** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C.  20549**

 

**FORM 10-K**

 
| **ý** | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE** |
|------------|------------|---------------------------------------------------------------------|
| ** ** | ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                 |

 

**For the Fiscal Year Ended: September 30,2005**

 

**OR**

 
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE** |
|------------|------------|-------------------------------------------------------------------------|
| ** ** | ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                     |

 

**Commission File Number: 0-20330**

 

**GARDENBURGER, INC.**

(Exact name of registrant as specified in itscharter)

 
| **OREGON**                                                       | ** ** | **93-0886359**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**15615 Alton Parkway, Suite 350,Irvine, California 92618**

(Address of principal executive offices)

 

Registrant’s telephone number, including areacode:   **(949) 255-2000**

 

Securities registered pursuant to Section 12(b) ofthe Act: **None**

 

Securities registered pursuant to Section 12(g) ofthe Act:

 

**Common Stock, no par value**

(Title of Class)

 

----

 

Indicateby check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act: Yes o    Noý

 

Indicateby check mark if the Registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act:  o

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days: Yes ý    No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K, or anyamendment to this Form 10-K.  ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act). Yes o    Noý

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o    Noý

 

Theaggregate market value of the voting and non-voting common equity held by non-affiliatesof the Registrant was $545,603 computed by reference to the last sales price asreported by the NASD’s OTC Bulletin Board ($0.07) as of the last business dayof the Registrant’s most recently completed second fiscal quarter, March 31,2005.

 

Thenumber of shares outstanding of the Registrant’s Common Stock as of December 14,2005 was 9,002,101 shares.

 

----

 

**Documents Incorporated byReference**

 

None.

 

 

----

 

**GARDENBURGER, INC.**

**2005 FORM 10-K ANNUAL REPORT**

 

**TABLE OF CONTENTS**

 
|       | **PART I**                                                                                                     | ** ** |
|------------|---------------------------------------------------------------------------------------------------------------------|------------|
|       |                                                                                                                |       |
| Item 1.    | Business                                                                                                            |       |
|       |                                                                                                                |       |
| Item 1A.   | Risk Factors                                                                                                        |       |
|       |                                                                                                                |       |
| Item 2.    | Properties                                                                                                          |       |
|       |                                                                                                                |       |
| 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, Related Stockholder Matters and Issuer Purchases of Equity  Securities |       |
|       |                                                                                                                |       |
| Item 6.    | Selected Financial Data                                                                                             |       |
|       |                                                                                                                |       |
| Item 7.    | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                         |       |
|       |                                                                                                                |       |
| Item 7A.   | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       |
|       |                                                                                                                |       |
| 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                                                                                            |       |
|       |                                                                                                                |       |
| 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  Accountant Fees and Services                                                                             |       |
|       |                                                                                                                |       |
|       | **PART IV**                                                                                                    | ** ** |
|       |                                                                                                                |       |
| Item 15.   | Exhibits  and Financial Statement Schedules                                                                         |       |
|       |                                                                                                                |       |
| Signatures |                                                                                                                |       |

 

1

----

 

**PART I**

 

**Item 1.  Business**

 

**Where YouCan Find More Information**

 

We file annual, quarterlyand special reports, proxy statements and other information with the Securitiesand Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 asamended (“Exchange Act”). You can inspect and copy our reports, proxystatements, and other information filed with the SEC at the offices of the SEC’sPublic Reference Room in Washington, D.C. Please call the SEC at 1-800-SEC-0330for further information on the Public Reference Room. The SEC maintains anInternet site at http://www.sec.gov/ where you can obtain most of our SECfilings. We also make available, free of charge on our website atwww.gardenburger.com, our annual reports on Form 10-K, quarterly reportson Form 10-Q, current reports on Form 8-K, and amendments to thosereports filed or furnished pursuant to Section 13(a) or 15(d) ofthe Exchange Act as soon as reasonably practicable after they are filedelectronically with the SEC.  The information found on our website is notpart of this Form 10-K. You can also obtain copies of these reports bycontacting Investor Relations at (949) 255-2000.

 

**General**

 

Gardenburger, Inc.was organized in 1985 as an Oregon corporation under the name Wholesome &Hearty Foods, Inc. and completed its initial public offering in 1992.  In October 1997, we changed our name toGardenburger, Inc; and, as our product line expanded to include meatalternative offerings beyond veggie burgers, began doing business in 2002 asGardenburger Authentic Foods Company. Our common stock trades on the over-the-counter market and is quoted onthe NASD’s OTC Bulletin Board.

 

**GoingConcern and Chapter 11 Filing**

 

Our financial statementshave been presented on a going concern basis, which contemplates therealization of assets and satisfaction of liabilities in the normal course ofbusiness.  However, we were out ofcompliance with certain debt covenants as of June 30, 2005 and September 30,2005. Because of such non-compliance, we classified all of our outstanding debtas current beginning with our June 30, 2005 balance sheet. In addition, asa result of CapitalSource Finance, LLC (“CapitalSource”) and Annex Holdings ILP (“Annex”) having the ability to call our debt at any point in time, allrelated exit fees were accrued and all remaining deferred financing fees werewritten off during the third quarter of fiscal 2005.

 

Both CapitalSource andAnnex currently have the right to declare all of the outstanding amounts due tothem under their respective agreements immediately due and payable; however,the outstanding indebtedness due and payable to CapitalSource was refinanced asdescribed below. We do not currently have the cash or alternative financingsource needed in order to pay such amounts. In addition, we have a workingcapital deficiency, incurred substantial net losses applicable to commonshareholders for fiscal years 2005, 2004 and 2003 and had negative operatingcash flow in 2004.  We had a totalshareholders’ deficit at September 30, 2005 of $82.0 million. We arehighly leveraged and have significant annual interest and dividend accrualsrelated to our convertible note payable and convertible redeemable preferredstock, which contribute to our net losses and shareholders’ deficit.

 

Operating under thisheavy debt burden and facing a continuing decline in our product category andincreased competition during 2005, we determined that in order to maximizevalue for our creditors and, if feasible, preferred shareholders, we movedforward with an effort to sell our business as a going concern.  We made this decision recognizing (i) thelikelihood that we did not have sufficient resources or credit availability toeffectively defend our market share in the grocery channel under existingcircumstances, (ii) the significant risk that our enterprise value wouldfurther erode if we continued to operate our business on a highly leveragedbasis, and (iii) that there was substantial doubt, if we continued tooperate under our existing debt burden, regarding our ability to continue as agoing concern.  Based on our goingconcern sale efforts in fiscal 2005, we have determined that the

 

2

----

 

value of Gardenburger isinadequate to allow for any recovery or retention of rights by our equityholders.

 

Following severalunsuccessful efforts to sell Gardenburger as a going concern over the past sixyears, including our fiscal 2005 efforts, as well as unsuccessful efforts torestructure and recapitalize Gardenburger, partially due to a lack of consensusbetween Annex and our preferred shareholders regarding distribution of theproceeds of a sale and the allocation of rights under a restructuring, on October 14,2005, we filed a voluntary petition for relief under Chapter 11 of the UnitedStates Bankruptcy Code (the “Bankruptcy Code”) in the United States BankruptcyCourt for the Central District of California, Santa Ana Division (the “BankruptcyCourt”) (Case No. SA 05-19539-JB) (the “Chapter 11 Case”). In connectionwith this Chapter 11 Case, on December 9, 2005, we filed a Plan ofReorganization (the “Plan”) and a related Disclosure Statement with theBankruptcy Court.

 

Significant terms of thePlan are as follows:

 

•                  Amounts due to holders of generalunsecured claims will be fully paid over an 18 month period;

•                  All outstanding preferred stock andcommon stock will be terminated with no compensation to the holders thereof,thereby converting Gardenburger to a privately held company from a publiclyheld company;

•                  Elimination of all principal, accruedinterest and accrued exit fees due pursuant to our Note Purchase Agreement, asamended, and Second Amended and Restated Convertible Senior Subordinated Note,as amended (the “Convertible Note”) held by Annex, which totaled $28.0 millionas of September 30, 2005, and issuance of new equity interests inGardenburger to Annex in full satisfaction of this claim;

•                  Payment of all principal and accruedinterest due pursuant to our Revolving Credit and Term Loan Agreement, asamended (the “Loan Agreement”) with CapitalSource, which totaled approximately$8.2 million as of September 30, 2005; and

•                  Ongoing operation of our business ona viable basis following confirmation of the Plan.

 

We will continue tooperate our business in the ordinary course as debtor-in-possession under thejurisdiction of the Bankruptcy Court and in accordance with applicableprovisions of the Bankruptcy Code.

 

Bankruptcy law does notpermit solicitation of acceptances of the Plan until the Bankruptcy Courtapproves the applicable Disclosure Statement relating to the Plan as providingadequate information of a kind, and in sufficient detail, as far as isreasonably practicable in light of the nature and history of the debtor and thecondition of the debtor’s books and records, that would enable a hypotheticalreasonable investor typical of the holder of claims or interests of therelevant class to make an informed judgment about the Plan.  Accordingly, this is not intended to be, norshould it be construed as, a solicitation for a vote on the Plan.  We will emerge from the Chapter 11 Case ifand when the Plan is confirmed by the Bankruptcy Court.

 

The filing of the Chapter11 Case constituted events of default under our Loan Agreement withCapitalSource and our Convertible Note held by Annex.  As a result of the events of default, alldebt outstanding under such loan documents became automatically and immediatelydue and payable.  As of September 30,2005, the amount of outstanding debt and accrued interest under the LoanAgreement was approximately $8.2 million, which was paid on November 22, 2005utilizing proceeds from our debtor-in-possession credit facilities discussed below.The amount of outstanding debt under the Convertible Note was approximately$28.0 million as of September 30, 2005. We believe that any effort ofAnnex to enforce their rights under the Convertible Note will be stayed as aresult of the filing of the Chapter 11 Case. In any event, we understand thatAnnex does not currently contemplate any such action and that Annex supportsthe Plan.

 

3

----

 

**Debtor-in-PossessionCredit Facilities**

 

In connection with the Chapter11 Case, on October 17, 2005, and as approved by the Bankruptcy Court on October 18,2005, we entered into an interim financing arrangement with CapitalSource.  In addition, senior and second lien creditfacilities with Wells Fargo Bank, National Association, acting through itsWells Fargo Business Credit operating division (“WFBC”), and GB Retail Funding,LLC (“GB”), respectively, were approved by the Bankruptcy Court on November 16,2005.

 

We require creditfacilities for use during the Chapter 11 Case (“DIP Financing”) and to meet ourworking capital needs and fund our obligations under the Plan upon andfollowing the effective date of the Plan (“Exit Financing”).

 

The WFBC creditfacilities provide for a secured revolving line of credit (the “WFBC RevolvingCredit Facility”) in an amount not to exceed $7.5 million and a securedequipment term loan (the “WFBC Term Credit Facility”) of $2.2 million. As of December 14,2005, the amounts outstanding under the WFBC Revolving Credit Facility and theWFBC Term Credit Facility were $0.4 million and $2.2 million, respectively.Upon the effective date of the Plan that is satisfactory to WFBC, the WFBC creditfacilities will convert to Exit Financing facilities by automatically extendingthe maturity date of the WFBC credit facilities to the date thirty-six monthsafter the date of closing of the WFBC credit facilities (November 22,2008). The WFBC credit facilities were used to refinance our CapitalSource debtand will provide for ongoing working capital needs and for payment ofobligations under, and in accordance with, the Plan.  All loans, advances and obligations under theWFBC credit facilities are secured by first priority security interests on allof our assets and reorganized Gardenburger, except general intangible assets(i.e., intellectual property, trademarks, brand names and domain names) andproceeds thereof.

 

The amount availableunder the WFBC Revolving Credit Facility is the lesser of (i) $7.5 millionor (ii) up to the sum of: (i) 85% of eligible accounts receivable and(ii) the lesser of (a) $4.5 million or (b) the lesser of (x)44.9% of eligible raw materials inventory plus 63.4% of eligible finished goodsinventory or (y) 85% of the appraised net orderly liquidation value of eligibleraw material inventory and eligible finished goods inventory, less (iii) reservesmaintained by WFBC.  The interest rate onthe WFBC Revolving Credit Facility is the Prime Rate plus 0.50% per annumfloating, payable monthly in arrears calculated on the basis of actual dayselapsed in each year of 360 days. We or reorganized Gardenburger may also electto fix the rate of interest on portions of revolving advances at an interestrate equal to 3.25% over Wells Fargo LIBOR. The default rate of interest will be 3.00% higher than the rateotherwise payable.  A fee of 0.50% perannum on the unused portion of the WFBC Revolving Credit Facility will bepayable monthly in arrears.   As of December 14,2005, we had $0.4 million outstanding on the WFBC Revolving Credit Facility atan interest rate of 7.75% and $3.1 million available for future use.  We utilized $0.7 million of the proceeds fromthis facility to pay off the entire balance owed to CapitalSource pursuant totheir Loan Agreement and, accordingly, as of the date of the filing of this Form 10-K,we do not owe any amounts to CapitalSource.

 

The initial amountavailable under the WFBC Term Credit Facility was $2.2 million.  The interest rate on the WFBC Term Facilityis the Prime Rate plus 1.00% per annum floating, payable monthly in arrears,calculated on the basis of actual days lapsed in a year of 360 days.  We or reorganized Gardenburger may also electto fix the rate of interest on portions of term advances at an interest rate equalto 3.75% over Wells Fargo LIBOR.  Thedefault rate of interest will be 3.00% higher than the rate otherwisepayable.  As of December 14, 2005,we had $2.2 million outstanding on the WFBC Term Credit Facility at an interestrate of 8.25%.

 

Pursuant to the Creditand Security Agreement, dated November 22, 2005, governing the WFBC creditfacilities (the “WFBC Credit Agreement”), we are required to comply withcertain financial covenants, which are described below:

 

4

----

 

(a) We are required to maintain a minimum Availability (as defined in the WFBCCredit Agreement) as follows:

 

| **Dates**                             | ** ** | **Minimum  Availability** | ** ** |
|---------------------------------------|------------|---------------------------|------------|
| 11/22/05 through 12/02/05             |       | $                         | 2,000,000  |   |
| 12/03/05 through 12/30/05             |       | $                         | 1,750,000  |   |
| 12/31/05 and at all times  thereafter |       | $                         | 1,500,000  |   |

 

(b) We are required to achieve Net Cash Flow (as defined in the WFBC CreditAgreement) in an amount not less than the amount set forth below for theperiods set forth below:

 

| **Test Period**            | ** ** | **Minimum  Net Cash Flow** | ** ** |
|----------------------------|------------|----------------------------|------------|
| 10/01/05  through 12/02/05 |       | $                          | (900,000   | ) |
| 10/29/05  through 12/30/05 |       | $                          | (600,000   | ) |
| 12/03/05  through 01/27/05 |       | $                          | (1,800,000 | ) |
| 12/31/05  through 02/24/06 |       | $                          | 200,000    |   |

 

(c) We are required to achieve, for each period described below, gross sales of notless than the amount set forth for each such period:

 

| **Period**                | ** ** | **Minimum Gross Sales** | ** ** |
|---------------------------|------------|-------------------------|------------|
| 10/01/05 through 10/31/05 |       | $                       | 3,600,000  |   |
| 11/01/05 through 11/30/05 |       | $                       | 3,000,000  |   |
| 12/01/05 through 12/31/05 |       | $                       | 3,600,000  |   |
| 01/01/06 through 01/31/06 |       | $                       | 4,300,000  |   |
| 02/01/06 through 02/28/06 |       | $                       | 3,900,000  |   |
| 03/01/06 through 03/31/06 |       | $                       | 5,100,000  |   |
| 04/01/06 through 04/30/06 |       | $                       | 4,500,000  |   |
| 05/01/06 through 05/31/06 |       | $                       | 5,200,000  |   |
| 06/01/06 through 06/30/06 |       | $                       | 5,200,000  |   |
| 07/01/06 through 07/31/06 |       | $                       | 4,700,000  |   |

 

(d) In the event we fail to achieve the minimum gross sales as set forth in item (c) abovefor any period set forth above, we are required to achieve, for the period setforth below ending on the same end date as the period for which we failed suchminimum gross sales covenant, cumulative Net Sales (as defined in the WFBCCredit Agreement) of not less than the amount set forth below for the periodending on the date set forth below:

 

| **Period**                 | ** ** | **Minimum  Net Sales** | ** ** |
|----------------------------|------------|------------------------|------------|
| 10/01/05  through 10/31/05 |       | $                      | 3,100,000  |   |
| 10/01/05  through 11/30/05 |       | $                      | 5,700,000  |   |
| 10/01/05  through 12/31/05 |       | $                      | 8,600,000  |   |
| 10/01/05  through 01/31/06 |       | $                      | 12,100,000 |   |
| 10/01/05  through 02/28/06 |       | $                      | 15,500,000 |   |
| 10/01/05  through 03/31/06 |       | $                      | 19,700,000 |   |
| 10/01/05  through 04/30/06 |       | $                      | 23,700,000 |   |
| 10/01/05  through 05/31/06 |       | $                      | 27,800,000 |   |
| 10/01/05  through 06/30/06 |       | $                      | 32,000,000 |   |
| 10/01/05  through 07/31/06 |       | $                      | 36,000,000 |   |

 

Pursuant to the WFBCCredit Agreement, on or before February 24, 2006, Wells Fargo shall setnew covenant levels for item (b) above. The new covenant levels will be based upon our projections and cashbudget for such periods received by Wells Fargo pursuant to the Credit andSecurity Agreement and will be no less stringent than the present levels, exceptthat with respect to item (b) above, the new covenant levels will be basedon a $500,000 negative variance based upon the projections and updated cashflow budget for such periods.  A copy ofthe Wells Credit Agreement is attached to this Annual Report on Form 10-Kas Exhibit 10.74.

 

5

----

 

The GB Loan Facilityconsists of a $5.0 million secured single-advance term loan. This facility issecured by a second priority lien in all collateral securing the WFBC creditfacilities, except that it is secured by a first priority perfected securityinterest in all of our general intangible assets (i.e., intellectual property,trademarks, brand names and domain names) and proceeds thereof. The interestrate on the GB Loan Facility is the Prime Rate plus 6.75% per annum floating,payable monthly in arrears. As of December 14, 2005, we had $4.9 millionoutstanding on the GB Loan Facility at an interest rate of 14.0%. Upon theeffective date of the Plan that is satisfactory to GB, the GB Loan Facilitywill convert to an Exit Financing facility by automatically extending thematurity date of the GB Loan Facility to the date thirty-six months after thedate of closing of the GB Loan Facility (November 22, 2008).

 

Pursuant to the Creditand Security Agreement, dated November 22, 2005, governing the GB Loan Facility(the “GB Credit Agreement”), we are required to comply with certain financialcovenants that are identical to the financial covenants described above inconnection with the WFBC credit facilities. A copy of the GB Credit Agreement is attached to this Annual Report on Form 10-Kas Exhibit 10.75.

 

As of December 2,2005, we were in compliance with all of the financial covenants describedabove.

 

**Overview**

 

We believe we are one ofthe leading producers and marketers of meat alternative products and brandedveggie burgers. The Gardenburger® product line is a national brand in theretail grocery, food service, club store and natural foods channels ofdistribution and features core burger offerings such as the OriginalGardenburger® veggie burger, meatless soy burgers such as Gardenburger FlameGrilled, and innovative meatless specialty items such as new GardenburgerMeals.

 

The popularity ofprotein-based low carbohydrate diets like Atkins and South Beach havepositively impacted the sales of beef, pork and chicken and have negativelyimpacted the meatless category. As these diet trends have slowed, the categoryvelocity declines have stabilized.  Inaddition, our results were adversely affected in fiscal 2005 by increasedcompetition for market share as a source of growth due to flat consumerconsumption. In fiscal 2006, we believe that Gardenburger has the opportunityto strengthen its market share in a relatively flat category through acombination of product mix optimization and repositioning to better leveragethe brand’s heritage among heavy category consumers.

 

Approximately 72% of ourgross sales were attributable to the Gardenburger® veggie burger and soy burgerproducts, with the remaining 28% attributable to our newer meat alternativeproducts in fiscal 2005.  Consumers, ingeneral, have been moving to the wider range of meat alternative productsbecoming available in the marketplace. In response to this development inconsumer tastes, in fiscal 2003, we added five new products, including BBQ Chik’nand Meatless Meatloaf.  In the thirdquarter of fiscal 2004, we introduced a new line of six microwaveable meatlessentrees to capitalize on the consumers’ need for convenience. We furtherexpanded our convenience focus with the early fiscal 2005 launch ofGardenburger Wraps.

 

We intend to continue asan innovative force in the meat alternative category with the objective ofbeing a leading provider of meatless meal alternatives in the four primarydistribution channels in which we distribute our products: retail grocerystores; food service, including restaurants, universities and other commercialoutlets; club stores; and natural foods outlets. We currently distribute ourproducts through more than 24,000 retail outlets, 30,000 food service outlets, 113club store locations and 3,500 natural foods stores.

 

Within the retailgrocery channel, our largest channel of distribution, we have approximately190,000 retail grocery placements of our products, representing an allcommodity volume (“ACV”)(1) penetration of

 

----

(1) ACV calculates the percentage of U.S. stores that carry at leastone Gardenburger product. 

 

6

----

 

approximately 69% as of September 30,2005, with an average of 5.0 product variations available in each retail outlet.  Each product is commonly referred to as astock keeping unit (“SKU”).

 

**Business Strategy**

 

In recent years, we haveseen increased competition in the meat alternative category, including theveggie burger segment, and have seen our market share of meat alternativeburgers decline due to heavy spending by competitors and changes in consumers’eating habits. Our business strategy consists of the following key elements:

 

***Focuson Achieving Profitability. ***Weare focused on achieving near-term profitability.  In furtherance of this goal, fixed overheadis closely monitored. Trade and marketing spending is focused on product mixoptimization, in-store activity and direct marketing to heavy category users,as we believe this approach has the quickest and most direct impact on sales.

 

***LeveragingNutritional Benefits of Products.****** ***Gardenburger’sproducts are inherently good sources of fiber, protein and other vitamins.  The brand continues to leverage these andother functional foods benefits in product introductions.

 

***IncreaseKey Channel Penetration.**** *We**believethat we are one of the leading producers and marketers of meatless products inthe retail grocery, food service, club store and natural foods distributionchannels.  Our goal is to manage a strongbrand position in these channels with profitability in all channels.  We will focus on improving our product mix toincrease share in grocery, ensuring the highest velocity Gardenburger items areon shelf at key retailers.  We arepursuing profitable growth in the food service channel where we have a strongmarket position across key business segments. We were selected as a vendor of choice in the Sysco Corporation launchof its Moonrose Vegetarian line, a private label brand of premium productstargeted at the emergent food service natural foods segment. In addition, webelieve that other distribution channels, such as sandwich chains, K-12 schoolsand colleges and universities, present growth opportunities, and we continue toactively pursue these opportunities through sales calls to potential customersand research into product types that best suit the particular markets.

 

## **Products**

## ** **

Gardenburger iscommitted to offering great tasting, better-for-you, convenient meatless foodchoices to consumers.  All of our productsare frozen and include: grain-based and soy-based veggie burgers, which areoffered in eleven varieties, and include specialized burger products in certainchannels, including Gardenburger SubTM for food service and GardenVegan® fornatural food stores.  We also offer avariety of meat analog products including Chik’n Grill, Meatless Riblets,Meatless Meatloaf, and Herb Crusted Cutlet, all of which imitate the taste andtexture of beef, chicken or pork products. In addition, in fiscal 2004 and 2005we introduced Meals and Wraps in the retail and natural food channels tocapitalize on the consumers’ need for convenience.

 

The recipes for ourproducts are proprietary, although they contain commonly knowningredients.  Veggie-grain based burgerscontain fresh mushrooms, brown rice or other whole grains, onions, rolled oats,cheeses, bulgur wheat, natural seasonings and spices.  Soy-based products are seasoned to taste likechicken, pork or beef.  All of our meatalternative products are considerably lower in fat and calories than respectivemeat products of comparable weight, are good sources of protein and are madewith all natural grains and vegetables.

 

7

----

 

Our products are asfollows:

 

**Retail Grocery Burger Products**

 
| **Product**                                                                    | ** ** | **Characterizing Ingredients**                                               | ** ** | **Fat** | ** ** | **Calories** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|---------|------------|--------------|------------|
| The Original  Gardenburger® sold in boxes of 4/2.5 oz. servings           |       | Mushrooms, brown  rice, soy, onions, rolled oats and low-fat cheese          |       | 2g      |       | 90           |       |
|                                                                           |       |                                                                         |       |    |       |         |       |
| Gardenburger  Black BeanTM sold in boxes of 4/2.5 oz. servings             |       | Black beans,  soy, brown rice, Anaheim chilies, onions, cumin, cilantro      |       | 2g      |       | 80           |       |
|                                                                           |       |                                                                         |       |    |       |         |       |
| Gardenburger  Veggie Medley® sold in boxes of 4/2.5 oz. servings          |       | Soy, mushrooms,  rolled oats, broccoli, carrots, red and yellow bell peppers |       | 2g      |       | 90           |       |
|                                                                           |       |                                                                         |       |    |       |         |       |
| Gardenburger  Savory PortabellaTM sold in boxes of 4/2.5 oz. servings      |       | Portabella  mushrooms, wild rice, soy, blue cheese, kashi blend              |       | 2.5g    |       | 100          |       |
|                                                                           |       |                                                                         |       |    |       |         |       |
| Gardenburger  Sun-Dried Tomato BasilTM sold in boxes of 4/2.5 oz. servings |       | Sun-dried  tomatoes, soy, mushrooms, rolled oats, mozzarella cheese, basil   |       | 3g      |       | 100          |       |
|                                                                           |       |                                                                         |       |    |       |         |       |
| Gardenburger  GardenVegan® sold in boxes of 4/2.5 oz. servings            |       | Bulgur wheat,  brown rice, mushrooms, onions                                 |       | 1g      |       | 100          |       |
|                                                                           |       |                                                                         |       |    |       |         |       |
| Gardenburger  Homestyle ClassicTM sold in boxes of 4/2.5 oz. servings      |       | Soy, onion,  garlic                                                          |       | 5g      |       | 110          |       |
|                                                                           |       |                                                                         |       |    |       |         |       |
| Gardenburger  Flame Grilled® sold in boxes of 4/2.5 oz. servings          |       | Soy, natural  grill flavor                                                   |       | 4g      |       | 120          |       |

 

8

----

 

**RetailGrocery Meatless Specialty Products**

 
| **Product**                                                                        | ** ** | **Description**                                      | ** ** | **Characterizing Ingredients**                                                   | ** ** | **Fat** | ** ** | **Calories** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------|------------|--------------|------------|
| Gardenburger  Flame Grilled Chik’nTM sold in boxes of 4/2.5 oz. servings  |       | Flame grilled  meatless chicken                      |       | Soy, wheat  gluten, sautéed vegetables and herbs                            |       | 2.5g    |       | 100          |       |
|                                                                               |       |                                                 |       |                                                                             |       |    |       |         |       |
| Gardenburger BBQ  Chik’nTM sold in 10 oz. packages                        |       | Meatless chicken  with sauce                         |       | Soy, wheat  gluten, barbecue sauce                                               |       | 8g      |       | 250          |       |
|                                                                               |       |                                                 |       |                                                                             |       |    |       |         |       |
| Gardenburger  Buffalo Chik’n WingsTM sold in 10 oz. packages              |       | Meatless chicken  wings in hot sauce                 |       | Soy, wheat  gluten, pepper sauce                                                 |       | 12g     |       | 180          |       |
|                                                                               |       |                                                 |       |                                                                             |       |    |       |         |       |
| Gardenburger  Country Fried Chik’n with Creamy Pepper GravyTM             |       | Meatless breaded  chicken cutlet with gravy          |       | Breading, soy,  wheat gluten, cream gravy                                        |       | 9g      |       | 190          |       |
|                                                                               |       |                                                 |       |                                                                             |       |    |       |         |       |
| Gardenburger  Meatless RibletsTM sold in boxes of 2/5 oz. servings             |       | Meatless pork  rib with sauce                        |       | Soy, wheat  gluten, barbecue sauce                                               |       | 5g      |       | 160          |       |
|                                                                               |       |                                                 |       |                                                                             |       |    |       |         |       |
| Gardenburger  Sweet & Sour PorkTM sold in 10 oz. packages             |       | Meatless pork  pieces in sweet & sour sauce |       | Soy, wheat  gluten, sweet & sour sauce, green peppers, onion, pineapple |       | 2g      |       | 170          |       |
|                                                                               |       |                                                 |       |                                                                             |       |    |       |         |       |
| Gardenburger  Herb Crusted Chicken PattyTM sold in boxes of 4/2.5 oz. servings |       | Meatless breaded  chicken patty                      |       | Breading, soy,  wheat gluten                                                     |       | 9g      |       | 170          |       |
|                                                                               |       |                                                 |       |                                                                             |       |    |       |         |       |
| Gardenburger  Breakfast SausageTM sold in boxes of 6/1.5 oz. patties           |       | Meatless  breakfast sausage                          |       | Soy                                                                              |       | 3.5g    |       | 50           |       |
|                                                                               |       |                                                 |       |                                                                             |       |    |       |         |       |
| Gardenburger  Meatless MeatballsTM sold in 10 oz. packages                     |       | Meatless herbed meatballs                            |       | Soy, bread  crumbs, parmesan cheese                                              |       | 4.5g    |       | 110          |       |
|                                                                               |       |                                                 |       |                                                                             |       |    |       |         |       |
| Gardenburger  Meatless MeatloafTM sold in 10 oz. packages                      |       | Meatless  meatloaf with brown gravy                  |       | Soy, green  pepper, onion, brown gravy                                           |       | 3.5g    |       | 130          |       |

 

9

----

 

**Retail Grocery Meatless Meals**

 
| **Product**                                               | ** ** | **Characterizing Ingredients**                                                            | ** ** | **Fat** | ** ** | **Calories** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------|------------|--------------|------------|
| Meatless Citrus  Glazed Chicken With Green Beans and Rice |       | Soy, wheat  gluten, brown and wild rice, green beans, citrus glaze                        |       | 2g      |       | 220          |       |
|                                                      |       |                                                                                      |       |    |       |         |       |
| Meatless Herb  Grilled Chicken With Vegetables            |       | Soy, wheat  gluten, roasted zucchini, squash, green, red and yellow peppers, butter sauce |       | 5g      |       | 220          |       |
|                                                      |       |                                                                                      |       |    |       |         |       |
| Meatless  Meatballs With Penne Marinara                   |       | Soy, breadcrumbs, parmesan cheese, penne pasta, tomato  sauce                             |       | 4.5g    |       | 300          |       |
|                                                      |       |                                                                                      |       |    |       |         |       |
| Meatless  Meatloaf With Broccoli and Red Peppers          |       | Soy, green  pepper, onion, brown gravy, broccoli florets, red peppers                     |       | 4.5g    |       | 180          |       |
|                                                      |       |                                                                                      |       |    |       |         |       |
| Meatless  Southwestern Chicken With Vegetables            |       | Soy, wheat  gluten, black beans, corn, grilled peppers, enchilada sauce                   |       | 1.5g    |       | 210          |       |
|                                                      |       |                                                                                      |       |    |       |         |       |
| Meatless Sweet  and Sour Pork With Rice                   |       | Soy, wheat  gluten, sweet and sour sauce, green peppers, onion, pineapple, brown rice     |       | 4g      |       | 310          |       |
|                                                      |       |                                                                                      |       |    |       |         |       |
| Black Bean  Chipotle Wraps                                |       | Black bean  patty, tortilla, chipotle sauce, mozzarella cheese                            |       | 8g      |       | 240          |       |
|                                                      |       |                                                                                      |       |    |       |         |       |
| Sun-Dried Tomato  Basil Wraps                             |       | Sun-dried tomato  basil patty, tortilla, tomato sauce, mozzarella cheese                  |       | 8g      |       | 240          |       |

