##### Table of Contents



UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    January 1, 2007ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission File
    No. 000-50052
  Cosi, Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

06-1393745(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)   1751 Lake Cook Road, Suite 600, Deerfield, Illinois
    60015
 Telephone Number
    (847) 597-8800
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Class
    Securities registered pursuant to Section 12(g) of the
    Act:
    None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K.  Yes o þ
  Rule 12b-2  o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K




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##### Table of Contents



TABLE OF
    CONTENTS
  Item

Description

PagePART I1.


Business


31A.


Risk
    Factors


71B.


Unresolved Staff
    Comments


162.


Properties


163.


Legal
    Proceedings


194.


Submission of
    Matters to a Vote of Security Holders


19PART II5.


Market for
    Registrants Common Equity, Related Stockholder Matters,
    and Issuer Purchases of Equity Securities


196.


Selected Financial
    Data


227.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


237A.


Quantitative and
    Qualitative Disclosures about Market Risk


358.


Financial
    Statements and Supplementary Data


359.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


359A.


Controls and
    Procedures


359B.


Other
    Information


36PART III10.


Directors,
    Executive Officers and Corporate Governance of the
    Registrant


3611.


Executive
    Compensation


3712.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Matters


3713.


Certain
    Relationships, Related Transactions and Director
    Independence


3714.


Principal
    Accounting Fees and Services


37PART IV15.


Exhibits and
    Financial Statement Schedules


37  2




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PART I  Item 1.
    BUSINESS  General
      www.getcosi.com. Form 10-K, Form 10-Q, Form 8-K
  Recent
    Developments
    Business
    Strategy
      Offering an innovative menu appealing to our target
    customer. made-to-order
 3




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Providing customers with an exceptional service and dining
    experience.
  Expanding marketing initiatives to build brand
    awareness.
  Increasing comparable restaurant sales and average unit
    volumes.
  Operating our restaurants efficiently.
  Growth
    Strategy
    Continue to develop company-owned
    restaurants:
  Build a system of franchised restaurants. multi-unit
  Pursue foodservice strategic alliances.
  Cosi
    Product Offerings
      People
   4




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Restaurant
    Operations
  Management Structure.
  Sales Forecasting.
  Product Quality.
  Food and Labor Cost Controls. item-by-item
  multi-unit
    day-to-day
  Management
    Information Systems
  up-to-date
  point-of-sale
  back-ups,
 5




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Purchasing
      Coca-Cola
      Competition
    Intellectual
    Property
       6




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Governmental
    Regulation
    and/or
      Item 1A.
    RISK
    FACTORS  Risks
    Related to Our Growth Strategy
  We may
    not be able to achieve our planned expansion. If we are unable
    to successfully open new restaurants, our revenue growth rate
    and profits may be reduced.
    
    locating suitable restaurant sites in new and existing markets;
    negotiating acceptable lease terms;
    generating positive cash flow from existing and new restaurants; 7




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
    successful operation and execution in new and existing markets;
    recruiting, training and retaining qualified corporate and
    restaurant personnel and management;
    attracting and retaining qualified franchisees;
    cost effective and timely planning, design and build-out of
    restaurants;
    the reliability of our customer and market studies;
    the reliability of our site identification studies;
    consumer trends;
    obtaining and maintaining required local, state, federal and
    where applicable, foreign governmental approvals and permits
    related to the construction of the sites and the sale of food
    and alcoholic beverages;
    creating customer awareness of our restaurants in new markets;    
    competition in our markets, both in our business and in locating
    suitable restaurant sites;
    the cost of our principal food products and supply and delivery
    shortages or interruptions;
    weather conditions; and
    general economic conditions.  We
    must identify and obtain a sufficient number of suitable new
    restaurant sites for us to sustain our revenue growth
    rate.
    Our
    expansion in existing markets can cause sales in some of our
    existing restaurants to decline, which could result in
    restaurant closures.
    Our
    expansion into new markets may present increased risks due to
    our unfamiliarity with the area. The restaurants we open in new
    geographic regions may not achieve market
    acceptance.
   8




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We may
    not be able to successfully incorporate a franchising and area
    developer model into our strategy.
    If our
    franchisees cannot develop or finance new restaurants, build
    them on suitable sites or open them on schedule, our growth and
    success may be impeded.
    Additional
    foodservice strategic alliances may not be successful and may
    materially adversely affect our business and results of
    operations.
    Any
    inability to manage our growth effectively could materially
    adversely affect our operating results.
   9




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If we
    are unable to successfully integrate future acquisitions, our
    business could be negatively impacted. Any acquisitions may also
    be costly.
    Risks
    Related to Our Business
  If we
    are unable to execute our business strategy, we could be
    materially adversely affected.
    
    our ability to generate positive cash flow from operations;
    identification and availability of suitable restaurant sites;
    competition for restaurant sites and customers;
    negotiation of favorable leases;
    management of construction and development costs of new and
    renovated restaurants;
    securing required governmental approvals and permits;
    recruitment and retention of qualified operating personnel;
    successful operation and execution in new and existing markets;
    recruiting, training and retaining qualified corporate and
    restaurant personnel and management;
    identification of under-performing restaurants and our ability
    to improve or efficiently close under-performing restaurants,
    including securing favorable lease termination terms;
    the rate of our internal growth, and our ability to generate
    increased revenue from existing restaurants;
    our ability to incorporate a franchising and area developer
    model into our strategy;
    competition in new and existing markets;
    the reliability of our customer and market studies;
    consumer trends;
    the cost of our principal food products and supply and delivery
    shortages or interruptions;
    weather conditions; and
    general regional, national and where applicable, foreign
    economic conditions.   10




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We
    have a limited operating history and we may be unable to achieve
    profitability.
  Form 10-K
  If
    internally generated cash flow from our restaurants does not
    meet our expectations, our business, results of operations and
    financial condition could be materially adversely
    affected.
    We may
    need additional capital in the future and it may not be
    available on acceptable terms.
    Our
    franchisees could take actions that could harm our
    business.
    We
    could face liability from our franchisees.
   11




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Our
    financial results are affected by the financial results of our
    franchisees.
    Our
    restaurants are currently concentrated in the Northeastern and
    Mid-Atlantic regions of the United States, particularly in
    the New York City area. Accordingly, we are highly vulnerable to
    negative occurrences in these regions.
    You
    should not rely on past increases in our average unit volumes as
    an indication of our future results of operations because they
    may fluctuate significantly.
    
    our ability to execute our business and growth strategy
    effectively;
    introduction of new menu items;
    sales performance by our new and existing restaurants;
    competition;
    general regional, national and where applicable, foreign
    economic conditions;
    weather conditions; and
    consumer trends.    Seasonality,
    inclement weather and other variable factors may adversely
    affect our sales and results of operations and could cause our
    quarterly results to fluctuate and fall below expectations of
    securities analysts and investors, resulting in a decline in our
    stock price.
   12




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Our
    operations depend upon governmental licenses and we may face
    liability under dram shop statutes.
  and/or Form 10-K
  Our
    failure or inability to enforce our trademarks or other
    proprietary rights could adversely affect our competitive
    position or the value of our brand.
      We
    hold significant amounts of illiquid assets and may have to
    dispose of them on unfavorable terms.
    We may
    face litigation that could have a material adverse effect on our
    business, financial condition and results of
    operations.
     13




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We
    have a new management team that does not have proven success
    with the Company.
            If we
    are unable to protect our customers credit card data, we
    could be exposed to data loss, litigation and liability, and our
    reputation could be significantly harmed.
    Risks
    Relating to the Food Service Industry
  Our
    business is affected by changes in consumer
    preferences.
  made-to-order
  General
    economic conditions and the effects of the war on terrorism may
    cause a decline in discretionary consumer spending, which would
    negatively affect our business.
   14




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Our
    success depends on our ability to compete with many food service
    businesses.
      Changes
    in food and supply costs could adversely affect our results of
    operations.
      Health
    concerns relating to the consumption of beef, poultry, produce
    or other food products could adversely affect the price and
    availability of beef, poultry, produce, and other food products,
    consumer preferences and our results of operations and stock
    price.
  e-coli
   15




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The
    food service industry is affected by litigation and publicity
    concerning food quality, health and other issues, which can
    cause customers to avoid our products and result in
    liabilities.
    Our
    business could be adversely affected by increased labor costs or
    labor shortages.
    Item 1B.
    UNRESOLVED
    STAFF COMMENTS    Item 2.
    PROPERTIES    10-year
      Street Address

