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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 2, 2006oro

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:  None
  Securities registered pursuant to Section 12(g) of the
    Act:
  Title of ClassCommon Stock ($.01 par value)   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
  
  Item

Description

PagePART I1.

Business


21A.

Risk Factors


61B.

Unresolved Staff
    Comments


142.

Properties


143.

Legal
    Proceedings


174.

Submission of
    Matters to a Vote of Security Holders


17PART II5.

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


176.

Selected Financial
    Data


197.

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


217A.

Quantitative and
    Qualitative Disclosures about Market Risk


338.

Financial
    Statements and Supplementary Data


339.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


339A.

Controls and
    Procedures


339B.

Other
    Information


35PART III10.

Directors and
    Executive Officers of the Registrant


3511.

Executive
    Compensation


3512.

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


3513.

Certain
    Relationships and Related Transactions


3514.

Principal
    Accounting Fees and Services


35PART IV15.

Exhibits and
    Financial Statement Schedules


35Foodservice Distribution AgreementConsent of Independent Registered Public Accounting FirmConsent of Independent Registered Public Accounting FirmCertification of CEOCertification of CFOCertifications   1




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PART I  Item 1.
    BUSINESS  General
      www.getcosi.com Form 10-K, Form 10-Q, Form 8-K c/o Investor
  Business
    Strategy
    Offering an innovative menu appealing to our target
    customer. made-to-order
  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.
 2




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Growth
    Strategy
    Continue to develop company-owned
    restaurants:
  Build a system of franchised restaurants. multi-unit
  Pursue foodservice strategic alliances.
  Cosi
    Product Offerings
  tm
    People
    Restaurant
    Operations
  Management Structure.
  Sales Forecasting.
  Product Quality.
 3




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Food and Labor Cost Controls. item-by-item
  multi-unit
    day-to-day
  Management
    Information Systems
  up-to-date
  point-of-sale
    Purchasing
      Coca-Cola
 4




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Competition
    Intellectual
    Property
      Governmental
    Regulation
    and/or
   5




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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;
    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;
    consumer trends;
    obtaining and maintaining required local, state and federal
    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. 6




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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.
    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.
   7




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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.
    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; 8




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
    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 and national economic conditions.    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.
   9




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Our
    franchisees could take actions that could harm our
    business.
    We
    could face liability from our franchisees.
    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 and national economic conditions; 10




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
    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.
    Our
    operations depend on 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.
     11




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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.
      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.
   12




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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.
    Our
    success depends on our ability to compete with many food service
    businesses.
      Fluctuations
    in coffee prices could adversely affect our operating
    results.
    Changes
    in food and supply costs could adversely affect our results of
    operations.
   13




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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