 

**Club Channel Products**

 
| **Product**                                                           | ** ** | **Description**             | ** ** | **Characterizing Ingredients**                                      | ** ** | **Fat** | ** ** | **Calories** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------------------------------------------|------------|---------|------------|--------------|------------|
| Original  Gardenburger sold in packages of 17/3.5 oz. servings        |       | Veggie-grain  style burger  |       | Mushrooms, brown  rice, soy, onions, rolled oats and low-fat cheese |       | 4g      |       | 130          |       |
|                                                                  |       |                        |       |                                                                |       |    |       |         |       |
| Gardenburger  Meatless Riblets sold in packages of 8/5.0 oz. servings |       | Analog pork rib  with sauce |       | Soy, wheat  gluten, barbecue sauce                                  |       | 5g      |       | 210          |       |

 

10

----

 

**Food Service Products**

 
| **Product**                                           | ** ** | **Description**                   | ** ** | **Characterizing Ingredients**                                                                           | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| 48/3.4 oz.  Original Gardenburger                     |       | Veggie-grain  style burger        |       | Mushrooms, brown  rice, onions, rolled oats and low-fat cheese, soy                                      |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 60/2.5 oz.  Original Gardenburger                     |       | Veggie-grain  style burger        |       | Mushrooms, brown  rice, onions, rolled oats and low-fat cheese, soy                                      |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 36/5.0 oz. Original Gardenburger                      |       | Veggie-grain  style burger        |       | Mushrooms, brown  rice, onions, rolled oats and low-fat cheese, soy                                      |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 48/2.75 oz. Gardenburger SubTM                    |       | Veggie-grain style burger         |       | Mushrooms, brown  rice, onions, rolled oats, red bell pepper and cheese                                  |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 48/3.4 oz.  Gardenburger Veggie Vegan®           |       | Veggie-grain style  burger        |       | Soy, mushrooms,  rolled oats, broccoli, carrots, red and yellow bell peppers                             |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 48/3.4 oz.  Gardenburger Santa Fe®               |       | Gourmet burger                    |       | Black beans,  Anaheim chilies, red and yellow bell peppers, corn, mushrooms, onion                       |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 48/2.75 oz. GardenFresh                               |       | Veggie-grain  style burger        |       | Soy, mushrooms,  onions, water chestnuts, carrots, and bell peppers                                      |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 48/3.4 oz.  GardenFresh                               |       | Veggie-grain  style burger        |       | Soy, mushrooms,  onions, water chestnuts, carrots, and bell peppers                                      |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 48/3.4 oz. Flame  Grilled SoyTM                   |       | Flame grilled  meatless burger    |       | Soy, natural  grill flavor                                                                               |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 48/3.4 oz.  Gardenburger Fire Roasted Vegetable® |       | Gourmet burger                    |       | Roasted garlic,  sun-dried tomatoes, brown rice, mushrooms, roasted peppers, corn, roasted  bell peppers |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 106/1.5 oz.  GardenSausage®                      |       | Meatless sausage  patty           |       | Soy, vegetarian  sausage flavor                                                                          |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 53/3.0 oz.  Chik’n GrillTM                   |       | Flame grilled  meatless chicken   |       | Soy, sautéed  vegetables and herbs                                                                  |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 1/10# (220  Nuggets) Chik’n NuggetsTM        |       | Breaded meatless  chicken nuggets |       | Breading, soy,  wheat gluten                                                                             |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 48/3.4 oz. Diner  Deluxe BurgerTM                 |       | Fried meatless  burger            |       | Soy protein                                                                                              |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 48/2.75 oz.  Gardenburger Black Bean                  |       | Gourmet burger                    |       | Soy, black  beans, brown rice, Anaheim chilies, onion, corn, cilantro                                    |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 48/3.4 oz.  Gardenburger Black Bean                   |       | Gourmet burger                    |       | Soy, black  beans, brown rice, Anaheim chilies, onion, corn, cilantro                                    |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 48/2.75 oz.  Flame Grilled Sub PattyTM            |       | Flame grilled  meatless burger    |       | Soy, natural  grill flavor                                                                               |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 53/3.0 oz. Naked  Riblets                             |       | Meatless riblet                   |       | Soy, vegetarian  sausage flavor, and spices                                                              |       |
|                                                  |       |                              |       |                                                                                                     |       |
| 48/3.0 oz. Herb  Crusted Chicken Patty                |       | Breaded Meatless  Chicken Patty   |       | Soy,  breadcrumbs, herbs and spices, and natural hickory smoke flavor                                    |       |

 

11

----

 

**Distribution**

 

We primarily distributeour products into four channels: retail grocery, food service, club stores andnatural foods stores.

 

***RetailGrocery****.* Gardenburgerproducts can now be found in more than 24,000 grocery stores with over 190,000placements.  Our ACV penetration in theU.S. retail grocery channel was approximately 69% as of September 30,2005, with an average of 5.0 SKUs.  Ourproducts are currently carried in the majority of the major U.S. retail grocerychains.

 

***FoodService****.* We distributeour products to more than 30,000 food service outlets throughout the U.S. andCanada, including restaurant chains such as Applebee’s, Fuddruckers, Red Robin,Subway, Blimpie and T.G.I. Friday’s.  Inmany of these restaurants, the Gardenburger brand name appears on themenu.  Additional points of food servicedistribution include academic institutions, hotels, amusement parks and sportsstadiums.  In the United States, thereare approximately 800,000 outlets in the food service channel.  We rely primarily on distributors such asSysco for distribution to this channel.

 

***ClubStores.***Our products are distributed to club stores withover 113 locations, primarily Costco. Currently, these stores carry the Original Gardenburger.  We are also testing Black Bean Chipotle Wrapand Meatless Meatballs in select Costco divisions.

 

***NaturalFoods.***Our products are distributed to more than 3,500natural food stores, including Whole Foods and Wild Oats.  We utilize food brokers that specialize innatural foods stores.

 

Our ability to expanddistribution in each of the described channels will depend in part on consumerpreferences, and to a certain extent on continuation of the current trends ofhealth awareness.  There is always a riskthat further development of low fat red or white meat products or technologicaladvances that limit food-borne disease risks may lead to a change in consumerpreferences and reduce demand for meat replacement products.  Demand for our products may be adverselyaffected by external factors, including dietary concerns about carbohydratesand ingredient preferences, which may occur rapidly and without warning.Because of our current dependence on meatless burgers and meat analogs, anychanges in consumer preferences or increase in competition in the meatalternative market segment would adversely affect our business to a greaterdegree than if we had multiple product lines.

 

We sell our products inNorth America, primarily through more than 100 independent, commissioned foodbrokers and more than 800 active distributors. The retail food brokers areindependent sales organizations, which have close working relationships withthe leading grocery chains, club stores and natural food stores. The foodbrokers arrange for sales of Gardenburger products, which we then ship and billdirectly to the retailers.  Products soldinto the food service channel are purchased directly by distributors, whicharrange for shipment by temperature-controlled truck to their frozen storagewarehouses in principal cities throughout the U.S. for distribution to U.S.food service outlets and some Canadian grocery and food service outlets. Salesto distributors and retailers are final sales and, historically, we have notexperienced significant levels of return product requests.

 

We have no non-cancelablelong-term contracts with our food brokers or distributors and occasionallychange brokers or distributors in an effort to increase coverage in ageographic region. We could experience a substantial temporary or permanentdecline in net sales if one or more of our major food brokers or distributorswere to discontinue handling our products, go out of business, or decide toemphasize distributing products of our competitors.

 

12

----

 

Contract ManagementCompanies, which manage cafeterias and other institutional eatingestablishments, also purchase our products. Examples of the additional pointsof food service distribution reached through the Contract Management Companiesinclude academic institutions, hotels, amusement parks and sports stadiums.Contract Management Companies typically purchase our products throughdistributors and provide us with an additional means to distribute ourproducts.

 

The following tablelists selected retailers, distributors and food service outlets that offer ourproducts for sale to consumers:

 
| **Retail**                                  | ** ** | ** ** |
|---------------------------------------------|------------|------------|
| **Grocery**                                 | ** ** | ** ** |
| **A&P**                                 | ** ** | ** ** |
| **AWG**                                     | ** ** | ** ** |
| **Albertsons**                              | ** ** | ** ** |
| **Burris  Foods Wholesale**                 | ** ** | ** ** |
| **C&S  Wholesale**                      | ** ** | ** ** |
| **Demoulas**                                | ** ** | ** ** |
| **Dillon’s  Stores**                   | ** ** | ** ** |
| **Dominick’s**                         | ** ** | ** ** |
| **Fleming  Wholesale**                      | ** ** | ** ** |
| **Fred  Meyer**                             | ** ** | ** ** |
| **Giant  Eagle**                            | ** ** | ** ** |
| **Giant  Food**                             | ** ** | ** ** |
| **Hannaford**                               | ** ** | ** ** |
| **Jewel**                                   | ** ** | ** ** |
| **King/Cullen**                             | ** ** | ** ** |
| **King  Soopers**                           | ** ** | ** ** |
| **Kroger**                                  | ** ** | ** ** |
| **Marsh**                                   | ** ** | ** ** |
| **Meijers**                                 | ** ** | ** ** |
| **Publix  Super Markets**                   | ** ** | ** ** |
| **QFC**                                     | ** ** | ** ** |
| **Rainbow  Foods**                          | ** ** | ** ** |
| **Raley’s**                            | ** ** | ** ** |
| **Ralph’s**                            | ** ** | ** ** |
| **Randall’s**                          | ** ** | ** ** |
| **Safeway**                                 | ** ** | ** ** |
| **Shaw’s**                             | ** ** | ** ** |
| **Smith’s**                            | ** ** | ** ** |
| **Shoprite**                                | ** ** | ** ** |
| **Stop  and Shop**                          | ** ** | ** ** |
| **Supervalu  Wholesale**                    | ** ** | ** ** |
| **Thriftway**                               | ** ** | ** ** |
| Tops                                        |       |       |
| **Von’s**                              | ** ** | ** ** |
| **Wakefern**                                | ** ** | ** ** |
| **Wal-Mart**                                | ** ** | ** ** |
| **Wegmans**                                 | ** ** | ** ** |
| **White  Rose Wholesale**                   | ** ** | ** ** |
| **Winn-Dixie**                              | ** ** | ** ** |
| ** **                                  | ** ** | ** ** |
| **Natural Foods**                           | ** ** | ** ** |
| **Wild  Oats**                              | ** ** | ** ** |
| **Whole  Foods**                            | ** ** | ** ** |
| ** **                                  | ** ** | ** ** |
| **Club Stores**                             | ** ** | ** ** |
| **Costco**                                  | ** ** | ** ** |
| ** **                                  | ** ** | ** ** |
| **Food Service**                            | ** ** | ** ** |
| **Distributors**                            | ** ** | ** ** |
| **Food Services of America** Dot Foods | ** ** | ** ** |
| **Sysco**                                   | ** ** | ** ** |
| **Gordon  Food Service**                    | ** ** | ** ** |
| **Reinhart  Food Service**                  | ** ** | ** ** |
| **U. S. Foodservice**                       | ** ** | ** ** |
| ** **                                  | ** ** | ** ** |
| **Restaurants**                             | ** ** | ** ** |
| **Applebee’s**                         | ** ** | ** ** |
| **Arctic  Circle**                          | ** ** | ** ** |
| **A&W**                                 | ** ** | ** ** |
| **Blimpie**                                 | ** ** | ** ** |
| **Burgerville**                             | ** ** | ** ** |
| **Dairy  Queen**                            | ** ** | ** ** |
| **Damon’s**                            | ** ** | ** ** |
| **Flamers**                                 | ** ** | ** ** |
| **Foster  Freeze**                          | ** ** | ** ** |
| **Fuddruckers**                             | ** ** | ** ** |
| **IHOP**                                    | ** ** | ** ** |
| **Lyons**                                   | ** ** | ** ** |
| **Red  Robin**                              | ** ** | ** ** |
| **Subway**                                  | ** ** | ** ** |
| **T.G.I.  Friday’s**                   | ** ** | ** ** |
| ** **                                  | ** ** | ** ** |
| ** **                                  | ** ** | ** ** |
| **Hotels**                                  | ** ** | ** ** |
| **Marriott**                                | ** ** | ** ** |
| **Sheraton**                                | ** ** | ** ** |
| ** **                                  | ** ** | ** ** |
| **Universities**                            | ** ** | ** ** |
| **Colorado  University**                    | ** ** | ** ** |
| **DePaul**                                  | ** ** | ** ** |
| **Harvard**                                 | ** ** | ** ** |
| **Indiana  University**                     | ** ** | ** ** |
| **Johns  Hopkins University**               | ** ** | ** ** |
| **MIT**                                     | ** ** | ** ** |
| **Princeton**                               | ** ** | ** ** |
| **Purdue**                                  | ** ** | ** ** |
| **Stanford**                                | ** ** | ** ** |
| **University  of California, Berkeley**     | ** ** | ** ** |
| UCLA                                        | ** ** | ** ** |
| **University  of Chicago**                  | ** ** | ** ** |
| **USC**                                     | ** ** | ** ** |
| ** **                                  | ** ** | ** ** |
| **Sports/Entertainment**                    | ** ** | ** ** |
| **Dodger  Stadium**                         | ** ** | ** ** |
| **Yankee  Stadium**                         | ** ** | ** ** |
| **Rose  Garden Arena**                      | ** ** | ** ** |
| **Six  Flags**                              | ** ** | ** ** |
| **Universal  Studios**                      | ** ** | ** ** |
| ** **                                  | ** ** | ** ** |
| **Contract Management Companies**           | ** ** | ** ** |
| **ARAMARK**                                 | ** ** | ** ** |
| **Avendra**                                 | ** ** | ** ** |
| **Foodbuy**                                 | ** ** | ** ** |
| **Gukenheimer**                             | ** ** | ** ** |
| **Sodexho**                                 | ** ** | ** ** |

 

13

----

 

**GeographicSales**

 

To date, we have focusedour sales efforts primarily in North America, and international sales have notbeen material.

 

##### **Salesand Marketing**

##### ** **

***Sales*.**  Our sales objective is to manage a strongmarket position with our veggie burgers and other meat alternative products inthe retail grocery, food service, club store and natural foods store channelsand to continue our expansion beyond veggie burgers in the meat alternativecategory. Our use of regional food brokers as our representatives allows us tomaintain contact with the nation’s major retail grocery chains and food serviceoutlets without a large internal sales force. Brokers are paid sales commissions on all products sold.

 

Our regional sales forceis located strategically in our primary geographic sales regions and inproximity to our brokers and is divided into a food service division and aretail and club division.  The regionalsales directors have substantial sales and industry experience. These regionalsales directors coordinate the efforts of the food brokers and distributors.

 

***Marketing. ***Our marketing effortsfocus on key seasonal periods for healthy eating.  Factors such as the aging population, obesityconcerns and consumer interest in good-for-you products and functional foodswill stimulate future consumer acceptance. We utilize in-store vehicles,targeted marketing, website communication and public relations campaigns to marketour products.

 

**Researchand Development**

 

Our research anddevelopment activities are focused on identifying existing nutritional benefitsand selectively adding benefits important to vegetarians, as well asimprovement and increased efficiency in the manufacturing process.  We continue to develop non-burger items suchas breakfast sausage, cutlets and nuggets to meet the needs of thevariety-seeking consumer. We conduct our research and development activities atour facilities in Clearfield, Utah.  In fiscal2005, 2004 and 2003, we spent approximately $357,000, $272,000 and $235,000,respectively, on research and development activities, which are included insales and marketing expense.

 

**Manufacturing**

 

Our 122,000 square-footClearfield facility handles multiple manufacturing lines for our products.  We believe the Clearfield facility will beable to support our growth plans for the foreseeable future.

 

The manufacturingprocess involves cleaning, chopping and mixing the ingredients; then forming,baking and quick-freezing the products and finally packaging them. Themanufacturing process at our Clearfield facility is highly automated, mixingand baking products in assembly-line fashion with minimal humaninteraction.  The Clearfield facilityalso utilizes proprietary ovens that quickly cook the products.  Products are shipped, fully cooked, frozenand packaged, via temperature controlled trucks to distributors throughoutNorth America.

 

We consider food safetya high priority and have prepared, in conjunction with government agencies, aHazard Analysis and Critical Control Point (“HACCP”) system and other programsdirected at ensuring the safety of our products.  HACCP is a comprehensive system that foodcompanies use to monitor specific steps in food production to identify safetyissues.  Using this type of system, wecan focus on the areas in which greatest risks exist and implement preventivemeasures.

 

A significant disruptionin our Clearfield facility’s production capacity as a result of, for instance,fire, severe weather, regulatory actions, work stoppages or other factors,could disable our capacity to manufacture our products.  If our meat alternative products become lessavailable, consumers may switch to another brand of products and grocery storesmay reduce shelf space allocated to our products.  Any significant unplanned disruption inmanufacturing would likely have a material adverse effect on our results ofoperations and financial condition.

 

14

----

 

**Seasonality**

 

The third and fourthquarters of our fiscal year typically have stronger sales due to the summergrilling season. We typically build inventories during the first and secondquarters of each fiscal year in anticipation of increased sales in the thirdand fourth fiscal quarters, although in fiscal 2005, we reduced inventorylevels that had built up over the 2002 to 2004 time period in order to improvecash flow and liquidity.

 

**Competition**

 

The market for veggieburgers and other meat alternative products is highly competitive. Our productscompete primarily on the basis of brand preference, taste, innovation, qualityof natural ingredients, ease of preparation, availability, price and consumerawareness. We believe that our products compare favorably to those offered byour competitors in all of these areas. We price our products competitively to our primary competitors, althoughcompetitors exhibited more aggressive promotional pricing in fiscal 2005 thanwe did. The calorie and fat content of Gardenburger® products is generallyequivalent to that of competitors’ products. According to AC Nielsen, sales ofour Gardenburger products represented 9.2% and 10.5% of meatless category salesduring fiscal 2005 and fiscal 2004, respectively.

 

We believe that ourprincipal competitors are The Kellogg Company, which distributes its productsunder the “Morningstar Farms” brand name to the food service, retail grocery,club and natural food channels; and Kraft Foods, which distributes soy-basedmeat analog products primarily in the food service, retail grocery, club andnatural food channels under the “Boca Burger” label. These companies havesubstantially greater financial and marketing resources than us.  In addition, other major national foodproducts companies could decide to produce meat alternative products at anytime in the future.

 

Our products alsocompete indirectly with other low fat meat products, such as ConAgra’s HealthyChoice 96% Extra Lean Ground Beef burger, and chicken or turkey based low fatproducts distributed by several large companies such as Tyson Foods, and withfrozen, mass-produced low calorie/low fat entrees, including national brandssuch as Healthy Choice, Lean Cuisine and Smart Ones. Large companies withsubstantially greater financial resources, name recognition and marketingresources than us produce these products.

 

**Significant Customers**

 

Sysco Foods (“Sysco”) andDot Foods, Inc. (“Dot”) accounted for approximately 14% and 13%,respectively, of our fiscal 2005 gross sales before trade discounts.  At September 30, 2005, Sysco, Dot andC&S Wholesale Grocers, Inc. (“C&S”) accounted for approximately 14%,25% and 9% of the gross outstanding accounts receivable balance, respectively.

 

Sysco is a food servicedistributor and sells our products to restaurants, hotels, and other foodservice customers. Dot is a redistributor; they sell our products to other,smaller distributors.  C&S is aretail food distributor and sells our products to grocery stores. The loss ofthese customers could have a material adverse effect on our business; however,there are competing distributors through which our products could be purchasedby the end users.

 

#### **Sourcesof Supply**

#### ** **

We use naturalingredients such as mushrooms, oats, rice, onions and soy protein. These arecommon agricultural items typically available in most parts of the UnitedStates.  In addition, we use packagingand other materials that are common in the food industry. As a result, webelieve, but cannot guarantee, that our sources of supply are reasonablyreliable and that we are at no greater risk regarding supply issues than othersimilar food processors and producers.

 

**Employees**

 

As of September 30,2005, we had approximately 156 full-time equivalent employees, withapproximately 135 of them employed at our Clearfield facility.  None of our employees are subject to acollective bargaining agreement, and we believe our relations with ouremployees to be good.

 

15

----

 

**Intellectual Property**

 

We have 22 U.S.registered trademarks, including “Gardenburger,” “Gardenburger HamburgerClassic,” and “GardenSausage.”  We haveregistered certain trademarks in Australia, Canada, France, Germany, Japan,Mexico and the United Kingdom, along with other smaller countries.

 

We actively monitor useof our trademarks by food service customers and others and take action webelieve appropriate to halt infringement or improper usage. We defend ourintellectual property aggressively and, from time to time, have been engaged ininfringement protection activities. Nonetheless, in the event third parties infringe or misappropriate ourtrademarks, we may have to incur substantial costs to protect our intellectualproperty or risk losing our rights. Any large expenditure or loss of rightscould have a material adverse effect on our results of operations, cash flowsand financial position.

 

We generally do not seekpatents for our recipes or production methods and, therefore, can protect themonly as trade secrets.  Some or all ofthese trade secrets could be obtained by others or could enter the publicdomain, which could place us at a competitive disadvantage.

 

##### **In aneffort to protect our trade secrets, all of our employees sign an “EmployeesProprietary Rights and Confidentiality Agreement,” which states that they willnot disclose our manufacturing processes, recipes, customer lists or otherconfidential material vital to our business. In addition, senior sales, marketing and administrative personnel signnon-compete agreements, which prohibit them from working for a competitor forspecified periods of time upon the termination of their employment withGardenburger.**

##### ** **

##### **ManagementInformation Systems**

##### ** **

We utilize a single Baanenterprise resource planning system, which is expected to meet our informationsystem needs for the foreseeable future. In addition to integrating manufacturing, sales and accountingfunctions, the Baan system provides real-time information for managementanalysis and use in operations. The Baan system aids management with productionplanning (planning of raw material purchases) and demand forecasting (matchingsupply to distribution centers with order volume) capabilities.  The Baan system also includes pallet tagging,bar coding and scanning applications that facilitate tracking of raw materialsand finished goods through our manufacturing operation.  The Baan system enables us to use electronicdata interchange (“EDI”) if desired by customers and suppliers, which webelieve expedites order entry, payment and cash collection processes.

 

##### **GovernmentRegulation**

##### ** **

The manufacturing,packaging, storage, distribution and labeling of food products are subject toextensive federal and state laws and regulations. The FDA has issuedregulations governing the ingredients that may be used in food products, thecontent of labels on food products and the labeling claims that may be made forfoods.  Foods may only include additives,colors and ingredients that are either approved by the FDA or generallyrecognized as safe. Our products must be manufactured in compliance with theFDA’s current Good Manufacturing Practice regulations applicable to food.

 

Regulators have broadpowers to protect public health, including the power to inspect our productsand facilities, to order the shutdown of a facility or to seize or stopshipment of our products and order a recall of previously shipped products, aswell as the power to impose substantial fines and seek criminal sanctionsagainst us or our officers.  While wecurrently carry $1 million of insurance against the cost of a product recall, asignificant recall could have an adverse effect on our results of operations,cash flows and financial condition. In addition, negative publicity may resultif regulators take any of the foregoing actions against us or if we were tovoluntarily recall products to avoid regulatory enforcement.

 

16

----

 

##### **Insurance**

##### ** **

We maintain insuranceagainst various risks related to our business. This includes property andcasualty, business interruption, director and officer liability, food spoilage,product liability, product recalls and workers’ compensation insurance. Wecurrently maintain $1 million of product recall insurance coverage, $2 millionof product liability insurance coverage and $20 million of general umbrellacoverage. We consider our policies adequate to cover the major risks in ourbusiness, but there can be no assurance that this coverage will be sufficientto cover the cost of defense or damages in the event of a significant productliability claim.

 

**Item 1A.  Risk Factors**

 

This Annual Report on Form 10-Kcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934.  Our actual results may differmaterially from the results projected in the forward-looking statements.  Factors that might cause such a differenceinclude, but are not limited to, the following:

 

***If weare unable to successfully implement a plan of reorganization under Chapter 11of the United States Bankruptcy Code, we ultimately may need to consider otheralternatives, including, but not limited to, a Chapter 7 liquidation.***

 

On October 14, 2005,we filed a voluntary petition for relief under Chapter 11 of the United StatesBankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Courtfor the Central District of California, Santa Ana Division (the “BankruptcyCourt”) (Case No. SA 05-19539-JB) (the “Chapter 11 Case”). In connection withthis Chapter 11 Case, on December 9, 2005, we filed a Plan ofReorganization (the “Plan”) and a related Disclosure Statement with theBankruptcy Court.

 

In addition, we havereceived a report from our independent registered public accounting firm regardingour financial statements for the fiscal year ended September 30, 2005 thatincluded an explanatory paragraph which stated that the financial statementshave been prepared assuming we will continue as a going concern. Theexplanatory paragraph stated that the uncertainty regarding the outcome of ourChapter 11 case raised substantial doubt about our ability to continue as agoing concern.

 

As a result of ourfinancial condition and our Chapter 11 Case, we may find it difficult tooperate our business in a normal fashion. In addition, our Chapter 11 Casecould adversely affect our ability to enter into collaborative relationshipswith business partners and our ability to sell our products and could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

***Oursuccess depends on our ability to attract and retain key personnel.***

 

We believe that oursuccess will depend, in part, on the continuing services of our key managementpersonnel.  The loss of the services ofkey personnel could have a material impact on our financial results.  We have entered into retention agreementswith our key management personnel in order to help ensure their continuedservice throughout our Chapter 11 Case. However, we cannot be assured that suchretention agreements will be adequate incentive to retain our key managementwhile we are in bankruptcy proceedings. Additionally, our success may depend onour ability to attract and retain additional skilled management personnel.

 

***Oursuccess depends on our ability to judge the impact of competitive products andpricing.***

 

Successful operation ofour business requires the ability to identify the effects of product andpricing trends.  If we are unable toevaluate the impact of product or pricing trends effectively, we may fail toimplement strategies allowing us to capitalize on those trends, which mayresult in decreased sales or increased costs.

 

***Oursuccess depends on our ability to compete with our competitors.***

 

The foodservice industryis intensely competitive with respect to the quality and value of food productsoffered and price.  Many of ourcompetitors have substantially greater financial, marketing, operating andother resources than we have, which may give them competitive advantages.  Our competitors

 

17

----

 

could also make changesto pricing or other marketing strategies which may impact us detrimentally. Asour competitors expand operations, we expect competition to intensify. Suchincreased competition could have a material adverse effect on our financialposition and results of operations.

 

***Weface commodity price and availability risks.***

 

We purchase energy andagricultural products that are subject to price volatility caused by weather,market conditions and other factors that are not predictable or within ourcontrol. Increases in commodity prices could result in lower operating margins.Occasionally, the availability of commodities can be limited due tocircumstances beyond our control. If we are unable to obtain such commodities,we may be unable to offer related products, which would have a negative impacton our profitability.

 

***Wedepend on our suppliers to deliver quality products to us timely.***

 

Our profitability isdependent on, among other things, our continuing ability to offer fresh,high-quality food at moderate prices. Our dependence on frequent deliveries of food and paper productssubjects our business to the risk that shortages or interruptions in supply,caused by adverse weather or other conditions, could adversely affect theavailability, quality and cost of ingredients. Any disruption in these distribution services could have a materialadverse effect on our financial position and results of operations.

 

***Consumerpreferences and perceptions may have significant effects on our business.***

 

Foodservice businessesare often affected by changes in consumer tastes and perceptions.  Foodservice businesses such as ours can alsobe affected materially and adversely by publicity resulting from poor foodquality, illness, injury or other health concerns or operating issues stemmingfrom one or a limited number of products. We can be similarly affected by consumer concerns with respect to thenutritional value of our products.

 

***Ourbusiness may be impacted by increased insurance costs.***

 

We may be negativelyaffected by rising healthcare costs. Although we seek to manage our claims to prevent increases, suchincreases can occur unexpectedly and without regard to our efforts to limitthem. If such increases occur, we may be unable to pass them along to theconsumer through product price increases, resulting in decreased operatingresults.

 

***Thenature of our business exposes us to potential litigation.***

 

We have thousands ofinteractions or transactions each day with vendors, customers, employees andothers.  In the ordinary course ofbusiness, disputes may arise for a number of reasons.  We may also be subject to liability claims orproduct recalls for products to be distributed in the future or products thathave already been distributed. We cannot be certain that we will prevail inevery legal action brought against us.

 

***Governmentalregulations may change and require us to incur substantial expenditures tocomply.***

 

We are subject togovernmental regulation at the federal, state and local level in many areas ofour business, such as food safety and sanitation, environmental issues andminimum wage. Governmental entities may change regulations that may require usto incur substantial cost increases in order to comply with such laws andregulations.  While we endeavor to complywith all applicable laws and regulations, we cannot assure you that we are infull compliance with all laws and regulations at all times or that we will beable to comply with any future laws or regulations.  If we fail to comply with applicable laws andregulations, we may be subject to sanctions or civil remedies, including finesand injunctions. The cost of compliance or the consequences of non-compliancecould have a material adverse effect on our business and results of operations.

 

***Compliancewith environmental laws may affect our financial condition.***

 

We are subject to variousfederal, state and local environmental laws. These laws govern discharges to air and water, as well as handling anddisposal practices for solid and hazardous wastes. These laws may also imposeliability for damages from and the costs of cleaning up sites of spills,disposals or other releases of hazardous materials. We may be responsible forenvironmental conditions or

 

18

----

 

contamination relating toour facilities and the land on which our facilities are located, regardless ofwhether we lease or own the facility or land in question and regardless ofwhether such environmental conditions were created by us or by a prior owner ortenant. The costs of any cleanup could be significant and have a materialadverse effect on our financial position and results of operations.

 

***Evolving regulation of corporate governance and public disclosure mayresult in additional expenses and continuing uncertainty.***

 

Changing laws,regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulationsare creating uncertainty for companies such as ours. These new or changed laws,regulations and standards are subject to varying interpretations in many casesdue to their lack of specificity, and, as a result, their application inpractice may evolve over time as new guidance is provided by regulatory andgoverning bodies, which could result in continuing uncertainty regardingcompliance matters and higher costs necessitated by ongoing revisions todisclosure and governance practices. We are committed to maintaining highstandards of corporate governance and public disclosure. As a result, we intendto invest resources to comply with evolving laws, regulations and standards,and this investment may result in increased general and administrative expensesand a diversion of management time and attention from revenue-generatingactivities to compliance activities.  Ifour efforts to comply with new or changed laws, regulations and standardsdiffer from the activities intended by regulatory or governing bodies due toambiguities related to practice, our reputation may be harmed.

 

***We may have difficulty implementing, in a timely manner, theinternal control procedures necessary to allow our management to report on theeffectiveness of our internal control.***

 

Pursuant to Section 404of Sarbanes-Oxley and the rules and regulations promulgated thereunder bythe SEC, we will be required to furnish an internal control report ofmanagement’s assessment of the effectiveness of our internal control as part ofour Annual Report on Form 10-K for the fiscal year ending September 30,2007. Our auditors will then be required to attest to, and report on, ourassessment. In order to issue our report, our management must document both thedesign of our internal control and the testing processes that supportmanagement’s evaluation and conclusion. Our management has begun the necessaryprocesses and procedures for issuing its report on our internal control.However, we may face significant challenges in implementing the required processesand procedures. There can be no assurance that we will be able to complete thework necessary for our management to issue its management report in a timelymanner, or that management will be able to report that our internal controlover financial reporting is effective. See also Item 9A for further discussion and analysis of our internalcontrol procedures.