City

Date Opened

FormatNORTHEAST257 Park Avenue South

New York, NY

February-97

Cosi38 East 45th Street

New York, NY

February-97

Cosi Downtown2160 Broadway

New York, NY

May-97

Cosi11 West 42nd Street

New York, NY

June-97

Cosi Downtown60 East 56th Street

New York, NY

September-97

Cosi Downtown3 World Financial Center

New York, NY

January-98

Cosi Downtown504 Avenue of the Americas

New York, NY

March-98

Cosi55 Broad Street

New York, NY

March-98

Cosi Downtown54 Pine Street

New York, NY

May-98

Cosi Downtown1633 Broadway

New York, NY

July-98

Cosi Downtown61 West 48th Street

New York, NY

August-98

Cosi Downtown685 Third Avenue

New York, NY

June-99

Cosi Downtown 16




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##### Table of Contents



Street Address

City

Date Opened

Format970 Farmington Avenue

W. Hartford, CT

August-99

Cosi461 Park Avenue South

New York, NY

January-00

Cosi50 Purchase Street

Rye, NY

March-00

Cosi841 Broadway

New York, NY

September-00

Cosi15 S. Moger Avenue

Mt. Kisco, NY

December-00

Cosi77 Quaker Ridge Road

New Rochelle, NY

November-01

Cosi1298 Boston Post Road

Larchmont, NY

December-01

Cosi471 Mount Pleasant Road

Livingston, NJ

September-02

Cosi29 Washington Street

Morristown, NJ

December-02

Cosi385 West Main Street

Avon, CT

December-02

Cosi498 7th Avenue

New York, NY

December-02

Cosi700 6th Avenue

New York, NY

February-03

Cosi51 East Pallisade

Englewood, NJ

February-03

Cosi980 Boston Post Road

Darien, CT

October-05

Cosi129 West Putnam Avenue

Greenwich, CT

February-06

Cosi441 South Oyster Bay Road

Plainview, NY

June-06

Cosi1209 High Ridge Road

Stamford, CT

July-06

Cosi44 Great Neck Road

Great Neck, NY

July-06

CosiMID ATLANTIC234 South 15th Street

Philadelphia, PA

September-96

Cosi325 Chestnut Street

Philadelphia, PA

April-97

Cosi1350 Connecticut Avenue

Washington, DC

September-97

Cosi1128 Walnut Street

Philadelphia, PA

December-97

Cosi1647 20th Street NW

Washington, DC

August-98

Cosi140 South 36th Street

Philadelphia, PA

August-98

Cosi761 Lancaster Avenue

Bryn Mawr, PA

September-98

Cosi3003 N. Charles Street

Baltimore, MD

December-98

Cosi (a)301 Pennsylvania Avenue SE

Washington, DC

March-99

Cosi2050 Wilson Boulevard

Arlington, VA

April-99

Cosi215 Lombard Street

Philadelphia, PA

May-99

Cosi1700 Pennsylvania Avenue

Washington, DC

August-99

Cosi Downtown1700 Market Street

Philadelphia, PA

September-99

Cosi Downtown700 King Street

Alexandria, VA

May-00

Cosi700 11th Street

Washington, DC

May-00

Cosi4250 Fairfax Drive

Arlington, VA

June-00

Cosi1919 M Street

Washington, DC

September-00

Cosi201 South 18th Street

Philadelphia, PA

October-00

Cosi1001 Pennsylvania Avenue NW

Washington, DC

October-00

Cosi Downtown7251 Woodmont Avenue

Bethesda, MD

December-00

Cosi11909 Democracy Drive

Reston, VA

May-01

Cosi1501 K Street NW

Washington, DC

December-01

Cosi Downtown1875 K Street

Washington, DC

July-02

Cosi Downtown601 Pennsylvania Ave. NW

Washington, DC

September-02

Cosi1275 K Street

Washington, DC

September-02

Cosi 17




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##### Table of Contents



Street Address

City

Date Opened

Format295 Main Street

Exton, PA

November-02

Cosi5252 Wisconsin Ave, NW

Washington, DC

December-02

Cosi177 Kentlands Blvd

Gaithersburg, MD

January-03

Cosi1333 H Street, NW

Washington DC

January-03

Cosi Downtown1801 N. Lynn Street

Arlington, VA

November-05

Cosi4025 Welsh Road

Willow Grove, PA

December-05

Cosi50 Yorktown Plaza

Elkins Park, PA

April-06

Cosi833 Chestnut

Philadelphia, PA

June-06

Cosi9177 Reisterstown Road

Owing Mills, MD

June-06

Cosi424 West Swedesford Road

Berwyn, PA

June-06

Cosi100 South Charles

Baltimore, MD

July-06

Cosi513 West Broad Street

Falls Church, VA

October-06

Cosi3503 Fairfax Drive, Suite 200

Arlington, VA

November-06

CosiMIDWEST116 S. Michigan Avenue

Chicago, IL

September-00

Cosi55 E. Grand Street

Chicago, IL

October-00

Cosi230 W. Washington Street

Chicago, IL

November-00

Cosi Downtown203 North LaSalle Street

Chicago, IL

May-01

Cosi Downtown301 South State Street

Ann Arbor, MI

May-01

Cosi1101 Lake Street

Oak Park, IL

June-01

Cosi101 North Old Woodward Avenue

Birmingham, MI

August-01

Cosi4074 The Strand West

Columbus, OH

October-01

Cosi25 E. Hinsdale

Hinsdale, IL

December-01

Cosi8775 N. Port Washington
    Road

Fox Point, WI

December-01

Cosi230 West Monroe Street

Chicago, IL

May-02

Cosi Downtown301 East Grand River Avenue

East Lansing, MI

May-02

Cosi84 W. Adams Road

Rochester Hills, MI

September-02

Cosi6390 Sawmill Road

Columbus, OH

September-02

Cosi2212 East Main Street

Bexley, OH

September-02

Cosi1478 Bethel Road

Columbus, OH

November-02

Cosi28674 Telegraph Road

Southfield, MI

November-02

Cosi37652 Twelve Mile Road

Farmington Hills, MI

December-02

Cosi7166 N. High Street

Worthington, OH

December-02

Cosi15131 LaGrange Road

Orland Park, IL

December-02

Cosi233 North Michigan Avenue

Chicago, IL

December-02

Cosi Downtown28 East Jackson Boulevard

Chicago, IL

January-03

Cosi Downtown1310 Polaris Parkway

Columbus, OH

February-03

Cosi33 N Dearborn

Chicago, IL

June-05

Cosi Downtown1740 Sherman Avenue

Evanston, IL

September-05

Cosi17848 Gardenway NE

Woodinville, WA

November-05

Cosi1825 2nd Street

Highland Park, IL

December-05

Cosi7545 166th Avenue NE

Redmond, WA

June-06

Cosi1023 West Belmont

Chicago, IL

June-06

Cosi18 West 066 22nd Street

Oak Brook Terrace, IL

August-06

Cosi 18




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Street Address

City

Date Opened

Format2200 North Clark

Chicago, IL

August-06

Cosi15522 Main Street, #P101-102

Mill Creek, WA

September-06

Cosi8310 Greenway Boulevard, #106

Middleton, WI

September-06

Cosi250 State Street

Madison, WI

September-06

Cosi910 North Milwaukee Avenue,
    Suite A

Lincolnshire, IL

November-06

Cosi220 South Washington Street

Naperville, IL

December-06

CosiMACYS7303 Southwest 88th Street

Miami, FL.

October-04

Cosi19501 Biscayne Blvd.

Aventura, FL.

October-04

Cosi9100 Southwest 136th Street

Miami, FL.

November-04

Cosi1601 Third Avenue

Seattle, WA.

November-04

Cosi19535 Biscayne Blvd.

