible Preferred Stock issued in the private placement were convertible
into a number of shares of our common stock representing approximately 58% of
our total equity on a fully diluted, as converted basis (i.e., assuming that all
outstanding options, warrants and other rights for the purchase of our common
stock were exercised, and all outstanding shares of all series of our preferred
stock, including the Series D Convertible Preferred Stock, were converted into
common stock). Net proceeds of the private placement were $12.6 million. As of
October 28, 2004 all shares of the Series D Convertible Preferred Stock had been
converted into 14,217,667 shares of our common stock.





In May
2004, we completed a private placement of 1,151,210 shares of common stock for
aggregate consideration of $10.0 million, or $8.70 per share. A portion of the
proceeds from the private placement was used to finance our acquisition of
Enersyst with the remainder to be used for working capital and other general
corporate purposes.





On
February 8, 2005, we closed a public offering of 5,000,000 shares of our common
stock at $20.50 before discounts and commissions to underwriters and other
offering expenses. Of the shares sold, 2,925,000 were sold by the Company and
2,075,000 were sold by certain selling stockholders. We plan to use the net
proceeds, approximately $55.0 million, to finance the development and
introduction of residential ovens, to pursue possible acquisitions or strategic
investments and for working capital and other general corporate
purposes.





Our
management anticipates that current cash on hand, collections of its accounts
receivable, cash from anticipated sales of ovens and the proceeds of our public
offering will provide sufficient liquidity for us to execute our business plan
and expand our business as needed. Additionally, on February 28, 2005, we closed
a $10.0 million credit facility with Bank of America. This facility will provide
stand-by credit availability to augment the cash flow anticipated from
operations.





We have,
and will continue to hold, inventory due to our manufacturing cycle. As of
December 31, 2004, we held $3.5 million of finished goods inventory (ovens),
$259,000 of demonstration inventory (ovens used for customer demonstrations,
tests and pilot programs) and $4.3 million of parts inventory (used for
manufacturing and service). We offer demonstration inventory free of charge or
at reduced prices to certain large prospective customers who wish to test and
evaluate an oven prior to purchase.





In
September 1999, we entered into an agreement with Whitbread Group PLC to provide
certain upgrades to, and an extended warranty for, a number of our ovens that
were sold to Whitbread. In February 2002, we entered into an agreement with
Whitbread to terminate the September 1999 agreement, under which we were
required to make monthly payments over a 24-month period to Whitbread. We did
not make certain of these monthly payments and were in default under the
February 2002 agreement. In connection with these matters, we recorded
adjustments to our warranty liability for Whitbread of approximately $190,000.
Other than a provision for the estimated effects of foreign exchange, there had
been no activity in our liability related to Whitbread since 2002. At September
30, 2004 this liability totaled $739,000. In November 2004, we settled this
liability for £150,000 (or approximately $280,000).





We did
not make certain payments to Maytag Corporation under a promissory note that we
issued for the purchase of certain parts and oven inventory in November 2001. In
January 2003, Maytag obtained a summary judgment against us in the amount of
$359,372, representing unpaid principal and interest under the note, and in
March 2004, we paid this judgment in full, including estimates for additional
costs. Our dispute with Maytag over these payments is part of a series of legal
proceedings against Maytag that is discussed in detail elsewhere in this Annual
Report.





Since the
October 2003 private placement, we have implemented plans to increase
expenditures in marketing, advertising and promotion, research and development
and customer support to serve the growth in our activity. In addition, we are
currently refining a prototype oven to be introduced in the residential oven
market. We anticipate that we will incur increased expenditures relating to
marketing, advertising and promotion and research and development of our
residential products in future periods.





Cash
provided by operating activities was $3.6 million for the year ended December
31, 2004 as compared to cash used in operations of $3.4 million for the year
ended December 30, 2003. Net cash provided by operating activities for 2004
resulted from our net income of $9.7 million plus non-cash charges of $1.2
million (principally depreciation and amortization) offset by an increased
investment in working capital of $7.3 million. The working capital investment
was largely due to increases of $8.6 million in accounts receivable and $6.8
million in inventory, offset by increases of $7.7 million in accounts payable
and $3.8 million in accrued expenses and warranty resulting, in large part, from
current sales to Subway franchisees and the inventory requirements to
accommodate the anticipated level of future orders. Substantially all of the
December 31, 2004 outstanding accounts receivable were collected prior to
January 31, 2005. Additionally, pursuant to the terms of the agreement under
which we provide ovens to Subway restaurants, we agreed to segregate the funds
for estimated warranty costs for the Subway ovens. The estimated warranty cost
is deposited to a separate account within 10 days of payment for the oven and
withdrawals for the cost of warranty parts and labor are made periodically, as
incurred, up to the amount initially deposited. Unexpended funds at the end of
the warranty period are retained by us. As of December 31, 2004, the amount of
these segregated funds totaled $3.2 million, which is classified as restricted
cash on the consolidated balance sheet as of December 31, 2004.  Net cash
used in operating activities for 2003 resulted from our net loss of $(14.3)
million, offset by $9.1 million of net non-cash charges (depreciation,
amortization, non-cash interest and debt extinguishment costs, and non-cash
compensation expenses) and a reduction in working capital of $944,000 consisting
of a





17





$258,000
increase in prepaid expenses and other assets, primarily related to procuring
appropriate levels of business insurance, and an $809,000 decrease in accounts
payable, related to bringing our vendor accounts current. These operating cash
requirements were partially offset by a decrease of $1.1 million in accounts
receivable as we focused efforts on collections, a $360,000 decrease in
inventories as production of finished ovens was curtailed and a $550,000
increase in deferred revenue from the sale of 150 ovens to two major
customers.





Cash used
in investing activities for the year ended December 31, 2004 was $10.9 million
compared to $33,000 for the year ended December 31, 2003. The increase is due
primarily to $7.7 million net cash expended for the acquisition of Enersyst and
$2.9 million in capital expenditures, primarily related to tooling and other
equipment purchases made to support activity from our relationship with the
Subway system and to establishing offices in Atlanta and New York. We anticipate
capital expenditures of approximately $5.0 million during 2005, including
anticipated capital expenditures in connection with the introduction of our
residential oven, and anticipate funding those expenditures from working capital
and the proceeds of our public offering.





Cash
provided by financing activities for the year ended December 31, 2004 was $11.4
million compared to $11.7 million for the year ended December 31, 2003. In 2004,
we received net proceeds of $10.0 million from the May 2004 private placement
and $1.8 million in proceeds from the exercise of options and warrants, and we
paid $380,000 in notes payable. In 2003, we received net proceeds of $12.6
million from the sales of our Series D Preferred Stock and $87,000 in proceeds
from the exercise of options and warrants, and we paid a $1.0 million loan with
these proceeds.





At
December 31, 2004, we had cash and cash equivalents of $12.9 million and working
capital of $17.4 million as compared to cash and cash equivalents of $8.9
million and working capital of $5.7 million at December 31, 2003.





**Contractual
Cash Obligations**





As of
December 31, 2004, our future contractual cash obligations are as follows (in
thousands):


**Payments
      Due By Period******
    ****
    ****
    ****
    **Total**
    ****
    **2005**
    ****
    **2006**
    ****
    **2007**
    ****
    **2008**
    ****
    **2009**
    ****
    **Thereafter**
    ****Operating
      Leases
    
    
    
    $
    6,323
    
    
    $
    669
    
    
    $
    998
    
    
    $
    1,001
    
    
    $
    1,008
    
    
    $
    933
    
    
    $
    1,714


We
believe that existing working capital and cash flow from operations, together
with availability under our recently closed $10.0 million credit facility with
Bank of America, will provide sufficient cash flow to meet our contractual
obligations. We intend to seek financing for any amounts that we are unable to
pay from operating cash flows. Financing alternatives are routinely evaluated to
determine their practicality and availability in order to provide us with
additional funding at the least possible cost.





We
believe that our existing cash, credit availability and anticipated future cash
flows from operations will be sufficient to fund our working capital and capital
investment requirements for the next twelve months and a reasonable period of
time thereafter.





**Authoritative
Pronouncements**





In
November 2004, the FASB issued SFAS No. 151, *Inventory
Costs - an amendment of ARB No. 43, Chapter* 4, to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Provisions of this Statement are
effective for fiscal years ending after June 15, 2005, but early application is
permitted. Adoption of this Statement will not materially impact our financial
statements.





In
December 2004, the FASB issued SFAS No. 123R (Revised 2004), *Share-Based
Payment* , which
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements based on alternative fair value models.
The share-based compensation cost will be measured based on the fair value of
the equity or liability instruments issued. We currently disclose pro forma
compensation expense quarterly and annually by calculating the stock option
grants' fair value using the Black-Scholes model and disclosing the impact on
net income and net income per share in a Note to the Consolidated Financial
Statements. Upon adoption, pro forma disclosure will no longer be an
alternative. The table in Note 2 to the Consolidated Financial Statements
reflects the estimated impact that such a change in accounting treatment would
have had on our net income and net income per share if it had been in effect
during the three years ended December 31, 2004. SFAS No. 123R also requires the
benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption.
While we cannot estimate what those amounts will be in the future, there were no
such amounts recognized in 2004. We will begin to apply SFAS No. 123R using the
most appropriate fair value model as of the interim reporting period ending
September 30, 2005.








**FACTORS
THAT MAY AFFECT FUTURE PERFORMANCE**





As
previously discussed, our actual results could differ materially from our
forward looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed below. These and
many other factors described in this report could adversely affect our
operations, performance and financial condition.





***We
have a history of losses, we could continue to incur losses in the future, and
we may never achieve sustained profitability.***





18





We had
net losses applicable to common stockholders of $27.1 million and $7.0 million
for the fiscal years ended December 31, 2003 and 2002, respectively. Our
accumulated deficit as of December 31, 2004 was $52.3 million. We were not
profitable during the fiscal years ended December 31, 2003 and 2002, and
although we were profitable during the fiscal year ended December 31, 2004, it
is uncertain whether our profitability can be sustained. We can provide no
assurance that our future operations will be profitable.





***We
have depended, and will continue to depend, upon one customer for a material
portion of our revenues, and if such customer’s contract is terminated, or if
such customer significantly reduces its purchases of our ovens, our revenues
would decrease and our financial performance would
decline.***





In March
2004, we were chosen to be the exclusive supplier of speed cook ovens to Subway
franchise restaurants worldwide. Revenues from the sale of ovens to Subway
franchisees constituted the substantial majority of our total revenues for our
2004 fiscal year, and although the North American roll-out to existing Subway
franchisees is expected to be substantially complete by March 31, 2005, we
expect that sales to Subway franchisees will continue to constitute a
significant portion of our revenues in the future as we undertake delivery of
ovens to international Subway locations, new Subway restaurants are opened and
existing restaurants assess their needs for additional ovens. However, our
agreement with the Subway system does not specify a number of ovens that Subway
franchisees must purchase in the future. If this agreement is terminated, or
Subway franchisees otherwise discontinue or significantly reduce their purchases
of our ovens either before or after completion of the system-wide roll-out, we
may be left with higher than expected levels of components and finished goods
inventory, our revenues would decrease, and our financial performance would
decline.


***Our
financial performance during the third and fourth quarters of 2004 and the first
quarter of 2005 may not be indicative of our future financial
performance.***





Although
we expect that sales to Subway franchisees will continue to constitute a
significant portion of our revenues in the future as we undertake delivery of
ovens to international Subway locations, new Subway restaurants are opened and
existing restaurants assess their needs for additional ovens, the North American
roll-out to existing Subway franchise restaurants began in the third quarter of
2004 and is expected to be substantially complete by March 31, 2005. This
roll-out will mark the highest level of sales and production volume in our
history. The roll-out has resulted in a material increase in our earnings for
the third and fourth quarters of 2004, and is expected to result in a material
increase in our earnings for the first quarter of 2005. Consequently, our
financial results for the three and nine months ended September 30, 2004 and the
three and twelve months ended December 31, 2004, and our expected results for
the three months ending March 31, 2005, will reflect a substantial increase over
the same periods in 2003 and 2004. Because of the unique nature of the size and
scope of the roll-out, there can be no assurance that in future periods we will
be able to duplicate our results realized during the roll-out by generating
sufficient other revenues to offset the loss of revenues associated with the
completion of the North American roll-out. Our inability to match or exceed
these results in future periods would affect our financial performance and may
materially and adversely affect the price of our common
stock.


******


***We
continue to expand rapidly, and we may be unable to manage our
growth.***





We intend
to continue the rapid growth of our business, but we cannot be sure that we will
successfully manage this growth. Continued growth could place a strain on our
management, operations and financial resources. There also will be additional
demands on our sales, marketing and information systems and on our administrative
infrastructure as we develop and offer new and additional products and enter new
markets. We cannot assure you that our operating and financial control systems,
administrative infrastructure, outsourced and internal production capacity,
facilities and personnel will be adequate to support our future operations or to
effectively adapt to future growth. If we cannot manage our growth effectively,
our business may be harmed.





***We
have a long sales cycle that requires an extended sales effort and is difficult
to predict.***





A
customer’s decision to purchase our commercial ovens often involves a lengthy
evaluation and product qualification process, and selling our commercial ovens
often requires us to educate potential customers about the uses and benefits of
our speed cook technology and services. In addition, the integration of our
ovens into a customer’s business is often a company-wide initiative, which can
include the development of new menus and food products and the launch of new
marketing and advertising campaigns. These factors have made the sales cycles
for our commercial ovens long, ranging from a few months to several years,
making it difficult for us to predict when sales to potential customers may
occur.





***Because
the market for our commercial ovens is an emerging sector of the commercial
cooking equipment market, we will be required to undertake significant marketing
efforts to achieve market acceptance, the success of which cannot be
predicted.***





The
market for our commercial ovens is a nascent sector of the commercial cooking
equipment market. As is typical with new products based on innovative
technologies, demand for and market acceptance of our commercial ovens are
subject to a high level of uncertainty. Achieving market acceptance for our
commercial ovens will require substantial marketing efforts and the expenditure
of significant funds to increase public awareness of our brand and our products,
and to educate potential customers as to the distinctive characteristics and
benefits of our products and our technologies. There can be no assurance that
our marketing efforts will result in significant market acceptance of our
commercial ovens.





***The
success of our planned entry into the residential oven market is subject to the
risks inherent in establishing a new business enterprise, and we cannot assure
you that we will be successful in this endeavor.***





An
important part of our growth strategy includes the research, development and
introduction of residential speed cook ovens. Historically, our expertise has
been in the speed cook sector of the commercial cooking equipment market, and
although we have developed technologies that currently are being licensed for
use in certain existing residential ovens, we have no prior experience in the
production, marketing and sale of products in the residential oven market. Our
entry into the residential oven market will be subject to all of the risks
inherent in the establishment of a new business enterprise, and acceptance of
our speed cook products in this market will depend upon our ability to, among
other things, successfully:





•
    
    refine
      and adapt our technologies for residential
application;





•
    
    develop
      residential ovens based on our technologies at a competitive price
      point;








19








•
    
    create
      and develop demand for and market acceptance of our technologies in the
      residential oven market;





•
    
    market,
      promote and distribute our speed cook ovens, and establish public
      awareness of our brand, in the residential oven
market;





•
    
    compete
      with the numerous, well-established manufacturers and suppliers of
      conventional and speed cook ovens already in the residential oven market;
      and





•
    
    establish
      and maintain sufficient internal research and development, marketing,
      sales, production and customer service infrastructures to support these
      efforts.








Although
this new line of business is closely related to our commercial oven business,
there can be no assurance that we will be able to successfully enter this
market. We expect to devote considerable resources and expenditures to this new
line of business, and we cannot assure you that we will be able to develop successful
residential oven technology or successfully commercialize and bring to market
our residential ovens. If we cannot successfully develop and bring to market our
residential ovens, our financial performance may suffer and our business may be
harmed.





***We
are subject to risks associated with developing products and technologies, which
could delay product introductions and result in significant
expenditures.***





We
continually seek to refine and improve upon the physical attributes, utility and
performance of our existing ovens and to develop new ovens. As a result, our
business is subject to risks associated with new product and technological
development, including unanticipated technical or other problems and the
possible insufficiency of funds allocated for the completion of development of a
particular product or technology. The occurrence of any of these risks could
cause a substantial change in the design, delay in the development, or
abandonment of new technologies and products. Consequently, there can be no
assurance that we will develop oven technologies superior to our current
technologies, successfully bring to market new commercial ovens, or develop and
successfully commercialize a residential line of ovens. Additionally, there can
be no assurance that, if developed, new technologies or products will meet our
current price or performance objectives, be developed on a timely basis or prove
to be as effective as products based on other technologies. The inability to
successfully complete the development of a product, or a determination by us,
for financial, technical or other reasons, not to complete development of a
product, particularly in instances in which we have made significant
expenditures, could have a material adverse effect on our operating
results.





***If
we are unable to keep up with evolving technology, our products may become
obsolete.***





The
market for our products and technologies is characterized by evolving
technology. We will not be able to compete successfully unless we continually
enhance and improve our existing products, complete development and introduce to
the market in a timely manner our proposed products, adapt our products to the
needs and standards of our customers and potential customers, and continue to
improve operating efficiencies and lower manufacturing costs. Moreover,
competitors may develop technologies or products that render our products
obsolete or less marketable.





***We
may not be able to compete effectively because our target markets are highly
competitive, and some of our competitors have greater financial or technological
resources.***





Both the
speed cook sector of the commercial cooking equipment market and the residential
oven market are characterized by intense competition. We compete, and will in
the future compete, with numerous well-established manufacturers and suppliers
of commercial and residential ovens, including manufacturers and suppliers whose
ovens have been developed under exclusive licenses of our proprietary speed cook
technologies. We also are aware of others who are developing, and in some cases
have introduced, new ovens based on other speed cook methods and technologies.
There can be no assurance that other companies do not have or are not currently
developing functionally equivalent products, or that functionally equivalent
products will not become available in the near future. In addition, there can be
no assurance that the products that we develop will be functionally superior to,
or gain more commercial acceptance than, products currently being produced by
third parties who have exclusive licenses to some of our proprietary
technologies. Most of our competitors possess substantially greater financial,
marketing, personnel and other resources than we do, and have established
reputations relating to product design, development, manufacture, brand
recognition, marketing and service of cooking equipment.





***The
use of outsourced manufacturing subjects us to potential disruptions in product
supply and other potential adverse effects.***





We do not
maintain supply agreements with third parties for raw materials or components.
Instead, we purchase these items pursuant to purchase orders in the ordinary
course of business. We attempt to maintain multiple sources of supply for these
items, but some of the specially-designed components used in our ovens are
sourced from a limited number of suppliers. Currently, some of our finished
ovens are assembled from these components by a contract manufacturer located in
China.





We are
and will continue to be dependent on the ability of these third parties to,
among other things, meet our design, performance and quality specifications,
provide components and produce finished ovens in a timely manner. Events beyond
our control could have an adverse effect on the cost or availability of raw
materials and components. Shipment delays, unexpected price increases or changes
in payment terms from our suppliers of components could impact our ability to
secure necessary components, and could adversely affect the ability of our
contract manufacturers to produce finished ovens for shipment to our customers.
Additionally, if any of our contract manufacturers experience delays,
disruptions, capacity constraints or quality control problems in its operations,
or negatively changes the payment or other terms under which it agrees to
assemble ovens for us, we may be unable to replace the lost manufacturing
capacity on a timely and cost-effective basis, product shipments to our
customers could be delayed and we may experience an increase in our component
part inventory levels. The occurrence of any of these events would have a
material adverse effect on our financial performance, competitive position and
reputation.





Outsourcing
operations to foreign countries also subjects us to various risks inherent in
foreign manufacturing, including increased credit risks, tariffs, duties and
other trade barriers, fluctuations in foreign currency exchange rates, shipping
delays, acts of terrorism and international political, regulatory and economic
developments. Any of these risks could increase our costs of goods, interrupt
our operations or have a significant impact on our foreign manufacturer’s
ability to deliver our products.