 

**Item 2.  Properties**

 

We lease approximately 5,200square feet of administrative office space in Irvine, California pursuant to anoperating lease with an initial term of three years. Current monthly rent isapproximately $11,300.  This leaseexpires October 31, 2006 and has one renewal option for 24 months.

 

We lease 122,000 squarefeet of production space at Freeport Center, Building A-16, in Clearfield,Utah, pursuant to a lease that will terminate on December 31, 2007.  We have the option to renew the lease for oneadditional five-year term commencing January 1, 2008.  The monthly rent on this facility iscurrently $41,000.  Our Clearfield, Utahproduction facility can support sales levels of approximately $220 million atcurrent pricing levels.  Given ourcurrent level of sales, we are operating the facility at approximately 35% ofoverall capacity.

 

We also lease approximately6,000 square feet of storage space at the Freeport Center in Clearfield on amonth-to-month basis.  The monthly rentfor the storage space is approximately $1,000.

 

19

----

 

**Item 3.  Legal Proceedings**

 

There are currently nomaterial, pending legal proceedings to which we are a party.  From time to time, we become involved inordinary, routine or regulatory legal proceedings incidental to our business.

 

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

 

No matters were submittedto a vote of security holders during the quarter ended September 30, 2005.

 

###### **PART II**

###### ** **

**Item 5.  Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

Our common stock tradeson the over-the-counter market and is quoted on the NASD’s OTC BulletinBoard.  Over-the-counter marketquotations reflect inter-dealer prices, without retail mark-up, mark-down orcommission and may not necessarily represent actual transactions. The high andlow bid quotations for the last two fiscal years were as follows:

 
| **Fiscal 2004** | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| Quarter 1       |       | $        | 0.54       |    | $          | 0.20 |   |
| Quarter 2       |       | 0.40     |       | 0.27    |       |
| Quarter 3       |       | 0.36     |       | 0.21    |       |
| Quarter 4       |       | 0.28     |       | 0.16    |       |
|                 |            |          |            |         |            |  |  |

 
| **Fiscal 2005** | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| Quarter 1       |       | $        | 0.21       |    | $          | 0.07 |   |
| Quarter 2       |       | 0.15     |       | 0.03    |       |
| Quarter 3       |       | 0.13     |       | 0.06    |       |
| Quarter 4       |       | 0.09     |       | 0.05    |       |
|                 |            |          |            |         |            |  |  |

 

The number ofshareholders of record and approximate number of beneficial owners of our commonstock at December 12, 2005 were 725 and 4,000, respectively.

 

There were no cashdividends declared or paid in fiscal 2005 or 2004 on our common stock and we donot anticipate declaring cash dividends on our common stock in the foreseeablefuture.  Under the terms of our loanagreement with CapitalSource Finance LLC, we may not pay any cash dividends orother distributions with respect to, or redeem any of, our capital stock.  We also may not, without the consent of AnnexHoldings I LP (“Annex”), the current holder of our convertible seniorsubordinated note, declare or pay any cash dividends or make any distributionswith respect to our capital stock or other equity securities to the extent thatat least $5 million in principal amount remains outstanding under ourconvertible senior subordinated note and Annex owns a majority of the thenoutstanding principal amount of such notes.

 

In addition, no cashdividends may be paid on our common stock unless dividends have been paid onall outstanding shares of our Series C and Series D ConvertiblePreferred Stock in an amount equal to 12% cumulative dividends accrued on suchpreferred shares through the record date for the common stock dividend (or, ifgreater, the amount of the common stock dividend payable on the preferredshares on an as-converted basis). The quarterly dividend accruing on thepreferred shares is $975,000.

 

There were no sales ofunregistered securities during fiscal 2005 and we did not purchase any of ouroutstanding securities during the fourth quarter of fiscal 2005. Informationregarding securities authorized for issuance under equity compensation plans isincluded in Item 12.

 

20

----

 

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

 
| ** **                                                                                      | ** ** | **Year Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **In thousands, except per share  amounts**                                                     | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ***Statement  of Operations Data*****(1)**                                                      |       |                              |       |   |   |   |   |   |   |   |   |
| Net sales                                                                                       |       | $                                 | 46,055     |   | $ | 48,580 |   | $ | 49,447 |   | $ | 54,596 |   | $ | 50,751 |   |
| Gross margin                                                                                    |       | 15,960                            |       | 16,307 |   | 18,738 |   | 22,907 |   | 18,193 |   |
| Sales and  marketing expense                                                                    |       | 12,213                            |       | 13,844 |   | 14,208 |   | 13,711 |   | 13,586 |   |
| General and  administrative expense                                                             |       | 6,105                             |       | 3,898 |   | 5,218 |   | 4,210 |   | 4,997 |   |
| Other operating  (income) expense, net                                                          |       | (20                               | )          | (16 | ) | 105 |   | 184 |   | 57 |   |
| Operating (loss)  income                                                                        |       | (2,338                            | )          | (1,419 | ) | (793 | ) | 4,802 |   | (447 | ) |
| Interest  expense, net                                                                          |       | (7,114                            | )          | (4,618 | ) | (4,409 | ) | (3,721 | ) | (2,342 | ) |
| Cumulative  effect of a change in accounting for slotting fees                                  |       | —                            |       | (1,150 | ) | — |   | — |   | — |   |
| Cumulative  effect of a change in accounting for goodwill                                       |       | —                            |       | — |   | (411 | ) | — |   | — |   |
| Preferred  dividends and accretion                                                              |       | 4,501                             |       | 4,839 |   | 5,177 |   | 4,955 |   | 4,367 |   |
| Net loss applicable  to common shareholders                                                     |       | $                                 | (13,953    | ) | $ | (12,026 | ) | $ | (10,790 | ) | $ | (3,874 | ) | $ | (7,156 | ) |
|                                                                                            |       |                              |       |   |   |   |   |   |   |   |   |
| Basic and  diluted loss per share before cumulative effect of a change in accounting  principle |       | $                                 | (1.55      | ) | $ | (1.21 | ) | $ | (1.15 | ) | $ | (0.43 | ) | $ | (0.80 | ) |
| Basic and  diluted loss per share for cumulative effect of a change in accounting  principle    |       | —                            |       | (0.13 | ) | (0.05 | ) | — |   | — |   |
| Basic and  diluted net loss per share applicable to common shareholders                         |       | $                                 | (1.55      | ) | $ | (1.34 | ) | $ | (1.20 | ) | $ | (0.43 | ) | $ | (0.80 | ) |
|                                                                                            |       |                              |       |   |   |   |   |   |   |   |   |
| ***Balance  Sheet Data***                                                                       |       |                              |       |   |   |   |   |   |   |   |   |
| Working capital  (deficit)                                                                      |       | $                                 | (30,370    | ) | $ | (616 | ) | $ | 5,937 |   | $ | 10,245 |   | $ | 9,857 |   |
| Total assets                                                                                    |       | 19,861                            |       | 24,484 |   | 28,228 |   | 31,062 |   | 22,061 |   |
| Long-term debt,  less current maturities                                                        |       | —                            |       | 3,513 |   | 4,979 |   | 6,540 |   | — |   |
| Convertible note  payable                                                                       |       | 27,988                            |       | 19,392 |   | 18,672 |   | 17,596 |   | 17,364 |   |
| Convertible  redeemable preferred stock                                                         |       | 60,352                            |       | 55,851 |   | 51,012 |   | 45,835 |   | 40,880 |   |
| Total  shareholders’ deficit                                                               |       | (81,979                           | )          | (68,026 | ) | (56,000 | ) | (45,210 | ) | (41,431 | ) |

 

----

(1)          Net sales and sales and marketing expenses each decreased by $8,806 infiscal 2001 upon adoption of FASB EITF 00-14, “Accounting for Certain SalesIncentives,” and EITF 00-25, “Vendor Income Statement Characterization ofConsideration Paid to a Reseller of the Vendor’s Products.”

 

21

----

 

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

 

**Forward-Looking Statements**

 

This Annual Report on Form 10-Kcontains certain forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934 and we intend that such forward-looking statements be subject tothe safe harbors created thereby. Words such as “may,” “will,” “expect,” “believe,”“anticipate,” “intend,” “could,” “estimate,” “should,” or “continue” or thenegative or other variations thereof or comparable terminology are intended toidentify forward-looking statements. In addition, any statements that refer toprojections of our future financial performance, trends in our businesses, orother characterizations of future events or circumstances are forward-lookingstatements. The forward-looking statements included herein are based oncurrent expectations and involve a number of risks and uncertainties, all ofwhich are difficult or impossible to predict accurately and many of which arebeyond our control.  As such, our actualresults may differ significantly from those expressed in any forward-lookingstatements.  Factors that may cause or contribute to such differencesinclude, but are not limited to: (i) consumers’ concerns or adversepublicity regarding our products; (ii) effectiveness of operatinginitiatives and advertising and promotional efforts; (iii) changes inconsumer preferences; (iv) the availability and pricing of competitiveproducts; (v) changes in our suppliers’ ability to provide quality andtimely products to us; (vi) availability of financing; (vii) newlegislation or government regulation concerning packaging or our ability toproduce or sell our products; (viii) the availability of distributors,such as retail grocery stores, food services outlets, such as restaurants, clubstores and natural food stores to carry our products; (ix) the success ofour research and development activities to develop new meat alternativeproducts; (x) the availability of our manufacturing facilities; and (xi) thecosts to protect our intellectual property rights. Readers should carefullyconsider these risks, as well as the additional risks described elsewhere inthis Annual Report on Form 10-K. We undertake no obligation to revise theforward-looking statements contained herein to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unanticipated events.

 

**GoingConcern and Chapter 11 Filing**

 

Our financial statementshave been presented on a going concern basis, which contemplates therealization of assets and satisfaction of liabilities in the normal course ofbusiness.  However, we were out ofcompliance with certain debt covenants as of June 30, 2005 and September 30,2005. Because of such non-compliance, we classified all of our outstanding debtas current beginning with our June 30, 2005 balance sheet. In addition, asa result of CapitalSource Finance, LLC (“CapitalSource”) and Annex Holdings ILP (“Annex”) having the ability to call our debt at any point in time, allrelated exit fees were accrued and all remaining deferred financing fees werewritten off during the third quarter of fiscal 2005.

 

Both CapitalSource andAnnex currently have the right to declare all of the outstanding amounts due tothem under their respective agreements immediately due and payable; however,the outstanding indebtedness due and payable to CapitalSource was refinanced asdescribed below.  We do not currentlyhave the cash or alternative financing source needed in order to pay suchamounts. In addition, we have a working capital deficit, incurred substantial netlosses applicable to common shareholders for fiscal years 2005, 2004 and 2003and had negative operating cash flow in 2004. We had a total shareholders’deficit at September 30, 2005 of $82.0 million. We are highly leveragedand have significant annual interest and dividend accruals related to our convertiblenote payable and convertible redeemable preferred stock, which contribute toour net losses and shareholders’ deficit.

 

Operating under thisheavy debt burden and facing a continuing decline in our product category andincreased competition during 2005, we determined that in order to maximizevalue for our creditors and, if feasible, preferred shareholders, we movedforward with an effort to sell our business as a going concern.  We made this decision recognizing (i) thelikelihood that we did not have sufficient resources or credit availability toeffectively defend our market share in the grocery channel under existingcircumstances, (ii) the significant risk that our enterprise value wouldfurther erode if we continued to operate our business on a highly leveragedbasis, and (iii) that there was substantial

 

22

----

 

doubt, if we continued tooperate under our existing debt burden, regarding our ability to continue as agoing concern.  Based on our goingconcern sale efforts in fiscal 2005, we have determined that the value ofGardenburger is inadequate to allow for any recovery or retention of rights byour equity holders.

 

Following severalunsuccessful efforts to sell Gardenburger as a going concern over the past sixyears, including our fiscal 2005 efforts, as well as unsuccessful efforts torestructure and recapitalize Gardenburger, partially due to a lack of consensusbetween Annex and our preferred shareholders regarding distribution of theproceeds of a sale and the allocation of rights under a restructuring, on October 14,2005, we filed a voluntary petition for relief under Chapter 11 of the UnitedStates Bankruptcy Code (the “Bankruptcy Code”) in the United States BankruptcyCourt for the Central District of California, Santa Ana Division (the “BankruptcyCourt”) (Case No. SA 05-19539-JB) (the “Chapter 11 Case”). In connectionwith this Chapter 11 Case, on December 9, 2005, we filed a Plan ofReorganization (the “Plan”) and a related Disclosure Statement with theBankruptcy Court.

 

Significant terms of thePlan are as follows:

 

•                  Amounts due to holders of generalunsecured claims will be fully paid over an 18 month period;

•                  All outstanding preferred stock andcommon stock will be terminated with no compensation to the holders thereof,thereby converting Gardenburger to a privately held company from a publiclyheld company;

•                  Elimination of all principal, accruedinterest and accrued exit fees due pursuant to our Note Purchase Agreement, asamended, and Second Amended and Restated Convertible Senior Subordinated Note,as amended (the “Convertible Note”) held by Annex, which totaled $28.0 millionas of September 30, 2005, and issuance of new equity interests inGardenburger to Annex in full satisfaction of this claim;

•                  Payment of all principal and accruedinterest due pursuant to our Revolving Credit and Term Loan Agreement, asamended (the “Loan Agreement”) with CapitalSource, which totaled approximately$8.2 million as of September 30, 2005; and

•                  Ongoing operation of our business ona viable basis following confirmation of the Plan.

 

We will continue tooperate our business in the ordinary course as debtor-in-possession under thejurisdiction of the Bankruptcy Court and in accordance with applicableprovisions of the Bankruptcy Code.

 

Bankruptcy law does notpermit solicitation of acceptances of the Plan until the Bankruptcy Courtapproves the applicable Disclosure Statement relating to the Plan as providingadequate information of a kind, and in sufficient detail, as far as isreasonably practicable in light of the nature and history of the debtor and thecondition of the debtor’s books and records, that would enable a hypotheticalreasonable investor typical of the holder of claims or interests of therelevant class to make an informed judgment about the Plan.  Accordingly, this is not intended to be, norshould it be construed as, a solicitation for a vote on the Plan.  We will emerge from the Chapter 11 Case ifand when the Plan is confirmed by the Bankruptcy Court.

 

The filing of the Chapter11 Case constituted events of default under our Loan Agreement withCapitalSource and our Convertible Note held by Annex.  As a result of the events of default, alldebt outstanding under such loan documents became automatically and immediatelydue and payable.  As of September 30,2005, the amount of outstanding debt and accrued interest under the Loan Agreementwas approximately $8.2 million, which was paid on November 22, 2005utilizing proceeds from our debtor-in-possession credit facilities discussedbelow. The amount of outstanding debt under the Convertible Note wasapproximately $28.0 million as of September 30, 2005. We believe that anyeffort of Annex to enforce their rights under the Convertible Note will bestayed as a result of the filing of the Chapter 11 Case. In any event, weunderstand that Annex does not currently contemplate any such action and thatAnnex supports the Plan.

 

23

----

 

**Debtor-in-PossessionCredit Facilities**

 

In connection with theChapter 11 Case, on October 17, 2005, and as approved by the BankruptcyCourt on October 18, 2005, we entered into an interim financingarrangement with CapitalSource.  Inaddition, senior and second lien credit facilities with Wells Fargo Bank,National Association, acting through its Wells Fargo Business Credit operatingdivision (“WFBC”), and GB Retail Funding, LLC (“GB”), respectively, wereapproved by the Bankruptcy Court on November 16, 2005.

 

We require creditfacilities for use during the Chapter 11 Case (“DIP Financing”) and to meet ourworking capital needs and fund our obligations under the Plan upon andfollowing the effective date of the Plan (“Exit Financing”).

 

The WFBC credit facilitiesprovide for a secured revolving line of credit (the “WFBC Revolving CreditFacility”) in an amount not to exceed $7.5 million and a secured equipment termloan (the “WFBC Term Credit Facility”) of $2.2 million. As of December 14,2005, the amounts outstanding under the WFBC Revolving Credit Facility and theWFBC Term Credit Facility were $0.4 million and $2.2 million, respectively.Upon the effective date of the Plan that is satisfactory to WFBC, the WFBC creditfacilities will convert to Exit Financing facilities by automatically extendingthe maturity date of the WFBC credit facilities to the date thirty-six monthsafter the date of closing of the WFBC credit facilities (November 22,2008). The WFBC credit facilities were used to refinance our CapitalSource debtand will provide for ongoing working capital needs and for payment ofobligations under, and in accordance with, the Plan.  All loans, advances and obligations under theWFBC credit facilities are secured by first priority security interests on allof our assets and reorganized Gardenburger, except general intangible assets(i.e., intellectual property, trademarks, brand names and domain names) andproceeds thereof.

 

The amount availableunder the WFBC Revolving Credit Facility is the lesser of (i) $7.5 millionor (ii) up to the sum of: (i) 85% of eligible accounts receivable and(ii) the lesser of (a) $4.5 million or (b) the lesser of (x)44.9% of eligible raw materials inventory plus 63.4% of eligible finished goodsinventory or (y) 85% of the appraised net orderly liquidation value of eligibleraw material inventory and eligible finished goods inventory, less (iii) reservesmaintained by WFBC.  The interest rate onthe WFBC Revolving Credit Facility is the Prime Rate plus 0.50% per annum floating,payable monthly in arrears calculated on the basis of actual days elapsed ineach year of 360 days. We or reorganized Gardenburger may also elect to fix therate of interest on portions of revolving advances at an interest rate equal to3.25% over Wells Fargo LIBOR.  Thedefault rate of interest will be 3.00% higher than the rate otherwisepayable.  A fee of 0.50% per annum on theunused portion of the WFBC Revolving Credit Facility will be payable monthly inarrears.  As of December 14, 2005,we had $0.4 million outstanding on the WFBC Revolving Credit Facility at aninterest rate of 7.75% and $3.1 million available for future use.  We utilized $0.7 million of the proceeds fromthis facility to pay off the entire balance owed to CapitalSource pursuant totheir Loan Agreement and, accordingly, as of the date of the filing of this Form 10-K,we do not owe any amounts to CapitalSource.

 

The initial amountavailable under the WFBC Term Credit Facility was $2.2 million.  The interest rate on the WFBC Term Facilityis the Prime Rate plus 1.00% per annum floating, payable monthly in arrears,calculated on the basis of actual days lapsed in a year of 360 days.  We or reorganized Gardenburger may also electto fix the rate of interest on portions of term advances at an interest rateequal to 3.75% over Wells Fargo LIBOR. The default rate of interest will be 3.00% higher than the rateotherwise payable.  As of December 14,2005, we had $2.2 million outstanding on the WFBC Term Credit Facility at aninterest rate of 8.25%.

 

Pursuant to the Creditand Security Agreement, dated November 22, 2005, governing the WFBC creditfacilities (the “WFBC Credit Agreement”), we are required to comply withcertain financial covenants, which are described below:

 

24

----

 

(a) We are required to maintain a minimum Availability (as defined in the WFBCCredit Agreement) as follows:

 

| **Dates**                             | ** ** | **Minimum  Availability** | ** ** |
|---------------------------------------|------------|---------------------------|------------|
| 11/22/05 through 12/02/05             |       | $                         | 2,000,000  |   |
| 12/03/05 through 12/30/05             |       | $                         | 1,750,000  |   |
| 12/31/05 and at all times  thereafter |       | $                         | 1,500,000  |   |

 

(b) We are required to achieve Net Cash Flow (as defined in the WFBC CreditAgreement) in an amount not less than the amount set forth below for theperiods set forth below:

 

| **Test Period**           | ** ** | **Minimum  Net Cash Flow** | ** ** |
|---------------------------|------------|----------------------------|------------|
| 10/01/05 through 12/02/05 |       | $                          | (900,000   | ) |
| 10/29/05 through 12/30/05 |       | $                          | (600,000   | ) |
| 12/03/05 through 01/27/05 |       | $                          | (1,800,000 | ) |
| 12/31/05 through 02/24/06 |       | $                          | 200,000    |   |

 

(c) We are required to achieve, for each period described below, gross sales of notless than the amount set forth for each such period:

 

| **Period**                | ** ** | **Minimum Gross Sales** | ** ** |
|---------------------------|------------|-------------------------|------------|
| 10/01/05 through 10/31/05 |       | $                       | 3,600,000  | ** ** |
| 11/01/05 through 11/30/05 |       | $                       | 3,000,000  | ** ** |
| 12/01/05 through 12/31/05 |       | $                       | 3,600,000  | ** ** |
| 01/01/06 through 01/31/06 |       | $                       | 4,300,000  | ** ** |
| 02/01/06 through 02/28/06 |       | $                       | 3,900,000  | ** ** |
| 03/01/06 through 03/31/06 |       | $                       | 5,100,000  | ** ** |
| 04/01/06 through 04/30/06 |       | $                       | 4,500,000  | ** ** |
| 05/01/06 through 05/31/06 |       | $                       | 5,200,000  | ** ** |
| 06/01/06 through 06/30/06 |       | $                       | 5,200,000  | ** ** |
| 07/01/06 through 07/31/06 |       | $                       | 4,700,000  | ** ** |

 

(d) In the event we fail to achieve the minimum gross sales as set forth in item (c) abovefor any period set forth above, we are required to achieve, for the period setforth below ending on the same end date as the period for which we failed suchminimum gross sales covenant, cumulative Net Sales (as defined in the WFBCCredit Agreement) of not less than the amount set forth below for the periodending on the date set forth below:

 

| **Period**                | ** ** | **Minimum  Net Sales** | ** ** |
|---------------------------|------------|------------------------|------------|
| 10/01/05 through 10/31/05 |       | $                      | 3,100,000  | ** ** |
| 10/01/05 through 11/30/05 |       | $                      | 5,700,000  | ** ** |
| 10/01/05 through 12/31/05 |       | $                      | 8,600,000  | ** ** |
| 10/01/05 through 01/31/06 |       | $                      | 12,100,000 | ** ** |
| 10/01/05 through 02/28/06 |       | $                      | 15,500,000 | ** ** |
| 10/01/05 through 03/31/06 |       | $                      | 19,700,000 | ** ** |
| 10/01/05 through 04/30/06 |       | $                      | 23,700,000 | ** ** |
| 10/01/05 through 05/31/06 |       | $                      | 27,800,000 | ** ** |
| 10/01/05 through 06/30/06 |       | $                      | 32,000,000 | ** ** |
| 10/01/05 through 07/31/06 |       | $                      | 36,000,000 | ** ** |

 

Pursuant to the WFBCCredit Agreement, on or before February 24, 2006, Wells Fargo shall setnew covenant levels for item (b) above. The new covenant levels will be based upon our projections and cashbudget for such periods received by Wells Fargo pursuant to the Credit andSecurity Agreement and will be no less stringent than the present levels,except that with respect to item (b) above, the new covenant levels willbe based on a $500,000 negative variance based upon the projections and updatedcash flow budget for such periods.  Acopy of the Wells Credit Agreement is attached to this Annual Report on Form 10-Kas Exhibit 10.74.

 

The GB Loan Facilityconsists of a $5.0 million secured single-advance term loan. This facility issecured by a second priority lien in all collateral securing the WFBC creditfacilities, except that it is secured by a first priority perfected securityinterest in all of our general intangible assets (i.e., 

 

25

----

 

intellectual property,trademarks, brand names and domain names) and proceeds thereof. The interestrate on the GB Loan Facility is the Prime Rate plus 6.75% per annum floating,payable monthly in arrears. As of December 14, 2005, we had $4.9 millionoutstanding on the GB Loan Facility at an interest rate of 14.0%. Upon theeffective date of the Plan that is satisfactory to GB, the GB Loan Facilitywill convert to an Exit Financing facility by automatically extending thematurity date of the GB Loan Facility to the date thirty-six months after thedate of closing of the GB Loan Facility (November 22, 2008).

 

Pursuant to the Credit and SecurityAgreement, dated November 22, 2005, governing the GB Loan Facility (the “GBCredit Agreement”), we are required to comply with certain financial covenantsthat are identical to the financial covenants described above in connectionwith the WFBC credit facilities.  A copyof the GB Credit Agreement is attached to this Annual Report on Form 10-Kas Exhibit 10.75.

 

As of December 2,2005, we were in compliance with all of the financial covenants describedabove.

 

**General**

 

Approximately 72% of ourgross sales were attributable to the Gardenburger® veggie burger and soy burgerproducts, with the remaining 28% attributable to our newer meat alternativeproducts in fiscal 2005. Consumers, in general, have been moving to the widerrange of meat alternative products becoming available in the marketplace. Inresponse to this development in consumer tastes, in fiscal 2003, we added fivenew products, including BBQ Chik’n and Meatless Meatloaf.  In the third quarter of fiscal 2004, weintroduced a new line of six microwaveable meatless entrees to capitalize onthe consumers’ need for convenience. Sales of this new line of Gardenburger Meals added $3.7 million of netsales in fiscal 2005. We further expanded our convenience focus with the early fiscal2005 launch of Gardenburger Wraps, which added $1.7 million of net sales in fiscal2005.

 

Our results have beenadversely affected by increased competition for market share as a source ofgrowth due to flat consumer consumption. This increased competition contributedto a 4.4% decrease in sales of our veggie burger products in fiscal 2005compared to fiscal 2004. This comes after drops of 8.7% and 11.0% in fiscal2004 and 2003, respectively.

 

**Results of Operations**

 

The following table is derived from ourStatements of Operations for the periods indicated and presents our results ofoperations in dollars, as well as a percentage of net sales (dollars inthousands).

 
| **Year Ended  September 30,**                                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                                                                                               |       | $        | 46,055     |     | $          | 48,580   |       | $ | 49,447 |   |
| Cost of goods  sold                                                                                                     |       | 30,095   |       | 32,273   |       | 30,709   |       |
| Gross margin                                                                                                            |       | 15,960   |       | 16,307   |       | 18,738   |       |
| Sales and  marketing expense                                                                                            |       | 12,213   |       | 13,844   |       | 14,208   |       |
| General and  administrative expense                                                                                     |       | 6,105    |       | 3,898    |       | 5,218    |       |
| Other operating  (income) expense, net                                                                                  |       | (20      | )          | (16      | )          | 105      |       |
| Operating loss                                                                                                          |       | (2,338   | )          | (1,419   | )          | (793     | )          |
| Interest  expense, net                                                                                                  |       | (7,114   | )          | (4,618   | )          | (4,409   | )          |
| Loss before  cumulative effect of a change in accounting for slotting fees and goodwill  and before preferred dividends |       | (9,452   | )          | (6,037   | )          | (5,202   | )          |
| Cumulative  effect of a change in accounting for slotting fees                                                          |       | —   |       | (1,150   | )          | —   |       |
| Cumulative  effect of a change in accounting for goodwill                                                               |       | —   |       | —   |       | (411     | )          |
| Net loss                                                                                                                |       | (9,452   | )          | (7,187   | )          | (5,613   | )          |
| Preferred  dividends                                                                                                    |       | 4,501    |       | 4,839    |       | 5,177    |       |
| Net loss  applicable to common shareholders                                                                             |       | $        | (13,953    | )        | $          | (12,026  | )          | $ | (10,790 | ) |

 

26

----

 
| **Year Ended  September 30,  (percentages may not add due to rounding)**                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                                                                                               |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost of goods  sold                                                                                                     |       | 65.3     |       | 66.4     |       | 62.1     |       |
| Gross margin                                                                                                            |       | 34.7     |       | 33.6     |       | 37.9     |       |
| Sales and  marketing expense                                                                                            |       | 26.5     |       | 28.5     |       | 28.7     |       |
| General and  administrative expense                                                                                     |       | 13.3     |       | 8.0      |       | 10.6     |       |
| Other operating  (income) expense, net                                                                                  |       | —   |       | —   |       | 0.2      |       |
| Operating loss                                                                                                          |       | (5.1     | )          | (2.9     | )          | (1.6     | )          |
| Interest  expense, net                                                                                                  |       | (15.4    | )          | (9.5     | )          | (8.9     | )          |
| Loss before  cumulative effect of a change in accounting for slotting fees and goodwill  and before preferred dividends |       | (20.5    | )          | (12.4    | )          | (10.5    | )          |
| Cumulative  effect of a change in accounting for slotting fees                                                          |       | —   |       | (2.4     | )          | —   |       |
| Cumulative  effect of a change in accounting for goodwill                                                               |       | —   |       | —   |       | (0.8     | )          |
| Net loss                                                                                                                |       | (20.5    | )          | (14.8    | )          | (11.3    | )          |
| Preferred  dividends                                                                                                    |       | (9.8     | )          | (10.0    | )          | (10.5    | )          |
| Net loss  applicable to common shareholders                                                                             |       | (30.3    | )%         | (24.8    | )%         | (21.8    | )%         |

 

***Net Sales***

 

The $2.5 million, or 5.2%decrease in net sales in fiscal 2005 compared to fiscal 2004 was the result of areduction in sales of our veggie burger products and our meat alternative productsintroduced prior to fiscal 2004, partially offset by the introduction of ourGardenburger Wraps, which contributed $1.7 million to our net sales in fiscal2005, and $3.7 million of sales related to our Gardenburger Meals in fiscal2005 compared to $2.3 million in fiscal 2004 and a reduction in trade spending.

 

Net sales to Costco decreasedby $372,000, or 8.9%, in fiscal 2005 compared to fiscal 2004.  Effective the second quarter of fiscal 2004,Costco removed the Kirkland Signature co-branding label from our Gardenburgeroriginal packaging, which meant that our product was no longer required to be carriedby all Costco stores.  After numerousregional presentations, we have been able to partially offset the negativeeffects of this action and, as of September 30, 2005, approximately 32% ofthe Costco stores continue to carry our Gardenburger product.

 

The $0.9 million, or1.8%, decrease in net sales in fiscal 2004 compared to fiscal 2003 was a resultof an 8.7% decrease in sales of our veggie burger products, a decrease in salesto Costco and an increase in trade spending, offset in part by continuinggrowth in meat alternative products. Sales of products launched after the endof fiscal 2003, which are all meat alternative products, contributed $5.2million to our net sales in fiscal 2004.

 

Net sales to Costcodecreased by $3.2 million, or 41%, in fiscal 2004 compared to fiscal 2003 as aresult of Costco’s decision to remove the Kirkland Signature co-branding labelfrom our Gardenburger original packaging.

 

Trade spending totaled $9.0million in fiscal 2005, $12.1 million in fiscal 2004 and $11.8 million infiscal 2003. Trade spending includes promotions, discounts, contractorigination fees and slotting fees. Pursuant to EITF No. 01-9 “Accountingfor Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’sProducts,” these costs are recorded at the later of when revenue is recognizedor when the sales incentive is offered and are generally classified as areduction of sales.

 

***GrossMargin***

 

The $0.3 million, or 2.1%, decrease in gross margin in fiscal 2005 compared to fiscal 2004 was primarily due to the decreased sales, partially offset by an increase in gross margin as a percentage of net sales. The increase in gross margin as a percentage of net sales in fiscal 2005 compared to fiscal 2004 was primarily due to reduced costs at our manufacturing facility and improved overhead absorption, partially offset by the impact of lower production volume as we reduced our inventory 

 

27

----

 

levels, primarily in the second quarter of fiscal 2005, therefore lowering the base over which to spread fixed costs. There were no material changes to raw material costs or selling prices in fiscal 2005 compared to fiscal 2004 and, at the current time, we do not anticipate any material selling price changes in fiscal 2006.