Aventura, FL

December-05

Cosi414 K Street

Sacramento, CA

January-06

Cosi     (a)
    
    Currently operating as a Xando Coffe and Bar location.  Item 3.
    LEGAL
    PROCEEDINGS    Item 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   PART II  Item 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, STOCK AND RELATED
    STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
    SECURITIES    Stock
    Price Information
    Fiscal 2006


Fiscal 2005Fiscal Quarter:

High


Low


High


LowFirst Quarter

$
10.99


$
8.34


$
7.42


$
5.61Second Quarter

$
10.94


$
6.04


$
7.18


$
4.42Third Quarter

$
6.81


$
4.27


$
10.00


$
6.82Fourth Quarter

$
5.61


$
4.27


$
10.08


$
7.72  19




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Stockholders
    Dividend
    Policy
    Securities
    Authorized for Issuance Under Equity Compensation
    Plans
      
  22-Nov-02


31-Dec-02


31-Dec-03


31-Dec-04


30-Dec-05


29-Dec-06COSI



100




73




37




80




109.2




67NASDAQ US



100




91




136




148




151




166S&P



100




90.9




129.3




156.4




159.5




176.7   Recent
    Sales of Unregistered Securities
    (a)
    Issuances
    of Shares of Common Stock   20




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(b)
    Exercises
    of Warrants                 21




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Item 6.
    SELECTED
    FINANCIAL DATA    Fiscal Year2006


2005


2004


2003


2002(In thousands, except per share data)Consolidated Statement of
    Operations Data:RevenuesRestaurant net sales

$
126,038.3


$
117,080.0


$
110,630.6


$
107,257.4


$
84,424.2Franchise fees and royalties


849.2



100.5











Total revenues


126,887.5



117,180.5



110,630.6



107,257.4



84,424.2Costs and expenses:Cost of food and beverage


29,157.0



28,205.3



28,012.8



29,713.9



22,697.5Restaurant labor and related
    benefits


42,473.3



39,174.1



39,021.6



37,996.9



27,792.5Occupancy and other restaurant
    operating expenses


33,007.3



28,594.5



27,954.1



29,324.9



23,452.4104,637.6



95,973.9



94,988.5



97,035.7



73,942.4General and administrative expenses


21,910.5



21,320.4



21,718.4
(2)


22,274.4



17,811.7Stock-based compensation expense(1)


4,977.7



2,944.2



2,855.3



893.7



Depreciation and amortization


7,767.3



7,425.1



6,947.8



7,852.5



5,951.2Restaurant pre-opening expenses


1,610.8



983.5



405.4



389.8



1,845.1Provision for losses on asset
    impairments and disposals


504.7



3,880.4



1,405.5



8,531.8



1,056.5Lease termination (benefit)
    expense, net


(231.5
)


(178.8
)


(588.8
)


(3,391.2
)


(1,165.0
)Gain on sale of assets


(482.3
)


(1,431.7
)










Operating loss


(13,807.3
)


(13,736.5
)


(17,101.5
)


(26,329.3
)


(15,017.7
)Other income (expense):Interest income


1,411.5



802.0



159.0



40.5



98.3Interest expense


(9.3
)


(34.0
)


(62.4
)


(316.8
)


(1,741.6
)Allowance on notes receivable from
    stockholders






(261.1
)


(1,266.0
)






Loss on early extinguishment of debt


















(5,083.2
)Other income (expense)


77.5



103.6



(102.5
)


112.0



380.9Total other income (expense)


1,479.7



610.5



(1,271.9
)


(164.3
)


(6,345.6
)Net loss


(12,327.6
)


(13,126.0
)


(18,373.4
)


(26,493.6
)


(21,363.3
)Preferred stock dividends


















(8,193.6
)Net loss attributable to common
    stockholders

$
(12,327.6
)

$
(13,126.0
)

$
(18,373.4
)

$
(26,493.6
)

$
(29,556.9
)Net loss per common
    share  basic and diluted

$
(0.32
)

$
(0.38
)

$
(0.62
)

$
(1.53
)

$
(5.13
)Weighted average shares used in
    computing net loss per common share  basic and diluted


38,207



34,929



29,432



17,304



5,763     (1)
    
    FAS 123R adopted in 2006(2)
    
    Includes $1.0 million in expenses related to the relocation
    of our corporate office from New York to Deerfield, IL  22




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##### Table of Contents



Fiscal Year2006


2005


2004


2003


2002(In thousands, except per share data)Selected Balance Sheet
    Data:Cash and cash equivalents

$
938.4


$
1,952.3


$
1,089.7


$
7,957.0


$
13,032.3Investments

$
18,961.5


$
32,917.5


$
9,961.6


$



$
Total assets

$
75,757.1


$
76,544.0


$
51,138.3


$
47,946.6


$
67,872.7Total debt and capital lease
    obligation

$
99.8


$
118.6


$
358.3


$
391.2


$
1,648.5Total stockholder equity

$
50,631.3


$
56,208.4


$
29,152.4


$
22,834.1


$
36,996.3Selected Statement of Cash Flow
    Data:Cash flow provided by (used in) in
    operating activities

$
3,949.2


$
(4,249.4
)

$
(9,631.1
)

$
(11,387.7
)

$
(4,902.4
)Cash flow used in investing
    activities

$
(6,674.1
)

$
(31,535.8
)

$
(17,267.9
)

$
(3,754.8
)

$
(28,374.5
)Cash flow provided by financing
    activities

$
1,711.0


$
36,647.7


$
20,031.7


$
10,067.2


$
41,839.7Selected Operating
    Data:Company-owned restaurants open at
    the end of the fiscal year of the fiscal year


110



96



92



89



91   Item 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  The following discussion and analysis of our financial
    condition and results of operations for the fiscal years ended
    January 1, 2007, January 2, 2006 and January 3,
    2005 should be read in conjunction with Selected
    Consolidated Financial Data and our audited consolidated
    financial statements and the notes to those statements that are
    included elsewhere in this Annual Report. Our discussion
    contains forward-looking statements based upon current
    expectations that involve risks and uncertainties, such as our
    plans, objectives, expectations and intentions. Actual results
    and the timing of events could differ materially from those
    anticipated in these forward-looking statements as a result of a
    number of factors, including those set forth under
    Cautionary Note Regarding Forward-Looking
    Statements below and elsewhere in this Annual Report.
  Business
    Overview
  Systemwide
    Restaurants:
  2006


Fiscal Year 2005


2004Company-








Company-








Company-Owned


Franchise


Total


Owned


Franchise


Total


Owned


Franchise


TotalRestaurants at beginning of period


96
(a)


5



101



92



0



92



89







89New restaurants opened


21



8



29



8



5



13



9







9Restaurants permanently closed


7







7



4



0



4



6







6Restaurants at end of
    period


110



13



123



96
(a)


5



101



92







92     (a)
    
    Includes two company-owned locations that were closed in October
    of 2005 as result of Hurricane Wilma. During the fourth quarter
    of fiscal 2006, one location was re-opened and one location was
    permanently closed.   23




---



##### Table of Contents



made-to-order and/or
              Critical
    Accounting Policies
     24




---



##### Table of Contents



Long lived assets: Accounting for the Impairment or Disposal of Long Lived
    Assets
  Lease termination charges: Accounting for
    Costs Associated with Exit or Disposal Activities
  Stock-based compensation: Share-Based Payment Accounting for Stock-Based
    Compensation
  Accounting for lease obligations: Bulletin No. 85-3, Accounting for Operating Leases with Scheduled Rent
    Increases
  Landlord allowances: No. 88-1, Issues Relating to Accounting for Leases
  Income taxes:
  Revenue
  Restaurant net sales.
 25




---



##### Table of Contents



Franchise fees and royalties.
  Gift card sales.
  Comparable
    Restaurant Sales
    Costs and
    Expenses
  Cost of food and beverage.
  Restaurant labor and related benefits.
  Occupancy and other restaurant operating
    expenses.
  General and administrative expenses.
  Stock compensation expense.
  Depreciation and amortization.
  Restaurant pre-opening expenses.
 26




---



##### Table of Contents



Results
    of Operations
    Fiscal Year2006


2005


2004Revenues:Restaurant net sales


99.3
%


99.9
%


100.0
%Franchise fees and royalties


0.7



0.1



0.0Total revenue


100.0



100



100.0Cost and expenses:Cost of food and beverage(1)


23.1



24.1



25.3Restaurant labor and related
    benefits(1)


33.7



33.5



35.2Occupancy and other restaurant
    operating expenses(1)


26.2



24.4



25.383.0



82.0



85.8General and administrative expenses


17.3



18.2



19.6
(2)Stock-based compensation expense


3.9



2.5



2.6Depreciation and amortization


6.1



6.3



6.3Restaurant pre-opening expenses


1.3



0.8



0.4Provision for losses on asset
    impairments and disposals


0.4



3.3



1.3Lease termination expense (benefit)


(0.2
)


(0.2
)


(0.5
)Gain on sale of assets


(0.4
)


(1.1
)


Total costs and expenses


110.9



111.8



115.5Operating loss


(10.9
)


(11.8
)


(15.5
)Other income (expense):Interest income


1.1



0.7



0.1Interest expense










(0.1
)Allowance for stockholders
    notes receivables






(0.2
)


(1.0
)Other income (expense)


0.1



0.1



(0.1
)Net loss


(9.7
)


(11.2
)


(16.6
)     (1)
    
    As a percentage of restaurant net sales(2)
    
    Fiscal 2004, includes $1.0 million of expenses related to
    the corporate office relocation from New York to Deerfield, IL  Fiscal
    Year 2006 (52 weeks) compared to Fiscal Year 2005
    (52 weeks)
  Restaurant
    Net Sales
   27