***We
may need additional capital to finance growth and to execute our business plan,
and we may be unable to obtain additional capital under terms acceptable to us
or at all.***





Our
capital requirements in connection with the execution of our business plan,
including our marketing and sales efforts, continuing commercial and residential
product development and working capital needs, are expected to be significant
for the foreseeable future. In addition, unanticipated events could cause our
revenues to be lower and our costs to be higher than expected, resulting in the
need for additional capital. Historically, cash generated from our operations
was not sufficient to fund our capital requirements, and we relied upon proceeds
from sales of our securities to fund our operations. We have recently closed a
public offering of our common stock which generated approximately $55.0 million
in proceeds to the Company and have closed a $10.0 million stand-by credit
facility with Bank of America. While we believe that our present capital
provides us the ability to execute our business plan, we cannot make assurances
in this regard. Further, if we do not have sufficient funds available, or are
unable to obtain capital necessary to meet our future requirements, we may be
unable to fund the research, development and sale of ovens, and we may have to
delay or abandon one or more aspects of our business plan, any of which could
harm our business.





***Our
financial performance is subject to significant
fluctuations.***





Our
financial performance is subject to quarterly and annual fluctuations due to a
number of factors, including:





•
    
    our
      lengthy, unpredictable sales cycle for commercial
ovens;





•
    
    the
      gain or loss of significant customers;





•
    
    unexpected
      delays in new product introductions;





•
    
    level
      of market acceptance of new or enhanced versions of our
      products;





•
    
    unexpected
      changes in the levels of our operating expenses including increased
      research and development and sales and marketing expenses associated with
      new product introductions;





•
    
    competitive
      product offerings and pricing actions; and





•
    
    general
      economic conditions.





The
occurrence of any of these factors could materially and adversely affect our
operating results and the price of our common stock.





***We
rely heavily on our senior management team and the expertise of management
personnel.***





Our
operations will depend for the foreseeable future on the efforts of our
executive officers and our other senior management to execute our business plan,
and any of our executive officers or senior management can terminate his
relationship with us at any time. Our business and prospects could be adversely
affected if these persons, in significant numbers, do not perform their key
roles as expected, or terminate their relationships with us, and we are unable
to attract and retain qualified replacements.





***Our
senior executive officers have limited prior experience in our
industry.***





Our
senior executive officers have limited experience in operating a business in our
industry, and there is no guarantee that these persons will fully develop the
necessary expertise to successfully execute our business plan. The failure of
our senior executive officers to fully develop this expertise would have a
significant impact on our ability to compete in this industry and to operate our
business effectively.





***Our
Chairman controls a significant interest in our common stock and may cause the
shares to be voted in ways with which you may
disagree.***





As of
March 1, 2005, OvenWorks, LLLP owns, of record, 10,799,333 shares of our common
stock, representing approximately 38.5% of our outstanding common stock. The
sole general partner of OvenWorks is Oven Management, Inc. Richard E. Perlman,
our Chairman, is the sole stockholder, sole director and President of Oven
Management, Inc. and also is a limited partner of OvenWorks. OvenWorks will be
able to exercise significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also delay or
prevent a change in control of us even if beneficial to our
stockholders.





***The
exercise of options or warrants will result in dilution to you.***





At March
1, 2005, 2.9 million shares of our common stock were subject to
issuance upon exercise of outstanding stock options at such times as those
options become vested and 472,000 shares of our common stock were subject to
issuance upon exercise of outstanding warrants. Your ownership will be diluted
by the exercise of any of these outstanding stock options and warrants.





20





***If
we are unable to protect our patents, trademarks and other intellectual
property, our business could be materially and adversely
affected.***





There can
be no assurance as to the breadth or degree of protection which existing or
future patents, if any, may afford us, that any patent applications will result
in issued patents, that our patents, pending patent applications, registered
trademarks or service marks, pending trademark applications or trademarks will
be upheld if challenged or that competitors will not develop similar or superior
methods or products outside the protection of any patent issued to us. There can
be no assurance that we will have all of the resources necessary to enforce or
defend a patent infringement or proprietary rights violation
action.





We also
rely on trade secrets and proprietary know-how and employ various methods to
protect the concepts, ideas and documentation of our proprietary technologies.
However, those methods may not afford complete protection and there can be no
assurance that others will not independently develop similar know-how or obtain
access to our know-how, concepts, ideas and documentation.





***If
our products or intellectual property violate the rights of others, we may
become liable for damages.***





If any of
our existing or future products, trademarks, service marks or other proprietary
rights infringe patents, trademarks, service marks or proprietary rights of
others, including others to which we have exclusively licensed some of our
proprietary cooking technologies, we could become liable for damages and may be
required to modify the design of our products, change the name of our products
or obtain a license for the use of our products. There can be no assurance that
we would be able to make any of these modifications or changes in a timely
manner, upon acceptable terms and conditions, or at all. The failure to do any
of the foregoing could have a material adverse effect upon our ability to
manufacture and market our products.





***We
are involved in legal proceedings which would adversely affect our operating
results and future operations if the outcomes were
unfavorable.***





We are
engaged in related arbitration and litigation proceedings against Maytag
Corporation relating to a series of contracts for research, development and
commercialization of certain technology through a joint, strategic relationship.
In its counterclaims, Maytag has alleged breach of these contracts and fraud,
and seeks damages in excess of $35 million. Maytag has also alleged that we
publicized false and misleading statements about Maytag’s use of our
intellectual property in its residential appliances in a January 2002 press
release and in certain other unidentified statements, and has asserted claims
that we caused false advertising with respect to Maytag’s goods and services,
that we intentionally interfered with Maytag’s prospective business, that we
defamed Maytag and that we unfairly competed with Maytag. The outcomes of these
proceedings are uncertain, and an unfavorable outcome would have an adverse
effect on our operating results and future operations.





***Our
business subjects us to significant regulatory compliance
burdens.***





We are
subject to regulations administered by various federal, state, local and
international authorities, including those administered by the United States
Food and Drug Administration, the Federal Communications Commission, the
European Community Council and the Japan Ministry of International Trade. These
regulations impose significant compliance burdens on us and there can be no
assurance that we will be able to comply with such regulations. Failure to
comply with these regulatory requirements may subject us to civil and criminal
sanctions and penalties. Moreover, new legislation and regulations, as well as
revisions to existing laws and regulations, at the federal, state, local and
international levels may be proposed in the future affecting the foodservice
equipment industry. These proposals could affect our operations, result in
material capital expenditures, affect the marketability of our existing products
and technologies and/or limit opportunities for us with respect to modifications
of our existing products or with respect to our new or proposed products or
technologies. In addition, expansion of our operations into new markets may
require us to comply with additional regulatory requirements. There can be no
assurance that we will be able to comply with additional applicable laws and
regulations without excessive cost or business interruption, and failure to
comply could have a material adverse effect on us.





***A
product liability claim in excess of our insurance coverage, or an inability to
acquire insurance at commercially reasonable rates, could have a material
adverse effect upon our business.***





We are
engaged in a business which could expose us to various claims, including claims
by foodservice operators and their staffs, as well as by consumers, for personal
injury or property damage due to design or manufacturing defects or otherwise.
We maintain reserves and liability insurance coverage at levels based upon
commercial norms and our historical claims experience. However, a material
product liability or other claim could be brought against us in excess of our
insurance coverage, or could not be covered by our then-existing insurance.
Additionally, a material product liability or other claim could be brought
against us that damages the reputation of our technologies or products in the
market. Any of these types of claims could have a material adverse effect upon
our business, operating results and financial condition.





***An
increase in warranty expenses could adversely affect our financial
performance.***





We offer
purchasers of our ovens a one-year limited warranty covering workmanship and
materials, during which period we or an authorized service representative will
make repairs and replace parts that have become defective in the course of
normal use. We estimate and record our future warranty costs based upon past
experience. Future warranty expenses on the one-year warranty, however, may
exceed our warranty reserves, which, in turn, could have a material adverse
effect on our financial performance.





**Item
7A.** **Quantitative
and Qualitative Disclosures about Market Risk**





For the
years ended December 31, 2004 and 2003, approximately 2% and 43%, respectively,
of the Company’s revenues were derived from sales outside of the United States.
These sales and subsequent accounts receivable, the salaries of employees
located outside of the United States and approximately 5% and 12%, respectively,
of selling, general and administrative expenses are denominated in foreign
currencies, principally Euros. The Company is subject to risk of financial loss
resulting from fluctuations in exchange rates of these currencies against the US
dollar. In addition, trade terms with customers outside of the United States are
longer than with customers inside of the United States, which increases the
potential of foreign exchange gains or losses.





The
Company believes that revenues from sources outside of the United States will
increase during 2005. There is no assurance that the Company will not be subject
to foreign exchange losses in the future.





As of
December 31, 2004, the Company does not have any assets or liabilities other
than those discussed above that have the potential for market risk that would
affect the operating results or cash flow of the Company and is not engaged in
any foreign currency hedging activity.





21





**Item
8.** **Financial
Statements and Supplementary Data**





The
financial statements set forth herein commence on page F- 1 of this
report.





**Item
9.** **Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure**





Not
applicable.





**Item
9A.** **Controls
and Procedures**





**Controls
and Procedures**





Based on
their evaluation as of December 31, 2004, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) were sufficiently effective to
ensure that the information required to be disclosed by us in this Annual Report
on Form 10-K was recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and instructions for
Form 10-K.


****
 **Management's
Responsibility for Maintaining Internal Controls**
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended). Our management assessed the
effectiveness of our internal control over financial reporting as of
December 31, 2004. In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") in Internal Control-Integrated Framework. Our management has
concluded that, as of December 31, 2004, our internal control over
financial reporting is effective based on these criteria. Our independent
registered public accounting firm, Ernst & Young LLP, has issued an audit
report on our assessment of our internal control over financial reporting. Our
report on internal controls and the internal control report of our independent
registered public accounting firm, Ernst & Young LLP, are included on pages
F-5 and F-3 of this report, respectively.


**ITEM
9B.    OTHER INFORMATION**





None.








**Part
III**





**Item
10.** **Directors
and Executive Officers of the Registrant**




The
directors and executive officers of TurboChef are as follows:





**Name**
    ****
    ****
    ****
    **Age**
    ****
    **Position**
    ****Richard
      E. Perlman
    
    
    
    58
    
    Chairman
      of the Board of DirectorsJames
      K. Price
    
    
    
    46
    
    President,
      Chief Executive Officer and DirectorJames
      A. Cochran
    
    
    
    57
    
    Senior
      Vice President and Chief Financial OfficerPaul
      P. Lehr
    
    
    
    58
    
    Vice
      President and Chief Operating OfficerWilliam
      A. Shutzer
    
    
    
    57
    
    DirectorRaymond
      H. Welsh
    
    
    
    73
    
    DirectorJ.
      Thomas Presby
    
    
    
    65
    
    DirectorSir
      Anthony Jolliffe
    
    
    
    66
    
    DirectorJames
      W. DeYoung
    
    
    
    61
    
    Director








22





***Richard
E. Perlman*** has been
Chairman of the Board since October 2003. He was formerly chairman of
PracticeWorks, Inc. from March 2001 until its acquisition by The Eastman Kodak
Company in October 2003. Mr. Perlman served as chairman and treasurer of AMICAS,
Inc. (formerly VitalWorks Inc.) from January 1998 and as a director from March
1997 to March 2001, when he resigned from all positions with that company upon
completion of the spin-off of PracticeWorks, Inc. from VitalWorks. From December
1997 until October 1998, Mr. Perlman also served as VitalWorks’ chief financial
officer. Mr. Perlman is the founder of Compass Partners, L.L.C., a merchant
banking and financial advisory firm specializing in corporate restructuring and
middle market companies, and has served as its president since its inception in
May 1995. From 1991 to 1995, Mr. Perlman was executive vice president of Matthew
Stuart & Co., Inc., an investment banking firm. Mr. Perlman received a B.S.
in Economics from the Wharton School of the University of Pennsylvania and a
Masters in Business Administration from the Columbia University Graduate School
of Business.





***James
K. Price*** has been
our President and Chief Executive Officer and a director since October 2003.
From March 2001 until its acquisition by The Eastman Kodak Company in October
2003, Mr. Price was the president and chief executive officer and a director of
PracticeWorks, Inc. Mr. Price was a founder of VitalWorks Inc. and served as its
executive vice president and secretary from its inception in November 1996 to
March 2001, when he resigned from all positions with VitalWorks upon completion
of the spin-off of PracticeWorks from VitalWorks. Mr. Price served as an
executive officer of American Medcare from 1993 and co-founded and served as an
executive officer of International Computer Solutions from 1985, in each
instance until American Medcare and International Computer Solutions merged into
VitalWorks in July 1997. Mr. Price holds a B.A. in Marketing from the University
of Georgia.





***James
A. Cochran*** has
served as our Senior Vice President and Chief Financial Officer since October
2003. He served as chief financial officer of PracticeWorks, Inc. from its
formation in August 2000 until its acquisition by The Eastman Kodak Company in
October 2003. He was VitalWorks Inc.’s chief financial officer from August 1999
to March 2001, when he resigned from all positions with VitalWorks upon
completion of the spin-off of PracticeWorks from VitalWorks. From 1992 until
joining VitalWorks, Mr. Cochran was a member of the accounting firm of BDO
Seidman, LLP, serving as a partner since 1995. He is a Certified Public
Accountant and received a B.B.A. in Accounting and an M.B.A. in Corporate
Finance from Georgia State University.







***Paul
P. Lehr*** has
served as our Vice President and Chief Operating Officer since October 2004, and
from November 2003 to October 2004, Mr. Lehr served as our Vice President of
Operations. From December 2001 until joining us in November 2003, Mr. Lehr was
self-employed. Mr. Lehr also served as executive vice president — commercial
sales of CSK Auto, Inc., a publicly traded automotive parts distribution
company, from February 2000 to December 2001. Before joining CSK Auto, in 1980
Mr. Lehr founded Motor Age, Inc., a distributor of automotive replacement parts.
Motor Age became part of Parts Plus Group, Inc. in 1997, and Mr. Lehr served as
president and chief executive officer of that industry roll-up until he joined
CSK Auto in February 2000. He received a B.S. in Economics and an M.B.A. from
City University of New York.





***William
A. Shutzer*** has been
a director of TurboChef since October 2003. Mr. Shutzer is a senior managing
director of Evercore Partners, a financial advisory and private equity firm. Mr.
Shutzer was a managing director of Lehman Brothers, Inc. from October 2000 to
November 2003 and a partner in Thomas Weisel Partners, LLC, an investment
banking firm, from September 1999 to October 2000. From March 1994 until October
1996, Mr. Shutzer was executive vice president of Furman Selz, Inc. and
thereafter until the end of December 1997, he was its president. From January
1998 until September 1999, he was chairman of ING Barings LLC’s Investment
Banking Group. From September 1978 until February 1994, Mr. Shutzer was a
managing director of Lehman Brothers and its predecessors. From March 2001 to
October 2003 he was a


director
of PracticeWorks, Inc. Mr. Shutzer is currently a director of Tiffany & Co.,
American Financial Group, CSK Auto, Inc., and Jupitermedia Corp. Mr. Shutzer
received a B.A. from Harvard University and an M.B.A. from Harvard Business
School.





***Raymond
H. Welsh*** has been
a director of TurboChef since October 2003. Since January 1995, Mr. Welsh has
been a senior vice president of UBS Financial Services, Inc. From March 2001 to
October 2003 he was a director of PracticeWorks, Inc. Mr. Welsh is a Trustee of
the University of Pennsylvania and PennMedicine. He is chairman of the board of
Bancroft Neurohealth and a trustee of the Bancroft Foundation. Mr. Welsh
received a B.S. in Economics from the Wharton School of the University of
Pennsylvania.





***J.
Thomas Presby*** became a
director of TurboChef in December 2003. In June 2002 he retired as a partner
with Deloitte Touche Tohmatsu, an international accounting and consulting firm.
Over a period of 30 years, Mr. Presby held many positions with Deloitte in the
United States and abroad, including deputy chairman and chief operating officer
from 1995 until his retirement. Mr. Presby also served as the chief executive
officer of Deloitte & Touche in Europe and Central Europe between 1990 and
1995. During the 1980s, Mr. Presby launched and served as the managing partner
of the Financial Services Center, an industry-focused practice unit of the firm.
Mr. Presby served as a director of PracticeWorks, Inc. from September 2002 until
its October 2003 sale to Eastman Kodak. He also served as a director of
GreenPoint Financial from January 2003 until its October 2004 sale to North Fork
Bank. Mr. Presby currently serves as a director and audit committee chair of
Tiffany & Co. and World Fuel Services Corporation. Mr. Presby received a
B.S. in Electrical Engineering from Rutgers University, and an M.S. in
Industrial Administration from the Carnegie Mellon University Graduate School of
Business. He is a Certified Public Accountant in New York and Ohio.





***Sir
Anthony Jolliffe*** became a
director of TurboChef in December 2003. He was previously a director from
November 1998 until 2001. Sir Anthony Jolliffe is a citizen of the United
Kingdom and an independent international business consultant. Until his
retirement from the accounting profession in 1982, Sir Anthony Jolliffe was a
Chartered Accountant in the United Kingdom for 18 years, during which time he
grew his accounting firm into a multi-national operation with offices in 44
countries with over 200 partners. His firm eventually merged with Coopers &
Lybrand and Grant Thornton. He remained with Grant Thornton for two years until
he retired. Since that time, Sir Anthony has built a number of businesses, two
of which have been listed on the London Stock Exchange. He is currently involved
in several business projects in China, the Middle East, the United States and
the United Kingdom. Sir Anthony has held, and currently holds, numerous
positions with governmental and charitable entities in the United Kingdom and
China, including being the former Lord Mayor of London and the chairman of the
Special Advisory Board to the Governor of Yunnan Province in China.





***James
W. DeYoung*** became a
director of TurboChef in December 2003. Mr. DeYoung is the founder and President
of Winston Partners Incorporated, which provides strategic corporate advisory,
corporate disclosure and investor relations services to select private and
publicly-owned companies. Mr. DeYoung also is a general partner of Resource
Ventures L.P., a private equity/venture fund. Prior to forming Winston Partners
in 1984, Mr. DeYoung spent 14 years with Baxter International, Inc., serving in
a senior capacity in marketing, investor relations, public relations and
corporate financial management functions. Mr. DeYoung is currently a director of
several private companies and is involved with numerous not-for-profit
organizations in the Chicago, Illinois area, including as a trustee of Rush
University Medical Center and Rush North Shore Medical Center. Mr. DeYoung is
also vice chairman and a director of the Chicago Horticultural Society. Mr.
DeYoung received a B.A. degree from Washington and Lee University and a J.D.
degree from Northwestern University School of Law.





23





**Audit
Committee Financial Expert**





We have a
standing audit committee of our Board of Directors established in accordance
with section 3(a)(58)(A) of the Securities Exchange Act. The following
directors, all of whom are independent, comprise our audit committee: Messrs.
Presby, Shutzer and DeYoung. The audit committee reviews, acts on and reports to
our board of directors on various auditing and accounting matters, including the
election of our independent registered public accounting firm (“accounting
firm”), the scope of our annual audits, fees to be paid to our accounting firm,
the performance of our accounting firm and our accounting practices and internal
controls.  The Board of Directors has determined that J. Thomas Presby,
chairman of the Audit Committee, is an audit committee financial expert and is
an independent member of the Board.





Directors
serve until the next Annual Meeting of Stockholders or their resignation.
Officers serve the Company at the discretion of the Board of
Directors.





**Compliance
with Section 16(a) of the Exchange Act**





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
executive officers, directors and persons who beneficially own more than ten
percent (10%) of a registered class of the Company’s equity securities (“ten
percent stockholders”) to file initial reports of ownership and changes in
ownership with the Securities and Exchange Commission (the “SEC”). Executive
officers, directors and ten percent stockholders are required by SEC regulation
to furnish the Company with copies of all Section 16(a) forms they
file.





Based
solely upon a review of the copies of such forms furnished to the Company, the
Company believes that during the fiscal year ended December 31, 2004, the
following filings applicable to its executive officers, directors and ten
percent stockholders were late:





Grand
Cheer Co. Ltd, a ten percent stockholder, filed three late reports on Form 4 for
2004 reporting seven sales of shares.