 

The $2.4 million, or13.0%, decrease in gross margin and the decrease in gross margin as apercentage of net sales in fiscal 2004 compared to fiscal 2003 were due to decreasedveggie burger sales, which have lower production costs than our other products,unfavorable manufacturing variances, which primarily resulted frominefficiencies related to the introduction of our new entrees in the thirdquarter of fiscal 2004, and higher trade spending. Except for an increase incertain commodity prices, primarily cheese, and certain shipping materials, we didnot experience material changes to our raw material costs in fiscal 2004compared to fiscal 2003.  We also did notmake any material selling price changes in fiscal 2004 compared to fiscal 2003.

 

***Salesand Marketing Expense***

 

The $1.6 million, or 11.8%,decrease in sales and marketing expense in fiscal 2005 compared to fiscal 2004was primarily due to reductions in spending on marketing programs and plannedreductions in travel and other non-essential expenditures as we focused onimproving our cash flow and liquidity position. In addition, sales and marketing expense in fiscal 2004 includesapproximately $57,000 of costs related to our move to Irvine, California fromPortland, Oregon with no comparable costs in fiscal 2005. These factors werepartially offset by a $399,000 increase in severance and related costs.

 

Sales and marketingexpense in fiscal 2004 included approximately $57,000 of costs related to ourmove to Irvine, California from Portland, Oregon compared to $150,000 of suchcosts in fiscal 2003. The remaining decrease in sales and marketing expense in fiscal2004 compared to fiscal 2003 was primarily due to the following:

 

•                  a$282,000 decrease in in-store product demonstration expense in the club storechannel;

•                  a$236,000 decrease in coupon design, production and insertion costs attributableto one fewer coupon drop;

•                  a$173,000 decrease in severance pay;

•                  a$136,000 decrease in inventory storage costs achieved through better inventory management;

•                  a$117,000 decrease in sales commission and broker incentives expense due tonegotiating lower commission rates for some brokers and restricting someincentive programs;

•                  a$99,000 decrease in product contributions; and

•                  a$95,000 decrease in advertising agency fees by eliminating the use of anadvertising agency for the retail sales channel.

 

These decreases werepartially offset by the following:

 

•                  a $111,000 increase in travelexpense;

•                  a $190,000 increase in sales bonuses;and

•                  a $218,000 increase in freightdelivery costs.

 

***Generaland Administrative Expense***

 

The $2.2 million, or 56.6%,increase in general and administrative expense in fiscal 2005 compared tofiscal 2004 was primarily due to the following:

 

•                  a $261,000increase in consulting costs related to Sarbanes-Oxley compliance;

•                  a $263,000increase in audit costs;

•                  an $899,000accrual for the new management retention program; and

•                  a $991,000increase in legal and other professional costs, primarily in connection withthe identification of strategic alternatives, including our filing for Chapter11 bankruptcy protection in October 2005.

 

28

----

 

These increases wereoffset by $587,000 of costs in the fiscal 2004 period related to our move toIrvine, California from Portland, Oregon and a $190,000 decrease indepreciation.

 

The decrease in generaland administrative expense in fiscal 2004 compared to fiscal 2003 was primarilydue to the following:

 

•                  a $688,000 decrease in costs incurredfor outside services and legal fees;

•                  a $100,000 decrease in bad debtexpense;

•                  a $364,000 decrease in depreciationexpense due primarily to the elimination of depreciation related to ourcomputer system, which has reached the end of its depreciable life; and

•                  a $70,000 reduction in rent expensedue to our move to smaller quarters in Irvine, California.

 

***OtherOperating Income (Expense)***

 

Other operating income infiscal 2005 and fiscal 2004 primarily represents a gain on the sale of otherassets.

 

Other operating expenseof $105,000 in fiscal 2003 represents losses on the disposal of fixed assets.

 

***InterestExpense***

 

As discussed above, as aresult of CapitalSource and Annex having the ability to call our debt at anypoint in time, all remaining exit fees were accrued and all deferred financingfees were written off during the quarter ended June 30, 2005.  The accrual of the remaining exit fees at June 30,2005 resulted in an increase to interest expense in fiscal 2005 of $1.4 millionand the write-off of all remaining deferred financing fees resulted in anincrease to interest expense in fiscal 2005 of $222,000.  We also recorded the 20% exit premium oninterest accrued on the Convertible Note subsequent to June 30, 2005,which totaled $160,000 in the fourth quarter of 2005.  In connection with our Chapter 11 Casediscussed above, we ceased the accrual of all interest and exit fees related toour Convertible Note effective October 14, 2005.

 

In connection with ourdebt amendments in February 2005, interest on outstanding advances underthe revolving notes from February 18, 2005 to May 31, 2005 was at anannual rate of prime rate plus 4.50%. After May 31, 2005, the interestrate reverted back to the annual rate of prime rate plus 2.50%.  In addition, as of February 18, 2005,interest on all outstanding amounts under the Convertible Note accrued at therate of 15% per annum instead of 13% per annum.

 

Interest expense infiscal 2005 also includes $110,000 and $250,000 for the amendment fees paid toCapitalSource and Annex, respectively, related to the February 2005amendments, as well as $204,000 of legal and other expenses related to theamendments. The amendment fees and related legal and other expenses wereprimarily expensed in the second quarter of fiscal 2005 since they were relatedto the waivers of our non-compliance with certain financial covenants.

 

***IncomeTaxes***

 

A valuation allowance hasbeen recorded for the full amount of deferred tax assets due to the uncertaintyregarding the realization of the net deferred tax assets consisting primarilyof net operating loss and credit carryforwards. Accordingly, no benefit has been recorded related to our losses in fiscal2005, 2004 or 2003.

 

***CumulativeEffect of Change in Accounting for Slotting Fees***

 

Slotting fees refer tooral arrangements pursuant to which the retail grocer allows our products to beplaced on the store’s shelves in exchange for a slotting fee. As reported inprevious filings, slotting fees were initially recorded as a prepaid asset andthe related expense was recognized ratably over a 12-month period beginning twomonths following product shipment as an offset to sales. Typically, twelvemonths is the estimated minimum period during which a retailer agrees toallocate shelf space.  However, giventhat there are no written contractual commitments requiring the retail grocersto allocate shelf space for twelve months, in fiscal 2004, we determined thatit was a preferable accounting method to expense the slotting fees as areduction of sales in determining net sales in the period the related revenueis recognized for the first shipment of the related product. In accordance 

 

29

----

 

with AccountingPrinciples Board Opinion (“APB”) 20, “Accounting Changes,” the cumulativeeffect of the change in accounting for slotting fees was reflected in the firstquarter of fiscal 2004.

 

***CumulativeEffect of Change in Accounting for Goodwill***

 

In accordance with theadoption provisions of SFAS No. 142, “Goodwill and Other IntangibleAssets,” in the first quarter of fiscal 2003, we tested the carrying value ofour goodwill utilizing a discounted cash flow analysis and determined that theremaining balance of $411,000 should be written off.  There was no goodwill on our balance sheet atSeptember 30, 2005 or 2004.

 

***PreferredDividends and Accretion***

 

Detail of our preferreddividends and accretion is as follows (in thousands):

 
| ** **                            | ** ** | **Year Ended September 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| 12% cumulative  dividends             |       | $                                 | 3,900      |   | $ | 3,900 |   | $ | 3,900 |   |
| Accretion of 10%  redemption premium  |       | 481                               |       | 769 |   | 1,022 |   |
| Accretion of  original issue discount |       | 120                               |       | 170 |   | 255 |   |
|                                  |       | $                                 | 4,501      |   | $ | 4,839 |   | $ | 5,177 |   |

 

The decreases inaccretion from fiscal 2003 to fiscal 2005 were due to extensions of theearliest redemption date for the preferred stock, which extended the time overwhich the redemption premium and original discount were accreted.

 

As discussed above,pursuant to our Plan, all shares of preferred stock will be canceled with nocompensation to the holders thereof. Accordingly, we eliminated the accrual of dividends and the accretion ofthe redemption premium and the original issue discount as of October 14,2005, the date we filed our Chapter 11 Case.

 

***Inflation***

 

We believe that theimpact of inflation was not material for fiscal years 2005, 2004 and 2003.

 

**Liquidityand Capital Resources**

 

***Fiscal2005 Cash Flow Initiatives***

 

During the fourth quarterof fiscal 2004, we experienced sales declines due to one of our majorcompetitors initiating a program of price discounting at unprecedentedlevels.  These sales declines resulted inoperating performance that was lower than our plans.  When combined with the significant cash outlaysfor capital expenditures, slotting fees and other product introduction costsassociated with the launch of our new microwavable meals, these events caused ahigher than expected use of our short-term note payable.

 

To improve our cash flowand liquidity, the following actions were taken in fiscal 2005:

 

•                  A reduction of approximately $2.0million in finished goods inventories which were built up over the 2002-2004timeframe;

•                  A reduction in slotting fees fromapproximately $3.1 million in fiscal 2004 to approximately $0.4 million in fiscal2005;

•                  A reduction in capital expendituresfrom approximately $1.4 million in fiscal 2004 to approximately $268,000 infiscal 2005;

•                  The completion, on October 1,2004, of a reduction in workforce at our manufacturing facility;

•                  A ban on non-essential travel andother administrative costs;

•                  The negotiation of extended paymentterms with several of our major vendors; and

•                  The institution of additional cashmanagement and tracking procedures.

 

As a result of thevarious initiatives, during fiscal 2005, we were able to make scheduledprincipal payments of $2.0 million on our long-term debt, pay the $650,000 exitfee to CapitalSource and fund all interest payments on our CapitalSource debt,which totaled approximately $1.0 million, with only a $453,000 increase in ourshort-term note payable. Net cash provided by operating activities in fiscal 

 

30

----

 

2005 was $2.5 million, a$3.1 million improvement from the $0.6 million used for operating activities infiscal 2004.

 

See “Debtor-in-PossessionCredit Facilities” for a discussion of our current DIP Financing and theultimate conversion to Exit Financing.

 

***General***

 

Accounts receivableincreased $371,000 to $3.2 million at September 30, 2005 from $2.8 millionat September 30, 2004, due to reductions in trade spending accruals, whichare reported as an offset to accounts receivable. Days sales outstanding wereapproximately 24 days at September 30, 2005 compared to 22 days at September 30,2004.

 

Inventories decreased $2.6million to $6.4 million at September 30, 2005 compared to $9.0 million at September 30,2004.  This decrease was due to a plannedreduction in finished goods inventories to improve cash flow and liquidity.Inventory turned approximately 4.7 times on an annualized basis in the fourthquarter of fiscal 2005 compared to approximately 3.9 times in the fourthquarter of fiscal 2004.

 

Accrued payroll andemployee benefits increased $0.8 million to $1.3 million at September 30,2005 compared to $0.5 million at September 30, 2004.  The increase is primarily due to $899,000 ofaccrued retention pursuant to our executive officer retention agreements at September 30,2005 compared to none at September 30, 2004.

 

Other current liabilitiesdecreased $2.9 million to $0.6 million at September 30, 2005 compared to$3.6 million at September 30, 2004, due primarily to the transfer of $3.2million of accrued interest at September 30, 2004 due on our ConvertibleNote to the Convertible Note balance.

 

Capital expenditures of $268,000during fiscal 2005 were primarily used for manufacturing equipment. We anticipatespending no more than $250,000 on capital expenditures in fiscal 2006 primarilyfor manufacturing equipment.

 

Other long-term assetsdecreased $370,000 to $326,000 at September 30, 2005 compared to $696,000at September 30, 2004 primarily due to the write-off of all remainingdeferred financing fees during the third quarter of fiscal 2005 as a result ofCapitalSource and Annex having the ability to call our debt at any point intime, as discussed above.  The write-offof deferred financing fees, which is reflected as a component of interestexpense, totaled $359,000 in fiscal 2005.

 

As of September 30,2005, our Loan Agreement with CapitalSource provided for an $8.0 million termloan with a maturity of January 31, 2007 and a $7.0 million short-termnote payable (together, “the Loans”). However, pursuant to our Plan asdiscussed above, the Loans were paid off and the Loan Agreement was terminated onNovember 22, 2005 utilizing our DIP Financing.

 

Our Convertible Notebalance included the following (in thousands):

 
| ** **       | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|------------------|------------|------------------------------|------------|-------------------------|------------|
| Principal        |       | $                            | 17,156     |                    | $          | 16,906 |   |
| Accrued Interest |       | 6,167                        |       | —                  |       |
| Exit Premium     |       | 4,665                        |       | 2,486                   |       |
|             |       | $                            | 27,988     |                    | $          | 19,392 |   |

 

According to our Plan,the Convertible Note balance will be extinguished and Annex will be issued newequity interests in Gardenburger in full satisfaction of this claim.  Accordingly, we ceased the accrual of allinterest and exit fees related to our Convertible Note effective October 14,2005.

 

31

----

 

Contractual paymentsunder our short-term note payable, our term loan, our Convertible Note, ouroperating leases and other obligations are significant.  A schedule of contractual paymentsremaining due at September 30, 2005 in the next five fiscal years,including exit fees of approximately $4.7 million for the Convertible Note, isas follows (in thousands):

 
| ** **                  | ** ** | **Total** | ** ** | **Fiscal   2006-2007** | ** ** | **Fiscal   2008-2009** | ** ** | **Thereafter** | ** ** |
|-----------------------------|------------|-----------|------------|------------------------|------------|------------------------|------------|----------------|------------|
| Short-Term Note  Payable    |       | $         | 5,244      |                   | $          | 5,244                  |       | $              | —     |   | $ | — |   |
| Term Loan                   |       | 2,861     |       | 2,861                  |       | —                 |       | —         |       |
| Convertible Note            |       | 27,988    |       | 27,988                 |       | —                 |       | —         |       |
| Operating Leases            |       | 1,431     |       | 1,269                  |       | 162                    |       | —         |       |
| Purchase Order  Obligations |       | 1,060     |       | 1,060                  |       | —                 |       | —         |       |
| License  Agreement          |       | 271       |       | 150                    |       | 121                    |       | —         |       |
| Retention  Agreements       |       | 899       |       | 899                    |       | —                 |       | —         |       |
| Total                       |       | $         | 39,754     |                   | $          | 39,471                 |       | $              | 283        |   | $ | — |   |

 

As discussed above, our short-termnote payable and our term loan were paid off on November 22, 2005 inaccordance with the Plan. In addition, pursuant to the Plan, the ConvertibleNote will be terminated in exchange for new equity interests in Gardenburger.

 

As of September 30,2005, we had 552,500 shares of Series C Convertible Preferred Stock and97,500 shares of Series D Convertible Preferred Stock outstanding.  The preferred stock balance consisted of thefollowing (in thousands):

 
| ** **               | ** ** | **September 30,** | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Original face  amount    |       | $                      | 32,500     |   | $ | 32,500 |   |
| Accrued  dividends       |       | 25,188                 |       | 21,288 |   |
| 10% redemption  premium  |       | 3,012                  |       | 2,531 |   |
| Original issue  discount |       | (348                   | )          | (468 | ) |
|                     |       | $                      | 60,352     |   | $ | 55,851 |   |

 

As discussed above,pursuant to our Plan, all shares of preferred stock will be canceled with nocompensation to the holders thereof. Accordingly, we eliminated the accrual of dividends and the accretion ofthe redemption premium and the original issue discount as of October 14,2005, the date we filed our Chapter 11 Case.

 

**Seasonality**

 

The third and fourthquarters of our fiscal year typically have stronger sales due to the summergrilling season. We typically build inventories during the first and secondquarters of each fiscal year in anticipation of increased sales in the thirdand fourth fiscal quarters, although in fiscal 2005, we have reduced inventorylevels that had built up over the 2002 to 2004 time period in order to improvecash flow and liquidity.

 

**CriticalAccounting Policies and Estimates**

 

***Revenue Recognition and Trade Spending***

 

Inaccordance with Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB104”), revenues are recognized upon passage of title to the customer, typicallyupon product pick-up, shipment or delivery to customers.

 

Ourrevenue arrangements with our customers often include sales incentives andother promotional costs such as coupons, volume-based discounts, slotting feesand off-invoice discounts. These costs are typically referred to collectivelyas “trade spending.”  Pursuant to EITF No. 00-14,EITF No. 00-25 and EITF No. 01-09, “Accounting for ConsiderationGiven by a Vendor to a Customer (Including a Reseller of the Vendor’sProducts),” these costs are recorded when revenue is recognized and aregenerally classified as a reduction of revenue. We do not provide for salesreturns since, historically, sales returns have not been significant.

 

32

----

 

Weare required to make estimates regarding the level of coupon redemption, theamount of product to be purchased by certain customers over certain timeperiods and related volume-based and off-invoice discounts, and slotting feesbased on product shipments in order to estimate our overall trade spending.These estimates are reviewed and recorded on a monthly basis based oninformation provided by our regional sales managers as to the types ofarrangements that have been made with our customers, historical results andcurrent period activity, and are recorded in our financial statements as anoffset to sales and trade receivables. Trade spending totaled $9.0 million in fiscal 2005, $12.1 million infiscal 2004 and $11.8 million in fiscal 2003. If our estimates are not reflective of actual results, we may berequired to record adjustments that could materially affect our results ofoperations and financial condition for any given period.

 

***Slotting Fees***

 

Slottingfees are a type of trade spending and refer to oral arrangements pursuant towhich the retail grocer allows our products to be placed on the store’s shelvesin exchange for a slotting fee. Typically, 12 months is the estimated minimumperiod during which a retailer agrees to allocate shelf space. However, giventhat there are no written contractual commitments requiring the retail grocersto allocate shelf space for twelve months, we expense the slotting fees as areduction of sales in determining net sales in the period the related revenueis recognized for the first shipment of the related product. The level ofslotting fees varies based on the number of new product introductions,potential product reintroductions and in what sales channels products areintroduced.  Slotting fees, which areincluded as a component of total trade spending, totaled $0.4 million in fiscal2005, $3.1 million in fiscal 2004 and $2.2 million (pro forma) in fiscal2003.  Prior to fiscal 2004, wecapitalized and amortized slotting fees over a 12-month period and, accordingly,the fiscal 2003 amount is pro forma assuming it was computed based on ourcurrent accounting policy.

 

***Inventory Valuation Allowance***

 

Weregularly evaluate the realizability of our inventory based on a combination offactors including the following: historical usage rates, forecasted sales orusage, historical spoilage rates and other factors.  Raw materials are reviewed periodically byour operating personnel for spoilage.  Finishedgoods are reviewed periodically by operating personnel to determine if inventorycarrying costs exceed market selling prices. If circumstances related to our inventories change, our estimates of therealizability of inventory could materially change. Write-offs of inventorytotaled $251,000 in fiscal 2005, $276,000 in fiscal 2004 and $140,000 in fiscal2003 and, as of September 30, 2005 and 2004, our inventory valuationallowance totaled $163,000 and $140,000, respectively. We have not experiencedmaterial losses related to our inventories in the past and believe that the currentlevel of valuation allowance is adequate.

 

***Accounts Receivable and Allowances forUncollectible Accounts***

 

Creditlimits are established through a process of reviewing the financial history andstability of each customer.  We regularlyevaluate the collectibility of our trade receivable balances by monitoring pastdue balances.  If it is determined that acustomer will be unable to meet its financial obligation, we record a specificreserve for bad debts to reduce the related receivable to the amount we expectto recover.  If circumstances related tospecific customers deteriorate, our estimates of the recoverability ofreceivables associated with those customers could materially change.  We recorded $4,000 in bad debt write-offs infiscal 2005, $3,000 in fiscal 2004 and $7,000 in fiscal 2003 and, as of September 30,2005 and 2004, our allowance for bad debts totaled $100,000 and $104,000,respectively. Historically, bad debts have not had a material effect on ourresults of operations or financial condition, and we believe our allowance fordoubtful accounts is adequate.

 

33

----

 

**New AccountingPronouncements**

 

***SFAS No. 154***

 

In May 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections: a replacementof APB Opinion No. 20 and FASB Statement No. 3,” which requirescompanies to apply most voluntary accounting changes retrospectively to priorfinancial statements.  SFAS No. 154is effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. Any future voluntary accounting changes made by us will be accounted forunder SFAS No. 154.

 

***SFAS No. 153***

 

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets.”  SFAS No. 153 amends APB Opinion No. 29,“Accounting for Nonmonetary Transactions,” by replacing the exception forexchanges of similar productive assets with an exception for exchanges that donot have commercial substance.  A transaction has commercial substance ifthe future cash flows of the entity are expected to change significantly as aresult of the exchange.  We adopted SFAS No. 153 on July 1,2005.  SFAS No. 153 did not have anyeffect on our financial position, results of operations or cash flow.

 

***SFASNo. 151***

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs: an amendment of ARB No. 43,Chapter 4,” to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and wasted material.  SFAS No. 151 is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005.  We do not believe the provisions of SFAS No. 151,when applied, will have a material impact on our financial position or resultsof operations.

 

***SFASNo. 123R***

 

In December 2004,the FASB issued SFAS No. 123R, “Share-Based Payment: an amendment of FASBStatements No. 123 and 95,” which requires companies to recognize in theirincome statement the grant-date fair value of stock options and otherequity-based compensation issued to employees. SFAS No. 123R is effective for annual periods beginning after June 15,2005.  Accordingly, we will adopt SFAS No. 123Rin the first quarter of fiscal 2006. Unamortized stock-based compensationexpense, on a pro forma basis, as of September 30, 2005 totaled $190,000,with $144,000 to be amortized in fiscal 2006 and $46,000 to be amortized infiscal 2007.

 

**Off-BalanceSheet Arrangements**

 

We do not have anyoff-balance sheet arrangements that have or are reasonably likely to have amaterial current or future effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources.

 

**Item 7A.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Amounts outstanding underour Loan Agreement bear interest at rates tied to the prime rate with a minimumrate of 10% on the term loan and 8% on the short-term note payable. At September 30,2005, we had $2.9 million outstanding at an interest rate of 11.25% on the termloan and $5.2 million outstanding at an interest rate of 8.25% on theshort-term note payable. A hypothetical 10% increase in the prime rate wouldincrease the interest rates currently being charged under the Loan Agreement to11.925% for the term loan and 8.925% for the short-term note payable. Based onamounts outstanding under the Loan Agreement at September 30, 2005, a 10%increase in the prime rate would increase our annual interest expense byapproximately $55,000 compared to the interest rates in effect at September 30,2005.

 

Our Convertible Note isat a fixed interest rate and, therefore, a change in market interest rateswould not affect interest expense related to the Convertible Note.

 

We do not currentlyutilize, nor do we anticipate utilizing, derivative financial instruments.

 

34

----

 

**Item 8.**    **Financial Statements andSupplementary Data**

 

The financial statementsand notes thereto required by this item begin on page F-1 as listed inItem 15 of Part IV of this document. Unaudited quarterly financial data**for each of the eight quarters in the period ended September 30,2005 is as follows:

 
| **In thousands, except per share  data**                                          | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| **2005**                                                                          | * *   | * *        | * *   | * *        | * *   | * *        | * *   | * *        | * *   |
| Net sales                                                                         |       | $               | 9,128      |            | $          | 12,083          |       | $               | 12,602     |   | $ | 12,242 |   |
| Gross margin                                                                      |       | 3,501           |       | 3,314           |       | 4,494           |       | 4,651           |       |
| Net loss  applicable to common shareholders                                       |       | (3,172          | )          | (4,041          | )          | (3,934          | )          | (2,806          | )          |
| Basic and  diluted net loss per share applicable to common shareholders  (1) |       | (0.35           | )          | (0.45           | )          | (0.44           | )          | (0.31           | )          |
|                                                                              |       |            |       |            |       |            |       |            |       |
| **2004**                                                                          | * *   | * *        | * *   | * *        | * *   | * *        | * *   | * *        | * *   |
| Net sales                                                                         |       | $               | 10,770     |            | $          | 12,914          |       | $               | 14,109     |   | $ | 10,787 |   |
| Gross margin                                                                      |       | 4,206           |       | 4,792           |       | 5,177           |       | 2,132           |       |
| Net loss  applicable to common shareholders                                       |       | (4,165          | )          | (2,189          | )          | (1,172          | )          | (4,500          | )          |
| Basic and  diluted net loss per share applicable to common shareholders  (1) |       | (0.46           | )          | (0.24           | )          | (0.13           | )          | (0.50           | )          |

 

----

(1)          Per share amounts may not add due to rounding.

 

**Item 9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

Effective June 25,2004, based on a recommendation of the Audit Committee of our Board ofDirectors, we dismissed our independent public accountants, KPMG LLP.  KPMG LLP’s report on our financial statementsfor the fiscal year ended September 30, 2003 did not contain an adverseopinion or disclaimer of opinion and was not qualified or modified as touncertainty, audit scope or accounting principles. During the fiscal year endedSeptember 30, 2003 and during the subsequent interim period through thedate of dismissal, June 25, 2004, there were not any disagreements betweenus and KPMG LLP on any matters of accounting principles or practices, financialstatement disclosure or auditing scope or procedure, or any reportable eventsas defined under Item 304(a)(1)(v) of Regulation S-K promulgated by theSecurities and Exchange Commission.

 

A copy of a letteraddressed to the Securities and Exchange Commission from KPMG LLP stating thatit agrees with the above statements is incorporated by reference into this Form 10-Kas Exhibit 16.1.

 

Also effective June 25,2004, based upon a recommendation of the Audit Committee of our Board ofDirectors, we engaged the firm of BDO Seidman, LLP to be our independent registeredpublic accounting firm. We did not consult BDO Seidman, LLP prior to June 25,2004 with respect to the application of accounting principles to a specifiedtransaction, either completed or proposed, or the type of audit opinion thatmight be rendered on our financial statements, or concerning any disagreementor reportable event with KPMG LLP.

 

Effective February 22,2005, we dismissed our independent public accountants, BDO Seidman, LLP (“BDO”). Effective February 24, 2005, we engaged the firm of Haskell &White LLP (“Haskell”) to be our independent registered public accountingfirm.  The Audit Committee of our Board of Directors recommended that wechange audit firms, directed the process of review of candidate firms toreplace BDO and made the final decision to engage Haskell.

 

BDO’s report on ourfinancial statements for the fiscal year ended September 30, 2004contained an explanatory paragraph indicating that there was substantial doubtas our ability to continue as a going concern.  Other than such statement,BDO’s report for the fiscal year ended September 30, 2004 did not containan adverse opinion or disclaimer of opinion and was not qualified or modifiedas to uncertainty, audit scope or accounting principles. During the fiscalyear ended September 30, 2004 and during the subsequent interim period throughthe date of dismissal, February 22, 2005, there were not any disagreementsbetween us and BDO on any matters of accounting principles or practices, 

 

35

----

 

financial statementdisclosure or auditing scope or procedure, or any reportable events as definedunder Item 304(a)(1)(v) of Regulation S-K promulgated by the Securitiesand Exchange Commission.

 

During the course oftheir audit of our financial statements for the year ended September 30,2004, BDO advised management and the Audit Committee of the Board of Directorsthat they had identified certain material weaknesses in internalcontrol. The Audit Committee discussed corrective actions and future planswith BDO, and we are in the process of undertaking steps to remedy thesematerial weaknesses. We authorized BDO to respond fully to the inquiries ofHaskell concerning these material weaknesses.

 

A copy of a letteraddressed to the Securities and Exchange Commission from BDO stating that itagrees with the above statements is incorporated by reference into this Form 10-Kas Exhibit 16.2.

 

During our two mostrecent fiscal years and through February 24, 2005, we did not consult withHaskell on any matter (i) involving the application of accountingprinciples to a specified transaction, either completed or proposed, or thetype of audit opinion that might be rendered on our financial statements, ineach case where a written report was provided or oral advice was provided thatHaskell concluded was an important factor considered by us in reaching adecision as to the accounting, auditing or financial reporting issue or (ii) concerningany disagreement, as that term is defined in Item 304(a)(1)(iv) ofRegulation S-K and the related instructions to Item 304 of Regulation S-K, or areportable event, as that term is defined in Item 304(a)(1)(v) ofRegulation S-K.

 

**Item 9A.  Controls and Procedures**

 

Duringthe course of their audit of our financial statements for the year ended September 30,2004, our former independent registered public accounting firm, BDO, advisedmanagement and the Audit Committee of our Board of Directors that they hadidentified certain deficiencies in internal control over financialreporting.  Certain of these deficiencies are considered to be “materialweaknesses” as defined under the standards established by the Public CompanyAccounting Oversight Board. These “material weaknesses” relate to cash and cashdisbursements and accounts payable cycles, inventory and revenue cycles andfinancial reporting. BDO also identified certain “significant deficiencies”that do not rise to the level of material weakness.  These “significantdeficiencies” involve matters relating to the design or operation of internalcontrol that, in the judgment of BDO, could adversely affect the organization’sability to record, process, summarize and report financial data consistent withthe assertions of management in the financial statements. Thesesignificant deficiencies relate to segregation of duties, lack of current accountingmanual, maintenance of important documents, discrepancies between our fixedasset ledger and general ledger, discrepancies with our stated capitalizationpolicy, human resource employee’s ability to enter employees, change salariesand issue checks, documentation of management’s review of journal entries andinformation technology policies and procedures.

 

We arecurrently in the process of undertaking steps to remedy these materialweaknesses and significant deficiencies. In October 2004, we retained Singer Lewak Greenbaum and Goldstein,LLP (“SLGG”) as an independent third party to assist management in thepreparation of our compliance with Section 404 of the Sarbanes-Oxley Actof 2002 (“SOA 404”).  SLGG assisted inthe formation of a cross representational Steering Committee, whose charterincludes the responsibility for SOA 404 compliance and remediationimplementation.  In November 2004,we hired a Manager of Business Systems and Analysis responsible for, amongother things, providing support for Sarbanes-Oxley compliance.  Theindividual assisted the Chief Financial Officer and Controller and providedadditional segregation of duties consistent with our objectives. Thisindividual resigned his position on July 29, 2005.

 

Management is diligentlyworking to implement control enhancements to eliminate the combined BDO andSteering Committee findings and risk areas identified through documentationsurveys, pending internal control test verification.  Significant deficiencies are currently beingcorrected and remediated in efforts to meet SOA 404 compliance prior to fiscalyear-end September 30, 2007.  In ouropinion, a 

 

36

----

 

majority of thesignificant deficiencies communicated in our Form 10-K for the year ended September 30,2004 and in our Form 10-Qs for the quarters ended December 31, 2004, March 31,2005 and June 30, 2005 have been remediated (refer to Item 9A of the 200410-K and Item 4 of the 10-Qs).  Theinternal control remediation efforts will help build a sound internal controlstructure and eliminate the observed significant deficiencies.  Below is a listing of some of the issues thathave been remediated and corrected, pending third party verification:

 

•                  Segregation of duties of Human Resourcesand Payroll Processing has occurred.

•                  New controls have been added andimplemented for vendor selection and disbursement processing.

•                  Check processing and cashdisbursement controls and safe keeping procedures have been enhanced includingvoucher packet organization.

•                  Deficiencies related to bankreconciliation controls have been remediated and controls strengthened.

•                  A new third party warehouse has beencontracted and controls are being established.

•                  Slotting fees are being expensed asincurred.

•                  Inventory tag protocol, along withfinished goods inventory reconciliations, has been improved and deficiencieshave been remediated.

•                  IT password controls have beenstrengthened along with data back-up and storage procedures.

 

The following issues arecurrently under active management remediation and Steering Committee oversight:

 

•                  Segregation of duties through theEnterprise Resource Planning System is nearing completion.

•                  Standard accounting proceduredocumentation is nearing completion and pending review.

•                  IT governance, controls, policies andprocedures are documented, pending final revision review.

 

Wehave discussed our corrective actions and future plans with our Audit Committeeand independent registered public accountants and, as of the date of this AnnualReport on Form 10-K, we believe the actions outlined above should correctthe deficiencies in internal controls that are considered to be materialweaknesses.