FormatNORTHEAST338 Elm Street

New Haven, CT

March  1996

Cosi38 East 45th  Street

New York, NY

February 1997

Cosi Downtown2160 Broadway

New York, NY

May 1997

Cosi11  West 42nd  Street

New York, NY

June  1997

Cosi Downtown60 East 56th  Street

New York, NY

September  1997

Cosi Downtown3 World Financial Center

New York, NY

January 1998

Cosi Downtown504 Avenue of the Americas

New York, NY

March  1998

Cosi 14




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Street Address

City

Date Opened

Format55 Broad Street

New York, NY

March  1998

Cosi Downtown54 Pine Street

New York, NY

May 1998

Cosi Downtown1633 Broadway

New York, NY

July 1998

Cosi Downtown61  West 48th  Street

New York, NY

August 1998

Cosi Downtown257 Park Avenue South

New York, NY

February 1999

Cosi685 Third Avenue

New York, NY

June  1999

Cosi Downtown970 Farmington Avenue

W. Hartford, CT

August 1999

Cosi461 Park Avenue South

New York, NY

January 2000

Cosi50 Purchase Street

Rye, NY

March  2000

Cosi841 Broadway

New York, NY

September  2000

Cosi15  S.  Moger Avenue

Mt. Kisco, NY

December  2000

Cosi545 Washington Boulevard

Jersey City, NJ

May 2001

Cosi Downtown77 Quaker Ridge Road

New Rochelle, NY

November 2001

Cosi1298 Boston Post Road

Larchmont, NY

December  2001

Cosi471 Mount Pleasant Road

Livingston, NJ

September  2002

Cosi29 Washington Street

Morristown, NJ

December  2002

Cosi498 7th  Avenue

New York, NY

December  2002

Cosi385  West Main Street

Avon, CT

December  2002

Cosi51 East Pallisade

Englewood, NJ

February 2003

Cosi700 6th  Avenue

New York, NY

February 2003

Cosi980 Boston Post Road

Darien, CT

October 2005

CosiMID-ATLANTIC234 South 15th  Street

Philadelphia, PA

September  1996

Cosi325 Chestnut Street

Philadelphia, PA

April 1997

Cosi1350 Connecticut Avenue

Washington, DC

September  1997

Cosi1128 Walnut Street

Philadelphia, PA

December  1997

Cosi140 South 36th  Street

Philadelphia, PA

August 1998

Cosi1647 20th  Street NW

Washington, DC

August 1998

Cosi761 Lancaster Avenue

Bryn Mawr, PA

September  1998

Cosi3003  N.  Charles Street

Baltimore, MD

December  1998

Cosi (a)301 Pennsylvania Avenue SE

Washington, DC

March  1999

Cosi2050 Wilson Boulevard

Arlington, VA

April 1999

Cosi215 Lombard Street

Philadelphia, PA

May 1999

Cosi1700 Pennsylvania Avenue

Washington, DC

August 1999

Cosi Downtown1700 Market Street

Philadelphia, PA

September  1999

Cosi Downtown700 King Street

Alexandria, VA

May 2000

Cosi700 11th  Street

Washington, DC

May 2000

Cosi4250 Fairfax Drive

Arlington, VA

June  2000

Cosi1919 M Street

Washington, DC

September  2000

Cosi1001 Pennsylvania Avenue NW

Washington, DC

October 2000

Cosi Downtown201 South 18th  Street

Philadelphia, PA

October 2000

Cosi7251 Woodmont Avenue

Bethesda, MD

December  2000

Cosi11909 Democracy Drive

Reston, VA

May 2001

Cosi1501 K Street NW

Washington, DC

December  2001

Cosi Downtown 15




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Street Address

City

Date Opened

Format1875 K Street

Washington, DC

July 2002

Cosi Downtown601 Pennsylvania Ave. NW

Washington, DC

September  2002

Cosi1275 K Street

Washington, DC

September  2002

Cosi295 Main Street

Exton, PA

November 2002

Cosi5252 Wisconsin Ave, NW

Washington, DC

December  2002

Cosi177 Kentlands Blvd

Gaithersburg, MD

January 2003

Cosi1333 H Street, NW

Washington DC

January 2003

Cosi Downtown1801  N.  Lynn Street

Arlington, VA

November 2005

Cosi4025 Welsh Road

Willow Grove, PA

December  2005

CosiMIDWEST116  S.  Michigan Avenue

Chicago, IL

September  2000

Cosi55  E.  Grand Street

Chicago, IL

October 2000

Cosi230 W. Washington Street

Chicago, IL

November 2000

Cosi Downtown203 North LaSalle Street

Chicago, IL

May 2001

Cosi Downtown301 South State Street

Ann Arbor, MI

May 2001

Cosi1101 Lake Street

Oak Park, IL

June  2001

Cosi101 North Old Woodward Avenue

Birmingham, MI

August 2001

Cosi4074 The Strand West

Columbus, OH

October 2001

Cosi25  E.  Hinsdale

Hinsdale, IL

December  2001

Cosi8775  N.  Port
    Washington Road

Fox Point, WI

December  2001

Cosi230  West Monroe Street

Chicago, IL

May 2002

Cosi Downtown301 East Grand River Avenue

East Lansing, MI

May 2002

Cosi84  W.  Adams Road

Rochester Hills, MI

September  2002

Cosi6390 Sawmill Road

Columbus, OH

September  2002

Cosi2212 East Main Street

Bexley, OH

September  2002

Cosi28674 Telegraph Road

Southfield, MI

November 2002

Cosi1478 Bethel Road

Columbus, OH

November 2002

Cosi233 North Michigan Avenue

Chicago, IL

December  2002

Cosi Downtown37652 Twelve Mile Road

Farmington Hills, MI

December  2002

Cosi15131 LaGrange Road

Orland Park, IL

December  2002

Cosi7166  N.  High Street

Worthington, OH

December  2002

Cosi28 East Jackson Blvd

Chicago, IL

January 2003

Cosi Downtown1310 Polaris Parkway

Columbus, OH

February 2003

Cosi33 N Dearborn

Chicago, IL

June  2005

Cosi Downtown1740 Sherman Ave

Evanston, IL

September  2005

Cosi17848 Gardenway NE

Woodinville, WA

November 2005

Cosi1825 2nd  Street

Highland Park, IL

December  2005

CosiFEDERATED7303 Southwest 88th  Street

Miami, FL

October 2004

Cosi400 Ernest G. Barrett Parkway

Kennesaw, GA

October 2004

Cosi(c)19535 Biscayne Blvd.

Aventura, FL

October 2004

Cosi9100 Southwest 136th  Street

Miami, FL

November 2004

Cosi(b)3333 Buford Drive

Buford, GA

November 2004

Cosi(c) 16




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Street Address

City

Date Opened

Format1601 Third Avenue

Seattle, WA

November 2004

Cosi4545 Poplar

Memphis, TN

November 2004

Cosi(c)2801 Stevens Creek Blvd.

Santa  Clara, CA

November 2004

Cosi(c)333 North University Drive

Plantation, FL

December  2004

Cosi(b)19535 Biscayne Blvd.

Aventura, FL

December  2005

Cosi     (a)
    
    Currently operating as a Xando Coffee and Bar location.(b)
    
    Currently closed due to Hurricane Wilma(c)
    
    Closed in January 2006  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 2005


Fiscal 2004Fiscal Quarter:

High


Low


High


LowFirst Quarter

$
7.42


$
5.61


$
5.87


$
2.70Second Quarter

$
7.18


$
4.42


$
7.04


$
5.17Third Quarter

$
10.00


$
6.82


$
6.31


$
4.53Fourth Quarter

$
10.08


$
7.72


$
6.63


$
4.90   Stockholders
    Dividend
    Policy
   17




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Securities
    Authorized for Issuance Under Equity Compensation
    Plans
    Recent
    Sales of Unregistered Securities
    (a) Issuances
    of Shares of Common Stock.
            (b) Exercises
    of Warrants
               18




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Item 6.
    SELECTED
    FINANCIAL DATA    Fiscal Year2005


2004


2003


2002


2001(In thousands, except per share
    data)Consolidated Statement of
    Operations Data:Total Revenues

$
117,180.5


$
110,630.6


$
107,257.4


$
84,424.2


$
70,184.1Costs and expenses:Cost of goods sold


28,205.3



28,012.8



29,713.9



22,697.5



18,791.7Restaurant expenses


67,768.6



66,975.7



67,321.8



51,244.9



45,396.3Total cost of sales


95,973.9



94,988.5



97,035.7



73,942.4



64,188.0General and administrative expenses


21,320.4



20,624.7



22,274.4



17,811.7



18,361.5Corporate office relocation expense






1,093.7











Stock compensation expense


2,944.2



2,855.3



893.7







Depreciation and amortization


7,425.1



6,947.8



7,852.5



5,951.2



6,749.3Restaurant pre-opening expenses


983.5



405.4



389.8



1,845.1



1,438.8Provision for losses on asset
    impairments and disposals


3,880.4



1,405.5



8,531.8



1,056.5



8,486.3Lease termination benefits, net


(178.8
)