OvenWorks,
LLLP, a ten percent stockholder, Oven Management, Inc., its general partner, and
Mr. Perlman, a director and executive officer of the Company who controls
OvenWorks and its general partner, each filed one late report on Form 4 for 2004
reporting Ovenworks’ conversion of preferred shares to common
shares.






**Code
of Ethics**





The
Company has adopted a code of ethics that applies to our executive officers,
including our Chairman, Chief Executive Officer, Chief Financial Officer and
Controller.  The Company’s code of ethics, which we call the “Guide for
Business Conduct” (the “Ethics Code”) is available on the Company’s website
( www.turbochef.com ). 
We will post any amendment to or waiver from the Ethics Code on the Company’s
website as well. We will
provide a copy of our Ethics Code without charge upon written request to
Secretary, TurboChef Technologies, Inc., Suite 1900, Six Concourse Parkway,
Atlanta, Georgia 30328.





**Item
11.** **Executive
Compensation**





**Compensation**





*Director
Compensation*





TurboChef’s
directors do not currently receive cash compensation for their services as
directors, but they are reimbursed for their reasonable and necessary expenses
for attending Board and Board committee meetings. Members of the Board who are
not TurboChef employees, or employees of any parent, subsidiary or affiliate of
TurboChef, are nevertheless eligible to participate in TurboChef’s stock option
plan.  Directors who are not employees receive the following one-time
grants under the Company’s director compensation plan:  (1) for membership
on the Board each member is granted options to purchase 33,333 shares of common
stock of the Company, the grant of which is effective on and priced as of the
date the director agrees to join the Board; (2) a director who is a chairman of
the Audit Committee, the Compensation Committee or the Global Initiatives
Committee of the Board is granted options to purchase 8,333, 8,333 and 16,667
shares of common stock of the Company, respectively, the grant of which is
effective on and priced as of the date the director agrees to be appointed
chairman; and (3) each director who is a member of a committee constituted by
the Board but who is not a chairman is granted options to purchase 3,333 shares
of common stock of the Company, the grant of which is effective on and priced as
of the date the director begins service on the committee.  In addition,
each Board member is granted options to purchase 8,333 shares of common stock
each year of service, and committee chairmen are granted options on an
additional 3,333 shares each year. Annual grants are effective on and priced as
of the anniversary date of service. Options granted under the Board compensation
plan vest 50% on each of the two anniversaries following their grant
date.





The
following table summarizes compensation awarded to, earned by or paid to the
Company’s Chief Executive Officer and its other most highly compensated
executive officers (collectively, the “Named Executive Officers”) for services
rendered to the Company during each of the last three fiscal years. The Company
had no other executive officers at December 31, 2004.








24








**Annual
Compensation**


**Name
      and Principal Position**
    
    **Fiscal
      Year**
    
    **Salary
      ($)**
    
    **Bonus
      ($)**
    
    **Other
      ($) (5)**
    
    **Long-Term
      Compensation**
      **Awards
      Securities**
      **Underlying
      Options (# )**Richard
      E. Perlman
    
    
    2004
    
    $
    365,000
    
    $
    191,630
    
    
    -0-
    
    
    -0-Chairman(1)
    
    
    2003
    
    
    56,154
    
    
    -0-
    
    
    -0-
    
    
    416,666James
      K. Price
    
    
    2004
    
    
    365,000
    
    
    191,630
    
    
    -0-
    
    
    -0-Chief
      Executive Officer(2)
    
    
    2003
    
    
    56,154
    
    
    -0-
    
    
    -0-
    
    
    416,666Paul
      P. Lehr
    
    
    2004
    
    
    175,814
    
    
    18,318
    
    
    75,000
    
    
    16,666Chief
      Operating Officer(3)
    
    
    2003
    
    
    9,231
    
    
    -0-
    
    
    -0-
    
    
    116,666James
      A. Cochran
    
    
    2004
    
    
    243,500
    
    
    60,545
    
    
    -0-
    
    
    -0-Chief
      Financial Officer(4)
    
    
    2003
    
    
    18,692
    
    
    -0-
    
    
    -0-
    
    
    133,333





(1)
    Mr.
      Perlman began serving as Chairman on October 28, 2003.(2)
    Mr.
      Price began serving as Chief Executive Officer on October 28,
      2003.(3)
    Mr.
      Lehr began serving as Chief Operating Officer on May 24, 2004 and from
      November 24, 2003 through May 24, 2004 he served as our Vice President of
      Operations.(4)
    Mr.
      Cochran began serving as Chief Financial Officer on October 28,
      2003.(5)
    The
      amounts presented for 2004 include a relocation payment of $75,000 to Mr.
      Lehr.The
      compensation set forth in this column does not include compensation in the
      form of perquisites or other personal benefits for Messrs. Perlman, Price,
      and Cochran in fiscal year 2004 and 2003 because such perquisites and
      other personal benefits did not exceed the lesser of $50,000 or 10% of the
      total annual salary and bonus for these individuals for such
      years.








**Executive
Agreements**




TurboChef
entered into a three-year employment agreement with each of Richard E. Perlman,
James K. Price and James A. Cochran on substantially the terms described
below.  The agreements automatically renew for additional one-year periods
at the end of the initial period and each renewal period unless notice of
non-renewal is given at least six months in advance. The employment agreements
for Messrs. Perlman and Price provide for an initial annual base salary of
$365,000 with a bonus of 2% of pre-tax profit (but limited to 100% of base
salary). The employment agreement for Mr. Cochran provides for an initial annual
base salary of $243,000 with a discretionary bonus based upon performance and
achievement of key Company objectives. The base salary in each case is subject
to an annual adjustment for changes in the Consumer Price Index. The agreements
also provide for a severance payment equal to three times the executive’s then
current total annual compensation (base salary, bonus and benefits) upon the
termination of the executive’s employment by TurboChef without cause or by the
executive for good reason or in the event of a change in control. The employment
agreements entitle the executive to participate in our employee benefit programs
and provide for other customary benefits. In addition, the employment agreements
provided for the grant of stock options on the first day of the executive’s
employment. The employment agreements provide for 100% vesting of all
outstanding stock options upon a change in control. The employment agreements
also provide for an additional, tax gross-up payment to be made by the Company
to the executive in the event that, upon a change in control, any payments made
to the executive are subject to an excise tax under Section 4999 of the Internal
Revenue Code. Finally, the employment agreements prohibit the executive from
engaging in certain activities which compete with the Company, seeks to recruit
its employees or disclose any of its trade secrets or otherwise confidential
information.
 
 TurboChef
and Paul P. Lehr entered into an employment agreement for two years, beginning
October 29, 2003, which automatically renews for an additional year at the end
of the initial term and at the end of each renewal year unless notice of
non-renewal is given at least six months in advance. The employment agreement
provides for an annual base salary of $200,000 and severance compensation equal
to one-half the annual base salary. Mr. Lehr is eligible for a discretionary
bonus based upon performance and achievement of key Company objectives. The
employment agreement provides for an additional, tax gross-up payment to be made
by the Company to the executive in the event that, upon a change in control, any
payments made to the executive are subject to an excise tax under Section 4999
of the Internal Revenue Code. Finally, the employment agreement prohibits the
executive from engaging in certain activities which compete with the Company,
seeks to recruit its employees or disclose any of its trade secrets or otherwise
confidential information.


**Compensation
Committee Interlocks and Insider Participation**





The
Company has a Compensation Committee the members of which are Messrs. Shutzer
and Welsh, both of whom are independent directors. Our compensation committee
establishes salaries, incentives and other forms of compensation for officers
and other employees. This committee also administers our incentive compensation
and benefit plans.





No
interlocking relationships currently exist, or have existed between our
compensation committee and the board of directors or compensation committee of
any other company.





**Option
Grants for Fiscal 2004**





The
following table sets forth information concerning stock options granted by the
Company to the named executive officers during fiscal 2004 and the potential
realizable value of such option grants.  The Company has granted no stock
appreciation rights.





25











**INDIVIDUAL
GRANTS**





**Name**
    
    **Number
      of**
      **Shares
      of**
      **Common
      Stock Underlying**
      **Options
      Granted**
    
    **%
      of Total**
      **Options**
      **Granted
      to**
      **Employees**
      **in
      2004**
    
    **Exercise**
      **Price**
      **$/Share)**
    
    **Expiration**
      **Date**
    
    **Potential
      Realizable Value at**
      **Assumed
      Annual Rates of Stock**
      **Price
      Appreciation for**
      **Option
      Term(1)****5%**
    
    **10%**Paul
      P. Lehr
    
    
    16,666
    
    
    
    2.48
    %
    
    
    10.20
    
    
    
    05/26/2014
    
    
    $
    106,908
    
    
    
    $
    270,925


(1)
    The
      potential realizable value of the options, if any, granted in 2004 to each
      of the named executive officers was calculated by multiplying those
      options by the excess of (a) the assumed market value of Common Stock, at
      the end of option term, if the market value of Common Stock were to
      increase 5% or 10% in each year of the option’s term over (b) the exercise
      price shown. This calculation does not take into account any taxes or
      other expenses which might be owed. The 5% and 10% appreciated rates are
      set forth in the SEC rules and no representation is made that the Common
      Stock will appreciate at these assumed rates or at all.





**Aggregated
Option Exercises in Last Fiscal Year and Year-End Option Value
Table**





Shown
below is information with respect to the number of TurboChef common shares
acquired upon exercise of stock options and the aggregate gains realized on
exercises during 2004 for the named executive officers. The table also sets
forth the number of shares covered by exercisable and unexercisable options held
by these executive officers on December 31, 2004 and the aggregate gains that
would have been realized had these options been exercised on December 31, 2004,
even though these options were not exercised, and the unexercisable options
could not have been exercised at that time.





**Aggregated
Option Exercises in**


**Last
Fiscal Year and Fiscal Year End Option Value**


**Name**
    
    **Shares**
      **Acquired**
      **on Exercise**
    
    **Value Realized**
      **(Market
      Price**
      **at Exercise Less**
      **Exercise
      Price)**
    
    **Number
      of Unexercised Options**
      **At
      Fiscal Year-End**
    
    **Value
      of Unexercised In-The-**
      **Money
      Options At Fiscal Year-**
      **End
      (1)****Exercisable**
    
    **Unexercisable**
    
    **Exercisable**
    
    **Unexercisable**Richard
      E. Perlman
    
    
    33
    
    
    
    $
    560
    
    
    
    138,856
    
    
    
    
    277,777
    
    
    
    $
    2,448,031
    
    
    
    $
    4,897,209James
      K. Price
    
    
    —
    
    
    
    
    -0-
    
    
    
    138,889
    
    
    
    
    277,777
    
    
    
    
    2,448,613
    
    
    
    
    4,897,209Paul
      P. Lehr
    
    
    38,889
    
    
    
    
    345,618
    
    
    
    28,704
    
    
    
    
    65,740
    
    
    
    
    492,300
    
    
    
    
    1,090,251James
      A. Cochran
    
    
    —
    
    
    
    
    -0-
    
    
    
    44,444
    
    
    
    
    88,889
    
    
    
    
    783,548
    
    
    
    
    1,567,113





(1)
    Options
      are “in the money” if the fiscal year-end fair market value of the Common
      Stock exceeds the option exercise price. At December 31, 2004, TurboChef
      common stock’s closing sales price was
$22.88.







**Item
12.** **Security
Ownership of Certain Beneficial Owners and Management**





**Security
Ownership**





***Five
Percent Owners***





The
following table sets forth information, as of March 1, 2005, as to shares of our
capital stock held by persons known to us to be the beneficial owners of more
than five percent of any class of our capital stock based upon information
publicly filed by such persons:





26














**Title
      of Class**
    
    **Name
      and Address of**
      **Beneficial
      Owner of Class**
    
    **Amount
      of Beneficial Ownership**
    
    **Percent
      of**
      **Class(1)**Common
    
    OvenWorks,
      LLLP
      655
      Madison Avenue
      Suite
      1500
      New
      York, NY  10021
    
    10,799,333
    (2)
    
    38.5
    %Common
    
    Jeffrey
      B. Bogatin
      888
      Park Avenue
      New
      York, NY  10021
    
    1,948,867
    (3)
    
    6.9
    %Common
    
    Raj
      Rajaratnam
    
    1,701,699
    (4)
    
    6.1
    %





(1)
    Based
      upon 28,074,914 shares outstanding on March 1, 2005.(2)
    Shares
      of common stock held by OvenWorks were issued upon the conversion of
      shares of Series D Convertible Preferred Stock that were issued in
      connection with a private placement to OvenWorks. Oven Management, Inc. is
      the sole general partner of OvenWorks, LLLP.  Richard Perlman, our
      Chairman, is the sole shareholder, sole director and President of Oven
      Management, Inc. and also a limited partner of
  OvenWorks.(3)
    Based
      upon ownership reported in a Schedule 13D filed on July 20,
      2004.(4)
    Based
      upon ownership reported in a Schedule 13G filed on March 4, 2005. The
      Schedule 13G was filed by Raj Rajaratnam as well as the following related
      entities, which disclaim being a “group” for these reporting purposes:
      Galleon Management, L.L.C., Galleon Management, L.P., Galleon Advisors,
      L.L.C., Galleon Captains Partners, L.P., Galleon Captains Offshore, Ltd.,
      Galleon Communications Partners, L.P., Galleon Communications Offshore,
      Ltd., Galleon Admirals Offshore, Ltd., and Galleon Buccaneers Offshore,
      Ltd..





***Officers
and Directors***





The
following table sets forth information concerning the shares of TurboChef Common
Stock that are beneficially owned by the following individuals:





•
    each
      of TurboChef’s directors;•
    each
      of TurboChef’s named executive officers; and•
    all
      of TurboChef’s directors and executive officers as a
  group.





Unless
otherwise indicated, the listing is based on the number of TurboChef common
shares held by such beneficial owners as of March 1, 2005. Unless otherwise
indicated in the footnotes to this table and subject to community property laws
where applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned.





The
number of shares shown as beneficially owned by each beneficial owner in the
table below includes shares that can be acquired by that beneficial owner
through stock option exercises on or prior to April 30, 2005. In calculating the
percentage owned by each beneficial owner, the Company assumed that all stock
options that are exercisable by that person on or prior to April 30, 2005 are
exercised by that person and the underlying shares issued. The total number of
shares outstanding used in calculating the percentage owned assumes no exercise
of options held by other beneficial owners and no exchange of any preferred
units of membership interest of Enersyst Development Center, L.L.C. 
Likewise, beneficial ownership of certain officers and directors is shown as if
shares of common stock have been distributed by OvenWorks, LLLP to its
partners.








**Name
      of Beneficial Owner**
    
    **Amount and Nature**
      **of
      Beneficial**
      **Ownership
      (1)**
    
    **Percent
      of**
      **Class**Richard
      E. Perlman
    
    
    11,007,633
    (2)
    
    
    38.9%James
      K. Price
    
    
    1,988,869
    (3)
    
    
    7.0%J.
      Thomas Presby
    
    
    142,739
    (4)
    
    
    *William
      A. Shutzer
    
    
    1,840,230
    (5)
    
    
    6.6%Raymond
      H. Welsh
    
    
    264,483
    (6)
    
    
    *Sir
      Anthony Jolliffe
    
    
    154,869
    (7)
    
    
    *James
      W. DeYoung
    
    
    318,506
    (8)
    
    
    1.1%James
      A. Cochran
    
    
    336,588
    (9)
    
    
    1.2%Paul
      P. Lehr
    
    
    23,608
    (10)
    
    
    *All
      current directors and executive officers as a group (9
      persons)
    
    
    11,617,790
    (2)(11)
    
    
    40.4%








*
    
    Less
      than 1%(1)
    
    Unless
      otherwise indicated, the Company believes that all persons named in the
      table have sole voting and investment power with respect to all shares of
      common stock beneficially owned by them. Percentages herein assume a base
      of 28,074,914 shares of common stock outstanding as of March 1,
      2005.(2)
    
    Includes
      208,300 shares of common stock issuable upon exercise of options and
      10,799,333 shares of common stock (or 38.5%) currently owned by OvenWorks,
      LLLP, which is controlled by Mr. Perlman. Current directors and executive
      officers (or their affiliates) would have beneficial ownership of an
      aggregate of 7,058,728 shares of the Company’s common stock if OvenWorks
      distributed such shares to its partners.





27








(3)
    Includes
      208,333 shares of common stock issuable upon exercise of options and
      1,780,536 shares of common stock currently owned by OvenWorks,
      LLLP.(4)
    Includes
      22,500 shares of common stock issuable upon exercise of options and
      120,239 shares of common stock currently owned by OvenWorks,
      LLLP.(5)
    Includes
      22,500 shares of common stock issuable upon exercise of options and
      1,817,730 shares of common stock currently owned by OvenWorks,
      LLLP.(6)
    Includes18,333
      shares of common stock issuable upon exercise of options and 246,150
      shares of common stock currently owned by OvenWorks,
  LLLP.(7)
    Includes
      99,999 shares of common stock issuable upon exercise of options and 54,870
      shares of common stock currently owned by OvenWorks,
  LLLP.(8)
    Includes
      18,333 shares of common stock issuable upon exercise of options and
      300,173 shares of common stock currently owned by OvenWorks,
      LLLP.(9)
    Includes
      66,666 shares of common stock issuable upon exercise of options and
      269,922 shares of common stock currently owned by OvenWorks,
      LLLP.(10)
    Shares
      issuable upon exercise of options.(11)
    Includes
      688,572 shares issuable upon exercise of options and 10,799,333 shares of
      common stock currently owned by OvenWorks,
LLLP.





**EQUITY
COMPENSATION PLAN INFORMATION**





The
following table sets forth as of December 31, 2004, information about our equity
compensation plans.





**Plan
      category**
    **Number
      of securities**
      **to
      be issued upon**
      **exercise
      of outstanding**
      **options,
      warrants and**
      **rights**
    **Weighted-average**
      **exercise
      price of**
      **outstanding
      options,**
      **warrants
      and rights**
    **Number
      of securities**
      **remaining
      available for**
      **future
      issuance under**
      **equity
      compensation plans**
      **(excluding
      securities**
      **reflected
      in first column)**Equity
      compensation
      plans
      approved by
      security
      holders
    
    3,651,554
    
    
    $
    6.86
    
    
    1,755,393Equity
      compensation
      plans
      not approved
      by
      security holders
    
    -0-
    
    
    
    -0-
    
    
    -0-Total
    
    3,651,554
    
    
    $
    6.86
    
    
    1,755,393




****


**Item
13.** **Certain
Relationships and Related Transactions**





None





**Item
14.** **Principal
Accountant Fees and Services**





Audit
Fees and All Other Fees





*Audit
Fees*





Fees for
audit services totaled approximately $568,000 in 2004 and approximately $165,000
in 2003, including fees associated with the annual audit and internal control
report, the reviews of the Company’s quarterly reports on Form 10-Q and annual
reports on Form 10-K.





*Audit-Related
Fees*





Fees for
audit related services totaled approximately $62,000 in 2004 and approximately
$12,000 in 2003. Audit related services principally include accounting
consultations and other attest services.


**


*Tax
Fees*





Fees for
tax services totaled approximately $22,000 in 2004, including tax compliance,
tax advice and tax planning. The Company did not pay its principal accountant
any fees for tax services in 2003.





*All
Other Fees*





The
Company did not pay its principal accountant any other fees in 2004 or in
2003.





The Audit
Committee pre-approves all services for which the principal accountant is
engaged.





We have
been advised by Ernst & Young LLP that neither the firm, nor any member of
the firm, has any financial interest, direct or indirect, in any capacity in the
Company or its subsidiaries.