 

Otherthan the changes noted above, there has been no change in our internal controlover financial reporting that occurred during our last fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

Further,our management has evaluated, under the supervision and with the participationof our President and Chief Executive Officer and our Chief Financial Officer,the effectiveness of our disclosure controls and procedures as of the end ofthe period covered by this report pursuant to Rule 13a-15(b) underthe Securities Exchange Act of 1934 (the “Exchange Act”). Based on thatevaluation, our President and Chief Executive Officer and our Chief FinancialOfficer have concluded that, as of the end of the period covered by thisreport, our disclosure controls and procedures provide reasonable assurance ofeffectiveness.

 

Pursuantto SOA 404, we will be required to furnish a report on management’s assessmentof the effectiveness of our internal control over financial reporting as partof our Annual Report on Form 10-K for the fiscal year ending September 30,2007. Our independent registered public accountants will then be required toattest to, and report on, our assessment. In order to issue our report, ourmanagement must document both the design of our internal control over financialreporting and the testing processes that support management’s evaluation andconclusion. Our management has begun the necessary processes and procedures forissuing its report on our internal control over financial reporting. However, wemay face significant challenges in implementing the required processes andprocedures. There can be no assurance that we will be able to complete the work

 

37

----

 

necessaryfor our management to issue its management report in a timely manner, or thatmanagement will be able to report that our internal control over financialreporting is effective.

 

Thestatements contained in Exhibit 31.1 and 31.2 should be considered inlight of, and read together with, the information set forth in this Item 9A.

 

**Item 9B.  Other Information**

 

None.

 

**PART III**

 

**Item 10.  Directors and Executive Officers of theRegistrant**

 

**Board ofDirectors**

 
| **Name**                       | ** ** | **Position**                                                  | ** ** | **Age** | ** ** | **Director Since** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------|------------|---------|------------|--------------------|------------|
| Charles E.  Bergeron (1), (2)  |       | Director                                                      |       | 60      |       | 2003               |       |
| Barry E. Krantz  (1), (2), (3) |       | Director                                                      |       | 61      |       | 2004               |       |
| Richard L. Mazer  (1), (2)     |       | Director                                                      |       | 60      |       | 1998               |       |
| Scott C. Wallace  (3)          |       | President, Chief  Executive Officer and Chairman of the Board |       | 50      |       | 2001               |       |
| Paul F. Wenner  (3)            |       | Founder and  Director                                         |       | 58      |       | 1985               |       |

 

----

(1)          Member of the Audit Committee.

(2)          Member of the Executive Personnel and Compensation Committee.

(3)          Member of the Nominating and Governance Committee.

 

Each of these individuals is presently serving on our Board of Directors. There are no family relationships among our executive officers and Directors.

 

**Charles E. Bergeron**has been Managing Director of Fuller Trident Group – Oregon, a regional investment banking firm, located in Portland, Oregon, since April 2003.  He was Chief Financial Officer of Epitope, Inc. (predecessor to OraSure Technologies, Inc.), a developer, manufacturer and marketer of oral specimen collection devices and medical diagnostic products, from January 1998 to December 2000 and Interim President from October 1999 to February 2000. He had previously served as Chief Financial Officer of Epitope Medical Products, a wholly-owned subsidiary of Epitope, Inc., from September 1997 to January 1998.  Mr. Bergeron joined Epitope, Inc. in August 1993 as President and Chief Executive Officer of Agrimax Floral Products, Inc., then a wholly-owned subsidiary of Epitope, Inc.  From 1978 to 1992, Mr. Bergeron was Senior Vice President, Finance of Freightliner Corporation, a Portland, Oregon, truck manufacturer. He holds a B.S. degree in management engineering and an M.S. degree in management science from Rensselaer Polytechnic Institute and an M.B.A. degree from Columbia University.

 

**Barry E.Krantz**has served asa Director of Gardenburger since July 2004. From August 1995 topresent, Mr. Krantz has been self-employed serving on the Board ofDirectors of and/or consulting with several of the major restaurant chains inthe United States and internationally. Mr. Krantz has spent more than 20years in various executive positions within the foodservice industry. From January 1994to August 1995, Mr. Krantz served as President and Chief OperatingOfficer of Family Restaurants, Inc., a $1.2 billion company that owned andoperated the El Torito, Chi-Chi’s, Reuben’s, Charley Brown’s, Coco’s, Carrows andjojos chains. From March 1993 to January 1994, Mr. Krantz servedas the Chief Operating Officer for Restaurant Enterprises Group, and served asPresident of its Family Restaurant Division from January 1989 to January 1994.From January 1979 to January 1988, Mr. Krantz was the SeniorVice President of Marketing and Concept Development for Denny’s Restaurants. Mr. Krantzreceived a B.A. degree from the University of Pennsylvania and an M.B.A. fromthe Stanford University Graduate School of Business. Before starting a careerin the food service industry, Mr. Krantz held a variety of productmanagement positions at General Foods Corporation 

 

38

----

 

andsenior account management positions at several major advertising agencies. Mr. Krantzis also on the Board of Directors of Red Tractor Cafe, Inc. and FreshChoice, Inc.

 

**RichardL. Mazer**is the President and Chief Executive Officer ofVentura Foods, LLC, a food processor, where he has worked since December 1997.  Mr. Mazer has been involved in the foodindustry for more than 20 years, including through his strategic and financialconsulting company, The Mazer Group, from 1992 to 1997.  Mr. Mazer received B.S. degrees inEconomics and Management from Massachusetts Institute of Technology.

 

**Scott C.Wallace** joined Gardenburger as President and Chief ExecutiveOfficer on January 15, 2001.  Mr. Wallacealso became Chairman of the Board in May 2002.  Prior to joining Gardenburger, Mr. Wallaceserved in various positions at Mauna Loa Macadamia Nut Corporation (“Mauna Loa”)since 1994, including President and Chief Executive Officer beginning in 1999,President and Chief Operating Officer from 1998 to 1999, and as President –North America Division prior to that. Before accepting a position at Mauna Loa, Mr. Wallace held amanagement position at E.J. Brach Corporation, a candy producer, for six years,and sales positions at Eastman Kodak Company, a manufacturer of cameraequipment, and Procter and Gamble, a consumer products company.  Mr. Wallace received a B.S. in Economicsfrom San Francisco State University.

 

**Paul F.Wenner** founded Gardenburger in 1985 as a sole proprietorshipand acted as its Vice President from the date of its incorporation until December 1989,when he became President, Chief Executive Officer and Chairman of theBoard.  From 1994 to May 2004, Mr. Wennerwas our Chief Creative Officer, providing advice regarding new productdevelopment and assisting with marketing efforts.  Mr. Wenner relinquished his duties asPresident in 1994 and as Chairman of the Board in 1995 and as Chief CreativeOfficer in 2004.  From 1980 through 1984,he owned and operated the Garden House Restaurant and Gourmet Cooking School,where he developed the Gardenburger® veggie patty.  The school was affiliated with Mt. HoodCommunity College’s evening educational curriculum.  Mr. Wenner received two Associate ofArts degrees from Mt. Hood Community College.

 

The following tableidentifies our current executive officers, the positions they hold, and theyear in which they began serving in their respective capacities.  Our executive officers are elected by theBoard of Directors annually to hold office until their successors are electedand qualified.

 

**Executive Officers**

 
| **Name**                    | ** ** | **Age** | ** ** | **Current Position(s) with Company**                          | ** ** | **Officer Since** | ** ** |
|-----------------------------|------------|---------|------------|---------------------------------------------------------------|------------|-------------------|------------|
| Scott C. Wallace            |       | 50      |       | Chief Executive  Officer, President and Chairman of the Board |       | 2001              |       |
| James W. Linford            |       | 58      |       | Senior Vice  President and Chief Operating Officer            |       | 1997              |       |
| Robert T. Trebing, Jr. |       | 55      |       | Chief Financial  Officer, Treasurer and Secretary             |       | 2003              |       |

 

For biographicalinformation for Scott C. Wallace, see “Board of Directors” above.

 

**James W.Linford**joined Gardenburger in March 1997 as VicePresident of Supply Chain, responsible for our manufacturing operations andlogistics. Upon the resignation of our Chief Executive Officer in August 2000and until Mr. Wallace joined Gardenburger in January 2001, Mr. Linfordserved as Interim President and Chief Executive Officer.  In January 2001, Mr. Linford was namedSenior Vice President and Chief Operating Officer. He was Vice President andGeneral Manager of CH2M Hill Food Group from 1995 to 1997, Director ofManufacturing for Ocean Spray Cranberries from 1993 to 1995 and General Managerof Operations for Ore-Ida Foods, a division of the Heinz Company, from 1987 to1993.

 

39

----

 

**Robert T.Trebing, Jr.**joined Gardenburger in November 2003as Senior Vice President and Chief Financial Officer.  Effective August 26, 2005, Mr. Trebingwas no longer an employee of Gardenburger, but was engaged on a consultingbasis to serve as Gardenburger’s Chief Financial Officer, Treasurer andSecretary. Prior to joining Gardenburger, Mr. Trebing served as ExecutiveVice President and Chief Financial Officer of Prandium, Inc., a companyengaged in the operation of restaurants in the full-service and fast-casualsegments, since April 1997. From December 2002 to February 2003,Mr. Trebing also served as the Acting President and Chief ExecutiveOfficer of Prandium, Inc.  He alsoserved as President of Chi-Chi’s, Inc., Koo Koo Roo, Inc. and TheHamlet Group, Inc., all restaurant chains and wholly-owned subsidiaries ofPrandium, Inc., since December 30, 2002.  Mr. Trebing served in various otherpositions at Prandium, Inc., since its founding in 1986.  Mr. Trebing received a B.A. fromCalifornia State University at Fullerton and an M.B.A. from the University ofSouthern California.

 

**AuditCommittee**

 

We have a standing Finance and AuditCommittee (the “Audit Committee”), which, during fiscal 2005, wascomposed of Mr. Bergeron (Committee Chair), Mr. Coleman, who resignedeffective March 14, 2005, and Mr. Mazer.  In addition, Mr. Krantz was added to theAudit Committee effective April 14, 2005.

 

**AuditCommittee Financial Expert**

 

As required by theSarbanes-Oxley Act of 2002, our Board of Directors has determined that onemember of our Audit Committee, Charles E. Bergeron, has the qualifications tobe an “audit committee financial expert” as defined in the SEC’s rules andregulations and also meets the standards of independence adopted by the SEC formembership on an audit committee.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) ofthe Exchange Act requires our Directors and executive officers and persons whoown more than 10% of the outstanding shares of our common stock (“10%shareholders”), to file with the SEC initial reports of beneficial ownershipand reports of changes in beneficial ownership of shares of our common stockand other equity securities. To the best of our knowledge, based solely onreview of the copies of such reports furnished to us or otherwise in our filesand on written representations from our Directors and executive officers, ourofficers, Directors and 10% shareholders complied with all applicable Section 16(a) filingrequirements during fiscal 2005.

 

**Code ofEthics**

 

We adopted a Code ofEthics that applies to all of our employees, including our principal executiveofficer and our principal financial and accounting officer.  We have filed a copy of our Code of Ethics asExhibit 14 to our Annual Report on Form 10-K for our fiscal yearended September 30, 2003. We will provide, free of charge to any person, acopy of our Code of Ethics.  Requestsshould be sent to:  Secretary,Gardenburger, Inc., 15615 Alton Parkway, Suite 350, Irvine,California 92618.

 

40

----

 

**Item 11.  Executive Compensation**

 

**DirectorCompensation**

 

Directors receive an$8,000 annual retainer for their service on the Board.  In addition, committee chairs are paid anadditional $12,000 per year and all committee members are paid $2,000 for eachcommittee meeting attended.  Duringfiscal 2005, five non-employee Directors, Messrs. Bergeron, Coleman,Krantz, Mazer and Wenner, received fees for their participation on our Board ofDirectors and Committees as follows:

 
| **Name**              | ** ** | **Fees Received** | ** ** |
|-----------------------|------------|-------------------|------------|
| Charles E.  Bergeron  |       | $                 | 76,000     |   |
| Alexander P.  Coleman |       | 16,000            |       |
| Barry E. Krantz       |       | 44,000            |       |
| Richard L. Mazer      |       | 42,000            |       |
| Paul F. Wenner        |       | 20,000            |       |
|                       |            |                   |            |  |

 

No other directorsreceived compensation for their participation on the Board of Directors.  All non-employee Directors are reimbursed fortheir expenses incurred in attending meetings of the Board of Directors.  Mr. Coleman ceased to be a Directoreffective March 14, 2005.

 

We also have a licensing agreement with Mr. Wenner, which expiresin May 2009.  Pursuant to theagreement, Mr. Wenner grants to us an exclusive, royalty-free, worldwidelicense to make use of, copy, reproduce, modify, adapt, distribute, transmit,broadcast, display, exhibit, project and otherwise exploit certain of Mr. Wenner’sproperty.  In exchange, we pay Mr. Wenner$75,000 per annum.  The agreement alsoprovides that, during the term of the agreement, Mr. Wenner shall make, atdates and times reasonably agreed to by each of Mr. Wenner and us, certainpersonal appearances for which Mr. Wenner shall be compensated at the rateof $500 per day, plus all reasonable and necessary expenses (including coach airtravel, hotel accommodations and meal expenses) incurred by Mr. Wenner inconnection with such personal appearances.  Mr. Wenner received approximately $79,000pursuant to this agreement in fiscal 2005.

** **

**CompensationCommittee Interlocks and Insider Participation**

 

During fiscal 2005,Directors who served on the Compensation Committee included Messrs. Bergeron,Coleman, who resigned effective March 14, 2005, Krantz and Mazer.  None of these individuals is, or has been inthe past, an officer or employee of Gardenburger.

 

41

----

 

**ExecutiveOfficer Compensation**

 

***SummaryCompensation Table***

 

The following tableprovides information for the fiscal years indicated concerning compensationearned by our Chief Executive Officer and our other executive officers whosesalary and bonus during fiscal 2005 exceeded $100,000 (collectively referred toas the “named executive officers”).

 
| ** **                       | ** ** | ** ** | ** ** | ** **              | ** ** | ** **     | ** ** | **Long-Term**    | ** ** | ** **           | ** ** |
|----------------------------------|------------|------------|------------|-------------------------|------------|----------------|------------|------------------|------------|----------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | ** **              | ** ** | ** **     | ** ** | **Compensation** | ** ** | ** **           | ** ** |
| ** **                       | ** ** | ** ** | ** ** | ** **              | ** ** | ** **     | ** ** | **Awards**       | ** ** | ** **           | ** ** |
| ** **                       | ** ** | ** ** | ** ** | ** **              | ** ** | ** **     | ** ** | **Securities**   | ** ** | ** **           | ** ** |
| ** **                       | ** ** | **Fiscal** | ** ** | **Annual Compensation** | ** ** | **Underlying** | ** ** | **All Other**    | ** ** |
| **Name and Principal Position**  | ** ** | **Year**   | ** ** | **Salary (1)**          | ** ** | **Bonus**      | ** ** | **Options (#)**  | ** ** | **Compensation (2)** | ** ** |
| Scott C. Wallace                 |       | 2005       |       | $                       | 286,000    |           | $          | —           |       | —               |       | $ | 6,075 |   |
| Chief Executive  Officer,        |       | 2004       |       | 283,800                 |       | 68,640         |       | —           |       | 6,964                |       |
| President and  Chairman of the   |       | 2003       |       | 270,092                 |       | —         |       | —           |       | 5,858                |       |
| Board                            |       |       |       |                    |       |           |       |             |       |                 |       |
|                             |       |       |       |                    |       |           |       |             |       |                 |       |
| James W. Linford                 |       | 2005       |       | 211,000                 |       | —         |       | —           |       | 4,151                |       |
| Senior Vice  President and       |       | 2004       |       | 209,423                 |       | 45,630         |       | —           |       | 5,519                |       |
| Chief Operating  Officer         |       | 2003       |       | 199,500                 |       | —         |       | —           |       | 4,745                |       |
|                             |       |       |       |                    |       |           |       |             |       |                 |       |
| Robert T.  Trebing, Jr. (3) |       | 2005       |       | 188,308                 |       | —         |       | —           |       | 258,789              |       |
| Former Senior  Vice President    |       | 2004       |       | 203,231                 |       | 40,000         |       | —           |       | 6,550                |       |
| and Chief  Financial Officer     |       | 2003       |       | —                  |       | —         |       | —           |       | —               |       |
|                                  |            |            |            |                         |            |                |            |                  |            |                      |            |  |  |  |

 

----

(1)          Amounts shown include cash compensation earned in each respective year,including amounts deferred at the election of the named executive officerpursuant to our 401(k) Plan.

(2)          Amounts included in this column for fiscal 2005 are as follows:

 
| **Name**         | ** ** | **401(k)  Matching** | ** ** | **Life  Insurance  Premiums** | ** ** | **Payout of   Accrued   Vacation Upon Termination** | ** ** | **Severance** | ** ** | **Consulting   Fees** | ** ** |
|------------------|------------|----------------------|------------|-------------------------------|------------|----------------------------------------------------------|------------|---------------|------------|-----------------------|------------|
| Mr. Wallace |       | $                    | 4,400      |                          | $          | 1,675                                                    |       | $             | —     |                  | $          | — |   | $ | — |   |
| Mr. Linford |       | 3,246                |       | 905                           |       | —                                                   |       | —        |       | —                |       |
| Mr. Trebing |       | 2,977                |       | 1,685                         |       | 7,627                                                    |       | 204,000       |       | 42,500                |       |
|                  |            |                      |            |                               |            |                                                          |            |               |            |                       |            |  |  |  |  |  |

 

----

(3)          Mr. Trebing’s employment with Gardenburger began in November 2003and was terminated in August 2005. In connection with his termination in August 2005, we entered intoa consulting agreement with Mr. Trebing whereby he performs the duties ofour Chief Financial Officer, Treasurer and Secretary and acts as our ChiefAccounting Officer.

 

***StockOptions Granted***

 

There were no stockoptions granted to the named executive officers during fiscal 2005.

 

***OptionExercises and Holdings***

 

The following tableprovides information concerning unexercised options held at September 30,2005 with respect to the named executive officers.  No named executive officers exercised anyoptions during fiscal 2005.

 

**Aggregated Option Exercises in Last Fiscal Year**

**and Fiscal Year-End Option Values**

 
| ** **                  | ** ** | **Number of  Securities Underlying  Unexercised Options  At September 30, 2005 (#)** | ** ** | **Value of Unexercised  In-The-Money Options  At September 30, 2005 (1)** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **Name**                    | ** ** | **Exercisable**                                                                           | ** ** | **Unexercisable**                                                              | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Scott C. Wallace            |       | 150,000                                                                                   |       | —                                                                         |       | $ | — |   | $ | — |   |
| James W. Linford            |       | 227,420                                                                                   |       | 20,000                                                                         |       | — |   | — |   |
| Robert T. Trebing, Jr. |       | —                                                                                    |       | —                                                                         |       | — |   | — |   |
|                             |            |                                                                                           |            |                                                                                |            |  |  |  |  |  |  |

 

----

(1)          Basedon the market price of the underlying securities at September 30, 2005,$0.05 per share.

 

42

----

 

**Employment, Severance and Changein Control Arrangements**

 

**Scott C. Wallace**

** **

Gardenburger entered intoan agreement with Scott C. Wallace dated February 24, 2004 and amended March 24,2005 regarding the terms of his employment as President and Chief ExecutiveOfficer of Gardenburger. Pursuant to the agreement, Mr. Wallace’s basesalary is currently $286,000 per year and is subject to annual review by theCompensation Committee and subject to adjustment by the Board of Directors inits sole discretion. Mr. Wallace is also entitled to participate in our401(k) plan, stock incentive plan and health and welfare benefit programs madeavailable to other officers and to four weeks’ paid vacation annually.

 

Mr. Wallace will beentitled to severance equal to one year’s base salary payable over 12 monthsand continuation of all health and welfare benefits for one year in the eventof involuntary termination other than for cause or due to death ordisability.  As used in Mr. Wallace’semployment agreement, “cause” means (i) any fraud or dishonesty by Mr. Wallaceinvolving Gardenburger, (ii) willful misconduct or gross negligence inconnection with performance of his duties, (iii) his conviction forcommitting a felony, (iv) the commission by Mr. Wallace of any act indirect competition with or materially detrimental to the best interests ofGardenburger, or (v) willful and continued failure by Mr. Wallace tosubstantially perform his duties after delivery of a written demand specifyingthe duties which have not been substantially performed.

 

The agreement providesfor a special bonus payable upon the completion of a sale of Gardenburger.  The special bonus will be equal to onepercent (1%) of the sale price up to $100 million and two percent (2%)of the portion, if any, of the sale price in excess of $100 million.  Mr. Wallace has the right, in his solediscretion, to waive receipt of any portion of the special bonus if, and to theextent that, he determines that a reduction in the special bonus would give himan income tax benefit.

 

The agreement alsoprovides that if Mr. Wallace’s employment is terminated for other thancause following a change in control, or if he terminates his employment for “goodreason,” he shall be paid an amount equal to his annual base salary currentlyin effect, or, if higher, his annual base salary as in effect prior to anyreduction within twelve months preceding termination, payable as a lumpsum.  He shall also receive continuationof all health and welfare benefits for a twelve-month period followingtermination.

 

“Good reason” means theundertaking of any of the following without Mr. Wallace’s consent: (i)relocation of his place of employment more than 25 miles from the location heis currently performing his duties; (ii) the reduction by more than 10% of hisbase compensation not related to a reduction in the salaries of all executiveofficers of Gardenburger; (iii) the significant change or reduction of hisduties that results in any diminution or adverse change of his position, statusor circumstances; or (iv) providing Mr. Wallace continues his employment withGardenburger through the 90-day period following the change in control, anytermination by Mr. Wallace of his position with Gardenburger or its successorthat is effective on or within the 30 days following expiration of a 90-dayperiod following the change in control for any reason or for no reason willconstitute “good reason.”  For thispurpose, if Mr. Wallace is terminated by Gardenburger without cause before thechange in control and such termination is in connection with the change incontrol, Mr. Wallace will be deemed to have continued his employment throughthe change in control date.

 

The agreement contains athree-year non-compete clause following termination.

 

**James W.Linford**

 

Gardenburger entered intoan employment agreement with Mr. Linford dated February 26, 2004 andamended March 24, 2005.  Pursuant tothe agreement, Mr. Linford’s current base salary is $211,000 per year andis subject to annual review by the Compensation Committee and subject toadjustment by the Board of Directors in its sole discretion.  Mr. Linford is also entitled toparticipate in our 401(k) plan, stock incentive plan and health and welfarebenefit programs made available to other officers and to four weeks’ paidvacation annually.

 

43

----

 

Mr. Linford will beentitled to severance equal to one year’s base salary payable over 12 monthsand continuation of all health and welfare benefits for one year in the eventof involuntary termination other than for cause (as defined above) or due todeath or disability.

 

The agreement providesfor a special bonus payable upon the completion of a sale of Gardenburger.  The special bonus will be equal to onequarter of one percent (0.25%) of the sale price up to $100 million andone half of one percent (0.5%) of the portion, if any, of the sale pricein excess of $100 million.

 

The agreement alsoprovides that if Mr. Linford’s employment is terminated for other thancause following a change in control, or if he terminates his employment for “goodreason,” (as defined above) he shall be paid an amount equal to his annual basesalary currently in effect, or, if higher, his annual base salary as in effectprior to any reduction within twelve months preceding termination, payable as alump sum.  He shall also receivecontinuation of all health and welfare benefits for a twelve-month periodfollowing termination.

 

The agreement contains athree-year non-compete clause following termination.

 

**Robert T.Trebing, Jr.**

 

Gardenburger entered intoa Separation Agreement dated August 26, 2005 and a Consulting Agreementdated August 26, 2005 with Mr. Trebing.  Pursuant to his previously existingemployment agreement, Mr. Trebing received $204,000, representing hisannual base salary, upon the date of his termination and the signing of theSeparation Agreement.  Pursuant to hisConsulting Agreement, Mr. Trebing received $25,500 upon signing of theagreement and receives $8,500 for his services every two week periodthereafter.  Pursuant to the ConsultingAgreement, Mr. Trebing serves as the Chief Financial Officer of theCompany, as well as the Principal Financial Officer. The Consulting Agreementremains in effect until the earlier of (i) the date of Gardenburger’semergence from bankruptcy under the United States Bankruptcy Code or (ii) terminationof the agreement by either party by giving the other party 30 days priorwritten notice.

 

**RetentionAgreements**

 

We entered into RetentionAgreements with each of Mr. Wallace, Mr. Linford and Mr. Trebing(together, the “Executives”) on January 27, 2005. On March 24, 2005,we entered into amendments to these Retention Agreements in order to, amongother things, revise the definition of “Change in Control” and delete Section 4.3“Bankruptcy Limitation” in each of the agreements. On each of May 4, 2005and July 19, 2005, we entered into, respectively, an Amended and RestatedRetention Agreement and a Second Amended and Restated Retention Agreement (the “Agreement”)with each of the Executives. The Agreement provides incentive for each of the Executivesto continue to be employed by us through and following a Change in Control (asdefined in the Agreement) or a Sale Transaction (as defined in the Agreement).The Agreement provides for payment of 100% of the retention bonus immediatelyfollowing the date of a Change in Control. The Agreement also provides for payment of 75% of a retention bonus onthe date of our execution of a Sale Transaction, with the remaining 25% of theretention bonus payable following the date of the consummation of thetransactions contemplated by the Sale Transaction.  If the signing of a Sale Transaction orChange in Control does not occur by January 27, 2007, the full 100% of theretention bonus is payable to the Executive. The Agreement also provides forpayment of a retention bonus if the Executive’s employment by us is terminatedwithout Cause (as defined in the Agreement) other than in connection with theExecutive’s death or disability (as defined in the Agreement). These retentionbonuses are subject to certain conditions set forth in the Agreement.Declaration by the Bankruptcy Court of the effectiveness of our Plan would beconsidered a Change in Control.

 

**Vestingof Options**

 

Certain options grantedto the named executive officers contain provisions that such options willimmediately become exercisable as to shares not previously vested upon (i) terminationof employment as a result of the optionee’s death or disability or (ii) terminationof employment without cause or for good reason following a change in control.

 

44

----

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

 

The following table setsforth, as of November 30, 2005, certain information furnished to us withrespect to beneficial ownership of our common stock and preferred stock by (i) eachDirector, (ii) the “named executive officers” (as defined under “ExecutiveCompensation”), (iii) all persons known by us to be beneficial owners of5% or more of our outstanding common stock or preferred stock, and (iv) allexecutive officers and Directors as a group. Unless otherwise indicated below, the address of each person listedbelow is 15615 Alton Parkway, Suite 350, Irvine, California 92618.

 
| ** **                                                                                                            | ** ** | **Amount and Nature of Beneficial Ownership (1)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Name and Address of Beneficial  Owner**                                                                             | ** ** | **Shares of  Common  Stock (2)**                  | ** ** | **Percentage  of  Class** | ** ** | **Shares of  Preferred  Stock** | ** ** | **Percentage  of  Class** | ** ** |
| Annex Capital Management LLC  (3)   1301 Avenue of the Americas   New York, New York 10019-6163                  |       | 2,311,473                                         |       | 20.4 | % | — |   | — |   |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| Gruber & McBaine Capital Management LLC (4)  50 Osgood Place, Penthouse   San Francisco, California 94133    |       | 832,607                                           |       | 9.1 | % | 15,000 |   | 2.3 | % |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| Rosewood Capital III, L.P. (5)   One Maritime Plaza, Suite 1330   San Francisco, California 94111                |       | 1,459,238                                         |       | 14.0 | % | 206,000 |   | 31.7 | % |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| Paul F. Wenner                                                                                                        |       | 1,344,180                                         |       | 13.5 | % | — |   | — |   |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| Farallon Partners, L.L.C. (6)   One Maritime Plaza, Suite 1325   San Francisco, California 94111                 |       | 1,012,233                                         |       | 10.1 | % | 142,000 |   | 21.8 | % |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| Farallon Capital Management,  L.L.C. (6)   One Maritime Plaza, Suite 1325   San Francisco, California 94111 |       | 370,552                                           |       | 4.0 | % | 52,000 |   | 8.0 | % |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| MidOcean Capital Investors, L.P. (7)   320 Park Avenue, 17th Floor  New York, New York 10022                          |       | 710,868                                           |       | 7.3 | % | 100,000 |   | 15.4 | % |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| James W. Linford (8)                                                                                                  |       | 295,416                                           |       | 3.2 | % | — |   | — |   |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| Scott C. Wallace (9)                                                                                                  |       | 156,922                                           |       | 1.7 | % | — |   | — |   |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| Richard L. Mazer                                                                                                      |       | 62,500                                            |       | * |   | — |   | — |   |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| Robert T. Trebing, Jr.                                                                                           |       | —                                            |       | — |   | — |   | — |   |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| Charles E. Bergeron                                                                                                   |       | —                                            |       | — |   | — |   | — |   |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| Barry E. Krantz                                                                                                       |       | —                                            |       | — |   | — |   | — |   |
|                                                                                                                  |       |                                              |       |   |   |   |   |   |   |
| All current  executive officers and Directors as a group (7 persons)                                                  |       | 1,859,018                                         |       | 17.9 | % | — |   | — |   |

 

----

*Less than one percent

 

45

----

 

(1)          Applicable percentage of ownership is based on 9,002,101 shares ofcommon stock and 650,000 shares of preferred stock outstanding as of November 30,2005.  Beneficial ownership is determinedin accordance with the rules of the Securities and Exchange Commission(the “SEC”), and is based on voting and investment power with respect toshares.  Shares of common stock subjectto options, warrants or other convertible securities that are exercisablecurrently or within 60 days after November 30, 2005 are deemed outstandingfor purposes of computing the percentage ownership of the person or groupholding such options, warrants or convertible securities, but are not deemedoutstanding for computing the percentage of any other person.  Unless otherwise indicated, to the best ofour knowledge, each of the persons named above has sole voting and investmentpower with respect to all shares shown as being beneficially owned by them.

 

(2)          Includes shares of common stock subject to options exercisable within 60days after November 30, 2005 as follows:

 
| **Name**                                                 | ** ** | **Number of Options** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| Mr. Wenner                                          |       | 953,000               |       |
| Mr. Linford                                         |       | 227,420               |       |
| Mr. Wallace                                         |       | 150,000               |       |
| Mr. Mazer                                           |       | 50,500                |       |
|                                                     |       |                  |       |
| All current  executive officers and Directors as a group |       | 1,380,920             |       |

 

(3)          Includes 1,753,492 shares of common stock that Annex has the right toacquire upon conversion of the Convertible Notes.  The conversion price was $9.78 as of November 30,2005.  Also includes warrants to purchase557,981 shares of our common stock.

 

(4)          Gruber & McBaine Capital Management, LLC (“GMCM”), has sharedvoting and dispositive power with respect to 641,276 shares of common stock. Jon D.Gruber and J. Patterson McBaine are the managers of GMCM, an investmentadviser, and Thomas O. Lloyd-Butler is a member of GMCM.  Also includes 15,000 shares of preferredstock (convertible into 93,754 shares of common stock) which GMCM and its affiliateseither own or with respect to which they have voting or dispositive power andwarrants to purchase 12,877 shares of common stock issued to GMCM and itsaffiliates.

 

(5)          Includes 1,287,552 shares of common stock issuable upon conversion of206,000 shares of preferred stock and warrants to purchase 171,686 shares ofcommon stock.