(588.8
)


(3,391.2
)


(1,165.0
)


6,410.7Gain on sale of assets


(1,431.7
)














Operating loss


(13,736.5
)


(17,101.5
)


(26,329.3
)


(15,017.7
)


(35,450.5
)Other income (expense):Interest income


802.0



159.0



40.5



98.3



340.5Interest expense


(34.0
)


(62.4
)


(316.8
)


(1,741.6
)


(654.4
)Allowance for notes receivable
    from stockholders


(261.1
)


(1,266.0
)










Loss on early extinguishment of
    debt














(5,083.2
)


Other income (expense)


103.7



(102.5
)


112.0



380.9



Total other income (expense)


610.6



(1,271.9
)


(164.3
)


(6,345.6
)


(313.9
)Net loss


(13,125.9
)


(18,373.4
)


(26,493.6
)


(21,363.3
)


(35,764.4
)Preferred stock dividends














(8,193.6
)


(6,678.1
)Net loss attributable to common
    stockholders

$
(13,125.9
)

$
(18,373.4
)

$
(26,493.6
)

$
(29,556.9
)

$
(42,442.5
)Net loss per common
    share  basic and diluted

$
(0.38
)

$
(0.62
)

$
(1.53
)

$
(5.13
)

$
(9.42
)Weighted average shares used in
    computing net loss per common share  basic and
    diluted


34,929



29,432



17,304



5,763



4,507 19




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|                                                                 |  |                                           |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|---------------------------------------------------------------- |  | ----------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                                 |  | Fiscal Year                               |          
|                                                                 |  | 2005                                      |           |   | 2004 |   |           | 2003 |  |   | 2002      |   |  | 2001 |          
|                                                                 |  | (In thousands, except per share
    data) |          
|                                                                
|Selected Balance Sheet
    Data:                                 |  |                                           |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Cash and cash equivalents                                        |  | $                                         | 1,952.3   |   |      | $ | 1,089.7   |      |  | $ | 7,957.0   |   |  | $    | 13,032.3  |   |  | $ | 4,469.6   |  
|Investments                                                      |  |                                           | 32,917.5  |   |      |   | 9,961.6   |      |  |   |          |   |  |      |          |   |  |   |          |  
|Total assets                                                     |  |                                           | 76,544.0  |   |      |   | 51,138.3  |      |  |   | 47,946.6  |   |  |      | 67,872.7  |   |  |   | 36,207.6  |  
|Total debt and capital lease
    obligations                     |  |                                           | 118.6     |   |      |   | 358.3     |      |  |   | 391.2     |   |  |      | 1,648.5   |   |  |   | 11,180.0  |  
|Mandatorily redeemable preferred
    stock                       |  |                                           |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   | 92,289.3  |  
|Total stockholders equity
    (deficit)                         |  |                                           | 56,208.4  |   |      |   | 29,152.4  |      |  |   | 22,834.1  |   |  |      | 36,996.3  |   |  |   | (90,818.5 | )
|Selected Statement of Cash Flow
    Data:                        |  |                                           |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Cash flow used in operating
    activities                       |  |                                           | (4,249.4  | ) |      |   | (9,631.1  | )    |  |   | (11,387.7 | ) |  |      | (4,902.4  | ) |  |   | (12,027.2 | )
|Cash flow used in investing
    activities                       |  |                                           | (31,535.7 | ) |      |   | (17,267.9 | )    |  |   | (3,754.8  | ) |  |      | (28,374.5 | ) |  |   | (20,622.9 | )
|Cash flow provided by financing
    activities                   |  | $                                         | 36,647.8  |   |      | $ | 20,031.7  |      |  | $ | 10,067.2  |   |  | $    | 41,839.7  |   |  | $ | 32,056.8  |  
|Selected Operating
    Data:                                     |  |                                           |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Company-owned restaurants open at
    the end of the fiscal year |  |                                           | 96        |   |      |   | 92        |      |  |   | 89        |   |  |      | 91        |   |  |   | 67        |  



20



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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 2, 2006, January 3, 2005 and December 29,
    2003 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
  and/or
             21




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Critical
    Accounting Policies
      Long lived assets: Accounting for
    the Impairment or Disposal of Long Lived Assets
  Lease termination costs:
  Accounting for
    Costs Associated with Exit or Disposal Activities,
  Stock options: Accounting for Stock Based
    Compensation  Transition and Disclosure. Accounting for Stock
    Based Compensation Accounting for Stock Issued to Employees
 22




---



##### Table of Contents



Share-Based Payment, Accounting for Stock-Based
    Compensation Accounting for Stock Issued to Employees , Statement of Cash
    Flows.
  Property and Equipment:
  Inventories:
  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:
  Restaurant
    Sales
    Franchise
    Fees and Royalties
    Comparable
    Restaurant Sales
   23




---



##### Table of Contents



Costs and
    Expenses
  Cost of goods sold.
  Restaurant operating expenses.
  General and administrative expenses.
  Stock compensation expense.
  Depreciation and amortization.
  Restaurant pre-opening expenses.
 24




---



##### Table of Contents



Results
    of Operations
    Fiscal Year2005


2004


2003Restaurant net sales


99.9
%


100
%


100
%Franchise fees and royalties


0.1



0.0



0.0Total revenue


100.0



100.0



100.0Cost and expenses:Cost of goods sold (1)


24.1



25.3



27.7Restaurant expenses (1)


57.9



60.5



62.8Total cost of sales (1)


82.0



85.8



90.5General and administrative expenses


18.2



18.6



20.7Corporate office relocation expense






1.0



Stock compensation expense


2.5



2.6



0.8Depreciation and amortization


6.3



6.3



7.3Restaurant pre-opening expenses


0.8



0.4



0.4Provision for losses on asset
    impairments and disposals


3.3



1.3



8.0Lease termination benefits, net


(0.2
)