28





**Part
IV**





**Item
15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K**





**(a)
The following documents are filed as part of this Report:**





**1.**
    **Financial
      Statements.**





**Description**
    
    **Page**Reports
      of Independent Registered Public Accounting Firms
    
    F-2Managements
      Responsibility for Financial Reporting
    
    F-5Consolidated
      Balance Sheets as of December 31, 2004 and 2003
    
    F-6Consolidated
      Statements of Operations for the years ended December 31, 2004, 2003 and
      2002
    
    F-7Consolidated
      Statements of Changes in Stockholders’ Equity (Deficit) for the years
      ended December 31, 2004, 2003 and 2002
    
    F-8Consolidated
      Statements of Cash Flows for the years ended December 31, 2004, 2003 and
      2002
    
    F-10Notes
      to Consolidated Financial Statements
    
    F-11





**2.     Financial
Statement Schedules.**





The
following Financial Statement Schedule for the Registrant is filed as part of
this Report and should be read in conjunction with the Registrant’s Financial
Statements:





**Description**
    
    **Page**Schedule
      II - Valuation and Qualifying Accounts
    
    S-1





Schedules
other than the one listed above are omitted as the required information is
inapplicable or the information is presented in the consolidated financial
statements or related notes.





**3.     Exhibits.**





The
following exhibits are required to be filed with this Report by Item 601 of
Regulation S-K:





**Exhibit
      No.**
    
    
    
    **Description**2.1
    
    —
    
    Stock
      Purchase Agreement dated as of October 28, 2003 by and between the
      Registrant and OvenWorks, LLLP (incorporated by reference to Exhibit 2.1
      to the Registrant’s Current Report on Form 8-K, filed with the Commission
      on November 10, 2003)2.2
    
    —
    
    Contribution
      Agreement, dated May 21, 2004 by and among the Registrant, Enersyst
      Development Center LLC and its members (incorporated by reference to
      Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed with the
      Commission on May 28, 2004)3.1
    
    —
    
    Restated
      Certificate of Incorporation (incorporated by reference to Exhibit 3.1.2
      to the Registrant’s Registration Statement on Form SB-2, Registration No.
      33-75008)3.2
    
    —
    
    Amendment
      to Certificate of Incorporation - Certificate of Designation of Series A
      Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to
      the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2000, filed with the Commission on November 14,
      2000)3.3
    
    —
    
    Amendment
      to Certificate of Incorporation - Certificate of Designation of Series B
      Convertible Preferred Stock (incorporated by reference to Exhibit 3.3 to
      the Registrant’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2000, filed with the Commission on April 16,
      2001)3.4
    
    —
    
    Amendment
      to Certificate of Incorporation - Certificate of Designation of Series C
      Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to
      the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March
      31, 2002, filed with the Commission on May 15, 2002)3.5
    
    —
    
    Amendment
      to Certificate of Incorporation - Certificate of Designation of Series D
      Convertible Preferred Stock (incorporated by reference to Exhibit 3(i) to
      the Registrant’s Current Report on Form 8-K, filed with the Commission on
      November 10, 2003)3.6
    
    —
    
    Certificate
      of Amendment to the Restated Certificate of Incorporation of TurboChef
      Technologies, Inc., as amended (incorporated by reference to Exhibit 99.1
      to the Registrant’s Current Report on Form 8-K, filed with the Commission
      on July 20, 2004)3.7
    
    —
    
    Certificate
      of Amendment to the Restated Certificate of Incorporation of TurboChef
      Technologies, Inc., as amended (incorporated by reference to Exhibit 99.1
      to the Registrant’s Current Report on Form 8-K, filed with the Commission
      on December 23, 2004)3.8
    
    —
    
    Restated
      By-Laws (incorporated by reference to Exhibit 3.2.2 to the Registrant’s
      Registration Statement on Form SB-2, Registration No.
      33-75008)4.1
    
    —
    
    Specimen
      Common Stock certificate (incorporated by reference to Exhibit 4.2 to the
      Registrant’s Registration Statement on Form SB-2, Registration No.
      33-75008)4.2
    
    —
    
    Specimen
      Common Stock certificate (incorporated by reference to Exhibit 4.11 to the
      Registrant’s Registration Statement on Form S-3, Registration No.
      333-121818)4.3
    
    —
    
    See
      Exhibits 3.1 through 3.8 for provisions of the Certificate of
      Incorporation and Bylaws of the Registrant defining the rights of holders
      of the Registrant’s Common Stock10.1
    
    —
    
    1994
      Stock Option Plan, as amended (incorporated by reference to Exhibit
      10.14.2 to the Registrant’s Registration Statement on Form SB-2,
      Registration No. 33-75008)





29








**Exhibit
      No.**
    
    
    
    **Description**10.2
    
    —
    
    Strategic
      Alliance Agreement dated as of September 26, 1997 by and between the
      Registrant and Maytag Corporation (incorporated by reference to Exhibit
      10.26 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
      ended September 30, 1997, filed with the Commission on November 14,
      1997)10.3
    
    —
    
    First
      Extension of the Project Agreement (RCAP-II) dated March 4, 1998 by and
      between the Registrant and Maytag Corporation (incorporated by reference
      to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the
      fiscal year ended December 31, 1997, filed with the Commission on March
      31, 1998)10.4
    
    —
    
    Commercial
      Cooking Appliance Project Agreement dated as of July 29, 1998 by and
      between TurboChef Technologies, Inc. and Maytag Corporation (incorporated
      by reference to Exhibit 10.30 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended June 30, 1998, filed with the Commission on
      August 14, 1998)10.5
    
    —
    
    Research
      and Development Contract dated July 29, 1999 by and between the Registrant
      and Gas Research Institute (incorporated by reference to Exhibit 10.36 to
      the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 1999, filed with the Commission on November 15,
      1999)10.6
    
    —
    
    License
      Agreement dated as of October 28, 1999 by and between the Registrant and
      Maytag Corporation (incorporated by reference to Exhibit 10.37 to the
      Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
      30, 1999, filed with the Commission on November 15,
  1999)10.7
    
    —
    
    Promissory
      Note, dated March 15, 2000, executed by Jeffrey B. Bogatin in favor of the
      Registrant (incorporated by reference to Exhibit 10.38 to the First
      Amendment to the Registrant’s Annual Report on Form 10-K for the fiscal
      year ended December 31, 1999, filed with the Commission on April 12,
      2000)10.8
    
    —
    
    Pledge
      Agreement, dated as of March 15, 2000, by and between Jeffrey B. Bogatin
      and the Registrant (incorporated by reference to Exhibit 10.39 to the
      First Amendment to the Registrant’s Annual Report on Form 10-K for the
      fiscal year ended December 31, 1999, filed with the Commission on April
      12, 2000)10.9*
    
    —
    
    OEM
      Contract dated May 19, 2000 between the Registrant and Shandong Xiaoya
      Group (incorporated by reference to Exhibit 10.12 to the Registrant’s
      Annual Report on Form 10-K for the fiscal year ended December 31, 2001,
      filed with the Commission on April 15, 2002)10.10
    
    —
    
    Settlement
      Agreement dated February 28, 2002 between the Registrant and Whitbread PLC
      (incorporated by reference to Exhibit 10.21 to the Registrant’s Annual
      Report on Form 10-K for the fiscal year ended December 31, 2001, filed
      with the Commission on April 15, 2002)10.11*
    
    —
    
    Supplementary
      Agreement to the OEM Manufacturing Contract executed on March 27, 2002
      between the Registrant and Shandong Xiaoya Group (incorporated by
      reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K
      for the fiscal year ended December 31, 2001, filed with the Commission on
      April 15, 2002)10.12
    
    —
    
    Promissory
      Note dated July 11, 2002 issued to Grand Cheer Company Ltd. (incorporated
      by reference to Exhibit 99.3 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2002, filed with the Commission
      on November 14, 2002)10.13
    
    —
    
    Amendment
      #2 to Supplementary Agreement to the OEM Manufacturing Contract executed
      on December 12, 2002 between the Registrant and Shandong Xiaoya Group
      (incorporated by reference to Exhibit 10.13 to the Registrant’s Annual
      Report on Form 10-K for the fiscal year ended December 31, 2002, filed
      with the Commission on April 16, 2003)








30








**Exhibit
      No.**
    
    
    
    **Description**10.14
    
    —
    
    Non-Plan
      Option Agreement dated as of October 9, 2002 between the Registrant and
      Vince Gennaro (incorporated by reference to Exhibit 10.14 to the
      Registrant’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2002, filed with the Commission on April 16, 2003)10.15
    
    —
    
    Stockholders’
      Agreement dated as of October 28, 2003 by and among the Registrant,
      OvenWorks, LLLP, Jeffrey Bogatin and Donald Gogel (incorporated by
      reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K,
      filed with the Commission on November 10, 2003)10.16
    
    —
    
    Voting
      Agreement dated as of October 28, 2003 by and among OvenWorks, LLLP,
      Jeffrey Bogatin and Donald Gogel (incorporated by reference to Exhibit
      99.1 to the Registrant’s Current Report on Form 8-K, filed with the
      Commission on November 10, 2003)10.17
    
    —
    
    Settlement
      and Release Agreement dated as of October 28, 2003 by and between the
      Registrant and Grand Cheer Company Limited (incorporated by reference to
      Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed with
      the Commission on November 10, 2003)10.18
    
    —
    
    Voting
      Agreement dated as of October 28, 2003 by and between OvenWorks, LLLP and
      Grand Cheer Company Limited (incorporated by reference to Exhibit 99.2 to
      the Registrant’s Current Report on Form 8-K, filed with the Commission on
      November 10, 2003)10.19*
    
    —
    
    Equipment
      Supplier Approval Agreement dated as of March 5, 2004 by and among the
      Registrant, Doctor’s Associates, Inc. and Independent Purchasing
      Cooperative, Inc. (incorporated by reference to Exhibit 10.19 to the
      Registrant’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2003, filed with the Commission on March 30, 2004)10.20
    
    —
    
    Consent
      to Transfer and First Amendment to Stockholders’ Agreement dated as of
      November 21, 2003 by and among the Registrant, OvenWorks, LLLP, Jeffrey
      Bogatin and Donald Gogel (incorporated by reference to Exhibit 10.20 to
      the Registrant’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2003, filed with the Commission on March 30,
      2004)10.21
    
    —
    
    TurboChef
      Technologies, Inc. 2003 Stock Incentive Plan (incorporated by reference to
      Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K for the
      fiscal year ended December 31, 2003, filed with the Commission on March
      30, 2004)10.22
    
    —
    
    Form
      of Incentive Stock Option Agreement under the 2003 Stock Incentive Plan
      (incorporated by reference to Exhibit 10.22 to the Registrant’s Annual
      Report on Form 10-K for the fiscal year ended December 31, 2003, filed
      with the Commission on March 30, 2004)10.23
    
    —
    
    Form
      of Non-Qualified Stock Option Agreement under the 2003 Stock Incentive
      Plan (incorporated by reference to Exhibit 10.23 to the Registrant’s
      Annual Report on Form 10-K for the fiscal year ended December 31, 2003,
      filed with the Commission on March 30, 2004)10.24
    
    —
    
    Form
      of Non-Qualified Stock Option Agreement for Consultants under the 2003
      Stock Incentive Plan (incorporated by reference to Exhibit 10.24 to the
      Registrant’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2003, filed with the Commission on March 30, 2004)10.25
    
    —
    
    Employment
      Agreement, dated as of February 9, 2004, by and between the Registrant and
      Richard E. Perlman (incorporated by reference to Exhibit 10.25 to the
      Registrant’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2003, filed with the Commission on March 30, 2004)10.26
    
    —
    
    Employment
      Agreement, dated as of February 9, 2004, by and between the Registrant and
      James K. Price (incorporated by reference to Exhibit 10.26 to the
      Registrant’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2003, filed with the Commission on March 30, 2004)10.27
    
    —
    
    Employment
      Agreement, dated as of February 9, 2004, by and between the Registrant and
      James A. Cochran (incorporated by reference to Exhibit 10.27 to the
      Registrant’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2003, filed with the Commission on March 30, 2004)10.28
    
    —
    
    Preferred
      Unit Exchange Agreement, dated May 21, 2004, by and among the Registrant
      and the members of Enersyst (incorporated by reference to Exhibit 10.1 to
      the Registrant’s Current Report on Form 8-K, filed with the Commission on
      May 28, 2004)10.29
    
    —
    
    Form
      of Subscription Agreement entered into as of May 21, 2004 by the
      Registrant and each of the Investors (incorporated by reference to Exhibit
      10.2 to the Registrant’s Current Report on Form 8-K, filed with the
      Commission on May 28, 2004)10.30
    
    —
    
    Form
      of Registration Rights Agreement, dated May 21, 2004, by and among the
      Registrant and the Investors (incorporated by reference to Exhibit 10.3 to
      the Registrant’s Current Report on Form 8-K, filed with the Commission on
      May 28, 2004)10.31
    
    —
    
    Amended
      and Restated Operating Agreement of Enersyst, dated May 21, 2004
      (incorporated by reference to Exhibit 10.4 to the Registrant’s Current
      Report on Form 8-K, filed with the Commission on May 28,
    2004)10.32
    
    —
    
    Amendment
      to TurboChef Technologies, Inc. 2003 Stock Incentive Plan (incorporated by
      reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended March 31, 2004, filed with the Commission on
      May 12, 2004, as amended on November 22, 2004)10.33
    
    —
    
    Warrant,
      dated December 13, 2002, issued to Banc of America Securities LLC
      (incorporated by reference to Exhibit 4.14 to the Registrant’s
      Registration Statement on Form S-3, Registration No. 333-117806)10.34
    
    —
    
    Warrant
      Certificate, dated March 19, 2001, issued to Grand Cheer Company Limited
      (incorporated by reference to Exhibit 4.15 to the Registrant’s
      Registration Statement on Form S-3, Registration No.
      333-117806)10.35
    
    —
    
    Employment
      Agreement, dated as of September 14, 2004, by and between the Registrant
      and Paul P. Lehr (incorporated by reference to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K, filed with the Commission on
      November 1, 2004)10.36
    
    —
    
    Credit
      Agreement dated as of February 28, 2005 among TurboChef Technologies,
      Inc., its subsidiaries and Bank of America, N.A. (incorporated by
      reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K,
      filed with the Commission on March 3, 2005)23.1
    
    —
    
    Consent
      of BDO Seidman, LLP, Independent Registered Public Accounting
      Firm23.2
    
    —
    
    Consent
      of Ernst & Young LLP, Independent Registered Public Accounting
      Firm24.1
    
    —
    
    Power
      of Attorney (see signature page)





31








**Exhibit
      No.**
    
    
    
    **Description**31.1
    
    —
    
    Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
    
    —
    
    Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
    
    —
    
    Certification
      of the Principal Executive Officer and Principal Financial Officer
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002








*
    Portions
      of these documents have been omitted and filed separately with the
      Securities and Exchange Commission pursuant to a request for confidential
      treatment of the omitted portions.








32








**(b)          Reports
on Form 8-K:**





The
following reports on Form 8-K were filed or furnished by the Registrant during
the fourth quarter of the fiscal year covered by this Report:





**Date
      Filed**
    
    **Items
      Reported**
    
    **Financial
      Statements Filed**November
      1, 2004
    
    Item
      2.02 -
    Results
      of Operations and Financial ConditionItem
      5.02 -
    Appointment
      of Principal OfficersItem
      7.01 -
    Regulation
      FD DisclosureItem
      8.01 -
    Other
      EventsItem
      9.01 -
    Financial
      Statements and Exhibits
    
    NoneNovember
      15, 2004
    
    Item
      2.02 -
    Results
      of Operations and Financial ConditionItem
      4.02 -
    Non-Reliance
      on Previously Issued Financial Statements or a Related Audit Report or
      Completed Interim ReviewItem
      9.01 -
    Financial
      Statements and Exhibits
    
    NoneDecember
      23, 2004
    
    Item
      7.01 -
    Regulation
      FD DisclosureItem
      9.01 -
    Financial
      Statements and Exhibits
    
    NoneDecember
      23, 2004
    
    Item
      8.01 -
    Other
      Events
    
    None








33






Report of
Independent Registered Public Accounting Firm
 
 Board of
Directors and Stockholders
 TurboChef
Technologies, Inc.
 Dallas,
Texas
 
 The audit
referred to in our report dated March 15, 2003, except as to Note 2 of the Notes
to Financial Statements which is as of November 18, 2004, relating to the
statements of operations, stockholders’ equity (deficit) and cash flows of
TurboChef Technologies, Inc. for the year ended December 31, 2002, which is
contained in Item 8 of this Form 10-K included the audit of the financial
statement schedule for the year ended December 31, 2002 listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company’s management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audit.
 
 In our
opinion such financial statement schedule presents fairly, in all material
respects, the information set forth therein for the year ended December 31,
2002.
 
 
 
 
 /s/ BDO
Seidman, LLP
 
 Dallas,
Texas
 March 15,
2003, except as to Note 2
 of the
Notes to Financial
 Statements
which is as of
 November
18, 2004









34


****


****


**SCHEDULE
II**


**TURBOCHEF
TECHNOLOGIES, INC.**


**VALUATION
AND QUALIFYING ACCOUNTS**





**Balance
      at**
      **Beginning**
      **of
      Year**
    
    **Charged
      to**
      **Costs
      and**
      **Expenses**
    
    **Charged
      to**
      **Other**
      **Accounts**
    
    **Deductions**
    
    **Balance
      at**
      **End
      of**
      **Year****(In
      thousands)**Allowance
      for Doubtful AccountsYear
      ended December 31, 2004
    
    
    $
    219
    
    $
    46
    
    $
    58
    
    $
    (126
    )
    $
    197Year
      ended December 31, 2003
    
    
    
    169
    
    
    101
    
    
    —
    
    
    (51
    )
    
    219Year
      ended December 31, 2002
    
    
    
    70
    
    
    100
    
    
    —
    
    
    (1
    )
    
    169Deferred
      Income Tax Asset Valuation AllowanceYear
      ended December 31, 2004
    
    
    
    19,624
    
    
    —
    
    
    —
    
    
    (3,678
    )
    
    15,946Year
      ended December 31, 2003
    
    
    
    14,747
    
    
    4,877
    
    
    —
    
    
    —
    
    
    19,624Year
      ended December 31, 2002
    
    
    
    12,454
    
    
    2,293
    
    
    —
    
    
    —
    
    
    14,747








All
financial statement schedules not listed are omitted because they are
inapplicable or the requested information is shown in the financial statements
of the Registrant or in the related notes to the consolidated financial
statements.





35





**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Annual Report on form 10-K for the
year ended December 31, 2004 to be signed on its behalf by the undersigned,
thereunto duly authorized on this 15th day of March, 2005.





TURBOCHEFTECHNOLOGIES,INC.By:
      /s/ James K. PriceJames
      K. Price*President
      and Chief Executive Officer*





**POWER
OF ATTORNEY**





KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints James K. Price and Richard E. Perlman, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.





**Signature**
    
    **Title**
    
    **Date**/s/
      Richard E. PerlmanRichard
      E. Perlman
    
    Chairman
      of the Board and Director
    
    March
      15, 2005/s/
      James K. PriceJames
      K. Price
    
    Chief
      Executive Officer, President and Director (Principal
      Executive
      Officer)
    
    March
      15, 2005/s/
      James A. CochranJames
      A. Cochran
    
    Senior
      Vice President, Assistant Secretary and Chief
      Financial
      Officer (Principal Financial and Accounting
      Officer)
    
    March
      15, 2005/s/
      William A. ShutzerWilliam
      A. Shutzer
    
    Director
    
    March
      15, 2005/s/
      Raymond H. WelshRaymond
      H. Welsh
    
    Director
    
    March
      15, 2005/s/
      J. Thomas PresbyJ.
      Thomas Presby
    
    Director
    
    March
      15, 2005/s/
      James W. DeYoungJames
      W. DeYoung
    
    Director
    
    March
      15, 2005/s/
      Anthony JolliffeSir
      Anthony Jolliffe
    
    Director
    
    March
      15, 2005







36







**INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS**





Reports
      of Ernst & Young LLP, Independent Registered Public Accounting
      Firm
    F-2Report
      of BDO Seidman, LLP, Independent Registered Public Accounting
      Firm
    F-4Managements’
      Report on Internal Control over Financial Reporting
    F-5Consolidated
      Financial Statements:Balance
      Sheets as of December 31, 2004 and 2003
    F-6Statements
      of Operations for the years ended December 31, 2004, 2003 and
      2002
    F-7Statements
      of Changes in Stockholders’ Equity (Deficit) for the years ended December
      31, 2004, 2003 and 2002
    F-8Statements
      of Cash Flows for the years ended December 31, 2004, 2003 and
      2002
    F-10Notes
      to Financial Statements
    F-11









F-1




Report of
Ernst & Young LLP, Independent Registered Public Accounting
Firm











The Board
of Directors and Shareholders


TurboChef
Technologies, Inc.