 

(6)          Each of the entities affiliated with FarallonPartners, L.L.C. (“FPLLC”) and the accounts managed by Farallon CapitalManagement, L.L.C. (“FCMLLC”), a registered investment adviser (together suchentities and accounts, “Farallon”), that acquired shares of preferred stockholds such securities directly in its own name. In addition, two of such entities own an aggregate of 3,700 shares ofcommon stock.  FPLLC, as the generalpartner of certain of such entities, and FCMLLC, pursuant to investmentmanagement agreements, each may, for purposes of Rule 13d-3 under theSecurities Exchange Act of 1934 (the “Exchange Act”), be deemed to ownbeneficially the shares held by such entities and accounts, as well as theshares of common stock into which the shares of preferred stock areconvertible.  Each of FCMLLC and FPLLC,and each managing member thereof, disclaim any beneficial ownership of suchshares.  All of the above-mentioned entitiesand persons disclaim group attribution. The 142,000 and 52,000 shares of preferred stock owned by FPLLC andFCMLLC, respectively, are convertible into 887,536 and 325,013 shares of commonstock, respectively.  Also includeswarrants to purchase 121,897 shares of common stock held by FPLLC and warrantsfor 44,639 shares of common stock held by FCMLLC.  The following people have shared voting anddispositive power with respect to the Farallon shares as managing members ofFPLLC and FCMLLC: Joseph F. Downes, Enrique H. Boilini, David I. Cohen, Chan R.Ding, William F. Duhamel, Charles E. Ellwein, Richard B. Fried, Monica R.Landry, William F. Mellin, Stephen L. Millham, Rajiv A. Patel, DerekSchrier, Thomas F. Steyer and Mark C.Wehrly.

 

(7)          Includes 100,000 sharesof preferred stock, which are currently convertible into 625,025 shares ofcommon stock and warrants to purchase 85,843 shares of common stock held byMidOcean Capital Investors, L.P. Ultramar Capital, Ltd., MidOcean Capital Partners, L.P, Existing FundGP, Ltd., MidOcean Partners, LP and MidOcean Associates, SPC may all be deemedto be beneficial owners of the shares as a result of their direct or indirectcontrol relationship with MidOcean Capital Investors, L.P. MidOcean CapitalPartners, L.P. is the general partner of MidOcean Capital Investors, L.P.  Existing Fund GP, Ltd. Is the general partnerof MidOcean Capital Partners, L.P. MidOcean Partners, LP is the sole owner ofExisting Fund GP, Ltd. And MidOcean Associates, SPC is the general partner ofMidOcean Partners, LP.   J. Edward Virtuemay be deemed the beneficial owner of the shares because he indirectly controlsthe securities, but disclaims beneficial ownership except to the extent of hispecuniary interest therein.

 

(8)          Includes 56,996 shares held in Mr. Linford’s401(k) Plan account.

 

(9)          Includes 6,922 shares held in Mr. Wallace’s401(k) Plan account.

 

46

----

 

Thefollowing table sets forth information, as of September 30, 2005, aboutshares of our common stock that may be issued upon the exercise of optionsgranted under our equity compensation plans and arrangements, divided betweenplans approved by our shareholders and plans or arrangements not submitted toour shareholders for approval.

 
| **Plan Category**                                       | ** ** | **Number of   securities to be   issued upon   exercise of   outstanding   options, warrants  and rights** | ** ** | **Weighted average   exercise price of   outstanding   options, warrants   and rights** | ** ** | **Number of securities   remaining available for   future issuance under   equity compensation  plans (excluding   securities reflected in  first column)** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by shareholders     |       | 1,141,920                                                                                                  |       | $                                                                                       | 2.34       |                                                                                                                                                        | 2,209,103  |   |
|                                                    |       |                                                                                                       |       |                                                                                    |       |                                                                                                                                                        |       |
| Equity  compensation plans not approved by shareholders |       | 2,103,462                                                                                                  | (1)        | 0.78                                                                                    |       | —                                                                                                                                                      |       |
| Total                                                   |       | 3,245,382                                                                                                  |       | $                                                                                       | 1.33       |                                                                                                                                                        | 2,209,103  |   |

 

----

(1)          Includes1,115,962 warrants exercisable for our common stock at $0.28 per share plusoptions granted pursuant to plans not approved by our shareholders.  See Note 15 of Notes to Financial Statementsunder the heading “Non-Plan Options” for a description of the material terms ofoptions granted without shareholder approval and not requiring shareholderapproval, which information is incorporated herein by reference.

 

**Item 13.     CertainRelationships and Related Transactions**

 

**CertainRelationships and Related Transactions**

 

Mr. Mazer isPresident and Chief Executive Officer of Ventura Foods, LLC.  We purchased barbecue sauce from VenturaFoods totaling $273,000 in fiscal 2005. We believe that the price paid to Ventura Foods is fair in comparison with prices that would be paid to an independentthird party for similar barbecue sauce. At September 30, 2005, we owed Ventura Foods, LLC $26,000 for thepurchase of such barbecue sauce.

 

Mr. Coleman, a formerDirector who resigned from our Board of Directors effective March 14, 2005,is Managing Partner of Annex Capital Management LLC to which we are indebted inthe principal amount of approximately $17.2 million plus $4.7 million of accruedbut unpaid interest and $6.2 million of accrued but unpaid exit fees related tothis debt.  This debt currently bearsinterest at the annual rate of 15%.

 

We also have a licensing agreement with Mr. Wenner, which isdescribed under the heading “Director Compensation” in Item 11. above.

 

47

----

 

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

 

The following fees areanticipated to be paid to Haskell & White LLP related to fiscal 2005and were paid to BDO Seidman, LLP related to fiscal 2004:  

 
| ** **          | ** ** | **2005** | ** ** | **% approved   by Audit Committee** | ** ** | **2004** | ** ** | **%   approved   by Audit Committee** | ** ** |
|---------------------|------------|----------|------------|-----------------------------------------------|------------|----------|------------|--------------------------------------------|------------|
| Audit Fees          |       | $        | 96,000     |                                          | 100        | %        | $          | 340,000                                    |       | 100 | % |
| Audit Related  Fees |       | —   |       | —                                        |       | —   |       | —                                     |       |
| Tax Fees (1)        |       | 24,550   |       | 100                                           | %          | 580      |       | 100                                        | %          |
| All Other Fees (2)  |       | 19,224   |       | 100                                           | %          | 11,452   |       | 100                                        | %          |
|                |       | $        | 139,774    |                                          |       |     | $          | 352,032                                    |       |   |   |

 

----

(1)   Consists of corporate tax complianceassistance and other tax consulting, which is customarily provided by a company’sindependent registered public accountant.

 

(2)   Consists of fees for the audit of our employeebenefit plan and assistance related to our reorganization and restructuringplan.

 

**Pre-ApprovalPolicies**

 

Priorto retaining Haskell & White LLP to provide services, we discuss theservices with the Chairman of the Audit Committee. The Chairman then reviewsthe request and, if the Chairman determines it necessary, he discusses thepotential services with the other Audit Committee members. The decision is thencommunicated to the Board of Directors and, if approved, it is formallyapproved at the next Audit Committee meeting.

 

**PART IV**

 

**Item 15.  Exhibits and Financial Statement Schedules**

 

**FinancialStatements and Schedules**

 
| Report of  Haskell & White LLP, Independent Registered Public Accounting Firm              |                              |
|-----------------------------------------------------------------------------------------------------|-----------------------------------|
|                                                                                                |                              |
| Report  of BDO Seidman, LLP, Independent Registered Public Accounting Firm                          |                              |
|                                                                                                |                              |
| Report  of KPMG LLP, Independent Registered Public Accounting Firm                                  |                              |
|                                                                                                |                              |
| Balance Sheets –  September 30, 2005 and 2004                                             |                              |
|                                                                                                |                              |
| Statements  of Operations – Years ended September 30, 2005, 2004 and 2003                 |                              |
|                                                                                                |                              |
| Statements  of Shareholders’ Deficit – Years ended September 30, 2005, 2004 and 2003 |                              |
|                                                                                                |                              |
| Statements of  Cash Flows – Years ended September 30, 2005, 2004 and 2003                 |                              |
|                                                                                                |                              |
| Notes to  Financial Statements                                                                      |                              |
|                                                                                                |                              |
| Schedule II                                                                                    | Valuation and Qualifying Accounts |   |
|                                                                                                     |                                   |  |

 

48

----

 

**Exhibits**

 

The exhibits filed as apart of this report are listed below and this list is intended to comprise theexhibit index:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                     |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Restated Articles of Incorporation, as amended  through March 23, 2004 (22)                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                |
| 3.2                  |       | 1995 Restated Bylaws, as amended July 13, 1999  (10)                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.1                 |       | Amended and Restated Rights Agreement between  Gardenburger, Inc. and First Chicago Trust Company of New York, dated  July 15, 1999 (10)                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.2                 |       | Amendment No. 1 dated as of January 2,  2002 to Rights Agreement dated as of July 15, 1999 between First Chicago  Trust Company of New York and Gardenburger, Inc., dated effective as of  January 2, 2002 (13)                            |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.3                 |       | Amendment No. 2 dated as of January 10,  2002 to the Amended and Restated Rights Agreement dated as of July 15,  1999, between Gardenburger, Inc. and EquiServe Trust Company, N.A.  (successor to First Chicago Trust company of New York (13) |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.4                 |       | Amendment No. 3 dated as of April 29, 2002  to the Amended and Restated Rights Agreement dated as of July 15, 1999,  between Gardenburger, Inc. and EquiServe Trust Company, N.A. (16)                                                          |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.5                 |       | Amendment No. 4 dated as of August 18,  2003 to the Amended and Restated Rights Agreement dated as of July 15,  1999, between Gardenburger, Inc. and EquiServe Trust Company, N.A. (19)                                                         |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.6                 |       | Office Space Lease by and between The Irvine Company  and Gardenburger, Inc. dated August 21, 2003. (20)                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.7                 |       | Facility Lease by and between Freeport Center  Associates, a Utah general partnership and Gardenburger, Inc., dated  May 28, 1997. (2)                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.8                 |       | Addendum, dated August 1, 1997, to Facility  Lease by and between Freeport Center Associates and Gardenburger,  Inc. (3)                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.9                 |       | Lease Extension, dated October 17, 2002, to  Facility Lease dated May 28, 1997 by and between Freeport Center  Associates and Gardenburger, Inc. (16)                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.10                |       | Warehouse Lease between Freeport Center Associates  and Gardenburger, Inc., dated January 25, 1999 (7)                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.11                |       | Note Purchase Agreement, dated as of March 27,  1998, between Gardenburger, Inc. and Dresdner Kleinwort Benson Private  Equity Partners L.P. (4)                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.12                |       | First Amendment to Note Purchase Agreement, dated  December 30, 1999, between Gardenburger, Inc. and Dresdner  Kleinwort Benson Private Equity Partners L.P. (11)                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.13                |       | Second Amendment, dated as of January 10, 2002,  to the Note Purchase Agreement, dated as of March 27, 1998, between  Dresdner Kleinwort Benson Private Equity Partners L.P. and  Gardenburger, Inc. (14)                                            |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.14                |       | Third Amendment, dated as of September 30,  2002, to the Note Purchase Agreement, dated as of March 27, 1998,  between Dresdner Kleinwort Benson Private Equity Partners L.P. and  Gardenburger, Inc. (16)                                           |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.15                |       | Fourth Amendment, dated as of December 31,  2002, to the Note Purchase Agreement, dated as of March 27, 1998, by and  among Dresdner Kleinwort Benson Private Equity Partners L.P. and  Gardenburger, Inc. (17)                                      |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.16                |       | Fifth Amendment, dated as of December 29, 2003,  to Note Purchase Agreement, dated as of March 27, 1998, between  Gardenburger, Inc. and Dresdner Kleinwort Benson Private Equity  Partners, L.P. (21)                                               |
|                 |       |                                                                                                                                                                                                                                                                |
| 10.17                |       | Sixth Amendment, dated as of August 13, 2004,  to Note Purchase Agreement, dated as of March 27, 1998, between  Gardenburger, Inc. and Dresdner Kleinwort Benson Private Equity  Partners, L.P. (29)                                                 |

 

49

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                 |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.18                |       | Amended and Restated Convertible Senior Subordinated  Note dated January 10, 2002, issued by Gardenburger, Inc. to  Dresdner Kleinwort Benson Private Equity Partners L.P. (14)                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.19                |       | First Amendment, dated as of December 29, 2003,  to Amended and Restated Convertible Senior Subordinated Note, dated as of  January 10, 2002, between Gardenburger, Inc. and Dresdner Kleinwort  Benson Private Equity Partners,  L.P. (21)                                      |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.20                |       | Second Amended and Restated Convertible Senior  Subordinated Note dated September 2, 2004, issued by  Gardenburger, Inc. to Annex Holdings I LP. (29)                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.21                |       | Instrument of Adherence, dated as of  September 2, 2004, between Dresdner Kleinwort Benson Private Equity  Partners, L.P. and Annex Holdings I LP. (29)                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.22                |       | Warrant Agreement, dated as of January 10,  2002, between Dresdner Kleinwort Benson Private Equity Partners L.P. and  Gardenburger, Inc. (14)                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.23                |       | Form of Warrant issued to Dresdner Kleinwort  Benson Private Equity Partners L.P. and holders of Gardenburger Inc.’s  preferred stock (14)                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.24                |       | Amended and Restated Warrant, issued to Annex  Holdings I LP, dated September 2, 2004. (29)                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.25                |       | Registration Rights Agreement, dated as of  March 27, 1998, between Gardenburger, Inc. and Dresdner Kleinwort  Benson Private Equity Partners L.P. (4)                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.26                |       | First Amendment, dated as of January 10, 2002,  to Registration Rights Agreement, dated as of March 27, 1998, between  Dresdner Kleinwort Benson Private Equity Partners L.P. and  Gardenburger, Inc. (14)                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.27                |       | Revolving Credit and Term Loan Agreement dated as of  January 10, 2002, between Gardenburger, Inc., CapitalSource Finance  LLC, as administrative agent and collateral agent for Lenders, and the  Lenders (14)                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.28                |       | First Amendment, dated as of September 30,  2002, to Revolving Credit and Term Loan Agreement, dated as of  January 10, 2002, between CapitalSource Finance LLC and  Gardenburger, Inc. (16)                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.29                |       | Second Amendment, dated December 31, 2002, to  Revolving Credit and Term Loan Agreement, dated January 10, 2002,  between CapitalSource Finance LLC and Gardenburger, Inc. (17)                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.30                |       | Third Amendment, dated March 31, 2003, to  Revolving Credit and Term Loan Agreement, dated January 10, 2002, between  CapitalSource Finance LLC and Gardenburger, Inc. (18)                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.31                |       | Fourth Amendment, dated as of December 29,  2003, to Revolving Credit and Term Loan Agreement dated as of  January 10, 2002, between Gardenburger, Inc. and CapitalSource  Finance LLC (21)                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.32                |       | Fifth Amendment, dated April 8, 2004, to  Revolving Credit and Term Loan Agreement dated January 10, 2002 between  CapitalSource Finance LLC and Gardenburger, Inc. (22)                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.33                |       | Sixth Amendment, dated August 13, 2004, to  Revolving Credit and Term Loan Agreement dated January 10, 2002 between  CapitalSource Finance LLC and Gardenburger, Inc. (29)                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.34                |       | Seventh Amendment, dated November 29, 2004, to  Revolving Credit and Term Loan Agreement dated January 10, 2002 between  CapitalSource Finance LLC and Gardenburger, Inc. (29)                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.35                |       | Eighth Amendment to Revolving Credit and Term Loan  Agreement, dated February 18, 2005, by and among  Gardenburger, Inc., CapitalSource Finance LLC and the Lenders party  thereto (27)                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.36                |       | Ninth Amendment to Revolving Credit and Term Loan  Agreement, dated August 9, 2005, by and among Gardenburger, Inc.,  CapitalSource Finance LLC and the Lenders party thereto (28)                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.37                |       | Ratification and Amendment dated as of  October 17, 2005 by and between Gardenburger, Inc. and  CapitalSource Finance LLC (31)                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                            |
| 10.38                |       | Stock Purchase Agreement, dated March 29, 1999,  by and between Gardenburger, Inc. and Rosewood Capital III, L.P.,  Farallon Capital Management LLC, Gruber & McBaine Capital  Management, LLC, BT Capital Investors LP and certain other purchasers  identified therein (6) |

 

50

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                     |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.39                |       | Amendment and Waiver of Stock Purchase Agreement,  dated April 14, 1999, by and between Gardenburger, Inc., and the  Purchasers identified on Exhibit A thereto (8)  |
|                 |       |                                                                                                                                                                                |
| 10.40                |       | Investor Rights Agreement, dated April 14,  1999, by and between Gardenburger, Inc., and the investors identified on  Exhibit A thereto (8)                          |
|                 |       |                                                                                                                                                                                |
| 10.41                |       | Preferred Stock Exchange Agreement, dated as of  January 10, 2002, by and among the Company and the holders of its  preferred stock (14)                                       |
|                 |       |                                                                                                                                                                                |
| 10.42                |       | Registration Rights Agreement, dated as of  January 10, 2002, by and among the Company and the holders of its  preferred stock (14)                                            |
|                 |       |                                                                                                                                                                                |
| 10.43                |       | Paul F. Wenner Stock Option Agreement dated  January 20, 1992 (1) (5)                                                                                                     |
|                 |       |                                                                                                                                                                                |
| 10.44                |       | Amendment, effective May 8, 2001, to Stock  Option Agreement dated January 20, 1992 between Gardenburger, Inc.  and Paul F. Wenner (5) (12)                     |
|                 |       |                                                                                                                                                                                |
| 10.45                |       | Amendment No. 2, dated as of December 22,  2003, to Stock Option Agreement dated January 20, 1992, between  Gardenburger, Inc. and Paul F. Wenner (5) (21) |
|                 |       |                                                                                                                                                                                |
| 10.46                |       | Amendment No. 3, dated May 12, 2004, to  Stock Option Agreement dated January 20, 1992, between  Gardenburger, Inc. and Paul F. Wenner (5) (22)            |
|                 |       |                                                                                                                                                                                |
| 10.47                |       | 1992 First Amended and Restated Combination Stock  Option Plan, as amended (“1992 Plan”) (5) (9)                                                                     |
|                 |       |                                                                                                                                                                                |
| 10.48                |       | Form of Incentive Stock Option Agreement for  Option grants to executive officers under 1992 Plan after May 24,  1995 (5) (7)                                        |
|                 |       |                                                                                                                                                                                |
| 10.49                |       | Form of Non-Statutory Stock Option Agreement  for Option grants to executive officers under 1992 Plan after May 24,  1995 (5) (7)                                    |
|                 |       |                                                                                                                                                                                |
| 10.50                |       | Incentive Stock Option Agreement with Scott C.  Wallace dated January 15, 2001 (5) (15)                                                                                   |
|                 |       |                                                                                                                                                                                |
| 10.51                |       | 2001 Stock Incentive Plan as Amended and Restated  Effective June 1, 2001 (“2001 Plan”) (5) (12)                                                                |
|                 |       |                                                                                                                                                                                |
| 10.52                |       | Form of Award Agreement under the  Gardenburger, Inc. 2001 Stock Incentive Plan (5) (18)                                                                             |
|                 |       |                                                                                                                                                                                |
| 10.53                |       | Form of Director Nonqualified Stock Option  Agreement under 2001 Plan (5) (15)                                                                                            |
|                 |       |                                                                                                                                                                                |
| 10.54                |       | Employment Agreement dated February 24, 2004  between Gardenburger, Inc. and Scott C. Wallace (5) (22)                                                               |
|                 |       |                                                                                                                                                                                |
| 10.55                |       | Amendment to Employment Agreement dated  March 24, 2005, by and between Gardenburger, Inc. and Scott C.  Wallace (5) (32)                                            |
|                 |       |                                                                                                                                                                                |
| 10.56                |       | Employment Agreement, dated February 26, 2004,  between Gardenburger, Inc. and James W. Linford (5) (22)                                                             |
|                 |       |                                                                                                                                                                                |
| 10.57                |       | Amendment to Employment Agreement dated  March 24, 2005, by and between Gardenburger, Inc. and James W.  Linford (5) (32)                                            |
|                 |       |                                                                                                                                                                                |
| 10.58                |       | Employment Agreement dated February 26, 2004 by  and between Gardenburger, Inc. and Robert T. Trebing,  Jr. (5) (22)                                                 |
|                 |       |                                                                                                                                                                                |
| 10.59                |       | Amendment to Employment Agreement dated  March 24, 2005, by and between Gardenburger, Inc. and Robert T. Trebing, Jr.  (5) (32)                                 |
|                 |       |                                                                                                                                                                                |
| 10.60                |       | Employment Agreement, dated February 26, 2004,  by and between Gardenburger, Inc. and Robert Dixon (5) (24)                                                          |
|                 |       |                                                                                                                                                                                |
| 10.61                |       | Amendment to Employment Agreement dated  March 24, 2005, by and between Gardenburger, Inc. and Robert  Dixon (5) (32)                                                |
|                 |       |                                                                                                                                                                                |
| 10.62                |       | Employment Agreement, dated February 26, 2004,  by and between Gardenburger, Inc. and Lori Luke (5) (24)                                                             |
|                 |       |                                                                                                                                                                                |
| 10.63                |       | Amendment to Employment Agreement dated  March 24, 2005, by and between Gardenburger, Inc. and Lori  Luke (5) (32)                                                   |

 

51

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                            |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.64                |       | Form of Indemnification Agreement between  Gardenburger, Inc. and its Officers and Directors (5) (7)                                                                                                        |
|                 |       |                                                                                                                                                                                                                       |
| 10.65                |       | Option Agreement dated April 14, 1996 between  Gardenburger, Inc. and Lyle G. Hubbard relating to 300,000 shares of  common stock (5) (16)                                                                  |
|                 |       |                                                                                                                                                                                                                       |
| 10.66                |       | Licensing Agreement, dated May 12, 2004,  between Gardenburger, Inc. and Paul F. Wenner (22)                                                                                                                     |
|                 |       |                                                                                                                                                                                                                       |
| 10.67                |       | Second Amended and Restated Retention Agreement,  dated July 19, 2005, by and between Gardenburger, Inc. and Scott C.  Wallace (5) (26)                                                                     |
|                 |       |                                                                                                                                                                                                                       |
| 10.68                |       | Second Amended and Restated Retention Agreement,  dated July 19, 2005, by and between Gardenburger, Inc. and James W.  Linford (5) (26)                                                                     |
|                 |       |                                                                                                                                                                                                                       |
| 10.69                |       | Second Amended and Restated Retention Agreement,  dated July 19, 2005, by and between Gardenburger, Inc. and Robert  T. Trebing, Jr. (5) (26)                                                          |
|                 |       |                                                                                                                                                                                                                       |
| 10.70                |       | Second Amended and Restated Retention Agreement,  dated July 19, 2005, by and between Gardenburger, Inc. and Robert  Dixon (5) (26)                                                                         |
|                 |       |                                                                                                                                                                                                                       |
| 10.71                |       | Second Amended and Restated Retention Agreement,  dated July 19, 2005, by and between Gardenburger, Inc. and Lori  Luke (5) (26)                                                                            |
|                 |       |                                                                                                                                                                                                                       |
| 10.72                |       | Separation Agreement, dated August 26, 2005, by  and between Robert T. Trebing, Jr. and Gardenburger, Inc. (5) (30)                                                                                    |
|                 |       |                                                                                                                                                                                                                       |
| 10.73                |       | Consulting Agreement, dated August 26, 2005, by  and between Robert T. Trebing, Jr. and Gardenburger, Inc.  (5) (30)                                                                                   |
|                 |       |                                                                                                                                                                                                                       |
| 10.74                |       | Credit and Security Agreement, dated  November 22, 2005, by and between Wells Fargo Bank, National Association  (acting through its Wells Fargo Business Credit operating division) and  Gardenburger, Inc. (33) |
|                 |       |                                                                                                                                                                                                                       |
| 10.75                |       | Credit and Security Agreement, dated  November 22, 2005, by and between GB Retail Funding, LLC and  Gardenburger, Inc. (33)                                                                                      |
|                 |       |                                                                                                                                                                                                                       |
| 14                   |       | Code of Ethics (20)                                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                       |
| 16.1                 |       | Letter re: Change in Certifying Accountant (23)                                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                       |
| 16.2                 |       | Letter re: Change in Certifying Accountant (25)                                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                       |
| 18                   |       | Letter re: Change in Accounting Principle (29)                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                       |
| 23.1                 |       | Consent of Haskell & White LLP, Independent  Registered Public Accounting Firm                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                       |
| 23.2                 |       | Consent of BDO Seidman, LLP, Independent Registered  Public Accounting Firm                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                       |
| 23.3                 |       | Consent of KPMG LLP, Independent Registered Public  Accounting Firm                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                       |
| 31.1                 |       | Certification of Chief  Executive Officer Pursuant to Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934.                                                                        |
|                 |       |                                                                                                                                                                                                                       |
| 31.2                 |       | Certification of Chief  Financial Officer Pursuant to Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934.                                                                        |
|                 |       |                                                                                                                                                                                                                       |
| 32                   |       | Certifications Pursuant to  Rule 13a-14(b) or Rule 15d-14(b) of the Securities  Exchange Act of 1934 and 18 U.S.C. Section 1350.                                                                  |

 

52

----

 

----

| (1)  | Incorporated by reference to the Company’s 1992  Form 10-K Annual Report, filed March 23, 1993.                                                   |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Incorporated by reference to the Company’s  Form 10-Q Quarterly Report for the quarter ended June 30, 1997,  filed August 14, 1997           |
| (3)  | Incorporated by reference to the Company’s 1997  Form 10-K Annual Report, filed March 31, 1998.                                                   |
| (4)  | Incorporated by reference to the Company’s Form 10-Q  for the quarter ended March 31, 1998, filed May 15, 1998.                              |
| (5)  | Management contract or compensatory plan or  arrangement.                                                                                                        |
| (6)  | Incorporated by reference to the Company’s  Form 8-K Current Report, filed April 1, 1999.                                                         |
| (7)  | Incorporated by reference to the Company’s  Form 10-K for the year ended December 31, 1998, filed  March 31, 1999.                           |
| (8)  | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended March 31, 1999, filed May 17,  1999.                             |
| (9)  | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended June 30, 1999, filed  August 13, 1999.                           |
| (10) | Incorporated by reference to the Company’s  Registration Statement on Form S-8 (No. 333-92665), filed  December 13, 1999.                    |
| (11) | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended December 31, 1999, filed  February 9, 2000.                      |
| (12) | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended December 31, 2001, filed  February 13, 2002.                     |
| (13) | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended June 30, 2002, filed August 9,  2002.                            |
| (14) | Incorporated by reference to the Company’s  Form 8-K dated January 10, 2002 and filed January 17, 2002.                                      |
| (15) | Incorporated by reference to the Company’s 2001  Form 10-K Annual Report, filed December 10, 2001.                                                |
| (16) | Incorporated by reference to the Company’s 2002  Form 10-K Annual Report, filed December 19, 2002.                                                |
| (17) | Incorporated by reference to the Company’s Quarterly  Report on Form 10-Q for the quarter ended December 31, 2002, filed  February 13, 2003. |
| (18) | Incorporated by reference to the Company’s Quarterly  Report on Form 10-Q for the quarter ended March 31, 2003, filed  May 14, 2003.         |
| (19) | Incorporated by reference to the Company’s  Form 8-K dated August 18, 2003 and filed August 19, 2003.                                        |
| (20) | Incorporated by reference to the Company’s  Form 10-K for the year ended September 30, 2003 and filed  December 29, 2003.                    |
| (21) | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended December 31, 2003 and filed  February 17, 2004.                  |
| (22) | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended June 30, 2004 and filed  August 16, 2004.                        |
| (23) | Incorporated by reference to the Company’s  Form 8-K dated June 25, 2004 and filed July 2, 2004.                                             |
| (24) | Incorporated by reference to the Company’s Form 8-K  dated January 27, 2005 and filed February 1, 2005.                                      |
| (25) | Incorporated by reference to the Company’s  Form 8-K dated February 22, 2005 and filed February 28, 2005.                                    |
| (26) | Incorporated by reference to the Company’s  Form 8-K dated July 19, 2005 and filed July 20, 2005.                                            |
| (27) | Incorporated by reference to the Company’s  Form 8-K dated February 18, 2005 and filed February 22, 2005.                                    |
| (28) | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended June 30, 2005 and filed  August 15, 2005.                        |
| (29) | Incorporated by reference to the Company’s  Form 10-K for the year ended September 30, 2004 and filed  February 18, 2005.                    |
| (30) | Incorporated by reference to the Company’s  Form 8-K dated August 26, 2005 and filed August 30, 2005.                                        |
| (31) | Incorporated by reference to the Company’s  Form 8-K dated October 17, 2005 and filed October 21, 2005.                                      |
| (32) | Incorporated by reference to the Company’s  Form 8-K dated March 24, 2005 and filed March 30, 2005.                                          |
| (33) | Incorporated by reference to the Company’s  Form 8-K dated November 22, 2005 and filed November 29, 2005.                                    |

 

53

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| Date:  December 16, 2005 |   |                         |                       |
|-------------------------------|--------|------------------------------|----------------------------|
|                          |   | **GARDENBURGER,  INC.**      |                       |
|                          |   |                         |
|                          |   | By:                          | /s/ ROBERT T. TREBING, JR. |   |
|                          |   | Robert T.  Trebing, Jr. |
|                          |   | Chief Financial  Officer     |
|                               |        |                              |                            |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities indicated on December 16, 2005.

 
| **Signature**                | ** ** | **Title**  |
|------------------------------|------------|------------|
| ** **                   | ** ** | ** ** |
| /s/ SCOTT C.  WALLACE        |       |       | Director,  Chairman, President |
| Scott C. Wallace             |       |       | and Chief  Executive Officer |
|                         |       |       | (Principal  Executive Officer) |
|                         |       |       |   |
|                         |       |       |   |
| /s/ ROBERT T.  TREBING, JR.  |       |       | Chief Financial  Officer |
| Robert T.  Trebing, Jr. |       |       | (Principal  Financial and Accounting Officer) |
|                         |       |       |   |
|                         |       |       |   |
| /s/ CHARLES E.  BERGERON     |       |       | Director |
| Charles E. Bergeron          |       |       |   |
|                         |       |       |   |
|                         |       |       |   |
| /s/ BARRY E.  KRANTZ         |       |       | Director |
| Barry E. Krantz              |       |       |   |
|                         |       |       |   |
|                         |       |       |   |
| /s/ RICHARD L.  MAZER        |       |       | Director |
| Richard L. Mazer             |       |       |   |
|                         |       |       |   |
|                         |       |       |   |
| /s/ PAUL F.  WENNER          |       |       | Founder and  Director |
| Paul F. Wenner               |       |       |   |

 

54

----

 

Report of IndependentRegistered Public Accounting Firm

 

The Board of DirectorsGardenburger, Inc.:

 

We have audited theaccompanying balance sheet of Gardenburger, Inc. (the “Company”) (anOregon corporation) as of September 30, 2005, and the related statementsof operations, shareholders’ deficit and cash flows for the year thenended.  In connection with our audit ofthe financial statements, we also have audited the supplementary informationincluded in Schedule II.  Thesefinancial statements and the financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and financial statement schedule basedon our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting.  Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Gardenburger, Inc. as of September 30,2005, and the results of its operations and its cash flows for the year thenended in conformity with accounting principles generally accepted in the UnitedStates.  Also in our opinion, the relatedfinancial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

 

The accompanyingfinancial statements have been prepared assuming that the Company will continueas a going concern. As discussed in Note 2 to the financial statements, theCompany is out of compliance with debt covenants, has a working capitaldeficiency, negative operating cash flow in fiscal 2004, has sufferedsubstantial recurring losses and, in October 2005, filed a voluntarypetition for relief under Chapter 11 of the United States Bankruptcy Code.  These matters, among others, raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  Management’s plans in regard tothese matters are described in Note 2. The financial statements do not includeany adjustments that might result from the outcome of this uncertainty.