---



##### Table of Contents



Franchise
    Fees and Royalties
    Costs
    and Expenses
  Cost of food and beverage.
  Restaurant labor and related benefits.
  Occupancy and other restaurant operating
    expenses.
  General and administrative costs.
  Stock-based compensation expense. Share-Based Payment Accounting for Stock-Based
    Compensation Accounting for Stock
    Issued to Employees
 28




---



##### Table of Contents



Depreciation and amortization.
  Restaurant pre-opening expenses.
  Provision for losses on asset impairments and
    disposals.
  Lease termination benefits, net.
  Gain on sale of assets.
  Allowance for notes receivable from
    stockholders.
  Interest income and expense.
  Other income (expense).
  Fiscal
    Year 2005 (52 weeks) compared to Fiscal Year 2004
    (53 weeks)
  Restaurant
    Net Sales
  52-week
 29




---



##### Table of Contents



52-week 52-week
  Franchise
    Fees and Royalties
    Costs
    and Expenses
  Cost of food and beverage.
  Restaurant labor and related benefits. Accounting for Stock Issued
    to Employees.
  Occupancy and other restaurant operating
    expenses.
  General and administrative costs.
  Stock-based compensation expense. Accounting
    for Stock Issued to Employees
  Depreciation and amortization.
 30




---



##### Table of Contents



Restaurant pre-opening expenses.
  Provision for losses on asset impairments and
    disposals.
    Lease termination benefits, net.
  Gain on sale of assets.
  Allowance for notes receivable from
    stockholders.
  Interest income and expense.
  Other income (expense).
  Liquidity
    and Capital Resources
   31




---



##### Table of Contents



and/or
 32




---



##### Table of Contents



Contractual
    Obligations
    Payments Due by PeriodDue


Due


DueTotal


Due


Fiscal 2008


Fiscal 2010


AfterDescription

Obligations


Fiscal 2007


to Fiscal 2009


to Fiscal 2011


Fiscal 2011(In thousands)Long-term debt(1)

$
125.0


$
25.0


$
50.0


$
50.0


$
Operating leases(2)(3)


94,799.4



15,296.5



28,782.1



23,424.8



27,296.0Purchase Obligations(4)


876.6



876.6











Total contractual cash obligations

$
95,801.0


$
16,198.1


$
28,832.1


$
23,474.8


$
27,296.0     (1)
    
    Amounts shown include aggregate scheduled interest payments of
    $0.03 million.(2)
    
    Amounts shown are net of $0.8 million of total sublease
    rental income due under non-cancelable subleases.(3)
    
    Includes approximately $0.6 million of obligations on
    leases for restaurants that are closed as of January 1,
    2007.(4)
    
    Contractual obligations related to new restaurant construction.  Off-Balance
    Sheet Arrangements
    Selected
    Quarterly Financial Data
    First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter(Dollars in thousands, except share data)Fiscal 2006Total revenues

$
29,645.0


$
32,509.5


$
32,951.0


$
31,782.0Total costs and
    expenses

$
33,933.0


$
33,641.2


$
36,194.2


$
36,926.4Net loss

$
(3,928.3
)

$
(748.9
)

$
(2,855.4
)

$
(4,795.0
)Basic and diluted loss per
    share:

$
(0.10
)

$
(0.02
)

$
(0.07
)

$
(0.12
)Fiscal 2005Total revenues

$
27,205.1


$
30,619.6


$
30,803.4


$
28,552.3Total costs and expenses

$
22,864.3


$
24,201.2


$
24,902.8


$
24,005.6Net loss

$
(2,795.6
)

$
(1,866.3
)

$
(2,426.4
)

$
(6,037.7
)Basic and diluted loss per share:

$
(0.09
)

$
(0.06
)

$
(0.06
)

$
(0.16
)   New
    Accounting Pronouncements
  Accounting for Uncertainty in income taxes, an interpretation
    of FASB Statement No. 109
 33




---



##### Table of Contents



CAUTIONARY
    NOTE REGARDING FORWARD LOOKING STATEMENTS
  Form 10-K
  
    the cost of our principal food products and supply and delivery
    shortages or interruptions;
    labor shortages or increased labor costs;
    changes in demographic trends and consumer tastes and
    preferences, including changes resulting from concerns over
    nutritional or safety aspects of beef, poultry, produce or other
    foods or the effects of food-borne illnesses such as mad
    cow disease and avian influenza or bird flu;
    competition in our markets, both in our business and locating
    suitable restaurant sites;
    our operation and execution in new and existing markets;
    expansion into new markets, including foreign countries;
    our ability to attract and retain qualified franchisees;
    our ability to locate suitable restaurant sites in new and
    existing markets and negotiate acceptable lease terms;
    the rate of our internal growth, and our ability to generate
    increased revenue from our existing restaurants;
    our ability to generate positive cash flow from existing and new
    restaurants;
    fluctuations in our quarterly results due to seasonality;
    increased government regulation and our ability to secure
    required governmental approvals and permits;
    our ability to create customer awareness of our restaurants in
    new markets;
    the reliability of our customer and market studies;
    cost effective and timely planning, design and build-out of new
    restaurants;
    our ability to recruit, train and retain qualified corporate and
    restaurant personnel and management;
    market saturation due to new restaurant openings;
    inadequate protection of our intellectual property;
    adverse weather conditions which impact customer traffic at our
    restaurants; and
    adverse economic conditions. 34




---



##### Table of Contents



Item 7A:
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Interest
    Rate Risk
    Foreign
    Currency Risk
    Inflation
    Item 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA    Item 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    Item 9A.
    CONTROLS
    AND PROCEDURES  Rule 13a-15(e)
  Managements
    Report on Internal Controls Over Financial Reporting
  Form 10-K.
 35




---



##### Table of Contents



Rule 13a-15(f)
      Internal Control-Integrated
    Framework.
    Changes
    in Internal Control Over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
  Item 9B.
    OTHER
    INFORMATION   PART III  Item 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE   36




---



##### Table of Contents



Item 11.
    EXECUTIVE
    COMPENSATION    Item 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    Item 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE    Item 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES   PART IV  Item 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES  The following documents are filed as part of this
    Report:
    Exhibits
  ExhibitNumber

Description of Exhibit2
.1

Merger Agreement by and among
    Xando, Incorporated, Xando Merger Corp. and Cosi Sandwich Bar,
    Inc. dated as of October 4, 1999 (Filed as Exhibit 2.1
    to the Companys Registration Statement on
    Form S-1,
    file #333-86390).3
.1

Amended and Restated Certificate
    of Incorporation of Cosi, Inc. (Filed as Exhibit 3.1 to the
    Companys Annual Report on
    Form 10-K
    for the period ended December 30, 2002).3
.2

Amended and Restated By-Laws of
    Cosi, Inc. (Filed as Exhibit 3.2 to the Companys
    Annual Report on
    Form 10-K
    for the period ended December 30, 2002).4
.1

Form of Certificate of Common
    Stock (Filed as Exhibit 4.1 to the Companys
    Registration Statement on
    Form S-1,
    file
    #333-86390).4
.2

Rights Agreement between Cosi,
    Inc. and American Stock Transfer and Trust Company as Rights
    Agent dated November 21, 2002 (Filed as Exhibit 4.2 to
    the Companys Annual Report on
    Form 10-K
    for the period ended December 30, 2002).4
.3

Amended and Restated Registration
    Agreement, dated as of March 30, 1999 (Filed as
    Exhibit 4.3 to the Companys Registration Statement on
    Form S-1,
    file #333-86390).4
.4

Supplemental Registration Rights
    Agreement, dated as of August 5, 2003 by and among the
    Company and the parties thereto (Filed as Exhibit 4.4.2 to
    the Companys Registration Statement on
    Form S-1,
    file #333-107689).4
.5

Amendment No. 1 to Rights
    Agreement dated as of November 21, 2002, between Cosi, Inc.
    and American Stock Transfer and Trust Company, as rights agent
    (Filed as Exhibit 4.3 to the Companys Quarterly
    Report on
    Form 10-Q
    for the fiscal quarter ended March 31, 2003). 37




---



##### Table of Contents



ExhibitNumber

Description of Exhibit4
.6

Investment Agreement, dated as of
    August 5, 2003, among the Company, Eric J. Gleacher,
    Charles G. Phillips, LJCB Nominees Pty Ltd, and ZAM Holdings,
    L.P. (Filed as Exhibit 4.9 to the Companys Registration
    Statement on
    Form S-1/A,
    file #333-107689).4
.7

Letter Agreement, dated as of
    August 5, 2003, among the Company, Eric J. Gleacher,
    Charles G. Phillips, LJCB Nominees Pty Ltd, and ZAM Holdings,
    L.P. (Filed as Exhibit 4.10 to the Companys Registration
    Statement on
    Form S-1/A,
    file #333-107689).10
.1