(0.5
)


(3.2
)Gain on sale of assets


(1.1
)






Operating loss


(11.8
)


(15.5
)


(24.5
)Other income (expense):Interest income


0.7



0.1



Interest expense






(0.1
)


(0.3
)Allowance for notes receivable
    from stockholders


(0.2
)


(1.0
)


Other (expense) income


0.1



(0.1
)


0.1Total other income (expense)


0.6



(1.1
)


(0.2
)Net loss


(11.2
)%


(16.6
)%


(24.7
)%     (1)
    
    As a percentage of restaurant net sales  Fiscal
    Year 2005 (52 weeks) compared to Fiscal Year 2004
    (53 weeks)
  Restaurant
    Net Sales
    Franchise
    Fees and Royalties
   25




---



##### Table of Contents



Costs
    and Expenses
  Cost of goods sold.
  Restaurant operating expenses. Accounting for Stock Issued to Employees.
  General and administrative costs.
  Stock compensation expense. Accounting for Stock Issued to
    Employees,
  Depreciation and amortization.
  Restaurant pre-opening expenses. pre-opening pre-opening
  Provision for losses on asset impairments and
    disposals.
 26




---



##### Table of Contents



Lease termination benefits, net.
  Gain on sale of assets.
  Allowance for notes receivable from
    stockholders.
  Interest income and expense.
  Other income (expense).
  Fiscal
    Year 2004 (53 weeks) compared to Fiscal Year 2003
    (52 weeks)
  Net
    Sales
      Costs
    and Expenses
  Cost of goods sold.
 27




---



##### Table of Contents



Restaurant operating expenses.
  General and administrative costs.
  Corporate office relocation.
  Stock compensation expense. Accounting for Stock Issued to
    Employees,
  Depreciation and amortization.
  Restaurant
    pre-opening
    expenses. pre-opening
  Provision for losses on asset impairments and
    disposals.
 28




---



##### Table of Contents



Lease termination benefits, net.
    Allowance for notes receivable from
    stockholders.
  Interest income and expense.
  Other income (expense).
  Liquidity
    and Capital Resources
             29




---



##### Table of Contents



Contractual
    Obligations:
  Payments Due by PeriodDue


Due


DueTotal


Due


Fiscal 2007


Fiscal 2009


AfterDescription

Obligations


Fiscal 2006


to Fiscal 2008


to Fiscal 2010


Fiscal 2010(In thousands)Long-term debt

$
150.0


$
25.0


$
50.0


$
50.0


$
25.0Operating leases(1)(2)


79,837.3



12,959.7



25,114.3



21,246.9



20,516.4Employee severance


58.4



58.4











Purchase Obligations(3)


904.8



904.8











Total contractual cash obligations

$
80,950.5


$
13,947.9


$
25,164.3


$
21,296.9


$
20,541.4     (1)
    
    Amounts shown are net of $1.4 million of total sublease
    rental income due under non-cancelable subleases.(2)
    
    Includes approximately $0.9 million of obligations on
    leases for restaurants that have been closed as of
    January 2, 2006.(3)
    
    Primarily contractual obligations related to new restaurant
    construction. 30




---



##### Table of Contents



Off-Balance
    Sheet Arrangements
    Selected
    Quarterly Financial Data
      First


Second


Third


FourthFiscal 2005

Quarter


Quarter


Quarter


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

$
27,205.1


$
30,619.6


$
30,803.4


$
28,552.3Total cost of sales


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
)   First


Second


Third


FourthFiscal 2004

Quarter


Quarter


Quarter


QuarterTotal revenues

$
24,917.2


$
29,008.5


$
28,170.0


$
28,534.9Total cost of sales


22,821.9



24,138.1



23,244.9



24,783.6Net loss

$
(6,378.1
)

$
(1,597.9
)

$
(3,815.4
)

$
(6,582.1
)Basic and diluted loss per share:

$
(0.24
)

$
(0.05
)

$
(0.12
)

$
(0.21
)   New
    Accounting Pronouncements
  Inventory Costs: an amendment of ARB No. 43,
    Chapter 4,
  Share-Based Payment Accounting for Stock-Based
    Compensation Accounting for Stock Issued to
    Employees , Statement of
    Cash Flows.
  Accounting for Conditional Asset Retirement Obligations-an
    interpretation of FASB Statement No. 143 and/or
 31




---



##### Table of Contents



13-1, Accounting for Rental Costs Incurred During a Construction
    Period 13-1). 13-1
  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 consumer preferences and demographic trends;
    competition in our markets, both in our business and locating
    suitable restaurant sites;
    our operation and execution in new and existing markets;
    expansion into new markets;
    our ability to attract and retain qualified franchisees;
    our ability to locate suitable restaurant sites in new and
    existing markets and negotiate acceptable lease terms;
    the rate of our internal growth, and our ability to generate
    increased revenue from our existing restaurants;
    our ability to generate positive cash flow from existing and new
    restaurants;
    fluctuations in our quarterly results due to seasonality;
    increased government regulation and our ability to secure
    required governmental approvals and permits;
    our ability to create customer awareness of our restaurants in
    new markets;
    the reliability of our customer and market studies;
    cost effective and timely planning, design and build-out of new
    restaurants;
    our ability to recruit, train and retain qualified corporate and
    restaurant personnel and management;
    market saturation due to new restaurant openings;
    inadequate protection of our intellectual property; 32




---



##### Table of Contents




    adverse weather conditions which impact customer traffic at our
    restaurants; and
    adverse economic conditions.    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  Disclosure
    Controls and Procedures
  Rule 13a-15(e)
 33




---



##### Table of Contents



Managements
    Report on Internal Control Over Financial Reporting
  Form 10-K.
  Rule 13a-15(f)
      Internal Control-Integrated
    Framework.
    Changes
    in Internal Control Over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
 34