We have
audited the accompanying consolidated balance sheets of TurboChef Technologies,
Inc. as of December 31, 2004 and 2003, and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for each of the
two years in the period ended December 31, 2004. Our audits also included the
financial statement schedule listed in the Index at Item 15(a)2. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly
in all material respects, the consolidated financial position of TurboChef
Technologies, Inc. at December 31, 2004 and 2003 and the consolidated results of
its operations and its cash flows for each of the two years in the period ended
December 31, 2004 in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.


We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of TurboChef Technologies,
Inc.’s internal control over financial reporting as of December 31, 2004, based
on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 14, 2005 expressed an unqualified opinion thereon.








/s/ Ernst
& Young
LLP





Atlanta,
Georgia


March 14,
2005












































F-2











Report of
Ernst & Young LLP, Independent Registered Public Accounting Firm on Internal
Control











The Board
of Directors and Shareholders


TurboChef
Technologies, Inc.








We have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Controls that TurboChef Technologies, Inc. maintained
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). TurboChef Technologies, Inc’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the company’s internal control over financial
reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In our
opinion, management’s assessment that TurboChef Technologies, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, TurboChef Technologies, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on **** the COSO
criteria **.**





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of TurboChef
Technologies, Inc. as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the two years in the period ended December 31, 2004 and our
report dated March 14, 2005 **** expressed
an unqualified opinion thereon.








/s/ Ernst
& Young
LLP





Atlanta,
Georgia


March 14,
2005





















































F-3











Report of
BDO Seidman, LLP, Independent Registered Public Accounting Firm











The Board
of Directors and Stockholders


TurboChef
Technologies, Inc.


Dallas,
Texas








We have
audited the accompanying statements of operations, stockholders’ equity
(deficit), and cash flows of TurboChef Technologies, Inc. for the year ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of TurboChef
Technologies, Inc. for the year ended December 31, 2002 in conformity with
accounting principals generally accepted in the United States.





The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. The Company’s recurring losses from operations and
its continued dependence on access to external financing and additional sales
raise substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.





BDO
Seidman, LLP





Dallas,
Texas


March 15,
2003, except as to Note 2


of the
Notes to Financial Statements
 which is
as of November 18, 2004













































































F-4








****


**Management’s
Report on Internal Controls**







The
management of TurboChef Technologies Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting. TurboChef’s
internal control system was designed to provide reasonable assurance to our
management and the board of directors regarding preparation and fair
presentation of published financial statements. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.





Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2004. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on our
assessment and those criteria, management believes that, as of December 31,
2004, the Company’s internal control over financial reporting is effective based
on those criteria.





The
Company’s independent registered public accounting firm has issued an audit
report on our assessment of the Company’s internal control over financial
reporting. This report appears on page F-3.








/s/ JAMES
K. PRICE


James K.
Price


President
and


Chief
Executive Officer








/s/ JAMES
A. COCHRAN


James A.
Cochran


Senior
Vice President and


Chief
Financial Officer














































































































F-5










**TURBOCHEF
TECHNOLOGIES, INC.**







**CONSOLIDATED
BALANCE SHEETS**


**(IN
THOUSANDS, EXCEPT SHARE DATA)**


**December
      31,****2004**
    
    **2003****Assets**Current
      assets:Cash
      and cash equivalents
    
    $
    12,942
    
    $
    8,890Restricted
      cash
    
    
    3,196
    
    
    —Accounts
      receivable, net of allowance of $197 and $219,
respectively
    
    
    9,585
    
    
    520Inventory
    
    
    8,155
    
    
    1,514Prepaid
      expenses
    
    
    426
    
    
    311Total
      current assets
    
    
    34,304
    
    
    11,235Property
      and equipment, net
    
    
    2,678
    
    
    101Developed
      technology, net of accumulated amortization of $493 in
2004
    
    
    7,577
    
    
    —Goodwill
    
    
    5,808
    
    
    —Other
      assets
    
    
    389
    
    
    84Total
      assets
    
    $
    50,756
    
    $
    11,420**Liabilities
      and Stockholders’ Equity (Deficit)**Current
      liabilities:Accounts
      payable
    
    $
    8,401
    
    $
    424Other
      payables
    
    
    1,445
    
    
    1,445Accrued
      expenses
    
    
    3,135
    
    
    1,007Notes
      payable
    
    
    —
    
    
    380Deferred
      revenue
    
    
    1,338
    
    
    1,366Accrued
      warranty
    
    
    2,586
    
    
    928Total
      current liabilities
    
    
    16,905
    
    
    5,550Other
      liabilities
    
    
    72
    
    
    —Total
      liabilities
    
    
    16,977
    
    
    5,550Commitments
      and contingenciesConvertible,
      redeemable preferred stock
    
    
    —
    
    
    12,605Stockholders’
      equity (deficit):Preferred
      stock, $1 par value, authorized 5,000,000 shares, 0 shares
      issued
    
    
    —
    
    
    —Preferred
      membership units exchangeable for 611,096 shares of TurboChef common
      stock
    
    
    6,351Common
      stock, $.01 par value, authorized 100,000,000 shares and 50,000,000
      shares;
      issued
      24,313,158 and 8,491,339 shares at December 31, 2004 and 2003,
      respectively
    
    
    243
    
    
    85Additional
      paid-in capital
    
    
    79,508
    
    
    55,630Accumulated
      deficit
    
    
    (52,277
    )
    
    (61,956
    )Notes
      receivable for stock issuances
    
    
    (46
    )
    
    (43
    )Treasury
      stock — at cost 10,710 shares at December 31, 2003
    
    
    —
    
    
    (451
    )Total
      stockholders’ equity (deficit)
    
    
    33,779
    
    
    (6,735
    )Total
      liabilities and stockholders’ equity (deficit)
    
    $
    50,756
    
    $
    11,420





The
accompanying notes are an integral part of these financial
statements.











F-6










**TURBOCHEF
TECHNOLOGIES, INC.**


**CONSOLIDATED
STATEMENTS OF OPERATIONS**


**(IN
THOUSANDS, EXCEPT SHARE DATA)**





**Years
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Revenues:Product
      sales
    
    $
    69,707
    
    $
    3,690
    
    $
    5,655Royalties
      and services
    
    
    1,187
    
    
    —
    
    
    —Total
      revenues
    
    
    70,894
    
    
    3,690
    
    
    5,655Costs
      and expenses:Cost
      of product sales
    
    
    44,047
    
    
    1,946
    
    
    3,474Research
      and development expenses
    
    
    1,202
    
    
    897
    
    
    413Selling,
      general and administrative expenses
    
    
    15,826
    
    
    6,523
    
    
    8,481Compensation
      and severance related to termination of
      former
      officers and directors
    
    
    —
    
    
    7,585
    
    
    —Total
      costs and expenses
    
    
    61,075
    
    
    16,951
    
    
    12,368Operating
      income (loss)
    
    
    9,819
    
    
    (13,261
    )
    
    (6,713
    )Other
      income (expense):Interest
      income
    
    
    63
    
    
    128
    
    
    147Interest
      expense and debt extinguishment costs
    
    
    (8
    )
    
    (1,105
    )
    
    (226
    )Other
      income(expense)
    
    
    106
    
    
    (111
    )
    
    108161
    
    
    (1,088
    )
    
    29Income
      (loss) before income taxes
    
    
    9,980
    
    
    (14,349
    )
    
    (6,684
    )Provision
      for income taxes
    
    
    301
    
    
    —
    
    
    —Net
      income (loss)
    
    
    9,679
    
    
    (14,349
    )
    
    (6,684
    )Preferred
      stock dividends
    
    
    —
    
    
    (12,800
    )
    
    (270
    )Net
      income (loss) applicable to common stockholders
    
    $
    9,679
    
    $
    (27,149
    )
    $
    (6,954
    )**Per
      share data:****Basic:**Net
      income (loss)
    
    $
    0.79
    
    $
    (2.11
    )
    $
    (1.06
    )Preferred
      stock dividends
    
    
    —
    
    
    (1.88
    )
    
    (0.04
    )Net
      income (loss) applicable to common stockholders
    
    $
    0.79
    
    $
    (3.99
    )
    $
    (1.10
    )Weighted
      average number of common shares outstanding - basic
    
    
    12,256,686
    
    
    6,797,575
    
    
    6,301,236**Diluted:**Net
      income (loss)
    
    $
    0.37
    
    $
    (2.11
    )
    $
    (1.06
    )Preferred
      stock dividends
    
    
    —
    
    
    (1.88
    )
    
    (0.04
    )Net
      income (loss) applicable to common stockholders
    
    $
    0.37
    
    $
    (3.99
    )
    $
    (1.10
    )Weighted
      average number of common shares outstanding - diluted
    
    
    26,142,101
    
    
    6,797,575
    
    
    6,301,236








The
accompanying notes are an integral part of these financial
statements.


























F-7

















**TURBOCHEF
TECHNOLOGIES, INC.**


**CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**


**(IN
THOUSANDS, EXCEPT SHARE DATA)**


**Preferred
      Stock**
    
    
    **Preferred**
      **Membership**
      **Units**
    
    **Common
      Stock****Shares**
    ****
    ****
    **Amount**
    ****
    ****
    ****
    ****
    ****
    **Shares**
    ****
    ****
    **Amount**
    
    
    **Additional
      Paid-in Capital**
    
    
    **Accumulated
      Deficit**Balance,
      January 1, 2002
    
    
    51,000
    
    $
    4,530
    
    $
    —
    
    
    6,139,404
    
    $
    61
    
    $
    43,751
    
    $
    (40,458
    )Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (6,684
    )Compensation
      expense, primarily related to
      stock
      options granted for services
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    238
    
    
    —Notes
      receivable for stock issuances
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Interest
      on notes receivable for stock
      issuances
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Preferred
      stock dividend
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (270
    )Conversion
      of preferred stock to common
      stock
    
    
    (21,000
    )
    
    (2,100
    )
    
    —
    
    
    153,274
    
    
    2
    
    
    2,098
    
    
    —Issuance
      of warrants
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    72
    
    
    —Issuance
      of common stock
    
    
    —
    
    
    —
    
    
    —
    
    
    12,111
    
    
    —
    
    
    25
    
    
    —Preferred
      stock dividends paid through
      issuance
      of common stock
    
    
    —
    
    
    —
    
    
    —
    
    
    48,053
    
    
    1
    
    
    456
    
    
    —Balance,
      December 31, 2002
    
    
    30,000
    
    
    2,430
    
    
    —
    
    
    6,352,842
    
    
    64
    
    
    46,640
    
    
    (47,412
    )Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (14,349
    )Compensation
      expense, primarily related to
      stock
      options granted for services
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    1,142
    
    
    —Cancellation
      of notes receivable for stock
      issuances
    
    
    —
    
    
    —
    
    
    —
    
    
    (280,000
    )
    
    (3
    )
    
    (1,677
    )
    
    —Interest
      on notes receivable for stock
      issuances
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Beneficial
      conversion of Series D
      preferred
      stock
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    12,605
    
    
    —Deemed
      dividend for beneficial
      conversion
      feature
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (12,605
    )
    
    —Conversion
      of preferred stock to common
      stock
    
    
    (30,000
    )
    
    (2,430
    )
    
    —
    
    
    931,217
    
    
    9
    
    
    2,421
    
    
    —Preferred
      stock dividends paid through
      issuance
      of common stock
    
    
    —
    
    
    —
    
    
    —
    
    
    257,899
    
    
    3
    
    
    393
    
    
    (195
    )Issuance
      of common stock for non-
      compete
      and release agreements
    
    
    —
    
    
    —
    
    
    —
    
    
    1,150,766
    
    
    12
    
    
    6,492
    
    
    —Other
      issuances of common stock
    
    
    
    
    
    
    
    
    —
    
    
    78,615
    
    
    —
    
    
    219
    
    
    —Balance,
      December 31, 2003
    
    
    —
    
    
    —
    
    
    —
    
    
    8,491,339
    
    
    85
    
    
    55,630
    
    
    (61,956
    )Net
      income
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    
    
    
    —
    
    
    9,679Issuance
      of preferred membership units
    
    
    —
    
    
    —
    
    
    6,351
    
    
    —
    
    
    —
    
    
    —
    
    
    —Conversion
      of Series D preferred stock
    
    
    —
    
    
    —
    
    
    —
    
    
    14,217,666
    
    
    142
    
    
    12,463
    
    
    —Compensation
      expense, primarily related to
      stock
      options granted for services
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    113
    
    
    —Exercise
      of options and warrants
      for
      common stock
    
    
    —
    
    
    —
    
    
    —
    
    
    464,
      032
    
    
    5
    
    
    1,757
    
    
    —Issuance
      of common stock in private
      placement,
      net of issuance costs
    
    
    —
    
    
    —
    
    
    —
    
    
    1,151,209
    
    
    11
    
    
    9,996
    
    
    —Cancellation
      of treasury shares and other
    
    
    —
    
    
    —
    
    
    —
    
    
    (11,088
    )
    
    —
    
    
    (451
    )
    
    —Interest
      on notes receivable for stock
      issuances
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Balance,
      December 31, 2004
    
    
    —
    
    
    —
    
    $
    6,351
    
    
    24,313,158
    
    $
    243
    
    $
    79,508
    
    $
    (52,277
    )


The
accompanying notes are an integral part of these financial statements.





F-8















**TURBOCHEF
TECHNOLOGIES, INC.**


**CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**


**(IN
THOUSANDS, EXCEPT SHARE DATA)**





**Notes
      Receivable**
      **For**
      **Stock
      Issuances**
    
    **Treasury**
      **Stock**
    
    **Total**
      **Stockholders’**
      **Equity**Balance,
      January 1, 2002
    
    $
    (2,406
    )
    $
    (451
    )
    $
    5,027Net
      loss
    
    
    —
    
    
    —
    
    
    (6,684
    )Compensation
      expense, primarily related
      to
      stock options granted for services
    
    
    —
    
    
    —
    
    
    238Notes
      receivable for stock issuances
    
    
    8
    
    
    —
    
    
    8Interest
      on notes receivable for stock
      issuances
    
    
    (132
    )
    
    —
    
    
    (132
    )Preferred
      stock dividend
    
    
    —
    
    
    —
    
    
    (270
    )Conversion
      of preferred stock to common
      stock
    
    
    —
    
    
    —
    
    
    —Issuance
      of warrants
    
    
    —
    
    
    —
    
    
    72Issuance
      of common stock
    
    
    —
    
    
    —
    
    
    25Preferred
      stock dividends paid through
      issuance
      of common stock
    
    
    —
    
    
    —
    
    
    457Balance,
      December 31, 2002
    
    
    (2,530
    )
    
    (451
    )
    
    (1,259
    )Net
      loss
    
    
    —
    
    
    —
    
    
    (14,349
    )Compensation
      expense, primarily related to
      stock
      options granted for services
    
    
    —
    
    
    —
    
    
    1,142Cancellation
      of notes receivable for stock
      issuances
    
    
    2,596
    
    
    —
    
    
    916Interest
      on notes receivable for stock
      issuances
    
    
    (109
    )
    
    —
    
    
    (109
    )Beneficial
      conversion of Series D
      preferred
      stock
    
    
    —
    
    
    —
    
    
    12,605Deemed
      dividend for beneficial
      conversion
      feature
    
    
    —
    
    
    —
    
    
    (12,605
    )Conversion
      of preferred stock to common
      stock
    
    
    —
    
    
    —
    
    
    —Preferred
      stock dividends paid through
      issuance
      of common stock
    
    
    —
    
    
    —
    
    
    201Issuance
      of common stock for non-
      compete
      and release agreements
    
    
    —
    
    
    —
    
    
    6,504Other
      issuances of common stock
    
    
    —
    
    
    —
    
    
    219Balance,
      December 31, 2003
    
    
    (43
    )
    
    (451
    )
    
    (6,735
    )Net
      income
    
    
    —
    
    
    —
    
    
    9,679Issuance
      of preferred membership units
    
    
    —
    
    
    —
    
    
    6,351Conversion
      of Series D preferred stock
    
    
    —
    
    
    —
    
    
    12,605Compensation
      expense, primarily related to
      stock
      options granted for services
    
    
    —
    
    
    —
    
    
    113Exercise
      of options and warrants
      for
      common stock
    
    
    —
    
    
    —
    
    
    1,762Issuance
      of common stock in private
      placement,
      net of issuance costs
    
    
    —
    
    
    —
    
    
    10,007Cancellation
      of treasury shares and other
    
    
    —
    
    
    451
    
    
    —Interest
      on notes receivable for stock
      issuances
    
    
    (3
    )
    
    —
    
    
    (3
    )Balance,
      December 31, 2004
    
    $
    (46
    )
    $
    —
    
    $
    33,779





The
accompanying notes are an integral part of these financial
statements.











F-9



















**TURBOCHEF
TECHNOLOGIES, INC.**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS**


**(IN
THOUSANDS)**





**Years
      Ended December 31,****2004**
    ****
    **2003**
    ****
    **2002**Cash
      flows from operating activities:Net
      income (loss)
    
    $
    9,679
    
    $
    (14,349
    )
    $
    (6,684
    )Adjustments
      to reconcile net income (loss) to net cash provided by (used in)
      operating
      activities:Depreciation
      and amortization
    
    
    1,052
    
    
    264
    
    
    530Non-cash
      interest on notes receivable from employees and directors
    
    
    (3
    )
    
    (109
    )
    
    (132
    )Non-cash
      interest and debt extinguishment costs on non-interest bearing promissory
      note
    
    
    8
    
    
    904
    
    
    200Non-cash
      compensation expense
    
    
    113
    
    
    7,995
    
    
    110Provision
      for doubtful accounts
    
    
    46
    
    
    101
    
    
    99Provision
      for uncollectible other receivables
    
    
    —
    
    
    735
    
    
    —Foreign
      exchange (gain) loss
    
    
    (44
    )
    
    117
    
    
    —Changes
      in operating assets and liabilities, net of effects of
      acquisition:Restricted
      cash
    
    
    (3,196
    )
    
    —
    
    
    —Accounts
      receivable
    
    
    (8,603
    )
    
    1,109
    
    
    (802
    )Inventories
    
    
    (6,822
    )
    
    360
    
    
    (280
    )Prepaid
      expenses and other assets
    
    
    (136
    )
    
    (258
    )
    
    (18
    )Accounts
      payable
    
    
    7,731
    
    
    (809
    )
    
    795Accrued
      expenses and warranty
    
    
    3,791
    
    
    (11
    )
    
    580Deferred
      revenue
    
    
    (27
    )
    
    553
    
    
    813Net
      cash provided by (used in) operating activities
    
    
    3,589
    
    
    (3,398
    )
    
    (4,789
    )Cash
      flows from investing activities:Acquisition
      of business
    
    
    (7,683
    )
    
    —
    
    
    —Purchase
      of property and equipment, net
    
    
    (2,913
    )
    
    (33
    )
    
    (113
    )Other
    
    
    (330
    )
    
    —
    
    
    —Net
      cash used in investing activities
    
    
    (10,926
    )
    
    (33
    )
    
    (113
    )Cash
      flows from financing activities:Proceeds
      from the sale of preferred stock, net
    
    
    —
    
    
    12,605
    
    
    —Proceeds
      from note payable
    
    
    —
    
    
    —
    
    
    1,000Payment
      of note payable
    
    
    (380
    )
    
    (1,000
    )
    
    —Proceeds
      from the sale of common stock, net
    
    
    10,007
    
    
    —
    
    
    —Proceeds
      from the exercise of stock options and warrants
    
    
    1,762
    
    
    87
    
    
    50Other
    
    
    —
    
    
    —
    
    
    (17
    )Net
      cash provided by financing activities
    
    
    11,389
    
    
    11,692
    
    
    1,033Net
      increase (decrease) in cash and cash equivalents
    
    
    4,052
    
    
    8,261
    
    
    (3,869
    )Cash
      and cash equivalents at beginning of year
    
    
    8,890
    
    
    629
    
    
    4,498Cash
      and cash equivalents at end of year
    
    $
    12,942
    
    $
    8,890
    
    $
    629Supplemental
      disclosures of noncash activities:Noncash
      financing activity — beneficial conversion of preferred
    stock
    
    $
    —
    
    $
    12,605
    
    $
    —Noncash
      financing activity — conversion of preferred stock to common
      stock
    
    $
    12,605
    
    $
    2,430
    
    $
    2,100Noncash
      financing activity — interest on notes receivable from stock
      issuances
    
    $
    —
    
    $
    109
    
    $
    132Noncash
      financing activity — accrued preferred stock dividend
    
    $
    —
    
    $
    —
    
    $
    270Noncash
      financing activity — preferred stock dividends paid through the issuance
      of common stock
    
    $
    —
    
    $
    396
    
    $
    457Noncash
      financing activity — issuance of
      preferred membership units exchangeable for TurboChef common stock in
      connection with Enersyst acquisition
    
    $
    6,351
    
    $
    —
    
    $
    —Noncash
      investing activity — cancellation of note receivable for stock
      issuance
    
    $
    —
    
    $
    2,596
    
    $
    —








The
accompanying notes are an integral part of these financial
statements.