Cosi, Inc. 2005 Omnibus Long-Term
    Incentive Plan (Filed as Exhibit C to the Companys
    Proxy Statement on Schedule 14A filed on March 31, 2005,
    file #000-50052).10
.2

Cosi Employee Stock Purchase Plan
    (Filed as Exhibit 10.2 to the Companys Registration
    Statement on
    Form S-1,
    file
    #333-86390).10
.3

Cosi Non-Employee Director Stock
    Incentive Plan (Filed as Exhibit 10.3 to the Companys
    Registration Statement on
    Form S-1,
    file #333-86390).10
.4

Cosi Sandwich Bar, Inc. Incentive
    Stock Option Plan (Filed as Exhibit 10.4 to the
    Companys Registration Statement on
    Form S-1,
    file #333-86390).10
.5.3

Employment agreement between Cosi,
    Inc. and Kevin Armstrong, dated May 9, 2005 (Filed as
    Exhibit 10.5.11 to the Companys Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended April 4, 2005).10
.5.4

Separation and Release Agreement
    between Cosi, Inc. and Cynthia Jamison, dated August 17,
    2005 (Filed as Exhibit 10.1 to the Companys Current report
    on
    Form 8-K,
    dated August 23, 2005).10
.5.5

Employment Agreement between Cosi,
    Inc. and William D. Forrest, dated December 12, 2005 (Filed
    as Exhibit 10.1 to the Companys Current report on
    Form 8-K,
    dated December 16, 2005).10
.5.6

Terms of Employment between Cosi,
    Inc. and William E. Koziel, effective as of August 17, 2005
    as described in the Companys Current Report on
    Form 8-K
    (Filed on August 23, 2005).10
.5.7

Terms of Employment between Cosi,
    Inc. and Christopher Carroll, effective as of May 22, 2006
    as described in the Companys Current Report of
    Form 8-K
    (Filed on May 25, 2006).10
.5.8

Terms of Employment between Cosi,
    Inc. and Christopher Ames, effective as of November 13,
    2006 as described in the Companys Current Report on
    Form 8-K
    (Filed on November 17, 2006).10
.5.9

Terms of Employment between Cosi,
    Inc. and Robert Merritt, effective as of March 12, 2007 as
    described in the Companys Current Report on
    Form 8-K
    (Filed on March 12, 2007).10
.6.1

Foodservice Distribution Agreement
    between Cosi, Inc. and Distribution Market Advantage, Inc. dated
    as of November 1, 2005.(1)10
.7.1

Cosi, Inc. Form of Franchise
    Agreement (Filed as Exhibit 10.5 to the Companys Quarterly
    Report on
    Form 10-Q
    for the fiscal quarter ended July 4, 2005).10
.7.2

Cosi, Inc. Form of Area Developer
    Franchise Agreement (Filed as Exhibit 10.6 to the
    Companys Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended July 4, 2005).10
.8

Form of Senior Secured Note and
    Warrant Purchase Agreement (Filed as Exhibit 10.7 to the
    Companys Registration on
    Form S-1,
    file #333-86390).10
.9

Securities Purchase Agreement
    dated as of April 27, 2004 (Filed as Exhibit 10.1 to
    the Companys Current Report on
    Form 8-K,
    dated April 28, 2004).10
.10

Form of Restricted Stock Award
    Agreement (Filed as Exhibit 10.1 to the Companys Current
    Report of
    Form 8-K,
    dated June 6, 2005).16


Letter from Ernst & Young
    LLP to the Securities and Exchange Commission, dated as of
    August 13, 2004, acknowledging its agreement with the
    statements made in Current Report on
    Form 8-K
    (Filed as Exhibit 16 to the Companys Current Report
    on
    Form 8-K,
    dated August 13, 2004). 38




---



##### Table of Contents



ExhibitNumber

Description of Exhibit21


Subsidiaries of Cosi, Inc.  (Filed
    as Exhibit 21.1 to the Companys Registration
    Statement on
    Form S-1,
    file
    #333-86390).23
.1

Filed herewith Consent of BDO
    Seidman, LLP,  Registered Public Accounting Firm.31
.1

Filed herewith Certification of
    the Interim Chief Executive Officer pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.31
.2

Filed herewith Certification of
    the Chief Financial Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.32
.1

Filed herewith Certification of
    the Interim Chief Executive Officer and Chief Financial Officer
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     (1)
    
    Portions of Exhibit 10.6.1 have been omitted and filed
    separately with the Securities and Exchange Commission pursuant
    to a request for confidential treatment. 39




---



##### 



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageReport of BDO
    Seidman, LLP, Independent Registered Public Accounting
    Firm


41Report of BDO
    Seidman, LLP, Independent Registered Public Accounting Firm on
    Internal Control Over Financial Reporting


42Consolidated
    Balance Sheets as of January 1, 2007 and January 2,
    2006


43Consolidated
    Statements of Operations for the Fiscal Years Ended
    January 1, 2007, January 2, 2006 and January 3,
    2005


44Consolidated
    Statements of Stockholders Equity for the Fiscal Years
    Ended January 1, 2007, January 2, 2006 and
    January 3, 2005


45Consolidated
    Statements of Cash Flows for the Fiscal Years Ended
    January 1, 2007, January 2, 2006 and January 3,
    2005


46Notes to
    Consolidated Financial Statements for the Fiscal Years Ended
    January 1, 2007, January 2, 2006 and January 3,
    2005


47Consent of BDO Seidman, LLPCertification of CEOCertification of the Chief Financial OfficerSection 906 Certifications   40




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm              Internal Control 
    Integrated Framework
  
    41




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm on
    Internal Control over Financial Reporting      Internal Control-Integrated Framework
            
    42




---



##### Table of Contents



Cosi,
    Inc.



Consolidated
    Balance Sheets

As of
    January 1, 2007 and January 2, 2006  January 1,


January 2,2007


2006(Dollars in thousands)ASSETSCurrent assets:Cash and cash equivalents

$
938.4


$
1,952.3Investments


18,961.5



32,917.5Accounts receivable, net


1,950.9



496.3Inventories


986.9



914.6Prepaid expenses and other current
    assets


4,032.8



3,672.7Total current assets


26,870.5



39,953.4Furniture and fixtures, equipment
    and leasehold improvements, net


46,007.5



33,502.6Intangibles, security deposits and
    other assets


2,879.1



3,088.0Total assets

$
75,757.1


$
76,544.0LIABILITIES AND
    STOCKHOLDERS
    EQUITYCurrent liabilities:Accounts payable

$
4,898.1


$
2,689.2Accrued expenses


8,550.5



9,837.2Deferred franchise revenue


1,172.5



510.0Current portion of long-term debt


17.0



18.8Current portion of other long-term
    liabilities


519.9



345.0Total current liabilities


15,158.0



13,400.2Deferred franchise revenue


2,345.0



Long-term debt, net of current
    portion


82.8



99.8Other long-term liabilities, net
    of current portion


7,540.0



6,835.6Total liabilities


25,125.8



20,335.6Commitments and contingenciesStockholders equity:Common stock 
    $.01 par value; 100,000,000 shares authorized,
    39,910,114 and 38,478,796 shares issued, respectively


399.1



384.8Additional paid-in capital


271,200.3



268,330.5Unearned stock compensation






(3,866.4
)Treasury stock,
    239,543 shares at cost


(1,197.7
)


(1,197.7
)Accumulated deficit


(219,770.4
)


(207,442.8
)Total stockholders equity


50,631.3



56,208.4Total liabilities and
    stockholders equity

$
75,757.1


$
76,544.0    43




---



##### Table of Contents



Cosi,
    Inc



Consolidated
    Statements of Operations

For the
    Fiscal Years Ended January 1, 2007, January 2, 2006
    and January 3, 2005  January 1,


January 2,


January 3,2007


2006


2005(Dollars in thousands, except per share data)Revenues:Restaurant net sales

$
126,038.3


$
117,080.0


$
110,630.6Franchise fees and royalties


849.2



100.5



Total revenues


126,887.5



117,180.5



110,630.6Costs and expenses:Cost of food and beverage


29,157.0



28,205.3



28,012.8Restaurant labor and related
    benefits


42,473.3



39,174.1



39,021.6Occupancy and other restaurant
    operating expenses


33,007.3



28,594.5



27,954.1104,637.6



95,973.9



94,988.5General and administrative expenses


21,910.5



21,320.4



21,718.4Stock-based compensation expense


4,977.7



2,944.2



2,855.3Depreciation and amortization


7,767.3



7,425.1



6,947.8Restaurant pre-opening expenses


1,610.8



983.5



405.4Provision for losses on asset
    impairments and disposals


504.7



3,880.4



1,405.5Lease termination (benefit)
    expense, net


(231.5
)


(178.8
)


(588.8
)Gain on sale of assets


(482.3
)


(1,431.7
)


Total costs and expenses


140,694.8



130,917.0



127,732.1Operating loss


(13,807.3
)


(13,736.5
)


(17,101.5
)Interest income


1,411.5



802.0



159.0Interest expense


(9.3
)


(34.0
)


(62.4
)Allowance on notes receivable from
    stockholders






(261.1
)


(1,266.0
)Other income (expense)


77.5



103.6



(102.6
)Net loss

$
(12,327.6
)

$
(13,126.0
)

$
(18,373.5
)Per Share Data:Basic and diluted loss per share

$
(0.32
)

$
(0.38
)

$
(0.62
)Weighted average common shares
    outstanding


38,207,173



34,928,990



29,432,050    44




---



##### Table of Contents



Cosi,
    Inc.