---



##### Table of Contents



Item 9B.
    OTHER
    INFORMATION   PART III  Item 10.
    DIRECTORS
    AND EXECUTIVE OFFICERS OF THE REGISTRANT    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    Item 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES   PART IV  Item 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES        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). 35




---



##### Table of Contents



|        |    |                        |  |                                                                                                                                                                                                                                                                                                
|------- | -- | ---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                       
|Number  |    | Description of Exhibit
|       
|        | 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 | .5.1                   |  | Employment Agreement between Cosi,
    Inc. and Cynthia Jamison, dated as of July 7, 2004. (Filed
    as Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended June 28, 2004).                                                                      
|        | 10 | .5.2                   |  | Separation and Release Agreement
    between Cosi, Inc. and Jonathan M. Wainwright, Jr., dated
    January 3, 2005. (Filed as Exhibit 10.1 to the
    Companys Current Report on
    Form 8-K,
    dated January 6, 2005).                                                                    
|        | 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 | .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).                                                                                                                                              

36



---



##### Table of Contents



|        |    |                        |  |                                                                                                                                                                                                                                                                                                                   
|------- | -- | ---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                       
|Number  |    | Description of Exhibit
|       
|        | 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                     |  | Consent of Independent Registered
    Public Accounting Firm                                                                                                                                                                                                                                                      
|        | 23 | .2                     |  | Consent of Independent Registered
    Public Accounting Firm                                                                                                                                                                                                                                                      
|        | 31 | .1                     |  | Certification of the Chief
    Executive Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                   
|        | 31 | .2                     |  | Certification of the Chief
    Executive Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                   
|        | 32 | .1                     |  | Certification of the 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.

37



---



##### Table of Contents



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageReports of
    Independent Registered Public Accounting Firms


39-40Report of
    Independent Registered Public Accounting Firm on Internal
    Control Over Financial Reporting


41Consolidated
    Balance Sheets as of January 2, 2006 and January 3,
    2005


42Consolidated
    Statements of Operations for the Fiscal Years Ended
    January 2, 2006, January 3, 2005 and December 29,
    2003


43Consolidated
    Statements of Stockholders Equity for the Fiscal Years
    Ended January 2, 2006, January 3, 2005 and
    December 29, 2003


44Consolidated
    Statements of Cash Flows for the Fiscal Years Ended
    January 2, 2006, January 3, 2005 and December 29,
    2003


45Notes to
    Consolidated Financial Statements for the Fiscal Years Ended
    January 2, 2006, January 3, 2005, and
    December 29, 2003


46-62  38




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm          ,
  Internal
    Control  Integrated Framework
      39




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm   To the Board
    of Directors
              40




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm on
    Internal Control over Financial Reporting
                      41




---



##### Table of Contents



COSI,
    INC.
  Consolidated
    Balance Sheets
 As of
    January 2, 2006 and January 3, 2005
  January 2,


January 3,2006


2005ASSETSCurrent assets:Cash and cash equivalents

$
1,952,343


$
1,089,691Investments


32,917,466



9,961,624Accounts receivable, net of
    allowances of $7,972 and $152,355, respectively


496,259



613,226Inventories


914,594



890,511Prepaid expenses and other current
    assets


3,672,673



2,315,098Total current assets


39,953,335



14,870,150Furniture and fixtures, equipment
    and leasehold improvements, net


33,502,646



34,074,491Intangibles, security deposits and
    other assets


3,088,016



2,193,701Total assets

$
76,543,997


$
51,138,342LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,689,239


$
3,972,952Accrued expenses


9,837,187



9,677,544Deferred franchise revenue


510,000



Current portion of long-term debt


18,779



74,904Current portion of other long-term
    liabilities


345,040



363,000Total current liabilities


13,400,245



14,088,400Long-term debt, net of current
    portion


99,818



283,367Other long-term liabilities, net
    of current portion


6,835,527



7,614,195Total liabilities


20,335,590



21,985,962Commitments and contingenciesStockholders equity:Common
    stock  $.01 par value;
    100,000,000 shares authorized, 38,478,796 and
    30,819,716 shares issued and outstanding, respectively


384,788



308,197Additional paid-in capital


268,330,471



225,519,747Unearned stock compensation


(3,866,398
)


(899,986
)Treasury stock,
    239,543 shares at cost


(1,197,715
)


Notes receivable from stockholders






(1,458,817
)Accumulated deficit


(207,442,739
)


(194,316,761
)Total stockholders equity


56,208,407



29,152,380Total liabilities and
    stockholders equity

$
76,543,997


$
51,138,342    42




---



##### Table of Contents



COSI,
    INC
  Consolidated
    Statements of Operations
 For the
    Fiscal Years Ended January 2, 2006, January 3, 2005
    and December 29, 2003
  January 2,


January 3,


December 29,2006


2005


2003RevenuesRestaurant net sales

$
117,080,028


$
110,630,624


$
107,257,385Franchise fees and royalties


100,511







Total revenues


117,180,539



110,630,624



107,257,385Cost of sales:Cost of goods sold


28,205,323



28,012,806



29,713,910Restaurant expenses


67,768,572



66,975,678



67,321,817Total cost of sales


95,973,895



94,988,484



97,035,727General and administrative expenses


21,320,441



20,624,741



22,274,382Corporate office relocation expense






1,093,699



Stock compensation expense


2,944,185



2,855,283



893,659Depreciation and amortization


7,425,099



6,947,756



7,852,511Restaurant pre-opening expenses


983,461



405,392



389,805Provision for losses on asset
    impairments and disposals


3,880,387



1,405,512



8,531,841Lease termination benefits, net


(178,745
)


(588,786
)


(3,391,252
)Gain on sale of assets


(1,431,739
)






Operating loss


(13,736,445
)