F-10














**TURBOCHEF
TECHNOLOGIES, INC.**


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      1.**
    
    **NATURE
      OF OPERATIONS AND GENERAL**





TurboChef
Technologies, Inc. (“the Company”) was incorporated in 1991 and became a
Delaware corporation in 1993. The Company is a leading provider of technology
and services for the high speed preparation of food products. The Company’s
customizable speed cook ovens, the C3 and the Tornado, cook food products at
high speeds with food quality comparable, and in many cases superior, to
conventional heating methods. In addition, the Company offers fee-based
equipment development and testing, prototype fabrication and other services, and
food preparation, menu planning and analysis and related consulting services, to
other food manufacturers and members of the foodservice industry. The Company’s
primary markets are with commercial food service operators throughout North
America, Europe and Asia. Management believes that the Company operates in one
primary business segment.





As of
December 31, 2002, and through much of 2003, the Company had been unable to
raise the necessary capital to continue normal business operations and expand
the Company’s operations. The Company’s working capital as of December 31, 2002
and during much of 2003 was severely limited and the Company delayed payments to
critical suppliers of parts, delayed purchases of ovens and extended other
accounts payables to preserve cash. As of December 31, 2002, the Company
required additional financing to support operations and, in the event the
Company’s cash position did not improve, the Company might not have been able to
meet its critical obligations. Taken together as of December 31, 2002, these
factors impacted the Company’s ability to operate as a going concern as of that
date. As a result of these conditions, the independent registered public
accounting firm’s report on the Company’s financial statements for the year
ended December 31, 2002 contains an explanatory paragraph regarding the
Company’s ability to continue as a going concern.





**NOTE
      2.**
    
    **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





The
accompanying financial statements reflect the application of certain accounting
policies described below and elsewhere in the notes to the financial
statements.





***Basis
of Consolidation and Presentation***


The
consolidated financial statements include the accounts of TurboChef Technologies
Inc. and its majority-owned and controlled company. Significant inter-company
accounts and transactions have been eliminated in consolidation. Certain prior
year amounts have been reclassified to conform to the current year presentation.
All share and per share data for all periods presented has been retroactively
restated to reflect the one-for-three reverse stock split approved November 30,
2004 and which became effective December 27, 2004.




***Restatement
of Financial Statements***
 The
Company restated its financial statements for the years ended December 31, 2003
and 2002 and amended its previous filings accordingly.




F-11







***Use
of Estimates***


The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The more significant estimates reflected in these financial statements include
warranty and accrued expenses, the beneficial conversion feature applicable to
the Company’s issuance of convertible preferred stock and valuation of
stock-based compensation.


******


***Cash
Equivalents***


The
Company considers all highly liquid investments with original maturities of
three months or less, when purchased, to be cash equivalents.





***Accounts
Receivable and Allowance for Doubtful Accounts***


Accounts
receivable consist of amounts owed to the Company for the sale of its products
in the normal course of business. Accounts receivable consist of monies owed in
US Dollars and Euros. Accounts receivable originally denominated in Euros are
translated into US Dollars with a transaction gain or loss recorded at such
time. Accounts receivable is reported net of allowance for doubtful accounts.
Generally, no collateral is received from customers and additions to the
allowance are based on ongoing credit evaluations of customers with general
credit experience being within the range of management’s
expectations.





***Inventories***


Inventories
are valued at the lower of cost, determined using the average cost method, or
market and primarily consist of ovens (finished goods) and parts for use in
production or as replacements. The
Company establishes reserves for inventory estimated to be obsolete,
unmarketable or slow moving on a case by case basis, equal to the difference
between the cost of inventory and estimated market value based upon assumptions
about future demand, technology changes and market conditions. Ovens
used for demonstration and testing are generally depreciated over a one-year
period. Depreciation for demonstration ovens was $188,000, $124,000, and
$183,000 for the years ended December 31, 2004, 2003 and 2002 respectively.
Inventory consists of the following at December 31:





**2004**
    
    **2003****(In
      thousands)**Finished
      goods — ovens
    
    $
    3,547
    
    $
    371Demonstration
      inventory, net
    
    
    259
    
    
    70Parts
      inventory, net
    
    
    4,349
    
    
    1,073$
    8,155
    
    $
    1,514





***Property
and Equipment***


Property
and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the respective assets
and accelerated methods for income tax purposes.





***Goodwill
and Other Intangible Assets***


Goodwill
represents the excess purchase price of net tangible and intangible assets
acquired in business combinations over their estimated fair values. Statement of
Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other
Intangible Assets*, requires goodwill and other acquired intangible assets
that have an indefinite useful life to no longer be amortized; however, these
assets must undergo an impairment test at least annually.  We completed our
annual goodwill impairment test in October 2004 and determined that the carrying
amount of goodwill was not impaired and there have been no developments
subsequent to October 2004 that would indicate an impairment exists. We will
continue to perform our goodwill impairment review annually or more frequently
if facts and circumstances warrant a review.


F-12





SFAS No.
142 also requires that intangible assets with definite lives be amortized over
their estimated useful life and reviewed for impairment in accordance with SFAS
No. 144, *Accounting
for the Impairment or Disposal of Long-Lived Assets* . We are
currently amortizing acquired developed technology using the straight line
method over an estimated useful life of 10 years and recorded $493,000 in
amortization expense for 2004.





***Other
Assets***


Other
assets consist primarily of deferred financing costs for transactions completed
in 2005 and capitalized patent costs, which include outside legal fees incurred
in the registration of the Company’s patents. These costs are amortized over
their economic lives, ranging from four to ten years. Amortization of other
assets was $16,000, $28,000, and $24,000 for the years ended December 31, 2004,
2003 and 2002, respectively.





***Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of***


The
Company reviews long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less estimated sales expenses. Management believes no
impairment exists as of December 31, 2004.





***Deferred
Revenue***


Deposits
received from customers for future purchases of cooking systems and any other
amounts received in advance of completion of the earning process is recorded as
deferred revenue. Deferred revenue amounts will be recognized when the cooking
systems are delivered and/or installed for the customer as required by the
specific nature of the sales transaction. The Company deferred revenue of
approximately $650,000 and $2.1 million and cost of revenue of approximately
$400,000 and $1.2 million related to ovens sold in 2003 and 2002, respectively,
to franchisees of a major restaurant chain under a proposal which offered a
future exchange for a new oven contingent on completion of a franchise-wide sale
and roll-out of the new ovens.







***Product
Warranty***


The
Company’s ovens are warranted against defects in material and workmanship for a
period of one year. Anticipated future warranty costs are estimated, based upon
historical expenses, and are recorded in the period cooking systems are sold.
Periodically, the Company’s warranty reserve is reviewed to determine if the
reserve is sufficient to cover estimated repair costs associated with the
remaining ovens under warranty. At this time, the Company believes that, based
upon historical data, the current warranty reserve is sufficient to cover the
costs associated. If warranty costs trend higher, the Company would need to
recognize a higher initial reserve as well as adjust the estimated amounts
necessary to cover all ovens remaining under warranty. Any such additional
reserves would be charged to cost of goods sold.





***Fair
Value of Financial Instruments***


The
carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximates fair value due to the short maturity
of these instruments.





***Revenue
Recognition***


Revenue
from product sales is recognized when substantially all obligations relating to
a sale are completed. If the terms of a sale require installation, the revenue
cycle is substantially complete after installation has occurred, accordingly, in
such cases revenue is recognized once the installation is complete. For sales
where the customer has assumed the installation responsibility or for sales to
designated agents, substantially all obligations are complete at the time of
shipment to the customer or the customer’s designated agent. Revenue for the
sale of replacement parts and accessories is recognized upon shipment to the
customer. Royalty revenues are recognized based on the sales dates of licensees’
products and services revenues are recorded based on attainment of scheduled
performance milestones.





Reserves
for sales returns and allowances are recorded in the same accounting period as
the related revenues and are not significant for any of the periods presented.
The Company deferred revenue of approximately $650,000 and $2.1 million and cost
of revenue of approximately $400,000 and $1.2 million related to ovens sold in
2003 and 2002, respectively, to franchisees of a major restaurant chain under a
proposal which offered a future exchange for a new oven contingent on completion
of a franchise-wide sale and roll-out of the new ovens.





***Cost
of Product Sales***


Cost of
product sales is calculated based upon the cost of the oven, the cost of any
accessories supplied with the oven, an allocation of cost for applicable
delivery, duties and taxes and a reserve for warranty. Cost of product sales
does not include any cost allocation for administrative and support services
required to deliver or install the oven or an allocation of costs associated
with the quality control of the Company’s contract manufacturer. These costs are
recorded within selling, general and administrative expenses. Cost of product
sales also does not attribute any allocation of compensation or general and
administrative expenses to royalty and services revenues.





***Shipping
and Handling Costs***


Shipping
and handling charges billed to customers are recorded as revenues, the
corresponding costs are included in cost of goods sold.





***Research
and Development Expenses***


Research
and development expenses consist of salaries and other related costs incurred
for personnel and departmental operations in planning, design and testing of the
rapid cook ovens. Research and development expenditures are charged to
operations as incurred.







***Advertising
Expenses***


Advertising
and promotion costs are expensed as incurred and amounted to $834,000, nil, and
$30,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.





***Foreign
Exchange***


For the
year ended December 31, 2004, less than 10% of our revenues were derived from
sales outside of the United States. For the years ended December 31, 2003 and
2002, approximately 43% and 37%, respectively, of the Company’s revenues were
derived from sales outside of the United States. These sales and subsequent
accounts receivable, the salaries of employees located outside of the United
States and less than 10% of selling, general and administrative expenses for the
year ended December 31, 2004 and approximately 12% for the years ended December
31, 2003 and 2002, respectively, are denominated in foreign currencies,
principally Euros. The Company is subject to risk of financial loss resulting
from fluctuations in exchange rates of these currencies against the US dollar.
In addition, trade terms with customers outside of the United States are longer
than with customers inside of the United States, which increases the potential
of foreign exchange gains or losses. At this time, the Company does not engage
in any hedging activities.





F-13





***Income
Taxes***


The
Company accounts for income taxes using the liability method. Deferred income
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss carryforwards. Deferred income tax assets and liabilities are measured
using enacted rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred income tax assets and liabilities of a change in tax rates is
recognized in the statements of operations in the period that includes the
enactment date. The Company recognizes and adjusts the deferred tax asset
valuation allowance based on judgments as to future realization of the deferred
tax benefits supported by demonstrated trends in the Company’s operating
results.





***Income
(Loss) Per Common Share***


Basic
earnings per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding during each period. Diluted
earnings per common share is calculated by dividing net income, adjusted on an
“as if converted” basis, by the weighted-average number of actual shares
outstanding and, when dilutive, the share equivalents that would arise from the
assumed conversion of convertible instruments. The per share amounts presented
in the consolidated statements of operations for the years ended December 31,
are based on the following:





**2004**
    
    **2003**
    
    **2002****(In
      thousands)**Numerator
      for basic and diluted earnings per share available to
      common
      stockholders:Net
      income (loss) applicable to common stockholders
    
    $
    9,679
    
    $
    (27,149
    )
    
    (6,954
    )Denominator:*Denominator
      for basic income (loss) per share available to common*
      *stockholders*Weighted
      average common shares outstanding
    
    
    12,257
    
    
    6,798
    
    
    6,301*Effect
      of potentially dilutive securities*Convertible
      preferred stock
    
    
    11,417
    
    
    —
    
    
    —Preferred
      membership interests exchangeable for common stock
    
    
    375
    
    
    —
    
    
    —Dilutive
      stock options and warrants
    
    
    2,093
    
    
    —
    
    
    —Shares
      applicable to diluted income (loss) per share applicable to
      common
      stockholders
    
    
    26,142
    
    
    6,798
    
    
    6,301








The
effect of potentially dilutive stock options and warrants is calculated using
the treasury stock method. Certain options and warrants are excluded from the
calculation because the average market price of the Company’s stock during the
period did not exceed the exercise price of those instruments. For the year
ended December 31, 2004, there were 192,000 shares of such options and warrants.
However, some or all of these instruments may be potentially dilutive in the
future. For the year ended December 31, 2003, the potentially dilutive
securities include options and warrants, which are convertible into 3,734,897
shares of common stock and 2,132,650 of convertible preferred stock, which was
convertible into 14,217,667 shares of common stock dependent upon the Company’s
ability to secure shareholder approval to increase the number of authorized
common shares. For the year ended December 31, 2002, the potential dilutive
securities included 2,818,232 shares for options and warrants and 931,217 shares
attributable to convertible preferred stock. For the years ended December 31,
2003 and 2002, potentially dilutive securities had an anti-dilutive effect and
were not included in the calculation of diluted net loss per common share.







***Stock-Based
Employee Compensation***


The
Company uses the intrinsic value method, as opposed to the fair value method, in
accounting for stock options. Under the intrinsic value method, no compensation
expense has been recognized for stock options granted to employees because the
exercise prices of employee stock options equals or exceeds the market value of
the underlying stock on the dates of grant. The table below presents a
reconciliation of the Company's pro forma net income (loss) giving effect to the
estimated compensation expense related to stock options that would have been
reported if the Company utilized the fair value method for the years ended
December 31:





F-14








**2004**
    
    **2003**
    
    **2002****(In
      thousands except per share amounts)**Net
      income (loss) applicable to common stockholders, as
    reported
    
    $
    9,679
    
    $
    (27,149
    )
    $
    (6,954
    )Deduct:
      Employee stock-based compensation income (expense),
      net
      of forfeitures
    
    
    (3,909
    )
    
    1,749
    
    
    (1,344
    )Pro
      forma net income (loss) applicable to common stockholders
    
    $
    5,770
    
    $
    (25,400
    )
    $
    (8,298
    )Net
      loss applicable to common stockholders per share —
      basic:As
      reported
    
    $
    0.79
    
    $
    (3.99
    )
    $
    (1.10
    )Pro
      forma
    
    $
    0.47
    
    $
    (3.74
    )
    $
    (1.32
    )Net
      loss applicable to common stockholders per share —
      diluted:As
      reported
    
    $
    0.37
    
    $
    (3.99
    )
    $
    (1.10
    )Pro
      forma
    
    $
    0.22
    
    $
    (3.74
    )
    $
    (1.32
    )





For
purposes of computing pro forma net income (loss), we estimate the fair value of
option grants using the Black-Scholes option pricing model. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable,
characteristics not present in our employee stock options. Additionally, option
valuation models require the input of highly subjective assumptions, including
the expected volatility of the stock price. Because our employee stock options
have characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimates, in management's opinion, the existing models may not
provide a reliable single measure of the fair value of its stock-based
awards.





For
purposes of the pro forma disclosures, the assumptions used to value the option
grants are stated as follows for the years ended December 31:





****
    
    **2004**
    
    **2003**
    
    **2002**Expected
      life (in years)
    
    
    3
    
    
    1 -
      3
    
    
    10Volatility
    
    
    65
      - 168
    %
    
    51
      - 174
    %
    
    40
    %Risk
      free interest rate—options
    
    
    3.86
      - 4.74
    %
    
    3.65
      - 4.31
    %
    
    4.24
      - 5.22
    %Dividend
      yield
    
    
    0.0
    %
    
    0.0
    %
    
    0.0
    %





***Recently
Issued Accounting Pronouncements***


In
November 2004, the FASB issued SFAS No. 151, *Inventory
Costs - an amendment of ARB No. 43, Chapter 4* , to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Provisions of this Statement are
effective for fiscal years ending after June 15, 2005 but early application is
permitted. Adoption of this Statement will not materially impact the Company’s
financial statements.





In
December 2004, the FASB issued SFAS No. 123R (Revised 2004), Share-Based
Payment, which requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements based on alternative
fair value models. The share-based compensation cost will be measured based on
the fair value of the equity or liability instruments issued. The Company
currently discloses pro forma compensation expense quarterly and annually by
calculating the stock option grants' fair value using the Black-Scholes model
and disclosing the impact on net income and net income per share in a Note to
the Consolidated Financial Statements. Upon adoption, pro forma disclosure will
no longer be an alternative. The table in Note 2 reflects the estimated impact
that such a change in accounting treatment would have had on our net income and
net income per share if it had been in effect during the three years ended
December 31, 2004. SFAS No. 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow
rather than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While the Company cannot estimate what those
amounts will be in the future, there were no such amounts recognized for 2004.
The Company will begin to apply SFAS No. 123R using the most appropriate fair
value model as of the interim reporting period ending September 30,
2005.





**NOTE
      3.**
    
    **BUSINESS
      COMBINATION**








On May
21, 2004, the Company acquired Enersyst Development Center, L.L.C. (“Enersyst”),
a leading provider and critical source of innovations to the food service
industry. Enersyst researches, develops and licenses patented technology that
enables food service equipment manufacturers to test, develop and provide
advanced products to the marketplace. Enersyst holds over 180 issued patents and
patent applications worldwide related to heat transfer, air impingement and
associated food technologies. As a result of this acquisition, the Company
believes it increased its leadership position in delivering the most advanced
innovations in speed cooking solutions to customers worldwide. The results of
Enersyst’s operations have been included in the consolidated financial
statements since the acquisition date.





Total
consideration for this transaction, $14.0 million, consisted of $7.7 million
cash, including transaction costs, and $6.3 million equity in the form of
Enersyst preferred membership units exchangeable in the future, at the
discretion of the holders, for 611,096 shares of TurboChef common stock. The
cash portion of the acquisition was paid with funds raised in a private
placement (see Note 10). Acquired developed technology has an estimated useful
life of 10 years and is being amortized using the straight-line method. Annual
amortization for each of the next five years will approximate $807,000. Total
goodwill recorded was $5.8 million, none of which is deductible for income tax
purposes.





F-15








The
following information summarizes the purchase price allocation (in thousands of
dollars):





Current
      assets
    
    $
    493Property
      and equipment
    
    
    20Developed
      technology
    
    
    8,070Goodwill
    
    
    5,808Current
      liabilities
    
    
    (357
    )Net
      assets acquired
    
    $
    14,034





The
following unaudited pro forma information presents the results of operations of
the Company as if the acquisition had occurred as of the beginning of the
immediately preceding period. The pro forma information is not necessarily
indicative of what would have occurred had the acquisitions been made as of such
periods, nor is it indicative of future results of operations. The pro forma
amounts give effect to appropriate adjustments for the fair value of the assets
acquired, amortization of intangibles and interest expense.