Consolidated
    Statements of Stockholders Equity

As of
    January 1, 2007, January 2, 2006 and January 3,
    2005  Common Stock





Treasury StockAdditional


Unearned


Shares of


Amount


StockholdersNumber of





Paid In


Stock


Treasury


Treasury


Notes


AccumulatedShares


Amount


Capital


Compensation


Stock


Stock


Receivable


Deficit


Total(Dollars in thousands, except share data)Balance, December 29, 2003


26,259,109


$
262.6


$
203,075.4


$
(1,835.8
)





$



$
(2,724.8
)

$
(175,943.3
)

$
22,834.1Issuance of common stock


4,284,403



42.8



19,566.3























19,609.1Issuance of restricted stock


23,722



0.2



131.8



(7.0
)


















125.0Stock compensation










2,151.3























2,151.3Amortization of unearned stock
    compensation














942.8



















942.8Exercise of warrants


3,424































Exercise of stock options


249,058



2.5



595.0























597.5Allowance for stockholders notes
    receivable


















1,266.0







1,266.0Net loss






























(18,373.5
)


(18,373.5
)Balance, January 3, 2005


30,819,716



308.2



225,519.7



(900.0
)










(1,458.8
)


(194,316.8
)


29,152.3Issuance of common stock, net of
    issuance costs


5,837,563



58.4



34,253.9























34,312.3Issuance of restricted stock


885,610



8.9



5,271.3



(5,155.1
)


















125.0Stock compensation










844.7























844.7Amortization of unearned stock
    compensation














2,188.7



















2,188.7Exercise of warrants


115,958



1.2



(1.2
)






















Exercise of stock options


819,949



8.2



2,442.0























2,450.2Allowance for stockholders notes
    receivable


















261.1







261.1Return of shares for notes
    receivable from stockholders


















239,543



(1,197.7
)


1,197.7







Net loss






























(13,126.0
)


(13,126.0
)Balance, January 2, 2006


38,478,796



384.8



268,330.5



(3,866.4
)


239,543



(1,197.7
)






(207,442.8
)


56,208.4Adoption of FAS 123R










(3,866.4
)


3,866.4



















Issuance of restricted stock


815,000



8.2



(8.2
)






















Stock-based compensation


11,376



0.1



5,020.6























5,020.7Exercise of warrants


263,302



2.6



440.6























443.2Exercise of stock options


341,640



3.4



1,283.2























1,286.6Net loss






























(12,327.6
)


(12,327.6
)Balance, January 1, 2007


39,910,114


$
399.1


$
271,200.3


$




239,543


$
(1,197.7
)

$



$
(219,770.4
)

$
50,631.3    45




---



##### Table of Contents



Cosi,
    Inc.



Consolidated
    Statements of Cash Flows

For the
    Fiscal Years Ended January 1, 2007, January 2, 2006
    and January 3, 2005  January 1,


January 2,


January 3,2007


2006


2005(In thousands)Cash flows from operating
    activities:Net loss

$
(12,327.6
)

$
(13,126.0
)

$
(18,373.5
)Adjustments to reconcile net loss
    to net cash provided by operating activitiesDepreciation and amortization


7,767.3



7,425.1



6,947.8Gain on sale of assets


(482.3
)


(1,431.7
)


Non-cash portion of asset
    impairments and disposals


504.7



3,828.1



1,393.8Provision (recovery) for bad debts


4.5



147.5



(39.2
)Stock-based compensation expense


5,020.6



3,033.4



3,219.1Allowance on notes receivable from
    stockholders






261.1



1,266.0Changes in operating assets and
    liabilities:Accounts receivable


(1,459.1
)


(30.6
)


34.4Inventories


(72.3
)


(24.1
)


92.3Prepaid expenses and other current
    assets


(360.0
)


(1,357.6
)


(856.6
)Other assets


306.8



(799.0
)


(335.6
)Accounts payable and accrued
    expenses


1,159.8



(1,889.0
)


(1,440.3
)Deferred franchise revenue


3,007.5



510.0



Other liabilities


879.3



(796.6
)


(1,539.3
)Net cash provided by (used in )
    operating activities


3,949.2



(4,249.3
)


(9,631.1
)Cash flows from investing
    activities:Capital expenditures


(21,307.2
)


(9,768.6
)


(7,392.2
)Proceeds from sale of assets


775.0



1,284.1



Purchases of investments


(171,682.5
)


(145,433.7
)


(29,917.1
)Redemption of investments


185,638.5



122,477.7



19,955.5(Payment) return of security
    deposits, net


(97.9
)


(95.3
)


85.9Net cash used in investing
    activities


(6,674.1
)


(31,535.8
)


(17,267.9
)Cash flows from financing
    activities:Proceeds from issuance of common
    stock


1,286.6



36,887.4



20,206.6Exercises of warrants


443.2







Principal payments on long-term debt


(18.8
)


(239.7
)


(172.0
)Principal payments on capital lease
    obligations










(2.9
)Net cash provided by financing
    activities


1,711.0



36,647.7



20,031.7Net (decrease) increase in cash and
    cash equivalents


(1,013.9
)


862.5



(6,867.4
)Cash and cash equivalents,
    beginning of year


1,952.3



1,089.7



7,957.0Cash and cash equivalents, end of
    year

$
938.4


$
1,952.3


$
1,089.7Supplemental disclosures of cash
    flow information:Cash paid for:Interest

$
9.3


$
24.3


$
74.3Corporate franchise and income taxes

$
268.0


$
206.9


$
288.2    46




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##### Table of Contents



COSI,
    INC.



Notes to
    Consolidated Financial Statements



COSI,
    INC.



Notes to
    Consolidated Financial
    Statements  (Continued)  For the
    Fiscal Years Ended January 1, 2007, January 2, 2006
    and January 3, 2005
  1.
    Organization
    and Summary of Significant Accounting Policies  Organization
          Fiscal
    Year
    Basis
    of Presentation
    Cash
    and Cash Equivalents
    Investments
    Accounting for Certain
    Investments in Debt and Equity Securities held-to-maturity
 47




---



##### Table of Contents



AccruedCost Basis


Interest


Total(In thousands )January 1,
    2007Debt securities issued by the
    U.S. Treasury and other U.S. government corporations
    and agencies

$
18,679.6


$
281.9


$
18,961.5$
18,679.6


$
281.9


$
18,961.5January 2,
    2006Debt securities issued by the
    U.S. Treasury and other U.S. government corporations
    and agencies


25,332.6



91.0



25,423.6Debt securities issued by states
    of the United States and political subdivisions of the states


5,499.6



0.2



5,499.8Corporate debt securities


1,993.2



0.9



1,994.1$
32,825.4


$
92.1


$
32,917.5   Concentration
    of Credit Risks
      Accounts
    Receivable
    Inventories
    Furniture
    and Fixtures, Equipment and Leasehold Improvements
     48




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##### Table of Contents



Long
    Lived Assets
  restaurant-by-restaurant
      Accounting
    for Lease Obligations
    sub-tenants
  Intangibles,
    Security Deposits and Other Assets
    Goodwill and Other
    Intangible Assets
  Lease
    Termination Charges
     49




---



##### Table of Contents



(In thousands)Balance as of December 29,
    2003

$
2,224.9Charged to costs and expenses


(588.8
)Deductions


(699.1
)(b)Balance as of January 3, 2005


937.0Charged to costs and expenses


(178.8
)Deductions


(16.0
)(b)Balance as of January 2, 2006


742.2Charged to costs and
    expenses


(231.5
)Deductions


(80.0
)(b)Balance as of January 1,
    2007

$
430.7     (b)
    
    Payments to landlords for lease obligations.  Other
    Liabilities
    Income
    Taxes
    Revenue
    Recognition
  Restaurant Net Sales.
  Franchise Fees and Royalties.
  Gift Card Sales.
 50