(17,101,457
)


(26,329,288
)Interest income


802,000



158,918



40,501Interest expense


(34,177
)


(62,439
)


(316,791
)Allowance on notes receivable from
    stockholders


(261,102
)


(1,265,984
)


Other income (expense)


103,746



(102,500
)


111,985Net loss

$
(13,125,978
)

$
(18,373,462
)

$
(26,493,593
)Per Share Data:Basic and diluted loss per share

$
(0.38
)

$
(0.62
)

$
(1.53
)Weighted average common shares
    outstanding


34,928,990



29,432,050



17,304,480    43




---



##### Table of Contents



COSI,
    INC.
  Consolidated
    Statements of Stockholders Equity
 As of
    January 2, 2006, January 3, 2005 and December 29,
    2003
  Common Stock





Treasury StockAdditional


Unearned


Shares of


Amount


StockholdersNumber of





Paid In


Stock


Treasury


Treasury


Notes


AccumulatedShares


Amount


Capital


Compensation


Stock


Stock


Receivable


Deficit


TotalBalance, December 30, 2002


16,573,514


$
165,735


$
189,255,034


$







$



$
(2,974,804
)

$
(149,449,706
)

$
36,996,259Issuance of restricted stock


1,678,471



16,785



2,712,654



(2,729,439
)


















Amortization of unearnedstock compensation














893,659



















893,659Return of shares for note


















(21,978
)


(250,003
)


250,003







Exercise of warrants


3,036



30



(249,783
)






21,978



250,003











250Issuance of common stock


4,990,752



49,909



6,774,387























6,824,296Conversion of debt to common stock


3,013,336



30,133



4,489,871























4,520,004Stock compensation










93,246























93,246Net loss






























(26,493,593
)


(26,493,593
)Balance, December 29, 2003


26,259,109



262,592



203,075,409



(1,835,780
)










(2,724,801
)


(175,943,299
)


22,834,121Issuance of common stock


4,284,403



42,844



19,566,282























19,609,126Issuance of restricted stock


23,722



237



131,787



(7,024
)


















125,000Stock compensation










2,151,295























2,151,295Amortization of unearned stock
    compensation














942,818



















942,818Exercise of warrants


3,424



34



























34Exercise of stock options


249,058



2,490



594,975























597,465Allowance for stockholders notes
    receivable


























1,265,984







1,265,984Net loss






























(18,373,462
)


(18,373,462
)Balance, January 3, 2005


30,819,716



308,197



225,519,747



(899,986
)










(1,458,817
)


(194,316,761
)


29,152,380Issuance of common stock, net of
    issuance costs


5,837,563



58,374



34,253,901























34,312,275Issuance of restricted stock


885,610



8,858



5,271,267



(5,155,125
)


















125,000Stock compensation










844,716























844,716Amortization of unearned stock
    compensation














2,188,713



















2,188,713Exercise of warrants


115,958



1,160



(1,160
)






















Exercise of stock options


819,949



8,199



2,442,000























2,450,199Allowance for stockholders notes
    receivable


























261,102







261,102Return of shares for notes


































receivable from stockholders


















239,543



(1,197,715
)


1,197,715







Net loss






























(13,125,978
)


(13,125,978
)Balance, January 2, 2006


38,478,796


$
384,788


$
268,330,471


$
(3,866,398
)


239,543


$
(1,197,715
)

$



$
(207,442,739
)

$
56,208,407    44




---



##### Table of Contents



COSI,
    INC.
  Consolidated
    Statements of Cash Flows
 For the
    Fiscal Years Ended January 2, 2006, January 3, 2005
    and December 29, 2003
  January 2,


January 3,


December 29,2006


2005


2003Cash flows from operating
    activities:Net loss

$
(13,125,978
)

$
(18,373,462
)

$
(26,493,593
)Adjustments to reconcile net loss
    to net cash used in operating activitiesDepreciation and amortization


7,425,099



6,947,756



7,852,511Amortization of deferred financing
    costs










90,490Gain on sale of assets


(1,431,739
)






Non-cash portion of asset
    impairments and disposals


3,828,078



1,393,828



8,232,284Provision (recovery) for bad debts


147,531



(39,206
)


202,710Impairment of intangible assets










607,900Stock compensation expense


844,716



2,276,294



93,246Amortization of unearned
    compensation


2,188,713



942,818



893,658Non-cash portion of interest
    expense










20,004Allowance on notes receivable from
    stockholders


261,102



1,265,984



Changes in operating assets and
    liabilities:Accounts receivable


(30,564
)


34,425



700,371Inventories


(24,083
)


92,344



482,875Prepaid expenses and other current
    assets


(1,357,575
)


(856,580
)


240,232Other assets


(799,017
)


(335,649
)


(155,538
)Accounts payable


(1,283,713
)


(2,060,572
)


(1,991,639
)Accrued expenses


(95,389
)


620,281



1,630,929Other liabilities


(796,628
)


(1,539,363
)


(3,794,126
)Net cash used in operating
    activities


(4,249,447
)


(9,631,102
)


(11,387,686
)Cash flows from investing
    activities:Capital expenditures


(10,722,585
)


(7,392,224
)


(4,069,913
)Increase in net accounts payable
    for capital expenditures


953,995







Proceeds from sale of assets


1,284,066







Purchases of investments, net


(22,955,842
)


(9,961,624
)


(Payment) return of security
    deposits, net


(95,298
)


85,893



315,122Net cash used in investing
    activities


(31,535,664
)


(17,267,955
)


(3,754,791
)Cash flows from financing
    activities:Proceeds from issuance of common
    stock


36,887,437



20,206,591



6,824,296Exercises of warrants






34



250Proceeds from long-term debt










4,500,000Principal payments on long-term
    debt


(239,674
)


(172,002
)


(1,140,825
)Principal payments on capital
    lease obligations






(2,917
)