**2004**
    ****
    **2003****(In
      thousands except per share amounts)**Revenues
    
    $
    72,343
    
    $
    7,481Net
      income (loss)
    
    
    9,814
    
    
    (14,025
    )Net
      income (loss) applicable to common stockholders
    
    
    9,814
    
    
    (26,825
    )Net
      income (loss) applicable to common stockholders
      per
      share:Basic
    
    $
    0.73
    
    $
    (3.49
    )Diluted
    
    
    0.36
    
    
    (3.49
    )








**NOTE
      4.**
    
    **CONCENTRATION
      OF CREDIT RISKS**








The
Company is generally subject to the financial well being of the business of
commercial food service operators and related equipment; however, management
does not believe that there is significant credit risk with respect to trade
receivables. On March 8, 2004, the Company announced that it had reached
agreement with Subway Restaurants to be the exclusive supplier of rapid cook
ovens to more than 20,000 Subway ® franchisees worldwide. TurboChef commenced the system-wide delivery of ovens to
Subway ® restaurants in the U.S. during the third quarter of 2004. For the year ended
December 31, 2004, 91% of the Company’s sales were made to Subway. For the years
ended December 31, 2003 and 2002, respectively, 19% and 22% of the Company’s
direct sales were made to Subway. As of December 31, 2004, 83% of the
outstanding accounts receivable were from Subway, of which substantially all
were collected prior to January 31, 2005.








**NOTE
      5.**
    
    **PROPERTY
      AND EQUIPMENT**








Property
and equipment consisted of the following at December 31:





**2004**
    
    **2003****Estimated
      Useful Lives**
      **(years)**
    
    **(In
      thousands)**Leasehold
      improvements
    
    
    5
    
    $
    222
    
    $
    235Furniture
      and fixtures
    
    
    5
    
    
    579
    
    
    685Equipment
    
    
    3-7
    
    
    2,299
    
    
    3453,100
    
    
    1,265Less
      accumulated depreciation
    
    
    
    
    
    (422
    )
    
    (1,164
    )$
    2,678
    
    $
    101





Depreciation
expense was $355,000, $112,000, and $323,000 for the years ended December 31,
2004, 2003 and 2002, respectively.





F-16








**NOTE
      6.**
    
    **ACCRUED
      EXPENSES**








Accrued
expenses consisted of the following as of December 31:





**2004**
    ****
    ****
    **2003**Accrued
      compensation and benefits
    
    $
    1,889
    
    $
    371Professional
      and accounting fees
    
    
    557
    
    
    286Sales
      and marketing allowances
    
    
    94
    
    
    287Other
    
    
    595
    
    
    63Total
      accrued expenses
    
    $
    3,135
    
    $
    1,007








**NOTE
      7.**
    
    **ACCRUED
      WARRANTY AND UPGRADE COSTS**


The
Company generally provides a one-year parts and labor warranty on its ovens.
Provisions for warranty claims are recorded at the time products are sold and
are reviewed and adjusted periodically by management to reflect actual and
anticipated experience.





Pursuant
to the terms of the agreement under which the Company provides ovens to
Subway ® restaurants, the Company agreed to segregate the funds for estimated warranty
costs for the Subway ovens. The estimated warranty cost is deposited to a
separate account within 10 days of payment for the oven and withdrawals for the
cost of warranty parts and labor are made periodically, as incurred, up to the
amount initially deposited. Unexpended funds at the end of the warranty period
are retained by the Company. As of December 31, 2004, the amount of these
segregated funds totaled $3.2 million.





In
September 1999, the Company entered into an agreement to upgrade and provide an
extended warranty for 262 ovens installed for Whitbread Group PLC (“Whitbread”).
The oven upgrades were completed in February 2000. Through 2000, the Company
incurred $1.7 million for expenses of this program in excess of $1.4 million
received from Whitbread. No additional costs were incurred since 2000. In
February 2002, the Company and Whitbread agreed to terminate the September 1999
upgrade and extended warranty agreement. In exchange for release from its
warranty obligation, TurboChef was required to pay Whitbread £460,000
(approximately $670,000) plus VAT (value added tax). On signing the agreement,
TurboChef made an initial payment to Whitbread of £50,000 (approximately
$72,000) plus VAT and committed to pay the balance over the next 24 months. Upon
entering into this agreement, the Company recorded an adjustment to reduce the
warranty liability by $190,000, the amount by which the amount of the warranty
liability related to Whitbread exceeded the amount to be paid under the
agreement. The Company had not made any payments from November 2002 through
September 30, 2004 and was currently in default of the agreement. As a result of
the default, an estimated warranty liability of $190,000 was recorded as of
December 31, 2002. Other than a provision for the estimated effects of foreign
exchange, there had been no activity in the Company’s liability related to the
Whitbread agreement since 2002. In November 2004, the Company settled this
liability with Whitbread for £150,000 (or approximately $280,000).





An
analysis of changes in the liability for product warranty claims, including
amounts related to Whitbread, is as follows for the years ended December
31:





**2004**
    
    **2003**
    
    **2002****(In
      thousands)****Whitbread:**Balance
      at beginning of year
    
    $
    729
    
    $
    612
    
    $
    670Provision
      for warranties
    
    
    —
    
    
    —
    
    
    —Warranty
      expenditures, including final settlement
    
    
    (280
    )
    
    —
    
    
    (248
    )Adjustments
    
    
    (405
    )
    
    —
    
    
    190Currency
      fluctuations
    
    
    (44
    )
    
    117
    
    
    —Balance
      at end of year
    
    
    —
    
    
    729
    
    
    612**Other:**Balance
      at beginning of year
    
    
    199
    
    
    434
    
    
    368Provision
      for warranties
    
    
    3,296
    
    
    274
    
    
    290Warranty
      expenditures
    
    
    (909
    )
    
    (509
    )
    
    (224
    )Balance
      at end of year
    
    
    2,586
    
    
    199
    
    
    434**Total:**Whitbread
    
    
    —
    
    
    729
    
    
    612Other
    
    
    2,586
    
    
    199
    
    
    434Balance
      at end of year
    
    $
    2,586
    
    $
    928
    
    $
    1,046





F-17








**NOTE
      8.**
    **INCOME
      TAXES**








The
components of the provision for income taxes for the years ended December 31:





**2004**
    
    **2003**
    
    **2002**Current:Federal
    
    $
    205
    
    $
    —
    
    $
    —State
    
    
    96
    
    
    —
    
    
    —Total
      provision for income taxes
    
    $
    301
    
    $
    —
    
    $
    —








The
following is a reconciliation of the provision (benefit) for income taxes at the
U.S. federal income tax rate to the income taxes reflected in the statements of
operations for the years ended December 31:








**2004**
    
    **2003**
    
    **2002****(In
      thousands)**Expected
      income tax provision (benefit)
    
    $
    3,393
    
    $
    (4,879
    )
    $
    (2,273
    )State
      income tax, net of federal benefit
    
    
    66
    
    
    —
    
    
    —Other
    
    
    23
    
    
    2
    
    
    (20
    )Changes
      in deferred income tax asset valuation allowance
    
    
    (3,181
    )
    
    4,877
    
    
    2,293Provision
      for income taxes
    
    $
    301
    
    $
    —
    
    $
    —





The
components of the Company’s net deferred tax assets as of December 31, were as
follows:








**2004**
    
    **2003****(In
      thousands)**Deferred
      income tax assets:Warranty
      reserves
    
    $
    879
    
    $
    315Deferred
      revenue
    
    
    364
    
    
    364Basis
      difference of other current assets
    
    
    207
    
    
    278Total
      current deferred income tax assets
    
    
    1,450
    
    
    957Net
      operating loss carryforwards
    
    
    13,118
    
    
    17,031Basis
      difference of intangible assets
    
    
    1,817
    
    
    1,349Research
      and development credit carryforwards
    
    
    245
    
    
    245Federal
      alternative minimum tax credit carryforwards
    
    
    205
    
    
    —Basis
      difference of other long-term assets
    
    
    63
    
    
    42Total
      non-current deferred income tax assets
    
    
    15,448
    
    
    18,667Total
      gross deferred income tax assets
    
    
    16,898
    
    
    19,624Deferred
      income tax liabilities:Basis
      difference of long-term intangible asset
    
    
    (906
    )
    
    —Basis
      difference of other long-term assets
    
    
    (46
    )
    
    —Total
      gross deferred income tax liabilities
    
    
    (952
    )
    
    —Net
      deferred income tax asset
    
    
    15,946
    
    
    19,624Less
      deferred income tax asset valuation allowance
    
    
    (15,946
    )
    
    (19,624
    )Net
      deferred income tax assets
    
    $
    —
    
    $
    —





In
assessing the realizability of deferred income tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
income tax assets will not be realized. The ultimate realization of deferred
income tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. Due
to the historical operating results of the Company, management is unable to
conclude on a more likely than not basis that the deferred income tax assets
will be realized. Accordingly, the Company recorded a valuation allowance equal
to 100% of the net deferred income tax assets at December 31, 2004 and 2003,
respectively.





F-18








The
provision for income taxes in 2004 was $301,000 and consists of estimated
Federal Alternative Minimum Tax and estimated state and local taxes. This tax
provision is an effective tax rate of 3% and reflects utilization of
approximately $9.4 million in operating losses carried forward from prior years
which reduced our taxable income in 2004. At
December 31, 2004, the Company has net operating loss carryforwards for federal
income tax purposes of $38.6 million, which may be used against future taxable
income, if any, and which expire in years 2009 to 2023. Additionally, the
Company has $3.2 million in income tax deductions related to stock option
exercises the tax effect of which will be reflected as a credit to additional
paid-in capital when realized. In October 2003 a change in ownership took place
(Note 9), which for income tax purposes under Internal Revenue Code Section 382,
limits the annual utilization of the $38.6 million loss carryforwards and could
cause some amount of the carryforwards to expire before they are utilized. The
Company has federal alternative minimum tax credit carryforwards of $205,000,
which may be used to offset future federal tax liability, if
any.





The
Company also has research and development credit carryforwards of approximately
$245,000, which may be used to offset future federal tax liability, if any. Such
credit also may be subject to limitations.








**NOTE
      9.**
    
    **PRIVATE
      PLACEMENT OF SERIES D PREFERRED STOCK AND RELATED
      EVENTS**








On
October 28, 2003, the Company completed a private placement of 2,132,650 shares
of its Series D Convertible Preferred Stock, par value $1.00 per share (the
“Series D Preferred Stock”) to OvenWorks, LLLP (“OvenWorks”) and to certain
other investors for whom OvenWorks served as nominee. At the time of issuance,
the shares of Series D Preferred Stock issued in the private placement were
convertible into an aggregate of 14,217,667 shares of the Company’s common
stock, which represented approximately 58% of the Company’s total equity on a
fully diluted, as converted basis (i.e. assuming that all outstanding options,
warrants and other rights for the purchase of common stock would have been
exercised, and all outstanding shares of all series of the Company’s preferred
stock, including the Series D Preferred Stock, would have been converted into
common stock). Net proceeds to the Company of $12.6 million were used to satisfy
existing obligations and to fund the Company’s working capital needs, including
product development and manufacturing, sales and marketing and other general
corporate purposes.







OvenWorks
is a Georgia limited liability limited partnership of which Oven Management,
Inc., a Georgia corporation controlled by Richard E. Perlman, serves as the
general partner. OvenWorks’ funding for purchase of the Series D Preferred Stock
was obtained through the sale of interests in OvenWorks, LLLP to individual
investors.





In
connection with the private placement, Messrs. Bogatin and Gogel, the Company’s
former Chairman and a member of the board resigned from their board and officer
positions and the Company appointed new officers and directors.





Shares of
the Series D Preferred Stock ranked senior to all other classes of stock of the
Company as to liquidation, dividends, redemption and other payments or
distributions. Holders of Series D Preferred Stock also had redemption rights
(to the extent they were unable to convert all or part of their shares to common
stock of the Company at December 31, 2004), preemptive rights, and demand and
piggy-back registration rights with respect to their shares. Holders of Series D
Preferred Stock were entitled to vote as a class in connection with certain
matters, were generally entitled to vote together with the holders of the
Company’s common stock on an as converted basis, and were also entitled to elect
two-thirds of the members of the Company’s Board of Directors.





At
December 31, 2003, the Company did not have enough shares of authorized but
unissued common stock to permit conversion of all of the shares of Series D
Preferred Stock. Accordingly, the Series D Preferred Stock was considered
redeemable preferred stock until a formal proxy statement was filed to approve
the authorization of additional shares of the Company’s common stock. Therefore,
at December 31, 2003, the Company recorded $12.6 million; the aggregate
consideration paid for such shares, as mezzanine equity.





The
shares of Series D Preferred Stock were immediately convertible, and such shares
also had beneficial conversion characteristics. In accordance with the guidance
of Emerging Issues Task Force (“EITF”) No. 98-5, *Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios,* and No.
00-27, *Application of Issue No. 98-5 to Certain Convertible
Instruments,* the
Company recorded $12.6 million as a deemed dividend representing the estimated
value of the beneficial conversion feature.





As of
December 31, 2004, all of the Series D Preferred Stock had been converted into
common stock.





In
connection with the private placement, Messrs. Bogatin and Gogel agreed to a
general 18-month prohibition on the transfer of their shares of capital stock of
the Company, and to a right of first refusal in favor of the Company and
OvenWorks, subject to a monthly trading allowance based on the average daily
trading volume of the Company’s common stock. Messrs. Bogatin and Gogel also
entered into voting agreements pursuant to which they agreed to vote all their
shares of the Company’s common stock in favor of, among other things, any
proposal to amend the Company’s Certificate of Incorporation to increase the
amount of the Company’s authorized capital stock. Additionally, Mr. Gogel
exercised his right to convert all of his shares of the Company’s Series C
Preferred Stock, plus all accrued and unpaid dividends thereon, into 267,855
shares of the Company’s common stock. Further, Messrs. Bogatin and Gogel have
each entered into a non-competition agreement and a release agreement in favor
of the Company in consideration for which they received an aggregate of 811,111
and 122,223 shares of the Company’s common stock, respectively. The $5.6 million
fair value of the shares issued for the non-compete agreements and the release
agreements was deemed compensation with no benefit to future periods and is
included in compensation and severance related to termination of former officers
and directors in the statement of operations for the year ended December 31,
2003.





Prior to
the private placement, Messrs. Bogatin and Gogel agreed to the termination of
all of their outstanding options to purchase the Company’s common stock.
Additionally, the Company agreed to cancel the obligations of Messrs. Bogatin
and Gogel to pay the Company $2.0 million and $100,000, respectively, under
certain promissory notes delivered by them to the Company in connection with
their exercise of stock options in 1999 and 2000. In return, Messrs. Bogatin and
Gogel agreed to the cancellation of the 266,667 and 13,333 shares respectively,
of the Company’s common stock acquired by them in connection with such option
exercises. The transactions resulted in a $916,000 compensation charge which is
also included in compensation and severance related to termination of former
officers and directors in the statement of operations for the year ended
December 31, 2003.







In
connection with the appointment of new officers and directors resulting from the
private placement transaction, the Company also terminated the employment of two
other former officers. The terms of the severance arrangements entered into
included a commitment for future cash payments and, for one former officer, a
grant of options to purchase 66,667 shares of the Company’s common stock at less
than fair market value





F-19





at the
grant date and, for the other former officer, modifications of vesting for
options previously granted. These transactions resulted in a compensation charge
which, together with the cash severance, aggregated $1.1 million and is included
in compensation and severance related to termination of former officers and
directors in the statement of operations for the year ended December 31,
2003.





In
connection with the private placement, the Company also entered into a
Settlement and Release Agreement with Grand Cheer, a principal stockholder of
the Company and the holder of the Company’s promissory note which was in
default. The agreement provided resolution of all claims under the note and
under its terms Grand Cheer exercised its rights to convert all of its shares of
the Company’s Series B Preferred Stock, plus all accrued and unpaid dividends
thereon, into 674,995 shares of the Company’s Common Stock and agreed to reduce
from 333,333 to 266,667 the number of shares of the Company’s common stock
issuable upon exercise of warrants held by Grand Cheer and the Company agreed to
pay Grand Cheer $1.2 million in cash from the proceeds of the transaction, and
issue to Grand Cheer 217,429 shares of its Common Stock. Grand Cheer also
entered into a voting agreement granting its irrevocable proxy with respect to
certain transactions to the investor in the private placement. On November 4,
2003 the Company paid Grand Cheer $1.2 million to settle its obligations under
the note. The $1.1 million fair value of the aggregate consideration in the
exchange in excess of the face value of the obligation was recorded as interest
and debt extinguishment costs in the statement of operations for the year ended
December 31, 2003.





Additionally,
in connection with the private placement, the Company entered a Settlement,
Release Agreement and Third Amendment to a certain manufacturing agreement,
which was in default, to resolve potential claims and reduce the monthly
purchase commitment. Pursuant to this agreement the Company agreed to make a
payment of $244,000 in full satisfaction of all amounts then due under the
agreement. In exchange, the Company was released from any claims which may have
existed as of the signing of the release agreement and the monthly minimum
purchase requirement of ovens that the Company must make was
reduced.








**NOTE
      10.**
    
    **STOCKHOLDERS’
      EQUITY**





***Reverse
Stock Split***


On
December 27, 2004, the Company effected a one-for-three reverse stock split. The
par value and number of authorized shares of Common Stock was not changed as a
result of this reverse stock split. All references to common stock, weighted
average number of common shares outstanding and per share amounts prior to the
effective date of the reverse stock split have been retroactively restated to
reflect the one-for-three reverse stock split.





***Stock
Option Plans***


The
Company has stock option plans that provide for the grant of incentive and
nonqualified options to purchase the Company’s stock to eligible officers, key
employees, directors and consultants. These plans include the 1994 Stock Option
Plan (the “1994 Plan”) and 2003 Stock Incentive Plan (the “2003 Plan”). The 1994
Plan, as amended, provided that an aggregate of 2,550,000 shares of the
Company’s common stock be reserved for grants to eligible participants. The 2003
Plan, as amended, reserved up to 3,333,333 shares of the Company’s common stock
for issuance to eligible participants. Options awarded under these plans (i) are
generally granted at exercise prices equal to or above quoted market prices on
the dates of the grant; (ii) generally become exercisable over a period of one
to four years; and (iii) generally expire seven or ten years subsequent to
award. At December 31, 2004, there was an aggregate maximum of 1.8 million
shares available for grant under both of these plans.




A summary
of stock option activity follows:





**Number of**
      **Shares**
    
    
    **Weighted**
      **Average**
      **Exercise**
      **Price**Options
      outstanding at January 1, 2002
    
    
    1,069,722
    
    $
    11.55Options
      granted
    
    
    380,378
    
    
    2.88Options
      exercised
    
    
    (12,111
    )
    
    3.99Options
      expired or canceled
    
    
    (39,472
    )
    
    12.42Options
      outstanding at December 31, 2002
    
    
    1,398,517
    
    $
    9.24Options
      granted
    
    
    2,262,128
    
    
    5.40Options
      exercised
    
    
    (33,615
    )
    
    2.58Options
      expired or canceled
    
    
    (732,057
    )
    
    11.01Options
      outstanding at December 31, 2003
    
    
    2,894,973
    
    $
    5.91Options
      granted
    
    
    673,333
    
    
    10.62Options
      exercised
    
    
    (274,363
    )
    
    4.01Options
      expired or canceled
    
    
    (172,317
    )
    
    8.01Options
      outstanding at December 31, 2004
    
    
    3,121,626
    
    $
    6.97Options
      exercisable at December 31, 2002
    
    
    864,738
    
    $
    11.82Options
      exercisable at December 31, 2003
    
    
    757,973
    
    $
    6.78Options
      exercisable at December 31, 2004
    
    
    1,246,848
    
    $
    6.53








F-20








The
following table summarizes information about the Company’s stock options
outstanding at December 31, 2004:





****
    ****
    ****
    ****
    **Options
      Outstanding**
    ****
    **Weighted**
      **Average**
      **Exercise
      Price**
    ****
    **Options
      Exercisable****Range
      of Exercise Prices**
    ****
    ****
    ****
    **Outstanding
      as**
      **of
      December 31,**
      **2004**
    ****
    **Weighted
      Average Remaining**
      **Contractual
      Life**
    ****
    ****
    ****
    **Exercisable
      as of**
      **December
      31, 2004**
    ****
    **Weighted
      Average**
      **Exercise
      Price**$0.93-$5.03
    
    
    
    
    410,487
    
    
    
    6.24
    
    
    $
    2.80
    
    
    
    377,154
    
    
    $
    2.96$5.04-$7.31
    
    
    
    
    1,630,000
    
    
    
    8.79
    
    
    $
    5.25
    
    
    
    596,333
    
    
    $
    5.24$7.32-$10.25
    
    
    
    
    845,556
    
    
    
    9.14
    
    
    $
    9.42
    
    
    
    144,445
    
    
    $
    8.37$10.26-$28.50
    
    
    
    
    235,583
    
    
    
    5.52
    
    
    $
    17.32
    
    
    
    128,916
    
    
    $
    20.893,121,626
    
    
    
    8.30
    
    
    $
    6.97
    
    
    
    1,246,848
    
    
    $
    6.53








In
addition, the Company grants, from time to time, non-plan stock options. The
following table summarizes all option grants outside of the 1994 Plan. No option
grants have been made outside of the 2003 Plan.