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##### Table of Contents



Gain
    on Sale of Assets
    Restaurant
    Pre-opening Expenses
    Advertising
    Costs
    Net
    Loss Per Share
  In-the-money Out-of-the-money
  Stock-Based
    Compensation
  Share-Based
    Payment Accounting for
    Stock-Based Compensation
 51




---



##### Table of Contents



Pro
    Forma:
  Fiscal Year2005


2004(In thousands, except per share data)Net loss as reported

$
(13,126.0
)

$
(18,373.5
)Add: Stock-based compensation
    expense included in reported net loss


3,158.5



3,219.1Deduct: Total stock-based employee
    compensation expense determined under the fair value based
    method for all awards


(4,063.6
)


(3,691.1
)Pro forma net loss

$
(14,031.1
)

$
(18,845.5
)Net loss per common share: basic
    and dilutedAs reported

$
(0.38
)

$
(0.62
)Pro forma

$
(0.40
)

$
(0.64
)   Fair
    Value of Financial Instruments
    Segment
    Information
    Accounting
    Estimates
    Reclassifications
   52




---



##### Table of Contents



New
    Accounting Pronouncements
  Accounting for Uncertainty in income taxes, an interpretation
    of FASB Statement No. 109
  2.
    Accounts
    Receivable    Fiscal Year2006


2005(In thousands)Accounts receivable, trade

$
172.1


$
72.6Reimbursements due from landlords


1,111.3



159.7Other


671.0



272.0Total receivables


1,954.4



504.3Less allowance for doubtful
    accounts


(3.5
)


(8.0
)Accounts receivable, net

$
1,950.9


$
496.3     (In thousands)Balance as of December 29,
    2003

$
393.1Charged to costs and expenses


(39.2
)Deductions


(201.5
)(a)Balance as of January 3, 2005


152.4Charged to costs and expenses


(72.1
)Deductions


(72.3
)(a)Balance as of January 2, 2006


8.0Charged to costs and
    expenses


13.0Deductions


(17.5
)(a)Balance as of January 1,
    2007

$
3.5     (a)
    
    Write-off of uncollectible accounts. 53




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##### Table of Contents



3.
    Prepaid
    Expenses and Other Current Assets    Fiscal Year2006


2005(In thousands)Prepaid insurance

$
1,915.9


$
1,888.4Prepaid rent


1,542.0



1,378.4Other


574.9



405.9Prepaid expenses and other current
    assets

$
4,032.8


$
3,672.7   4.
    Furniture
    and Fixtures, Equipment and Leasehold Improvements    Fiscal Year2006


2005(In thousands)Leasehold improvements

$
48,222.4


$
38,213.4Restaurant equipment


18,920.0



14,017.4Furniture and fixtures


12,361.8



10,130.1Computer and telephone equipment


10,856.3



9,321.3Construction in progress


378.5



1,250.7Vehicles


29.7



Total furniture and fixtures,
    equipment and leasehold improvements


90,768.6



72,932.9Less accumulated depreciation and
    amortization


(44,761.1
)


(39,430.3
)Furniture and fixtures, equipment
    and leasehold improvements, net

$
46,007.5


$
33,502.6     5.
    Intangibles,
    Security Deposits and Other Assets    Fiscal Year2006


2005(In thousands)Security deposits

$
1,384.6


$
1,286.7Liquor licenses


438.2



631.4Trademarks


195.0



195.0Other


861.2



975.0Total other assets

$
2,879.1


$
3,088.0  54




---



##### Table of Contents



6.
    Accrued
    Expenses    Fiscal Year2006


2005(In thousands)Payroll and related benefits and
    taxes

$
2,225.6


$
2,933.3Insurance


1,281.5



1,235.5Taxes other than income taxes


897.1



673.6New restaurant construction


716.5



954.0Unredeemed gift cards/certificates


666.5



438.9Utilities


588.8



649.9Deferred credits


560.6



601.2Rent


470.6



529.7Professional and legal


394.8



453.6Other


748.5



1,367.5Total accrued expenses

$
8,550.5


$
9,837.2   7.
    Long-Term
    Debt      8.
    Income
    Taxes    Fiscal Year2006


2005(In thousands)Deferred tax assets:Net operating loss carryforward

$
53,652.2


$
34,868.3Depreciation expense and
    impairment of long-lived assets


13,506.4



11,720.5Contractual lease increases


2,080.9



1,994.0Deferred franchise revenue


891.1



Stock-based compensation


408.0



1,469.2Lease termination accrual


163.7



282.0Accrued expenses


123.9



86.2Allowance for doubtful accounts


1.3



3.0Total deferred tax assets


70,827.5



50,423.2Valuation allowance


(70,827.5
)


(50,423.2
)Net deferred taxes

$



$
  55




---



##### Table of Contents



Fiscal Year EndedJanuary 1,


January 2,


January 3,2007


2006


2005Statutory federal income tax rate


35.0
%


35.0
%


35.0
%State income taxes


3.0



3.0



3.038.0



38.0



38.0Less valuation allowance


(38.0
)


(38.0
)


(38.0
)Effective Tax Rate


0.0
%


0.0
%


0.0
%   9.
    Stockholders
    Equity  Common
    Stock Purchase Rights
         56




---



##### Table of Contents



Stock
    Purchase Warrants
    10.
    Stock-Based
    Employee Compensation  Share-Based Payments Accounting for Stock-Based Compensation.
   57




---



##### Table of Contents



For the Fiscal Year EndedJanuary 1,


January 2,


January 3,2007


2006


2005(In thousands)Stock options variable accounting

$



$
844.7


$
2,151.3Stock option compensation expense


1,073.6







Restricted stock compensation
    expense


3,822.1



2,188.7



942.8Awards of restricted stock to
    non-employee directors


125.0



125.0



125.0Total non-cash stock-based
    compensation expense


5,020.7



3,158.4



3,219.1Non-cash compensation included in
    labor and related benefits


43.0



214.2



363.8Separately captioned stock
    compensation expense

$
4,977.7


$
2,944.2


$
2,855.3       2005


2004Expected dividend yield


0
%


0
%Expected stock price volatility


68
%


68
%Average risk-free interest rate


3.79
%


3.47
%Average expected life of options


5



5Weighted average grant date fair
    value

$
3.89


$
2.84   paid-in-capital
   58




---



##### Table of Contents



WeightedWeighted


Average


AggregateNumber of


Average Exercise


Remaining


IntrinsicOptions


Price


Contractual Term


Value(In thousands)Outstanding as of
    December 29, 2003


4,410,839


$
5.68Granted


1,514,291


$
4.59Exercised


(249,058
)

$
2.40Cancelled/Expired


(419,122
)

$
8.90Outstanding as of January 3,
    2005


5,256,950


$
5.26Granted


146,845


$
6.54Exercised


(819,949
)

$
2.99Cancelled/Expired


(386,771
)

$
5.07Outstanding as of January 2,
    2006


4,197,075


$
6.09Granted


Exercised


(341,640
)

$
3.99Cancelled/Expired


(120,358
)

$
2.31Outstanding as of January 1,
    2007


3,735,077


$
6.32



5.9


$
4,338.5Exercisable as of January 1,
    2007


3,040,567


$
6.58



5.4


$
4,020.0     WeightedAverageTotal Exercisable at the End of the Year:

Options


Exercise PriceAs of January 1,
    2007


3,040,567


$
6.58As of January 2, 2006


2,794,564


$
6.87As of January 3, 2005


2,763,986


$
6.35     Options OutstandingWeighted





Options ExercisableAverage


Weighted





WeightedNumber of


Remaining


Average


Number of


AverageOptions


Contractual


Exercise


Options


ExerciseRange of Exercise Prices

Outstanding


Life in Years


Price


Exercisable


Price$1.36 - $ 2.04


862,010



6.6


$
1.79



831,860


$
1.78$2.09 - $ 3.14


517,817



6.6



2.65



481,749



2.68$4.33 - $ 6.50


941,116



7.7



5.17



390,494



5.12$6.52 - $ 9.78


297,833



4.2



7.9



230,451



8.26$9.84 - $12.25


1,116,301



3.6



12.06



1,106,013



12.063,735,077



5.9


$
6.32



3,040,567


$
6.58  59




---



##### Table of Contents



WeightedNumbre of


Average Grant-Shares  of


Date FairRestricted Stock


ValueNon-vested at December 29,
    2003


1,261,446


$
1.62Granted






Vested


735,123



1.62Forfeited










Non-vested at January 3, 2005


526,323



1.62Granted


860,000



5.99Vested


698,323



2.70Forfeited










Non-vested at January 2, 2006


688,000



5.99Granted


869,000



8.66Vested


353,300



7.46Forfeited


(54,000
)