 

 
| /s/ Haskell & White LLP |   |
|----------------------------------|--------|
| Irvine, California               |
| December 14,  2005          |

 

F-1

----

 

Report of Independent RegisteredPublic Accounting Firm

 

The Board of DirectorsGardenburger, Inc.:

 

We have audited theaccompanying balance sheet of Gardenburger, Inc. (the “Company”) (anOregon corporation) as of September 30, 2004, and the relatedstatements of operations, shareholders’ deficit and cash flows for the year thenended.  In connection with our audit ofthe financial statements, we also have audited the supplementary informationincluded in Schedule II.  Thesefinancial statements and the financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and financial statement schedule basedon our audit. The financial statements and financial statement schedule ofGardenburger, Inc. for the year ended September 30, 2003 were auditedby another independent registered public accounting firm. That firm expressedan unqualified opinion on those financial statements in their report dated November 7,2003, except as to Note 16 to those financial statements, which was as of December 29,2003.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Gardenburger, Inc. as of September 30,2004, and the results of its operations and its cash flows for the year then endedin conformity with accounting principles generally accepted in the United States.  Also in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

 

As described in Note 4 tothe financial statements for the year ended September 30, 2004, theCompany changed its method of accounting for slotting fees as of October 1,2003.

 

The accompanyingfinancial statements have been prepared assuming that the Company will continueas a going concern. As discussed in Note 2 to the financial statements, theCompany has a working capital deficiency, negative operating cash flow, and hassuffered substantial recurring losses. These matters, among others, raise substantial doubt about the Company’sability to continue as a going concern. Management’s plans in regard to these matters are described in Note2.  The financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

 
| /s/ BDO Seidman, LLP                                                                                              |   |
|-------------------------------------------------------------------------------------------------------------------|--------|
| Costa Mesa, California                                                                                            |
| December 29,  2004, except for Note 18, paragraphs 1 and 4, as to which the date is  February 18, 2005. |

 

F-2

----

 

Report of IndependentRegistered Public Accounting Firm

 

The Board of DirectorsGardenburger, Inc.:

 

We have audited theaccompanying statements of operations, shareholders’ deficit and cash flows forthe year ended September 30, 2003. In connection with our audit of the financial statements, we also haveaudited financial statement schedule II. These financial statements andfinancial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the results of operations and cash flows of Gardenburger, Inc.for the year ended September 30, 2003 in conformity with U.S. generallyaccepted accounting principles. Also in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

 

As described in Note 4,the financial statements for the year ended September 30, 2003 include theadoption of Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*.

 

 
| /s/ KPMG LLP           |   |
|------------------------|--------|
| Portland, Oregon       |
| November 7,  2003 |

 

F-3

----

 

GARDENBURGER, INC.

BALANCE SHEETS

(In thousands, except share amounts)

 
| ** **                                                                                                                                                                 | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2005**               | ** ** | **2004** | ** ** |
| **Assets**                                                                                                                                                                 |       |                   |       |   |   |
| Current Assets:                                                                                                                                                            |       |                   |       |   |   |
| Cash and cash  equivalents                                                                                                                                                 |       | $                      | 13         |   | $ | 5 |   |
| Restricted cash                                                                                                                                                            |       | 174                    |       | 166 |   |
| Accounts  receivable, net of allowances of $100 and $104 at September 30, 2005 and  2004, respectively                                                                |       | 3,219                  |       | 2,848 |   |
| Inventories, net                                                                                                                                                           |       | 6,361                  |       | 8,964 |   |
| Prepaid expenses                                                                                                                                                           |       | 1,351                  |       | 1,155 |   |
| Total current  assets                                                                                                                                                      |       | 11,118                 |       | 13,138 |   |
|                                                                                                                                                                       |       |                   |       |   |   |
| Machinery, equipment  and leasehold improvements, net of accumulated depreciation of $15,065 and  $13,303 at September 30, 2005 and 2004, respectively                |       | 8,417                  |       | 10,650 |   |
| Other assets, net of  accumulated amortization of $89 and $1,725 at September 30, 2005 and 2004,  respectively                                                        |       | 326                    |       | 696 |   |
| Total assets                                                                                                                                                               |       | $                      | 19,861     |   | $ | 24,484 |   |
|                                                                                                                                                                       |       |                   |       |   |   |
| **Liabilities and Shareholders’ Deficit**                                                                                                                             |       |                   |       |   |   |
| Current Liabilities:                                                                                                                                                       |       |                   |       |   |   |
| Short-term note  payable                                                                                                                                                   |       | $                      | 5,244      |   | $ | 4,791 |   |
| Current portion  of long-term debt                                                                                                                                         |       | 2,861                  |       | 2,000 |   |
| Convertible note  payable                                                                                                                                                  |       | 27,988                 |       | — |   |
| Accounts payable                                                                                                                                                           |       | 3,467                  |       | 2,905 |   |
| Accrued payroll  and employee benefits                                                                                                                                     |       | 1,294                  |       | 475 |   |
| Other current  liabilities                                                                                                                                                 |       | 634                    |       | 3,583 |   |
| Total current  liabilities                                                                                                                                                 |       | 41,488                 |       | 13,754 |   |
|                                                                                                                                                                       |       |                   |       |   |   |
| Long-term debt, less current maturities                                                                                                                                    |       | —                 |       | 3,513 |   |
| Convertible note payable                                                                                                                                                   |       | —                 |       | 19,392 |   |
| Total long-term  debt                                                                                                                                                      |       | —                 |       | 22,905 |   |
|                                                                                                                                                                       |       |                   |       |   |   |
| Convertible  redeemable preferred stock, liquidation preference of $62,004 and $58,104 at  September 30, 2005 and 2004, respectively, and 650,000 shares  outstanding |       | 60,352                 |       | 55,851 |   |
|                                                                                                                                                                       |       |                   |       |   |   |
| Commitments, contingencies and subsequent events                                                                                                                           |       |                   |       |   |   |
|                                                                                                                                                                       |       |                   |       |   |   |
| Shareholders’ Deficit:                                                                                                                                                |       |                   |       |   |   |
| Preferred stock,  no par value, 5,000,000 shares authorized                                                                                                                |       | —                 |       | — |   |
| Common stock, no  par value, 25,000,000 shares authorized; 9,002,101 shares issued and  outstanding at September 30, 2005 and 2004                                    |       | 11,189                 |       | 11,189 |   |
| Additional  paid-in capital                                                                                                                                                |       | 12,500                 |       | 12,500 |   |
| Accumulated  deficit                                                                                                                                                       |       | (105,668               | )          | (91,715 | ) |
| Total  shareholders’ deficit                                                                                                                                          |       | (81,979                | )          | (68,026 | ) |
| Total  liabilities and shareholders’ deficit                                                                                                                          |       | $                      | 19,861     |   | $ | 24,484 |   |

 

See accompanying notes to financial statements.

 

F-4

----

 

GARDENBURGER, INC.

STATEMENTS OFOPERATIONS

(In thousands, except share and per share amounts)

 
| ** **                                                                                                       | ** ** | **For the Year Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                             |       |                                      |       |   |   |   |   |
| Net sales                                                                                                        |       | $                                         | 46,055     |   | $ | 48,580 |   | $ | 49,447 |   |
| Cost of goods sold                                                                                               |       | 30,095                                    |       | 32,273 |   | 30,709 |   |
| Gross margin                                                                                                     |       | 15,960                                    |       | 16,307 |   | 18,738 |   |
|                                                                                                             |       |                                      |       |   |   |   |   |
| Operating expenses:                                                                                              |       |                                      |       |   |   |   |   |
| Sales and  marketing                                                                                             |       | 12,213                                    |       | 13,844 |   | 14,208 |   |
| General and  administrative                                                                                      |       | 6,105                                     |       | 3,898 |   | 5,218 |   |
| Other operating  (income) expense, net                                                                           |       | (20                                       | )          | (16 | ) | 105 |   |
|                                                                                                             |       | 18,298                                    |       | 17,726 |   | 19,531 |   |
| Operating loss                                                                                                   |       | (2,338                                    | )          | (1,419 | ) | (793 | ) |
|                                                                                                             |       |                                      |       |   |   |   |   |
| Other income (expense):                                                                                          |       |                                      |       |   |   |   |   |
| Interest income                                                                                                  |       | 1                                         |       | 2 |   | 11 |   |
| Interest expense                                                                                                 |       | (7,115                                    | )          | (4,620 | ) | (4,420 | ) |
|                                                                                                             |       | (7,114                                    | )          | (4,618 | ) | (4,409 | ) |
| Loss before  cumulative effect of a change in accounting for slotting fees and goodwill  and preferred dividends |       | (9,452                                    | )          | (6,037 | ) | (5,202 | ) |
| Cumulative effect of a change in accounting for  slotting fees                                                   |       | —                                    |       | (1,150 | ) | — |   |
| Cumulative effect of a change in accounting for  goodwill                                                        |       | —                                    |       | — |   | (411 | ) |
| Net loss                                                                                                         |       | (9,452                                    | )          | (7,187 | ) | (5,613 | ) |
| Preferred  dividends                                                                                             |       | 4,501                                     |       | 4,839 |   | 5,177 |   |
| Net loss  applicable to common shareholders                                                                      |       | $                                         | (13,953    | ) | $ | (12,026 | ) | $ | (10,790 | ) |
|                                                                                                             |       |                                      |       |   |   |   |   |
| Basic and  diluted loss per share before cumulative effect of changes in accounting  principle                   |       | $                                         | (1.55      | ) | $ | (1.21 | ) | $ | (1.15 | ) |
|                                                                                                             |       |                                      |       |   |   |   |   |
| Basic and  diluted loss per share for cumulative effect of changes in accounting  principle                      |       | —                                    |       | (0.13 | ) | (0.05 | ) |
|                                                                                                             |       |                                      |       |   |   |   |   |
| Basic and  diluted net loss per share applicable to common shareholders                                          |       | $                                         | (1.55      | ) | $ | (1.34 | ) | $ | (1.20 | ) |
|                                                                                                             |       |                                      |       |   |   |   |   |
| Shares used in  basic and diluted per share caluclations                                                         |       | 9,002,101                                 |       | 9,002,101 |   | 9,002,101 |   |

 

See accompanying notes to financial statements.

 

F-5

----

 

GARDENBURGER, INC.

STATEMENTS OF SHAREHOLDERS’DEFICIT

(In thousands, except share amounts)

 
| ** **                             | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **             | ** ** | **Total**   | ** ** |
|----------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|------------------------|------------|-------------|------------|
| ** **                             | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | **Shareholders’** | ** ** |
| ** **                             | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**            | ** ** | **Deficit** | ** ** |
| **Balance at September 30, 2002** |       | 9,002,101        |       | $           | 11,189     |            | $          | 12,500                 |       | $           | (68,899    | ) | $ | (45,210 | ) |
|                                   |       |             |       |        |       |            |       |                   |       |        |       |
| Accrual of preferred dividends         |       | —           |       | —      |       | —          |       | (5,177                 | )          | (5,177      | )          |
| Net loss                               |       | —           |       | —      |       | —          |       | (5,613                 | )          | (5,613      | )          |
| **Balance at September 30, 2003** |       | 9,002,101        |       | 11,189      |       | 12,500          |       | (79,689                | )          | (56,000     | )          |
|                                   |       |             |       |        |       |            |       |                   |       |        |       |
| Accrual of preferred dividends         |       | —           |       | —      |       | —          |       | (4,839                 | )          | (4,839      | )          |
| Net loss                               |       | —           |       | —      |       | —          |       | (7,187                 | )          | (7,187      | )          |
| **Balance at September 30, 2004** |       | 9,002,101        |       | 11,189      |       | 12,500          |       | (91,715                | )          | (68,026     | )          |
|                                   |       |             |       |        |       |            |       |                   |       |        |       |
| Accrual of preferred dividends         |       | —           |       | —      |       | —          |       | (4,501                 | )          | (4,501      | )          |
| Net loss                               |       | —           |       | —      |       | —          |       | (9,452                 | )          | (9,452      | )          |
| **Balance at September 30, 2005** |       | 9,002,101        |       | $           | 11,189     |            | $          | 12,500                 |       | $           | (105,668   | ) | $ | (81,979 | ) |

 

See accompanying notes to financial statements.

 

F-6

----

 

GARDENBURGER, INC.

STATEMENT OF CASHFLOWS

(In thousands)

 
| ** **                                                                                        | ** ** | **For the Year Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                             |       |                                      |       |   |   |   |   |
| Net loss                                                                                          |       | $                                         | (9,452     | ) | $ | (7,187 | ) | $ | (5,613 | ) |
| Adjustments to  reconcile net loss to net cash flows provided by (used in) operating  activities: |       |                                      |       |   |   |   |   |
| Depreciation and  amortization                                                                    |       | 2,893                                     |       | 3,043 |   | 3,236 |   |
| Cumulative  effect of a change in accounting for slotting fees                                    |       | —                                    |       | 1,150 |   | — |   |
| Cumulative  effect of a change in accounting for goodwill                                         |       | —                                    |       | — |   | 411 |   |
| Accrual of  long-term debt and convertible note payable exit fees                                 |       | 2,176                                     |       | 875 |   | 1,349 |   |
| Accrual of Annex  interest                                                                        |       | 1,598                                     |       | — |   | — |   |
| Accrual of Annex  amendment fee                                                                   |       | 250                                       |       | — |   | — |   |
| (Gain) loss on  sale of other assets                                                              |       | 3                                         |       | (16 | ) | 105 |   |
| Increase  (decrease) in cash from changes in:                                                     |       |                                      |       |   |   |   |   |
| Restricted cash                                                                                   |       | (8                                        | )          | 26 |   | 225 |   |
| Accounts  receivable, net                                                                         |       | (371                                      | )          | 112 |   | 167 |   |
| Inventories, net                                                                                  |       | 2,603                                     |       | 227 |   | (98 | ) |
| Prepaid expenses                                                                                  |       | (196                                      | )          | (216 | ) | (523 | ) |
| Accounts payable                                                                                  |       | 562                                       |       | 359 |   | 206 |   |
| Accrued payroll  and employee benefits                                                            |       | 819                                       |       | (229 | ) | (18 | ) |
| Other current  liabilities                                                                        |       | 1,621                                     |       | 1,284 |   | 2,077 |   |
| Net cash  provided by (used in) operating activities                                              |       | 2,498                                     |       | (572 | ) | 1,524 |   |
|                                                                                              |       |                                      |       |   |   |   |   |
| Cash flows from investing activities:                                                             |       |                                      |       |   |   |   |   |
| Payments for  purchase of machinery, equipment and leasehold improvements                         |       | (268                                      | )          | (1,444 | ) | (1,962 | ) |
| Proceeds from  sale of other assets                                                               |       | —                                    |       | 113 |   | — |   |
| Net cash used in  investing activities                                                            |       | (268                                      | )          | (1,331 | ) | (1,962 | ) |
|                                                                                              |       |                                      |       |   |   |   |   |
| Cash flows from financing activities:                                                             |       |                                      |       |   |   |   |   |
| Proceeds from  line of credit, net                                                                |       | 453                                       |       | 2,608 |   | 1,067 |   |
| Payments on  long-term debt                                                                       |       | (2,000                                    | )          | (1,455 | ) | (1,902 | ) |
| Payment of  CapitalSource exit fee                                                                |       | (650                                      | )          | — |   | — |   |
| Capitalized  financing fees                                                                       |       | (25                                       | )          | (315 | ) | — |   |
| Net cash (used  in) provided by financing activities                                              |       | (2,222                                    | )          | 838 |   | (835 | ) |
|                                                                                              |       |                                      |       |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                                                  |       | 8                                         |       | (1,065 | ) | (1,273 | ) |
|                                                                                              |       |                                      |       |   |   |   |   |
| Cash and cash equivalents:                                                                        |       |                                      |       |   |   |   |   |
| Beginning of  period                                                                              |       | 5                                         |       | 1,070 |   | 2,343 |   |
| End of period                                                                                     |       | $                                         | 13         |   | $ | 5 |   | $ | 1,070 |   |
|                                                                                              |       |                                      |       |   |   |   |   |
| **Supplemental Cash Flow Information**                                                            |       |                                      |       |   |   |   |   |
| Cash paid during the period for income taxes                                                      |       | $                                         | 17         |   | $ | 5 |   | $ | 7 |   |
| Cash paid during the period for interest                                                          |       | 924                                       |       | 983 |   | 2,017 |   |
| Non-cash preferred dividends                                                                      |       | 4,501                                     |       | 4,839 |   | 5,177 |   |
|                                                                                              |       |                                      |       |   |   |   |   |
| **Supplemental Non-Cash Information**                                                             |       |                                      |       |   |   |   |   |
| Reclassification  of accrued interest from other current liabilities to convertible note  payable |       | $                                         | 4,570      |   | $ | — |   | $ | — |   |
| Write-off of  fully depreciated machinery, equipment and leasehold improvements                   |       | 739                                       |       | — |   | — |   |

 

See accompanying notes to financial statements.

 

F-7

----

 

**GARDENBURGER, INC.**

**NOTES TO FINANCIAL STATEMENTS**

 

**1.****                                      ORGANIZATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Organizationand Nature of Operations***

 

Gardenburger, Inc.was incorporated in Oregon in 1985 to provide a line of meatless food productsin response to the public’s awareness of the importance of diet to overallhealth and fitness.  Toward this end, wedeveloped and now produce and distribute frozen, meatless food products,consisting of veggie burgers and soy-based: i) burgers; ii) chicken; iii) pork;and iv) other products.  Our products aresold principally to retail and food service customers throughout the UnitedStates.

 

***Estimates***

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reportingperiod.  Actual results could materially differfrom those estimates.  Managementbelieves that the estimates used are reasonable. Significant estimates made bymanagement include estimates for bad debts, excess and obsolete inventory, couponliabilities and other trade spending liabilities.

 

***CashEquivalents***

 

Cash equivalents consistof highly liquid investments with maturities at the date of purchase of 90 daysor less.

 

***RestrictedCash***

 

Pursuant to our line ofcredit agreement, cash receipts related to our accounts receivable aredeposited into a lockbox and are then applied against our line of creditbalance, generally the next business day. Accordingly, cash in our lockbox is considered restricted.

 

***FairValue of Financial Instruments***

 

The carrying amounts ofour financial instruments, including cash and cash equivalents, restrictedcash, accounts receivable, accounts payable and accrued liabilities,approximate fair value due to the short maturities of these financialinstruments. Our convertible notes are also considered a financial instrument,however, their fair value is not readily determinable due to their being heldby a single entity and the lack of a public trading market.

 

***AccountsReceivable and Allowances for Uncollectible Accounts***

 

Credit limits areestablished through a process of reviewing the financial history and stabilityof each customer.  We regularly evaluatethe collectibility of our trade receivable balances by monitoring past duebalances.  If it is determined that acustomer will be unable to meet its financial obligation, we record a specificreserve for bad debts to reduce the related receivable to the amount we expectto recover.  Historically, bad debts havenot had a material effect on us.  Ifcircumstances related to specific customers deteriorate, our estimates of therecoverability of receivables associated with those customers could materiallychange.

 

***Inventories***

 

Inventories are valued atthe lower of cost (based on standard costs, which approximate the first-in,first-out (FIFO) method) or market, and include materials, labor andmanufacturing overhead.

 

***ContractOrigination Costs***

 

Costs incurred for theorigination of certain distribution and other contracts are included as aprepaid asset on our balance sheet and amortized over the life of the relatedcontract. Such costs are refundable to us should the contract be terminatedprior to completion.  At September 30,2005 and 2004, prepaid assets included $116,000 and $209,000, respectively, ofcontract origination costs.

 

F-8

----

 

***Machinery,Equipment and Leasehold Improvements***

 

Machinery and equipmentand leasehold improvements are stated at cost. Significant improvements are capitalized and maintenance and repairs areexpensed. Depreciation and amortization are provided using the straight-linemethod over the estimated useful lives of the assets. Leasehold improvementsare amortized over the lease term or the estimated useful life of the asset,whichever is shorter.  Machinery andequipment are reviewed for impairment whenever events or circumstances indicatethat the carrying amount of assets may not be recoverable in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 144 “Accountingfor the Impairment or Disposal of Long-Lived Assets.” We evaluaterecoverability of property, plant and equipment to be held and used by comparingthe carrying amount of an asset to estimated future net undiscounted cash flowsto be generated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured as the amount by which the carryingamount of the assets exceeds the fair value of the assets. We determined thatno impairment existed as of September 30, 2005.

 

Estimated useful livesare as follows:

 
| Leasehold  improvements         |   | 5 - 12 years |   |
|---------------------------------|--------|--------------|--------|
| Office furniture  and equipment |   | 3 - 10 years |   |
| Machinery and equipment         |   | 3 - 15 years |   |
| Vehicles                        |   | 5 years      |   |

 

***OtherAssets***

 

As of September 30, 2005, other assetsconsist of trademarks.  In prior periods,other assets also included deferred financing fees.  However, as discussed in Note 2, our deferredfinancing fees were fully written off during fiscal 2005. Trademarks areamortized using the straight-line method over forty years. Trademarks arereviewed for impairment and changes in their estimated remaining useful lives wheneverevents or circumstances indicate that the carrying amount of assets may not berecoverable in accordance with SFAS No. 144. We evaluate recoverability bycomparing the carrying amount of the assets to estimated future netundiscounted cash flows to be generated by the assets.  If such assets are considered to be impaired,the impairment to be recognized is measured as the amount by which the carryingamount of the assets exceeds the fair value of the assets.  We determined that no impairment existed asof September 30, 2005.  See alsoNote 4 regarding the write-off of our goodwill balance in fiscal 2003.

 

# ***Segmentand Enterprise-Wide Reporting***

# ** **

We disclose segment enterprise-wideinformation in accordance with SFAS No. 131, “Disclosures about Segmentsof an Enterprise and Related Information.” Based upon definitions contained within SFAS No. 131, we havedetermined that we operate in one segment. In addition, virtually all sales are domestic, and all of our long-livedassets are located within the United States.

 

***Concentrationsof Credit Risk and Significant Customers***

 

We invest any excess cashwith high credit quality financial institutions, which bear minimal risk, and,by policy, limit the amount of credit exposure to any one financialinstitution.

 

For fiscal 2005, two customersaccounted for approximately 14% and 13% of gross sales, respectively, andapproximately 14% and 25% of the gross accounts receivable balance at September 30,2005, respectively. One additional customer represented approximately 9% of ouraccounts receivable balance at September 30, 2005.

 

For fiscal 2004, threecustomers accounted for approximately 12%, 10% and 8% of gross sales,respectively, and approximately 7%, 12% and 14% of the gross accountsreceivable balance at September 30, 2004, respectively.

 

For fiscal 2003, threecustomers accounted for approximately 13%, 12% and 9% of gross sales,respectively.

 

Historically, we have notincurred significant losses related to accounts receivable.

 

F-9

----

 

***RevenueRecognition and Sales Incentives***

 

In accordance with StaffAccounting Bulletin No. 104, Revenue Recognition (“SAB 104”), revenues arerecognized upon passage of title to the customer, typically upon productpick-up, shipment or delivery to customers.

 

Our revenue arrangementswith our customers often include sales incentives and other promotional costssuch as coupons, volume-based discounts, slotting fees and off-invoicediscounts. These costs are typically referred to collectively as “tradespending.”  Pursuant to EITF No. 00-14,EITF No. 00-25 and EITF No. 01-09, “Accounting for ConsiderationGiven by a Vendor to a Customer (Including a Reseller of the Vendor’sProducts),” these costs are recorded when revenue is recognized and aregenerally classified as a reduction of revenue. We do not provide for salesreturns since, historically, sales returns have not been significant. See alsoNote 4 for a discussion of a change in accounting for slotting fees.

 

***Trade Spending***

 

Certain trade spending items are subject toestimation. We are required to make estimates regarding the level of couponredemption, the amount of product to be purchased by certain customers overcertain time periods and related volume-based and off-invoice discounts, andslotting fees based on product shipments in order to estimate our overall tradespending. These estimates are reviewed and recorded on a monthly basis based oninformation provided by our regional sales managers as to the types ofarrangements that have been made with our customers, historical results andcurrent period activity, and are recorded in our financial statements as anoffset to sales and trade receivables. Trade spending totaled $9.0 million in fiscal 2005, $12.1 million infiscal 2004 and $11.8 million in fiscal 2003. If our estimates are notreflective of actual results, we may be required to record adjustments thatcould materially affect our results of operations and financial condition forany given period.

 

***SlottingFees***

 

Slotting fees are a typeof trade spending and refer to oral arrangements pursuant to which the retailgrocer allows our products to be placed on the store’s shelves in exchange fora slotting fee. Typically, 12 months is the estimated minimum period duringwhich a retailer agrees to allocate shelf space. However, given that there areno written contractual commitments requiring the retail grocers to allocateshelf space for twelve months, we expense the slotting fees as a reduction ofsales in determining net sales in the period the related revenue is recognizedfor the first shipment of the related product. The level of slotting feesvaries based on the number of new product introductions, potential productreintroductions and in what sales channels products are introduced.  Slotting fees, which are included as acomponent of total trade spending, totaled $0.4 million in fiscal 2005, $3.1million in fiscal 2004 and $2.2 million (pro forma) in fiscal 2003.  Prior to fiscal 2004, we capitalized andamortized slotting fees over a 12-month period and, accordingly, the fiscal2003 amount is pro forma assuming it was computed based on our currentaccounting policy. See also Note 4 for a discussion of a change in accountingfor slotting fees.

 

***Shipping and FreightCharges***

 

We incur costs related to shipping andhandling of our manufactured products, which amounted to $1.3 million, $1.6 millionand $1.4 million for fiscal 2005, 2004 and 2003, respectively.  We expense these costs as incurred as acomponent of sales and marketing expense. We also incur shipping and handling charges related to the receipt ofraw materials, which are recorded as a component of cost of goods sold.  Payments received from customers for shippingand handling costs are included as a component of net sales upon recognition ofthe related sale.

 

***AdvertisingCosts***

 

Advertising costs,including media advertising, design and printing of coupons, and otheradvertising, which are included in sales and marketing expense, are expensedwhen the advertising first takes place. Advertising expense was approximately $741,000 in fiscal 2005, $602,000in fiscal 2004 and $572,000 in fiscal 2003.

 

F-10

----

 

***SpoilsCosts***

 

Expenses for spoils,which are incurred after our products are received by our customers, were approximately$543,000 in fiscal 2005, $385,000 in fiscal 2004 and $293,000 in fiscal 2003and are included in sales and marketing expense.

 

***Researchand Development Costs***

 

Our research anddevelopment activities are focused on identifying existing nutritional benefitsand selectively adding benefits important to vegetarians, as well asimprovement and increased efficiency in the manufacturing process.  We continue to develop non-burger items suchas breakfast sausage, cutlets and nuggets to meet the needs of thevariety-seeking consumer. We conduct our research and development activities atour facilities in Clearfield, Utah.  Researchand development costs are expensed as incurred. Research and developmentexpense was approximately $357,000 in fiscal 2005, $272,000 in fiscal 2004 and$235,000 in fiscal 2003 and is included in sales and marketing expenses in theaccompanying statements of operations.

 

***NetLoss Per Share***

 

Basic loss per share iscalculated using the weighted average number of common shares outstanding forthe period and diluted loss per share is computed using the weighted averagenumber of common shares and dilutive common equivalent shares outstanding.

 

Basic net loss per shareand diluted net loss per share are the same for all periods presented since wewere in a loss position in all periods. Potentially dilutive securities that are not included in the diluted lossper share calculations because they would be antidilutive are as follows (inthousands):

 
| ** **                  | ** ** | **Year Ended September 30,** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Stock options               |       | 2,129                             |       | 3,023 |   | 3,929 |   |
| Stock warrants              |       | 1,116                             |       | 1,116 |   | 1,116 |   |
| Convertible Note            |       | 1,753                             |       | 1,730 |   | 1,730 |   |
| Convertible preferred stock |       | 4,062                             |       | 4,062 |   | 4,062 |   |
| Total                       |       | 9,060                             |       | 9,931 |   | 10,837 |   |

 

***ComprehensiveIncome Reporting***

 

SFAS No. 130, “ReportingComprehensive Income” establishes standards for reporting and displayingcomprehensive income and its components in a full set of general purposefinancial statements. The objective of SFAS No. 130 is to report a measureof all changes in the equity of an enterprise that result from transactions andother economic events of the period other than transactions with owners.Comprehensive loss did not differ from currently reported net loss in theperiods presented.

 

***StockBased Compensation Plans***

 

We account for stockoptions using the intrinsic value method as prescribed by Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”  Pursuant to SFAS No. 123, “Accountingfor Stock-Based Compensation,” as amended, we have computed, for pro formadisclosure purposes, the impact on net loss and net loss per share as if we hadaccounted for our stock-based compensation plans in accordance with the fairvalue method prescribed by SFAS No. 123 as follows (in thousands, exceptper share amounts):

 
| ** **                                                                                                             | ** ** | **Year Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                             | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss  applicable to common shareholders, as reported                                                               |       | $                                 | (13,953    | ) | (12,026 | ) | $ | (10,790 | ) |
| Deduct - total  stock-based employee compensation expense determined under the fair value  based method for all awards |       | (165                              | )          | (201 | ) | (450 | ) |
| Net loss  applicable to common shareholders, pro forma                                                                 |       | $                                 | (14,118    | ) | (12,227 | ) | $ | (11,240 | ) |
|                                                                                                                   |       |                              |       |   |   |   |   |
| Basic and  diluted net loss per share applicable to common shareholders – as reported                             |       | $                                 | (1.55      | ) | (1.34 | ) | $ | (1.20 | ) |
| Basic and  diluted net loss per share applicable to common shareholders – pro forma                               |       | $                                 | (1.57      | ) | (1.36 | ) | $ | (1.25 | ) |

 

There were no optionsgranted during fiscal 2005, 2004 or 2003.

 

F-11

----

 

SFAS No. 123R, “Share-BasedPayment,” requires companies to recognize in their income statement thegrant-date fair value of stock options and other equity-based compensationissued to employees.  We adopted SFAS No. 123Reffective October 1, 2005. Unamortized stock-based compensation expense,on a pro forma basis, as of September 30, 2005 totaled $190,000, with$144,000 to be amortized in fiscal 2006 and $46,000 to be amortized in fiscal2007.

 

***Reclassifications***

 

Certain reclassificationshave been made to the prior year amounts to conform to the current yearpresentation.

 

**2.****                                      GOINGCONCERN AND CHAPTER 11 FILING**

 

Our financial statementshave been presented on a going concern basis, which contemplates therealization of assets and satisfaction of liabilities in the normal course ofbusiness.  However, as discussed below,we were out of compliance with certain debt covenants as of June 30, 2005and September 30, 2005. Because of such non-compliance, we classified allof our outstanding debt as current beginning with our June 30, 2005balance sheet. In addition, as a result of CapitalSource Finance, LLC (“CapitalSource”)and Annex Holdings I LP (“Annex”) having the ability to call our debt at anypoint in time, all related exit fees were accrued and all remaining deferredfinancing fees were written off during the third quarter of fiscal 2005.

 

Both CapitalSource and Annex currently have the right to declare all ofthe outstanding amounts due to them under their respective agreementsimmediately due and payable; however, the outstanding indebtedness due andpayable to CapitalSource was refinanced as described below. We do not currentlyhave the cash or alternative financing source needed in order to pay suchamounts. In addition, we have a working capital deficiency, incurredsubstantial net losses applicable to common shareholders for fiscal years 2005,2004 and 2003 and had negative operating cash flow in 2004.  We had a total shareholders’ deficit atSeptember 30, 2005 of $82.0 million. We are highly leveraged and havesignificant annual interest and dividend accruals related to our convertiblenote payable and convertible redeemable preferred stock, which contribute toour net losses and shareholders’ deficit.