**Grant
      Year**
    
    **Shares
      Granted**
    
    **Exercise
      Price**
    
    **Remaining
      Life**
      **(in
      years)**
    
    **Shares
      Exercisable as**
      **of
      December 31, 2004**1995
    
    
    87,500
    
    
    $
    7.50
    
    
    
    1.00
    
    
    
    87,5001995
    
    
    7,000
    
    
    $
    27.00
    
    
    
    1.25
    
    
    
    7,000





Compensation
expense relating to these options in the amount of $12,000 was recorded in 2002
and is included in selling, general and administrative expense in the Company’s
statement of operations.





In 2003,
the Company recorded compensation expense of $255,000 included in selling,
general and administrative expense in connection with options given in payment
for consulting services. The number of shares of common stock which can be
purchased under these grants aggregated 50,000 exercisable at $5.25. These
options expire in 2013. None of these options have been exercised.





In 2004,
the Company recorded compensation expense of $113,000 included in selling,
general and administrative expense in connection with options given in payment
for consulting services. The number of shares of common stock which can be
purchased under these grants were 3,334 and 8,333 exercisable at $9.30 and
$14.25, respectively. These options expire in 2014. As of December 31, 2004,
none of these options have been exercised.





***Stock
Issuances***


In April
2002, the Company issued 19,328 and 11,176 shares of common stock as payment of
accrued dividends on the Company’s Series B and Series C convertible preferred
stock, respectively.





In April
2003, the Company issued 80,158 and 40,079 shares of common stock as payment of
accrued dividends on the Company’s Series B and Series C convertible preferred
stock, respectively.





In
October 2003, the Company issued 92,347 and 45,314 shares of common stock as
payment of accrued dividends on the Company’s Series B and Series C convertible
preferred stock, respectively.





In 2003,
the Company issued an aggregate of 45,000 shares of common stock in exchange for
services. The fair value of these shares totaled $132,250 and the Company
included this compensation charge in selling, general and administrative
expense.





In May
2004, the Company completed a private placement of 1,151,209 shares of common
stock for aggregate consideration of $10.0 million, or $8.70 per share. A
portion of the proceeds from the private placement was used to finance
TurboChef’s acquisition of Enersyst (see Note 3) with the remainder to be used
for working capital and other general corporate purposes.





On
February 8, 2005, (Note 16) the Company closed a public offering of 5,000,000
shares of its common stock at $20.50 before discounts and commissions to
underwriters and other offering expenses. Of the shares sold, 2,925,000 were
sold by the Company and 2,075,000 were sold by certain selling shareholders. The
Company plans to use the net proceeds to finance the development and
introduction of residential ovens, to pursue possible acquisitions or strategic
investments and for working capital and other general corporate
purposes.





***Stock
Warrants***


In March
2001, the Company issued investor warrants to purchase 333,333 shares of common
stock at $3.60 per share, in connection with the sale of its Series B
Convertible Preferred Stock. These warrants were exercisable in three equal
annual installments, commencing one year from the date of issuance and expire in
2011. These warrants were valued at $380,000 and were recorded in stockholders’
equity in the accompanying financial statements. In October 2003 and as
described in Note 9, these warrants were modified to reduce the number of
warrants to 266,667 in conjunction with a settlement with the investor. The fair
value ascribed to this modification was $400,000 and is included as a reduction
in interest and debt extinguishment costs related to the overall Grand Cheer
settlement.





In June
2001, the Company issued investor warrants to purchase an additional 104,167
shares of common stock at $3.00 per share, in connection with the sale of
208,333 shares of common stock. These warrants vest ratably over three years.
These warrants were valued at $158,000 at issuance and are recorded in
stockholders’ equity in the accompanying financial statements. These warrants
were exercised in March 2004.





In August
2001, the Company converted a $1.0 million convertible note into its Series C
Convertible Preferred Stock. A total of 132,275 warrants to purchase the
Company’s common stock at $4.53 per share were issued along with the preferred
stock. These warrants vest ratably over three years. These warrants were valued
at $235,000 at issuance and are recorded in stockholders’ equity in the
accompanying financial statements.





F-21








In
October 2001, the Company issued investor warrants to purchase an additional
83,333 shares of common stock at $6.75 per share, in connection to the sale of
83,333 shares of common stock. The warrants are exercisable immediately and
expire in 2011. These warrants were valued at $489,000 at issuance and are
recorded in stockholders’ equity in the accompanying financial
statements.





In
connection with the sale of 349,941 shares of common stock in December 2001, the
Company issued warrants to purchase an additional 27,995 shares and 30,986
shares of common stock at $12.30 and $16.02 per share, respectively. The
warrants are exercisable immediately and expire in 2006. These warrants were
valued at $230,000 at issuance and are recorded in stockholders’ equity in the
accompanying financial statements. The 27,995 warrants with a per share price of
$12.30 were exercised in December 2004.





In
December 2002, the Company issued 83,333 warrants to purchase common stock at
$3.09 per share in connection with an agreement with Bank of America to assist
in raising capital for the Company. The warrants are exercisable immediately and
expire in December 2007. These warrants were valued at $72,000 at issuance and
are recorded in stockholders’ equity in the accompanying financial statements.
These warrants were exercised in January 2004.





At
December 31, 2004, warrants remained outstanding for purchase of an aggregate of
529,928 shares of the Company’s common stock.





**NOTE
      11.**
    
    **RELATED-PARTY
      TRANSACTIONS**





In July
2002, the Company issued a non-interest bearing promissory note in the amount of
$1.0 million to Grand Cheer Company Limited, a principal stockholder of the
Company, which was secured by proceeds from sale of 350 ovens. All of the ovens
were sold and cash received but no payment was made to Grand Cheer. The note was
due on October 15, 2002. The note provided that if the Company did not repay the
note in full by October 15, 2002, all remaining unvested warrants (222,222
warrants) previously issued to Grand Cheer would immediately vest. In connection
with issuance of the note, the Company incurred a non-cash finance charge of
$200,000 which was payable by offsetting the exercise price of the 333,333
warrants previously issued to Grand Cheer upon its purchase of the Company’s
Series B Convertible Preferred Stock. The $200,000 finance charge was recorded
as interest expense during the third quarter of 2002.





In
connection with the foregoing transaction, a question arose as to whether
Jeffrey B. Bogatin, Chairman at the time, or a member of his family had a direct
or indirect ownership interest in or control of Grand Cheer, a Hong Kong company
which is a principal stockholder and creditor of the Company. Mr. Bogatin had an
outside business relationship with a principal of Grand Cheer. Mr. Bogatin
provided the Company with an affidavit stating that neither he nor any member of
his family nor any entity in which any of them had an interest (i) in the past
had any direct or indirect interest in or beneficial ownership of Grand Cheer,
(ii) in the past has been an affiliate of Grand Cheer, (iii) in the past held
any director, executive or officer position with Grand Cheer or (iv) was in a
position to influence the day-to-day business operations of Grand Cheer. In
addition, Grand Cheer represented to the Company that Mr. Bogatin had not held
any direct or indirect interest in Grand Cheer and had not held any director,
executive, officer or other control position in Grand Cheer. If Mr. Bogatin had
been determined to have an interest in or control of Grand Cheer, the investment
in the Company and loan made to the Company by Grand Cheer, which had been
negotiated on behalf of the Company by Mr. Bogatin, would not have been arm’s
length transactions. In addition, if Mr.
Bogatin had been deemed to beneficially own the securities of the Company held
by Grand Cheer, Mr. Bogatin’s ownership as reflected in the table included under
“Item 2. Security Ownership of Certain Beneficial Owners and Management,” would
not have been accurately reflected in the Company’s 2002 Annual Report on Form
10-K. This matter was reviewed by the Audit Committee of the Company at the time
which determined that future transactions with Grand Cheer, including any
amendment or modification to the loan, would be subject to their approval. As
described in Note 9, the Grand Cheer loan was paid in full and the Company
settled all its related obligations thereunder in connection with the October
2003 private placement transaction.





In April
2001, the Company raised $1.0 million through the issuance of an 8%
Non-Negotiable Promissory Note due April 20, 2003 from Donald J. Gogel, at the
time a director of the Company. The entire outstanding principal amount of this
note was to be converted into preferred stock of the Company upon the approval
of the stockholders. This was approved by the stockholders of the Company in
August 2001 and the note was converted into Series C Convertible Preferred
Stock. In addition, the Company issued 132,275 warrants to purchase shares of
its common stock. The warrants have a term of 10 years at an exercise price of
$4.53 per share and were valued at $190,000. This amount was treated as
unamortized discount charged to interest expense. Each share of the preferred
stock has (i) a liquidation value of $300 per share, (ii) is entitled to a
dividend of $24.00 per share, payable semi-annually in cash or in shares of the
common stock at the then fair market value and are (iii) convertible into shares
of Common Stock at a conversion price of $3.78. As described in Note 8, these
securities were converted into common stock in connection with the October 2003
private placement transaction.








**NOTE
      12.**
    
    **COMMITMENTS
      AND CONTINGENCIES**





The
Company is obligated under certain non-cancelable leases for office space and
equipment. Certain obligations under these non-cancelable leases are secured
with stand-by letters of credit totaling $312,000 and expiring in less than one
year. Obligations for office space, which extends beyond one year, are
$669,000, $998,000, $1.0 million, $1.0 million, $933,000 and $1.7 million in
2005, 2006, 2007, 2008, 2009 and thereafter, respectively. Rent expense for each
of the years ended December 31, 2004, 2003 and 2002 was $473,000, $271,000 and
$407,000, respectively.





The
Company terminated an agreement with a manufacturing outsourcing partner in
December 2004 and is in the process of negotiating a final settlement related to
certain outstanding matters. The Company is unable to determine the outcome of
such negotiations at this time. However the Company does not believe it will
result in a significant negative impact to the results of operations, when
settled.


F-22








**NOTE
      13.**
    
    **LITIGATION**





*Maytag
Corporation*





TurboChef
filed for arbitration against Maytag Corporation in Dallas, Texas, on February
2, 2001, in connection with a series of contracts for research, development and
commercialization of certain technology through a joint, strategic relationship.
After a stay of the proceedings pending settlement discussions, the Company’s
third amended claim was submitted on May 6, 2004 and a fourth amendment on March
4, 2005. The amended claims include claims for substantial damages for breach of
those contracts, specific performance of those contracts, fraud, theft of trade
secrets, breach of fiduciary duty, usurpation of corporate opportunity,
correction of inventorship, punitive damages and attorneys’ fees. They also seek
an injunction and equitable assignment of ownership which would require Maytag
to return all rights in all intellectual property owned by us under those
contracts.





Maytag
has not yet responded to the Company’s amended claims. Earlier, on July 17,
2002, Maytag filed an answer and counterclaim in response to our second amended
claim, in which Maytag denied our allegations. In its July 17, 2002
counterclaim, Maytag alleges breach of the above-referenced contracts and fraud,
and seeks damages in excess of $35 million. We believe that these counterclaims
by Maytag are without merit, and we intend to vigorously defend against Maytag’s
allegations. The arbitrators issued a scheduling order that contemplates a final
hearing on all claims in late May and June 2005.





In May
2002, Maytag filed a complaint in Iowa federal court seeking, among other
things, to require that two of our claims originally filed and pending in the
Texas arbitration be decided only in a separate arbitration proceeding in
Boston, Massachusetts. Maytag’s complaint in the Iowa proceeding also alleges
that in a January 2002 press release (and in certain other unidentified
statements) we publicized false and misleading statements about Maytag’s use of
our intellectual property in its residential appliances. Based upon this
allegation, Maytag asserts claims that we caused false advertising with respect
to Maytag’s goods and services, that we have intentionally interfered with
Maytag’s prospective business, that we have defamed Maytag and that we have
unfairly competed with Maytag. Unlike Maytag’s counterclaims in the Texas
arbitration proceeding, its complaint in the Iowa proceeding does not specify
the dollar amount of damages sought. In July 2002, we filed a motion to dismiss
the Maytag complaint or, in the alternative, stay the Iowa proceeding pending
resolution of the Texas arbitration. On July 30, 2002, Maytag filed a Motion for
Leave to File First Amended Complaint adding a claim that we failed to pay a
promissory note in the amount of $327,478. On January 6, 2003, the Federal Court
in the Iowa proceeding granted a summary judgment against us on the claim
related to the promissory note, in the amount of $359,372. In March 2004, we
tendered full payment of the amount of the summary judgment. In addition, on
December 23, 2002, the Federal Court issued an order staying indefinitely the
remainder of Maytag’s claims in the Iowa proceeding, pending the final
resolution of the Texas arbitration. Thus, we do not expect further prosecution
of the Iowa proceeding until after the Texas arbitration is
concluded.





Maytag
has also initiated arbitration against us in Boston, claiming damages in excess
of $1.3 million for failure to pay for ovens. Our financial statements include
accounts payable of approximately $1.4 million in connection with this claim. We
have filed a counterclaim alleging that Maytag breached its warranty and
committed fraud and that we have been damaged in an amount in excess of $1.5
million. We believe that these claims by Maytag are without merit, and we intend
to vigorously defend against Maytag’s allegations. We have agreed to a
scheduling order with Maytag that contemplates a hearing in the Boston
arbitration sometime after the hearing on the Texas arbitration, in
2005.





The
outcome of any litigation is uncertain and an unfavorable outcome could have a
material adverse effect on our operating results and future operations. Since
the outcomes of the arbitration proceedings are uncertain, no adjustments have
been made to the financial statements





*Duke
Manufacturing Co.*





Our
subsidiary, Enersyst Development Center, LLC, was engaged in arbitration with
Duke Manufacturing Co. relating to Enersyst’s termination of Duke’s license to
use Enersyst technology as a result of Duke’s failure to make required payments
under the license agreement. Duke was seeking reinstatement of the license
agreement and related monetary damages. The final arbitration hearing has been
conducted, and the arbitration panel has rejected Duke’s claims, upheld
Enersyst’s termination of the license and awarded Enersyst approximately $66,000
in damages.





Additionally,
on January 26, 2005, Duke filed a complaint against TurboChef in federal
district court in St. Louis, Missouri, but we have not been served. The
complaint seeks a declaration that Duke’s speed cook oven products do not
violate two of our patents relating to the use of catalytic converters, and that
those patents are invalid. Duke’s complaint provides no substantiation for its
claims, and we therefore are unable to evaluate the factual or legal basis for
them. We intend to vigorously defend against these claims if and when properly
served. An adverse outcome could have an adverse effect on our operating
results, future operations and competitive position. The outcome of this
proceeding is uncertain, and an unfavorable outcome could have an adverse effect
on our operating results and future operations. Because the outcome of this
proceeding is uncertain, we have made no corresponding adjustments to our
financial statements.





We also,
from time to time, are party to various other legal proceedings that arise in
the ordinary course of our business.





F-23

























**NOTE
      14.**
    
    **QUARTERLY
      FINANCIAL INFORMATION (UNAUDITED)**





Unaudited
quarterly financial information follows (in thousands except per share
data):





2004
    
    First
    
    Second
    
    Third
    
    Fourth
    
    Fiscal
      YearTotal
      revenues
    
    $
    946
    
    $
    2,420
    
    $
    31,006
    
    $
    36,522
    
    $
    70,894Gross
      profit
    
    
    499
    
    
    1,246
    
    
    11,704
    
    
    13,398
    
    
    26,847Net
      (loss) income available to common
      stockholders
    
    
    (1,946
    )
    
    (2,261
    )
    
    6,419
    
    
    7,467
    
    
    9,679Basic
      (loss) income per share
    
    $
    (0.23
    )
    $
    (0.24
    )
    $
    0.64
    
    $
    0.35
    
    $
    0.79Number
      of shares used in the computation
      of
      basic (loss) income per share
    
    
    8,615,656
    
    
    9,258,823
    
    
    9,987,607
    
    
    21,098,010
    
    
    12,256,686Diluted
      (loss) income per share
    
    $
    (0.23
    )
    $
    (0.24
    )
    $
    0.24
    
    $
    0.27
    
    $
    0.37Number
      of shares used in the computation
      of
      diluted (loss) income per share
    
    
    8,615,656
    
    
    9,258,823
    
    
    26,676,983
    
    
    27,201,127
    
    
    26,142,101








**2003**
    ****
    **First**
    ****
    **Second**
    ****
    **Third**
    ****
    **Fourth**
    ****
    **Fiscal
      Year**Total
      revenues
    
    $
    1,775
    
    $
    547
    
    $
    507
    
    $
    861
    
    $
    3,690Gross
      profit
    
    
    872
    
    
    239
    
    
    268
    
    
    365
    
    
    1,744Net
      loss available to common
      Stockholders
    
    
    (972
    )
    
    (1,700
    )
    
    (638
    )
    
    (23,839
    )
    
    (27,149
    )Basic
      and diluted loss per share
    
    $
    (0.15
    )
    $
    (0.26
    )
    $
    (0.10
    )
    $
    (3.03
    )
    $
    (3.99
    )Number
      of shares used in the
      computation
      of loss per share
    
    
    6,354,178
    
    
    6,473,080
    
    
    6,473,080
    
    
    7,865,563
    
    
    6,797,575








**NOTE
      15.**
    
    **REVENUE
      BY GEOGRAPHIC AREA**








The
Company currently derives primarily all its revenues from the sale of ovens. The
Company does not have significant assets outside the United States. Revenues by
geographic region for each of the three years ended December 31, 2004 is as
follows:





**REGION**
    
    **2004**
    
    **2003**
    
    **2002****(In
      thousands)**North
      America
    
    $
    69,182
    
    $
    2,096
    
    $
    3,576Europe
      and Asia
    
    
    1,712
    
    
    1,594
    
    
    2,079Totals
    
    $
    70,894
    
    $
    3,690
    
    $
    5,655








**NOTE
      16.**
    
    **SUBSEQUENT
      EVENTS**





On
February 8, 2005, the Company closed a public offering of 5,000,000 shares of
its common stock at $20.50 before discounts and commissions to underwriters and
other offering expenses. Of the shares sold, 2,925,000 were sold by the Company
and 2,075,000 were sold by certain selling shareholders. The Company plans to
use the net proceeds to finance the development and introduction of residential
ovens, to pursue possible acquisitions or strategic investments and for working
capital and other general corporate purposes.





On
February 28, 2005, the Company entered into a Credit Agreement with Bank of
America, N.A. (the “Credit Agreement”). The Credit Agreement allows TurboChef to
borrow up to $10 million at any time under the revolving credit facility, based
upon a portion of TurboChef’s eligible accounts receivable. The Credit Agreement
also provides for a letter of credit facility within the credit limit. Revolving
credit loans under the Credit Agreement bear interest at a rate of the British
Bankers Association LIBOR Rate plus 3.50% unless for certain reasons Eurodollar
Rate Loans are unavailable, then at a rate in an amount of 2.50% over the higher
of the Federal Funds Rate plus 0.5% and Bank of America’s prime rate. The
Company’s obligations under the Credit Agreement would be secured by
substantially all of the assets of TurboChef and its subsidiaries. The Credit
Agreement contains customary affirmative and negative covenants and acceleration
provisions. The credit commitment expires on February 28, 2006, and any
outstanding indebtedness under the Credit Agreement would be due on that date.
TurboChef has not borrowed under the Credit Agreement.





As of
March 1, 2005, the Company had exchanged Enersyst preferred membership units
into 517,531 shares of common stock and has 93,565 shares remaining available
under the exchange.





F-24