7.74Non-vested at January 1,
    2007


1,149,700


$
7.48     Rule 10b5-1(c)(1)(i)(B) Regulation S-K
 60




---



##### Table of Contents



11.
    Defined
    Contribution Plan    12.
    Commitments
    and Contingencies  Commitments
    Fiscal Year

Amount(In thousands)2007

$
15,296.52008


14,814.12009


13,968.02010


12,647.62011


10,777.2Thereafter


27,296.0$
94,799.4          61




---



##### Table of Contents



Purchase
    Commitments
    Coca-Cola
      Self-Insurance
   62




---



##### Table of Contents



Litigation
    13.
    Subsequent
    Event   63




---



##### Table of Contents



SIGNATURES
      By:
    /s/  WILLIAM
    KOZIEL    (Principal Financial Officer and
 Principal Accounting Officer)
      Signature

Title

Date/s/  William
    D. ForrestWilliam
    D. Forrest

Chairman of the Board

March 19, 2007/s/  Robert
    MerrittRobert
    Merritt

Interim Chief Executive Officer,
    President and Director(Principal Executive Officer)

March 19, 2007/s/  William
    KozielWilliam
    Koziel

Chief Financial Officer,
    Secretary
    and Treasurer(Principal Financial Officer and Principal Accounting
    Officer)

March 19, 2007/s/  Eli
    CohenEli
    Cohen

Director

March 19, 2007/s/  Creed
    L.
    Ford IIICreed
    L. Ford III

Director

March 19, 2007/s/  Mark
    DemilioMark
    Demilio

Director

March 19, 2007/s/  Michael
    ODonnellMichael
    ODonnell

Director

March 19, 2007  64




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##### Table of Contents



EXHIBIT INDEX
  ExhibitNumber

Description of Exhibit2
.1

Merger Agreement by and among
    Xando, Incorporated, Xando Merger Corp. and Cosi Sandwich Bar,
    Inc. dated as of October 4, 1999 (Filed as Exhibit 2.1
    to the Companys Registration Statement on
    Form S-1,
    file #333-86390).3
.1

Amended and Restated Certificate
    of Incorporation of Cosi, Inc. (Filed as Exhibit 3.1 to the
    Companys Annual Report on
    Form 10-K
    for the period ended December 30, 2002).3
.2

Amended and Restated By-Laws of
    Cosi, Inc. (Filed as Exhibit 3.2 to the Companys
    Annual Report on
    Form 10-K
    for the period ended December 30, 2002).4
.1

Form of Certificate of Common
    Stock (Filed as Exhibit 4.1 to the Companys
    Registration Statement on
    Form S-1,
    file #333-86390).4
.2

Rights Agreement between Cosi,
    Inc. and American Stock Transfer and Trust Company as Rights
    Agent dated November 21, 2002 (Filed as Exhibit 4.2 to
    the Companys Annual Report on
    Form 10-K
    for the period ended December 30, 2002).4
.3

Amended and Restated Registration
    Agreement, dated as of March 30, 1999 (Filed as
    Exhibit 4.3 to the Companys Registration Statement on
    Form S-1,
    file #333-86390).4
.4

Supplemental Registration Rights
    Agreement, dated as of August 5, 2003 by and among the
    Company and the parties thereto (Filed as Exhibit 4.4.2 to
    the Companys Registration Statement on
    Form S-1,
    file #333-107689).4
.5

Amendment No. 1 to Rights
    Agreement dated as of November 21, 2002, between Cosi, Inc.
    and American Stock Transfer and Trust Company, as rights agent
    (Filed as Exhibit 4.3 to the Companys Quarterly
    Report on
    Form 10-Q
    for the fiscal quarter ended March 31, 2003).4
.6

Investment Agreement, dated as of
    August 5, 2003, among the Company, Eric J. Gleacher,
    Charles G. Phillips, LJCB Nominees Pty Ltd, and ZAM Holdings,
    L.P. (Filed as Exhibit 4.9 to the Companys
    Registration Statement on
    Form S-1/A,
    file #333-107689).4
.7

Letter Agreement, dated as of
    August 5, 2003, among the Company, Eric J. Gleacher,
    Charles G. Phillips, LJCB Nominees Pty Ltd, and ZAM Holdings,
    L.P. (Filed as Exhibit 4.10 to the Companys
    Registration Statement on
    Form S-1/A,
    file #333-107689).10
.1

Cosi, Inc. 2005 Omnibus Long-Term
    Incentive Plan (Filed as Exhibit C to the Companys
    Proxy Statement on Schedule 14A filed on March 31,
    2005, file #000-50052.10
.2

Cosi Employee Stock Purchase Plan
    (Filed as Exhibit 10.2 to the Companys Registration
    Statement on
    Form S-1,
    file #333-86390).10
.3

Cosi Non-Employee Director Stock
    Incentive Plan (Filed as Exhibit 10.3 to the Companys
    Registration Statement on
    Form S-1,
    file #333-86390).10
.4

Cosi Sandwich Bar, Inc. Incentive
    Stock Option Plan (Filed as Exhibit 10.4 to the
    Companys Registration Statement on
    Form S-1,
    file #333-86390).10
.5.3

Employment Agreement between Cosi,
    Inc. and Kevin Armstrong, dated May 9, 2005. (Filed as
    Exhibit 10.51.11 to the Companys Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended April 4, 2005).10
.5.4

Separation and Release Agreement
    between Cosi, Inc. and Cynthia Jamison, dated August 17,
    2005 (Filed as Exhibit 10.1 to the Companys Current
    Report on
    Form 8-K,
    dated August 23, 2005).10
.5.5

Employment Agreement between Cosi,
    Inc. and William D. Forrest, dated December 12, 2005 (Filed
    as Exhibit 10.1 to the Companys Current Report on
    Form 8-K,
    dated December 16, 2005).10
.5.6

Terms of Employment between Cosi,
    Inc. and William E. Koziel, effective as of August 17, 2005
    as described in the Companys Current Report on
    Form 8-K
    (Filed on August 23, 2005).10
.5.7

Terms of Employment between Cosi,
    Inc. and Christopher Carroll, effective as of May 22, 2006
    as described in the Companys Current Report on
    Form 8-K
    (Filed on May 25, 2006).10
.5.8

Terms of Employment between Cosi,
    Inc. and Christopher Ames, effective as of November 13,
    2006 as described in the Companys Current Report on
    Form 8-K
    (Filed on November 17, 2006).10
.5.9

Terms of Employment between Cosi,
    Inc. and Robert Merritt, effective as of March 12, 2007 as
    described in the Companys Current Report on
    Form 8-K
    (Filed on March 12, 2007). 65




---



##### Table of Contents



ExhibitNumber

Description of Exhibit10
.6.1

Foodservice Distribution Agreement
    between Cosi, Inc. and Distribution Market Advantage, Inc. dated
    as of November 1, 2005.(1)10
.7.1

Cosi, Inc. Form of Area Developer
    Franchise Agreement (Filed as Exhibit 10.6 to the
    Companys Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended July 4, 2005).10
.7.2

Cosi, Inc. Form of Area Developer
    Franchise Agreement (Filed as Exhibit 10.6 to the
    Companys Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended July 4, 2005).10
.8

Form of Senior Secured Note and
    Warrant Purchase Agreement (Filed as Exhibit 10.7 to the
    Companys Registration on
    Form S-1,
    file #333-86390).10
.9

Securities Purchase Agreement
    dated as of April 27, 2004 (Filed as Exhibit 10.1 to
    the Companys Current Report on
    Form 8-K,
    dated April 28, 2004).10
.10

Form of Restricted Stock Award
    Agreement (Filed as Exhibit 10.1 to the Companys
    Current Report on
    Form 8-K,
    dated June 6, 2005).16


Letter from Ernst & Young
    LLP to the Securities and Exchange Commission, dated as of
    August 13, 2004, acknowledging its agreement with the
    statements made in Current Report on
    Form 8-K
    (Filed as Exhibit 16 to the Companys Current Report
    on
    Form 8-K,
    dated August 13, 2004.21


Subsidiaries of Cosi, Inc. (Filed
    as Exhibit 21.1 to the Companys Registration
    Statement on
    Form S-1,
    file #333-86390).23
.1

Filed herewith Consent of BDO
    Seidman, LLP, Independent Registered Public Accounting Firm.31
.1

Filed herewith Certification of
    the Interim Chief Executive Officer pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.31
.2

Filed herewith Certification of
    the Chief Financial Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.32
.1

Certification of the Interim Chief
    Executive Officer and Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.     (1)
    
    Portions of Exhibit 10.6.1 have been omitted and filed
    separately with the Securities and Exchange Commission pursuant
    to a request for confidential treatment. 66