(116,509
)Net cash provided by financing
    activities


36,647,763



20,031,706



10,067,212Net increase (decrease) in cash
    and cash equivalents


862,652



(6,867,351
)


(5,075,265
)Cash and cash equivalents,
    beginning of period


1,089,691



7,957,042



13,032,307Cash and cash equivalents, end of
    period

$
1,952,343


$
1,089,691


$
7,957,042Supplemental disclosures of cash
    flow information:Cash paid for:Interest

$
24,259


$
74,324


$
315,833Corporate franchise and income
    taxes

$
206,887


$
288,165


$
220,800    45




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial Statements
 For the Fiscal Years Ended January 2, 2006,
    January 3, 2005 and December 29, 2003
  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,
 46




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##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
    Concentration
    of Credit Risks
      Accounts
    Receivable
      (Dollars in thousands)Balance as of December 30,
    2002

$
232.1Charged to costs and expenses


202.4Deductions


(41.4
)(a)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

$
8.0     (a)
    
    Write-off of uncollectible accounts.  Inventories
  first-in,
  Accounting
    for Lease Obligations
  Bulletin No. 85-3, Accounting for Operating Leases with Scheduled Rent
    Increases No. 88-1, Issues Relating to Accounting for Leases.
 47




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##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
     Furniture
    and Fixtures, Equipment and Leasehold Improvements
    Restaurant
    Impairment Charges
        Lease
    Termination Benefits, Net
  Accounting for Costs
    Associated with Exit or Disposal Activities
   48




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
      (Dollars in thousands)Balance as of December 30,
    2002

$
6,625.6Charged to costs and expenses


(3,391.3
)Deductions


(1,009.4
)(b)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


(178.7
)Deductions


(16.1
)(b)Balance as of January 2,
    2006

$
742.2     (b)
    
    Payments to landlords and others for leases.    Gain
    on Sale of Assets
    Intangibles,
    Security Deposits and Other Assets
    Goodwill and Other
    Intangible Assets,
  Other
    Liabilities
    Income
    Taxes
   49




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
    Revenue
    Recognition
    Cost
    of Sales
    Advertising
    Costs
    Restaurant
    Pre-Opening Costs
    Net
    Loss Per Share
    Stock-Based
    Compensation
  Share-Based Payment, Accounting for Stock-Based
    Compensation. Accounting for Stock Issued to Employees , Statement of Cash
    Flows.
 50




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
     Pro
    Forma:
  Fiscal Year2005


2004


2003Net loss as reported

$
(13,125,941
)

$
(18,373,462
)

$
(26,493,593
)Add: Stock-based compensation
    expense included in reported net loss


3,158,451



3,219,113



986,905Deduct: Total stock-based employee
    compensation expense determined under the fair value based
    method for all awards


(4,063,585
)


(3,691,060
)


(2,123,150
)Pro forma net loss

$
(14,031,075
)

$
(18,845,409
)

$
(27,629,838
)Net loss per common share: basic
    and dilutedAs reported

$
(0.38
)

$
(0.62
)

$
(1.53
)Pro forma

$
(0.40
)

$
(0.64
)

$
(1.60
)     Accounting for Stock Issued to Employees,
    Fiscal Year2005


2004


2003Expected dividend yield


0
%


0
%


0
%Expected stock price volatility


68
%


68
%


40
%Average risk-free interest rate


3.79
%


3.47
%


4.01
%Average expected life of options


5



5



5     Fair
    Value of Financial Instruments
   51




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
   Segment
    Information
    Accounting
    Estimates
    Reclassifications
    New
    Accounting Pronouncements
  Inventory Costs: an amendment of ARB No. 43,
    Chapter 4,
  Accounting for Conditional Asset Retirement
    Obligations  an interpretation of FASB Statement
    No. 143 and/or
  13-1, Accounting for Rental Costs Incurred During a Construction
    Period 13-1). 13-1
 52




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
   2.
    Accounts
    Receivable    Fiscal Year2005


2004Accounts receivable, trade

$
72,558


$
530,745Reimbursements due from landlords


159,675



Other


271,998



234,836Total receivables


504,231



765,581Less allowance for doubtful
    accounts


(7,972
)


(152,355
)Accounts receivable, net

$
496,259


$
613,226   3.
    Prepaid
    Expenses and Other Current Assets  :
  Fiscal Year2005


2004Prepaid insurance

$
1,888,411


$
2,102,120Prepaid rent


1,378,384



51,983Other


405,878



160,995Prepaid expenses and other current
    assets

$
3,672,673


$
2,315,098   4.
    Furniture
    and Fixtures, Equipment and Leasehold Improvements    Fiscal Year2005


2004Leasehold improvements

$
38,213,411


$
36,694,608Furniture and fixtures


10,130,070



8,856,755Restaurant equipment


14,017,377



12,885,967Computer and telephone equipment


9,321,252



8,253,972Construction in progress


1,250,728



530,104Total furniture and fixtures,
    equipment and leasehold improvements


72,932,838



67,221,406Less accumulated depreciation and
    amortization


(39,430,192
)


(33,146,915
)Furniture and fixtures, equipment
    and leasehold improvements, net

$
33,502,646


$
34,074,491    53




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
   5.
    Intangibles,
    Security Deposits and Other Assets    Fiscal Year2005


2004Liquor licenses

$
631,365


$
785,598Trademarks


195,000



195,000Security deposits


1,286,696



1,191,398Other


974,955



21,705Total other assets

$
3,088,016


$
2,193,701     6.
    Accrued
    Expenses    Fiscal Year2005


2004Payroll and related benefits and
    taxes

$
2,933,332


$
2,648,324Taxes payable, other than income
    taxes


673,597



762,305Professional and legal


453,597



553,044Rent


529,653



417,418Gift cards/certificates


438,878



334,731Severance


58,447



380,741Insurance


1,235,485



2,216,698Utilities


649,883



332,189New restaurant construction


953,995



Unearned revenue


601,241



539,727Other


1,309,079



1,492,367Total accrued expenses

$
9,837,187


$
9,677,544   7.
    Long-Term
    Debt       54




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
     8.
    Capital
    Lease Obligations    9.
    Income
    Taxes    Fiscal Year2005


2004Deferred tax assets:Net operating loss carryforward

$
50,423,195


$
47,673,687Deferred compensation


1,469,231



341,995Depreciation expense and
    impairment of long-lived assets


11,720,494



11,417,515Lease termination accrual


282,009



356,046Allowance for doubtful accounts


3,029



57,895Contractual lease increases


1,994,001



1,578,249Accrued expenses


86,146



130,788Total deferred tax assets


65,978,105



61,556,175Valuation allowance


(65,978,105
)


(61,556,175
)Net deferred taxes

$



$
     10.
    Stockholders
    Equity  Common
    Stock Purchase Rights
     55




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
          Stock
    Purchase Warrants
   56




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
   Initial
    Public Offering
    Rights
    Offering
    Private
    Placement
      Secondary
    Public Offering
    11.
    Stock-Based
    Employee Compensation   57




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
  Accounting for Stock
    Issued to Employees.
        For the Fiscal Year
    EndedJanuary 2,


January 3,


December 29,2006


2005


2003Stock options variable accounting

$
844,738


$
2,151,295


$
Amortization of unearned
    compensation related to restricted stock grants to employees


2,188,713



942,818



893,659Awards of restricted stock to
    non-employee directors


125,000



125,000



Total non-cash stock compensation
    expense


3,158,451



3,219,113



893,659Compensation included in
    restaurant operating expenses


214,266



363,830



Separately captioned stock
    compensation expense

$
2,944,185


$
2,855,283


$
893,659      58




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
          Number of


Range of


Weighted AverageOptions


Exercise Price


Exercise PriceBalance as of December 30,
    2002


3,406,332



$1.56 - $18.81


$
10.41Granted


2,845,689



$1.36 - $ 7.00


$
2.13Cancelled/Expired


(1,841,182
)


$1.36 - $12.25


$
8.72Balance as of December 29,
    2003


4,410,839



$1.36 - $12.25


$
5.68Granted


1,514,291



$2.85 - $ 6.53


$
4.59Exercised


(249,058
)


$1.56 - $ 5.30


$
2.40Cancelled/Expired


(419,122
)


$1.63 - $ 12.3


$
8.90Balance as of January 3, 2005


5,256,950



$1.36 - $12.25


$
5.26Granted


146,845



$5.06 - $ 6.94


$
6.54Exercised


(819,949
)


$1.37 - $ 6.11


$
2.99Cancelled/Expired


(386,771
)


$1.63 - $ 6.87


$
5.07Balance as of January 2,
    2006


4,197,075



$1.36 - $12.25


$
6.09  59




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
     WeightedAverageExerciseOptions


PriceAs of January 2,
    2006


2,794,564


$
6.87As of January 3, 2005


2,763,986


$
6.35As of December 29, 2003


1,853,950


$
7.63     Options Outstanding


Options ExercisableWeightedAverage


Weighted





WeightedNumber of


Remaining


Average


Number of


AverageOptions


Contractual


Exercise


Options


ExerciseRange of Exercise
    Prices

Outstanding


Life in Years


Price


Exercisable


Price$1.36 - $ 2.02


987,400



7.5


$
1.79



707,800


$
1.78$2.09 - $ 2.99


592,472



7.3



2.60



419,910



2.63$3.30 - $ 4.94


555,530



8.3



4.66



139,680



4.66$5.08 - $ 7.00


757,624



7.6



5.93



262,060



5.87$8.93 - $12.25


1,304,049



4.3



11.62



1,265,114



11.604,197,075



6.6


$
6.09



2,794,564


$
6.87   12.
    Defined
    Contribution Plan    13.
    Commitments
    and Contingencies  Commitments
    2006

$
12,959,6962007


13,052,5072008


12,061,7882009


11,300,0772010


9,946,826Thereafter

$
20,516,353    60




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
    Accounting for
    Leases
  Bulletin No. 88-1, Issues Relating to Accounting for Leases
          Purchase
    Commitments
    Coca-Cola
 61




---



##### Table of Contents



COSI,
    INC.
  Notes to Consolidated Financial
    Statements  (Continued)
       Self-Insurance
    Litigation
   62




---



##### 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 15, 2006/s/  KEVIN
    ARMSTRONGKevin
    Armstrong

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

March 15, 2006/s/  WILLIAM
    KOZIELWilliam
    Koziel

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

March 15, 2006/s/  ELI
    COHENEli
    Cohen

Director

March 15, 2006/s/  CREED
    L. FORD IIICreed
    L. Ford III

Director

March 15, 2006/s/  TERRY
    DIAMONDTerry
    Diamond

Director

March 15, 2006/s/  EDNA
    MORRISEdna
    Morris

Director

March 15, 2006/s/  MARK
    DEMILIOMark
    Demilio

Director

March 15, 2006/s/  ROBERT
    MERRITTRobert
    Merritt

Director

March 15, 2006  63




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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
.5.1

Employment Agreement between Cosi,
    Inc. and Cynthia Jamison, dated as of July 7, 2004. (Filed
    as Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended June 28, 2004).10
.5.2

Separation and Release Agreement
    between Cosi, Inc. and Jonathan M. Wainwright, Jr., dated
    January 3, 2005. (Filed as Exhibit 10.1 to the
    Companys Current Report on
    Form 8-K,
    dated January 6, 2005).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). 64




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##### 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

Consent of Independent Registered
    Public Accounting Firm.23
.2

Consent of Independent Registered
    Public Accounting Firm.31
.1

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

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

Certification of the 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. 65