 

Operating under thisheavy debt burden and facing a continuing decline in our product category andincreased competition during 2005, we determined that in order to maximizevalue for our creditors and, if feasible, preferred shareholders, we movedforward with an effort to sell our business as a going concern.  We made this decision recognizing (i) thelikelihood that we did not have sufficient resources or credit availability toeffectively defend our market share in the grocery channel under existingcircumstances, (ii) the significant risk that our enterprise value wouldfurther erode if we continued to operate our business on a highly leveragedbasis, and (iii) that there was substantial doubt, if we continued tooperate under our existing debt burden, regarding our ability to continue as agoing concern.  Based on our goingconcern sale efforts in fiscal 2005, we have determined that the value ofGardenburger is inadequate to allow for any recovery or retention of rights byour equity holders.

 

Following severalunsuccessful efforts to sell Gardenburger as a going concern over the past sixyears, including our fiscal 2005 efforts, as well as unsuccessful efforts torestructure and recapitalize Gardenburger, partially due to a lack of consensusbetween Annex and our preferred shareholders regarding distribution of theproceeds of a sale and the allocation of rights under a restructuring, on October 14,2005, we filed a voluntary petition for relief under Chapter 11 of the UnitedStates Bankruptcy Code (the “Bankruptcy Code”) in the United States BankruptcyCourt for the Central District of California, Santa Ana Division (the “BankruptcyCourt”) (Case No. SA 05-19539-JB) (the “Chapter 11 Case”). In connectionwith this Chapter 11 Case, on December 9, 2005, we filed a Plan ofReorganization (the “Plan”) and a related Disclosure Statement with theBankruptcy Court.

 

F-12

----

 

Significant terms of thePlan are as follows:

•                  Amounts due to holders of generalunsecured claims will be fully paid over an 18 month period;

•                  All outstanding preferred stock andcommon stock will be terminated with no compensation to the holders thereof,thereby converting Gardenburger to a privately held company from a publiclyheld company;

•                  Elimination of all principal, accruedinterest and accrued exit fees due pursuant to our Note Purchase Agreement, asamended, and Second Amended and Restated Convertible Senior Subordinated Note,as amended (the “Convertible Note”) held by Annex, which totaled $28.0 millionas of September 30, 2005, and issuance of new equity interests inGardenburger to Annex in full satisfaction of this claim;

•                  Payment of all principal and accruedinterest due pursuant to our Revolving Credit and Term Loan Agreement, asamended (the “Loan Agreement”) with CapitalSource, which totaled approximately$8.2 million as of September 30, 2005; and

•                  Ongoing operation of our business ona viable basis following confirmation of the Plan.

 

We will continue tooperate our business in the ordinary course as debtor-in-possession under thejurisdiction of the Bankruptcy Court and in accordance with applicableprovisions of the Bankruptcy Code.

 

Bankruptcy law does notpermit solicitation of acceptances of the Plan until the Bankruptcy Courtapproves the applicable Disclosure Statement relating to the Plan as providingadequate information of a kind, and in sufficient detail, as far as isreasonably practicable in light of the nature and history of the debtor and thecondition of the debtor’s books and records, that would enable a hypotheticalreasonable investor typical of the holder of claims or interests of therelevant class to make an informed judgment about the Plan.  Accordingly, this is not intended to be, norshould it be construed as, a solicitation for a vote on the Plan.  We will emerge from the Chapter 11 Case ifand when the Plan is confirmed by the Bankruptcy Court.

 

The filing of the Chapter11 Case constituted events of default under our Loan Agreement withCapitalSource and our Convertible Note held by Annex.  As a result of the events of default, alldebt outstanding under such loan documents became automatically and immediatelydue and payable.  As of September 30,2005, the amount of outstanding debt and accrued interest under the LoanAgreement was approximately $8.2 million, which was paid on November 22, 2005utilizing proceeds from our debtor-in-possession credit facilities discussedbelow. The amount of outstanding debt under the Convertible Note wasapproximately $28.0 million as of September 30, 2005. We believe that anyeffort of Annex to enforce their rights under the Convertible Note will bestayed as a result of the filing of the Chapter 11 Case. In any event, weunderstand that Annex does not currently contemplate any such action and thatAnnex supports the Plan.

 

**3.             DEBTOR-IN-POSESSION CREDIT FACILITY**

 

In connection with theChapter 11 Case, on October 17, 2005, and as approved by the BankruptcyCourt on October 18, 2005, we entered into an interim financingarrangement with CapitalSource.  Inaddition, senior and second lien credit facilities with Wells Fargo Bank,National Association, acting through its Wells Fargo Business Credit operatingdivision (“WFBC”), and GB Retail Funding, LLC (“GB”), respectively, wereapproved by the Bankruptcy Court on November 16, 2005.

 

We require creditfacilities for use during the Chapter 11 Case (“DIP Financing”) and to meet ourworking capital needs and fund our obligations under the Plan upon andfollowing the effective date of the Plan (“Exit Financing”).

 

F-13

----

 

The WFBC creditfacilities provide for a secured revolving line of credit (the “WFBC RevolvingCredit Facility”) in an amount not to exceed $7.5 million and a securedequipment term loan (the “WFBC Term Credit Facility”) of $2.2 million. As of December 14,2005, the amounts outstanding under the WFBC Revolving Credit Facility and theWFBC Term Credit Facility were $0.4 million and $2.2 million, respectively.Upon the effective date of the Plan that is satisfactory to WFBC, the WFBC creditfacilities will convert to Exit Financing facilities by automatically extendingthe maturity date of the WFBC credit facilities to the date thirty-six monthsafter the date of closing of the WFBC credit facilities (November 22, 2008).The WFBC credit facilities were used to refinance our CapitalSource debt andwill provide for ongoing working capital needs and for payment of obligationsunder, and in accordance with, the Plan. All loans, advances and obligations under the WFBC credit facilities aresecured by first priority security interests on all of our assets andreorganized Gardenburger, except general intangible assets (i.e., intellectualproperty, trademarks, brand names and domain names) and proceeds thereof.

 

The amount availableunder the WFBC Revolving Credit Facility is the lesser of (i) $7.5 millionor (ii) up to the sum of: (i) 85% of eligible accounts receivable and(ii) the lesser of (a) $4.5 million or (b) the lesser of (x)44.9% of eligible raw materials inventory plus 63.4% of eligible finished goodsinventory or (y) 85% of the appraised net orderly liquidation value of eligibleraw material inventory and eligible finished goods inventory, less (iii) reservesmaintained by WFBC.  The interest rate onthe WFBC Revolving Credit Facility is the Prime Rate plus 0.50% per annumfloating, payable monthly in arrears calculated on the basis of actual dayselapsed in each year of 360 days. We or reorganized Gardenburger may also electto fix the rate of interest on portions of revolving advances at an interestrate equal to 3.25% over Wells Fargo LIBOR. The default rate of interest will be 3.00% higher than the rateotherwise payable.  A fee of 0.50% perannum on the unused portion of the WFBC Revolving Credit Facility will bepayable monthly in arrears.  As of December 14,2005, we had $0.4 million outstanding on the WFBC Revolving Credit Facility atan interest rate of 7.75% and $3.1 million available for future use.  We utilized $0.7 million of the proceeds fromthis facility to pay off the entire balance owed to CapitalSource pursuant totheir Loan Agreement and, accordingly, as of the date of the filing of this Form 10-K,we do not owe any amounts to CapitalSource.

 

The initial amountavailable under the WFBC Term Credit Facility was $2.2 million.  The interest rate on the WFBC Term Facilityis the Prime Rate plus 1.00% per annum floating, payable monthly in arrears,calculated on the basis of actual days lapsed in a year of 360 days.  We or reorganized Gardenburger may also electto fix the rate of interest on portions of term advances at an interest rateequal to 3.75% over Wells Fargo LIBOR. The default rate of interest will be 3.00% higher than the rateotherwise payable.  As of December 14,2005, we had $2.2 million outstanding on the WFBC Term Credit Facility at aninterest rate of 8.25%.

 

Pursuant to the Creditand Security Agreement, dated November 22, 2005, governing the WFBC creditfacilities (the “WFBC Credit Agreement”), we are required to comply withcertain financial covenants, which are described below:

 

(a) We are required to maintain a minimum Availability (as defined in the WFBCCredit Agreement) as follows:

 

| **Dates**                             | ** ** | **Minimum Availability** | ** ** |
|---------------------------------------|------------|--------------------------|------------|
| 11/22/05 through  12/02/05            |       | $                        | 2,000,000  |   |
| 12/03/05 through  12/30/05            |       | $                        | 1,750,000  |   |
| 12/31/05 and at all  times thereafter |       | $                        | 1,500,000  |   |

 

F-14

----

 

(b) We are required to achieve Net Cash Flow (as defined in the WFBC CreditAgreement) in an amount not less than the amount set forth below for theperiods set forth below:

 

| **Test Period**            | ** ** | **Minimum Net Cash Flow** | ** ** |
|----------------------------|------------|---------------------------|------------|
| 10/01/05 through  12/02/05 |       | $                         | (900,000   | ) |
| 10/29/05 through  12/30/05 |       | $                         | (600,000   | ) |
| 12/03/05 through  01/27/05 |       | $                         | (1,800,000 | ) |
| 12/31/05 through  02/24/06 |       | $                         | 200,000    |   |

 

(c) We are required to achieve, for each period described below, gross sales of notless than the amount set forth for each such period:

 

| **Period**                 | ** ** | **Minimum Gross Sales** | ** ** |
|----------------------------|------------|-------------------------|------------|
| 10/01/05 through  10/31/05 |       | $                       | 3,600,000  |   |
| 11/01/05 through  11/30/05 |       | $                       | 3,000,000  |   |
| 12/01/05 through  12/31/05 |       | $                       | 3,600,000  |   |
| 01/01/06 through  01/31/06 |       | $                       | 4,300,000  |   |
| 02/01/06 through  02/28/06 |       | $                       | 3,900,000  |   |
| 03/01/06 through  03/31/06 |       | $                       | 5,100,000  |   |
| 04/01/06 through  04/30/06 |       | $                       | 4,500,000  |   |
| 05/01/06 through  05/31/06 |       | $                       | 5,200,000  |   |
| 06/01/06 through 06/30/06  |       | $                       | 5,200,000  |   |
| 07/01/06 through  07/31/06 |       | $                       | 4,700,000  |   |

 

(d) In the event we fail to achieve the minimum gross sales as set forth in item (c) abovefor any period set forth above, we are required to achieve, for the period setforth below ending on the same end date as the period for which we failed suchminimum gross sales covenant, cumulative Net Sales (as defined in the WFBCCredit Agreement) of not less than the amount set forth below for the periodending on the date set forth below:

 

| **Period**                 | ** ** | **Minimum Net Sales** | ** ** |
|----------------------------|------------|-----------------------|------------|
| 10/01/05 through  10/31/05 |       | $                     | 3,100,000  |   |
| 10/01/05 through  11/30/05 |       | $                     | 5,700,000  |   |
| 10/01/05 through  12/31/05 |       | $                     | 8,600,000  |   |
| 10/01/05 through  01/31/06 |       | $                     | 12,100,000 |   |
| 10/01/05 through  02/28/06 |       | $                     | 15,500,000 |   |
| 10/01/05 through 03/31/06  |       | $                     | 19,700,000 |   |
| 10/01/05 through  04/30/06 |       | $                     | 23,700,000 |   |
| 10/01/05 through  05/31/06 |       | $                     | 27,800,000 |   |
| 10/01/05 through  06/30/06 |       | $                     | 32,000,000 |   |
| 10/01/05 through  07/31/06 |       | $                     | 36,000,000 |   |

 

Pursuant to the WFBCCredit Agreement, on or before February 24, 2006, Wells Fargo shall setnew covenant levels for item (b) above. The new covenant levels will be based upon our projections and cashbudget for such periods received by Wells Fargo pursuant to the Credit andSecurity Agreement and will be no less stringent than the present levels,except that with respect to item (b) above, the new covenant levels willbe based on a $500,000 negative variance based upon the projections and updatedcash flow budget for such periods.  Acopy of the Wells Credit Agreement is attached to this Annual Report on Form 10-Kas Exhibit 10.74.

 

The GB Loan Facilityconsists of a $5.0 million secured single-advance term loan. This facility issecured by a second priority lien in all collateral securing the WFBC credit facilities,except that it is secured by a first priority perfected security interest inall of our general intangible assets (i.e., intellectual property, trademarks,brand names and domain names) and proceeds thereof. The interest rate on the GBLoan Facility is the Prime Rate plus 6.75% per annum floating, payable monthlyin arrears. As of December 14, 2005, we had $4.9 million outstanding onthe GB Loan Facility at an interest rate of 14.0%. Upon the effective date ofthe Plan that is satisfactory to GB, the GB Loan Facility will convert to anExit Financing facility by automatically extending the maturity date of the GBLoan Facility to the date thirty-six months after the date of closing of the GBLoan Facility (November 22, 2008).

 

F-15

----

 

Pursuant to the Creditand Security Agreement, dated November 22, 2005, governing the GB LoanFacility (the “GB Credit Agreement”), we are required to comply with certainfinancial covenants that are identical to the financial covenants describedabove in connection with the WFBC credit facilities.  A copy of the GB Credit Agreement is attachedto this Annual Report on Form 10-K as Exhibit 10.75.

 

As of December 2,2005, we were in compliance with all of the financial covenants describedabove.

 

**4.             CHANGES IN ACCOUNTING PRINCIPLES**

 

***Accounting for Slotting Fees***

 

Slotting fees refer tooral arrangements pursuant to which the retail grocer allows our products to beplaced on the store’s shelves in exchange for a slotting fee. As reported inprevious filings, slotting fees were initially recorded as a prepaid asset andthe related expense was recognized ratably over a 12-month period beginning twomonths following product shipment as an offset to sales.  Typically, 12 months is the estimated minimumperiod during which a retailer agrees to allocate shelf space.  However, given that there are no writtencontractual commitments requiring the retail grocers to allocate shelf spacefor twelve months, in fiscal 2004, we determined that it was a preferableaccounting method to expense the slotting fees at the time revenue isrecognized.  In accordance withAccounting Principles Board Opinion (“APB”) 20, “Accounting Changes,” thecumulative effect of the change in accounting for slotting fees was reflectedin the first quarter of fiscal 2004.  Theunaudited quarterly results for the first, second and third quarters of fiscal2004 were restated for this change in accounting policy as indicated below (inthousands, except per share data):

 
| ** **                                                                                                                            | ** ** | **2004  1st Quarter  (Restated)  (Unaudited)** | ** ** | **2004  2nd Quarter  (Restated)  (Unaudited)** | ** ** | **2004  3rd Quarter  (Restated)  (Unaudited)** | ** ** | **2004  4th Quarter  (Unaudited)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------|------------|
| Income (loss)  before cumulative effect of a change in accounting principle and preferred  dividends, as reported                     |       | $                                              | (1,730     | )                                              | $          | (1,225                                         | )          | $                                  | 108        |   | $ | (3,398 | ) |
| Adjustment to  record actual slotting fees incurred                                                                                   |       | 9                                              |       | 330                                            |       | (131                                           | )          | n/a                                |       |
| Loss before  cumulative effect of a change in accounting principle and preferred  dividends, as adjusted                              |       | (1,721                                         | )          | (895                                           | )          | (23                                            | )          | (3,398                             | )          |
| Cumulative  effect of a change in accounting for slotting fees                                                                        |       | (1,150                                         | )          | —                                         |       | —                                         |       | —                             |       |
| Preferred  dividends                                                                                                                  |       | 1,294                                          |       | 1,294                                          |       | 1,149                                          |       | 1,102                              |       |
| Net loss  applicable to common shareholders                                                                                           |       | $                                              | (4,165     | )                                              | $          | (2,189                                         | )          | $                                  | (1,172     | ) | $ | (4,500 | ) |
| * *                                                                                                                              | * *   | * *                                       | * *   | * *                                       | * *   | * *                                       | * *   | * *                           | * *   |
| Basic and  diluted net loss per share applicable to common shareholders, as reported                                                  |       | $                                              | (0.34      | )                                              | $          | (0.28                                          | )          | $                                  | (0.12      | ) | $ | (0.50 | ) |
| Adjustment for  reversal of period slotting fee additions and amortization and cumulative  effect of a change in accounting principle |       | $                                              | (0.13      | )                                              | $          | 0.04                                           |       | $                                  | (0.01      | ) | $ | n/a |   |
| Basic and  diluted net loss per share applicable to common shareholders, as adjusted (1)                                              |       | $                                              | (0.46      | )                                              | $          | (0.24                                          | )          | $                                  | (0.13      | ) | $ | (0.50 | ) |

 

----

(1)          Per share amounts may not add due to rounding.

 

F-16

----

 

Pro forma results forfiscal 2003, assuming the change in accounting for slotting fees occurred on October 1,2002, the first day of fiscal 2003, are as follows (in thousands, except pershare data):

 
| ** **                                                                                                        | ** ** | **Fiscal 2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|
| Income (loss)  before cumulative effect of a change in accounting principle and preferred  dividends, as reported |       | $               | (5,202     | ) |
| Adjustment to  record actual slotting fees incurred                                                               |       | (216            | )          |
| Income (loss)  before cumulative effect of a change in accounting principle and preferred  dividends, pro forma   |       | $               | (5,418     | ) |
|                                                                                                              |       |            |       |
| Net loss  applicable to common shareholders, as reported                                                          |       | $               | (10,790    | ) |
| Adjustment to  record actual slotting fees incurred                                                               |       | (216            | )          |
| Net loss  applicable to common shareholders, pro forma                                                            |       | $               | (11,006    | ) |
|                                                                                                              |       |            |       |
| Basic and  diluted loss per share before cumulative effect of a change in accounting  principle, as reported      |       | $               | (1.15      | ) |
| Adjustment to  record actual slotting fees incurred                                                               |       | (0.02           | )          |
| Basic and  diluted loss per share before cumulative effect of a change in accounting  principle, pro forma(1)     |       | $               | (1.18      | ) |
|                                                                                                              |       |            |       |
| Basic and  diluted net loss per share applicable to common shareholders, as reported                              |       | $               | (1.20      | ) |
| Adjustment to  record actual slotting fees incurred                                                               |       | (0.02           | )          |
| Basic and  diluted net loss per share applicable to common shareholders, pro forma                                |       | $               | (1.22      | ) |

 

----

(1)          Per share amounts may not add due to rounding.

 

***Accounting for Goodwill***

 

InJuly 2001, the FASB issued SFAS No. 141, “Business Combinations,” andSFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141requires that the purchase method of accounting be used for all businesscombinations initiated after June 30, 2001.  SFAS No. 142 changes the accounting forgoodwill from an amortization method to an impairment-only approach. Thus,amortization of goodwill, including goodwill recorded in past businesscombinations, ceased upon adoption of this Statement in the first quarter offiscal 2003.

 

Pursuantto SFAS No. 142, “Goodwill and Other Intangible Assets,” we evaluated ourgoodwill balance for impairment upon the adoption of SFAS No. 142 in thefirst quarter of fiscal 2003 utilizing the discounted cash flows method anddetermined that the entire goodwill balance of $411,000 was permanentlyimpaired.  Accordingly, we wrote off ourentire goodwill balance of $411,000 in the first quarter of fiscal 2003.

 

**5.****                                      NEWACCOUNTING PRONOUNCEMENTS**

 

***SFAS No. 154***

 

In May 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections: areplacement of APB Opinion No. 20 and FASB Statement No. 3,” whichrequires companies to apply most voluntary accounting changes retrospectivelyto prior financial statements.  SFAS No. 154is effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. Any future voluntary accounting changes made by us will be accounted forunder SFAS No. 154.

 

***SFASNo. 151***

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs: an amendment of ARB No. 43,Chapter 4,” to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and wasted material.  SFAS No. 151 is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005.  We do not believe the provisions of SFAS No. 151,when applied, will have a material impact on our financial position or resultsof operations.

 

F-17

----

 

***SFASNo. 123R***

 

In December 2004,the FASB issued SFAS No. 123R, “Share-Based Payment: an amendment of FASBStatements No. 123 and 95,” which requires companies to recognize in theirincome statement the grant-date fair value of stock options and otherequity-based compensation issued to employees. SFAS No. 123R is effective for annual periods beginning after June 15,2005.  Accordingly, we adopted SFAS No. 123Ron October 1, 2005. Unamortized stock-based compensation expense, on a proforma basis, as of September 30, 2005 totaled $190,000, with $144,000 tobe amortized in fiscal 2006 and $46,000 to be amortized in fiscal 2007.

 

**6.             INVENTORIES**

 

Detail of inventories at September 30,2005 and 2004 was as follows (in thousands):

 
| ** **             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Raw materials          |       | $        | 521        |     | $          | 967 |   |
| Packaging and supplies |       | 294      |       | 426      |       |
| Finished goods         |       | 5,546    |       | 7,571    |       |
|                   |       | $        | 6,361      |     | $          | 8,964 |   |

 

**7.             MACHINERY, EQUIPMENT AND LEASEHOLDIMPROVEMENTS**

 

Detail of machinery andequipment and leasehold improvements at September 30, 2005 and 2004 was asfollows (in thousands):

 
| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Machinery and  equipment        |       | $        | 18,741     |     | $          | 18,415 |   |
| Office furniture  and equipment |       | 3,215    |       | 3,869    |       |
| Leasehold improvements          |       | 1,485    |       | 1,550    |       |
|                            |       | 23,441   |       | 23,834   |       |
| Construction in  progress       |       | 41       |       | 119      |       |
|                            |       | 23,482   |       | 23,953   |       |
| Less accumulated  depreciation  |       | (15,065  | )          | (13,303  | )          |
|                            |       | $        | 8,417      |     | $          | 10,650 |   |

 

**8.             OTHER ASSETS**

 

As of September 30, 2005, other assets includetrademarks.  As of September 30,2004, other assets also included deferred financing fees. See Note 2 for adiscussion of the write-off of the deferred financing fees during fiscal 2005. Thegross amount of deferred financing fees and trademarks and the related accumulatedamortization were as follows (in thousands):

 
| ** **               | ** ** | **September 30,** | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Deferred financing fees  |       | $                      | —     |   | $ | 2,006 |   |
| Accumulated amortization |       | —                 |       | (1,647 | ) |
|                     |       |                   |       | 359 |   |
|                     |       |                   |       |   |   |
| Trademarks               |       | 415                    |       | 415 |   |
| Accumulated amortization |       | (89                    | )          | (78 | ) |
|                     |       | 326                    |       | 337 |   |
|                     |       | $                      | 326        |   | $ | 696 |   |

 

Amortization expense wasas follows during fiscal 2005, 2004 and 2003 (in thousands):

 
| ** **              | ** ** | **Year Ended September 30,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| ** **              | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Deferred financing fees |       | $                                 | 385        |   | $ | 318 |   | $ | 305 |   |
| Trademarks              |       | 11                                |       | 10 |   | 10 |   |
|                         |            |                                   |            |  |  |  |  |  |  |  |

 

F-18

----

 

Amortization oftrademarks is as follows over the next five fiscal years (in thousands):

 
| 2006 |   | $  | 10     |   |
|------|--------|----|--------|--------|
| 2007 |   | 10 |   |
| 2008 |   | 10 |   |
| 2009 |   | 10 |   |
| 2010 |   | 10 |   |

 

**9.             OTHER CURRENT LIABILITIES**

 

Other current liabilitiesincluded the following (in thousands):

 
| ** **       | ** ** | **September 30,** | ** ** |
|------------------|------------|------------------------|------------|
| ** **       | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Accrued interest |       | $                      | 77         |   | $ | 3,288 |   |
|                  |            |                        |            |  |  |  |  |

 

There were no othercurrent liabilities that represented 5% or more of the total currentliabilities balance at September 30, 2005 or 2004.

 

**10.          COMMITMENTS AND CONTINGENCIES**

 

***OperatingLeases***

 

We lease our operatingfacilities and corporate offices. Additionally, we lease certain equipment.  Future minimum lease payments under operatingleases at September 30, 2005 were as follows (in thousands):    

 
| **Year Ending September 30,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
| 2006                               |       | $          | 692        |   |
| 2007                               |       | 577        |       |
| 2008                               |       | 153        |       |
| 2009                               |       | 9          |       |
| 2010                               |       | —     |       |
| Thereafter                         |       | —     |       |
| Total                              |       | $          | 1,431      |   |

 

Rental expense for theyears ended September 30, 2005, 2004 and 2003 was $641,000, $661,000 and$773,000, respectively.

 

***Contractual Obligations***

 

Contractual paymentsunder our short-term note payable, our term loan, our Convertible Note, ouroperating leases and other obligations are significant.  A schedule of contractual paymentsremaining due at September 30, 2005 in the next five fiscal years,including exit fees of approximately $4.7 million for the Convertible Note, isas follows (in thousands):

 
| ** **                 | ** ** | **Total** | ** ** | **Fiscal  2006-2007** | ** ** | **Fiscal  2008-2009** | ** ** | **Thereafter** | ** ** |
|----------------------------|------------|-----------|------------|-----------------------|------------|-----------------------|------------|----------------|------------|
| Short-Term Note Payable    |       | $         | 5,244      |                  | $          | 5,244                 |       | $              | —     |   | $ | — |   |
| Term Loan                  |       | 2,861     |       | 2,861                 |       | —                |       | —         |       |
| Convertible Note           |       | 27,988    |       | 27,988                |       | —                |       | —         |       |
| Operating Leases           |       | 1,431     |       | 1,269                 |       | 162                   |       | —         |       |
| Purchase Order Obligations |       | 1,060     |       | 1,060                 |       | —                |       | —         |       |
| License Agreement          |       | 271       |       | 150                   |       | 121                   |       | —         |       |
| Retention Agreements       |       | 899       |       | 899                   |       | —                |       | —         |       |
| Total                      |       | $         | 39,754     |                  | $          | 39,471                |       | $              | 283        |   | $ | — |   |

 

As discussed in Note 2above, our short-term note payable and our term loan were paid off on November 22,2005 in accordance with the Plan. In addition, pursuant to the Plan, theConvertible Note will be terminated in exchange for new equity interests inGardenburger.

 

F-19

----

 

In addition, we haveretention, employment, severance and change-in-control agreements with ourexecutive officers and certain other employees, which provide for benefitsupon, among other things, a sale of Gardenburger. The Bankruptcy Courtdeclaring our Plan effective would be considered a change-in-control.  See also Note 18.

 

In the normal course ofbusiness, we offer customers trade spending incentives.

 

**11.****                              ****REVOLVING CREDIT AND TERM LOAN **

 

As of September 30,2005, we had a Revolving Credit and Term Loan Agreement (as amended, the “LoanAgreement”) with CapitalSource Finance LLC (“CapitalSource”).  The Loan Agreement provided for an $8.0 millionterm loan and a $7.0 million short-term note payable (together, “the Loans”).

 

In order to addressissues relating to our ability to meet our financial obligations and to addressnon-compliance with certain of our financial covenants, we entered into amendmentsto this Loan Agreement on February 18, 2005. Pursuant to the amendment toour Loan Agreement, CapitalSource agreed to waive our non-compliance withcertain financial covenants as of September 30, 2004 and December 31,2004 and to provide additional availability of up to $500,000 under therevolving credit facility from February 18, 2005 to May 31,2005.  In addition, future financialcovenants were amended.

 

At September 30,2005, we had $2.9 million outstanding at an interest rate of 11.25% on the termloan and $5.2 million outstanding at an interest rate of 8.25% on theshort-term note payable. Pursuant to the Plan, all amounts outstanding underthe Loans were paid off and Loan Agreement terminated on November 22, 2005utilizing our DIP Financing. The $650,000 required exit fee was paid in August 2005.

 

We also paidCapitalSource an unused line of credit fee equal to 0.083% per month of unusedamounts under the short-term note payable, which totaled $24,576 in fiscal2005, $32,116 in fiscal 2004 and $42,964 in fiscal 2003.

 

**12.          CONVERTIBLE SENIOR SUBORDINATED NOTES AND WARRANTS**

 

In September 2004,Dresdner Kleinwort Benson Private Equity Partners LP (“Dresdner”), the originalholder of our Convertible Note, transferred all rights, including interestaccrued from September 30, 2001, pursuant to the Convertible Note, toAnnex. There were no changes to the terms of the Convertible Note upon thistransfer.

 

In order to addressissues relating to our ability to meet our financial obligations and to addressnon-compliance with certain of our financial covenants, we entered intoamendments to our Note Purchase Agreement with Annex on February 18, 2005.Pursuant to the amendment to our Note Purchase Agreement, Annex agreed to waiveour non-compliance with certain financial covenants, amended future financialcovenants and consented to the amendment to the Loan Agreement discussed above.

 

The interest rate on theConvertible Note was 15% per annum as of September 30, 2005.

 

At September 30,2005, the Convertible Note balance consisted of the following (in thousands):

 
| Principal         |   | $     | 17,156 |   |
|-------------------|--------|-------|--------|--------|
| Accrued interest  |   | 6,167 |   |
| Accrued exit fees |   | 4,665 |   |
|              |   | $     | 27,988 |   |

 

According to our Plan,the Convertible Note balance will be extinguished and Annex will be issued new equityinterests in Gardenburger in full satisfaction of this claim.  Accordingly, we ceased the accrual of allinterest and exit fees related to our Convertible Note effective October 14,2005.

 

F-20

----

 

In addition, under theterms of the Warrant Agreement, which was issued in January 2002 inconnection with certain term revisions to the Convertible Note, we issued animmediately exercisable warrant with a ten-year term to purchase557,981 shares of our common stock at a price of $0.28 per share, subjectto anti-dilution adjustments.  Annex hasregistration rights with respect to shares issuable upon exercise of thiswarrant.  However, pursuant to the Plan,these warrants will be canceled in connection with the exchange of all of Annex’soutstanding claims into new equity interests of Gardenburger.

 

The Convertible Note isconvertible into common stock at the election of the holder; the conversionprice at September 30, 2005 was $9.78 per share.

 

**13.          CONVERTIBLE REDEEMABLE PREFERRED STOCK**

 

At September 30,2005, we had outstanding 552,500 shares of Series C Convertible RedeemablePreferred Stock (“Series C Stock”) with a face value of $27.6 million and97,500 shares of Series D Convertible Redeemable Preferred Stock (“Series DStock”) with a face value of $4.9 million, which are convertible into 2,762,500and 1,300,000 shares (subject to antidilution adjustments) of our common stock,respectively, at any time at the discretion of the holder.

 

The terms of the Series CStock and Series D Stock provide for a 12% cumulative dividend and a 10%premium on any liquidation or redemption. The premium was being accreted overthe redemption period.  At September 30,2005, we had accrued $3.0 million in relation to the redemption premium, whichis included in the preferred stock balance in the balance sheet.  The liquidation preference of the Series Cand Series D Stock was $62.0 million at September 30, 2005.

 

As approved by ourshareholders at our 2004 Annual Shareholder Meeting in March 2004, theterms of our Series C Stock and Series D Stock were amended to deferthe earliest date on which holders may require redemption, upon satisfaction ofcertain conditions outside of the control of the holders, of their shares of Series CStock and Series D Stock to as late as June 30, 2008 instead of March 31,2006. Accordingly, the amount of the 10% redemption premium not previouslyaccreted was being accreted over a longer period of time, which reduced ourquarterly preferred dividend charge from $1.3 million to approximately $1.2million beginning in the third quarter of fiscal 2004. Detail of our preferreddividends was as follows (in thousands):

 
| ** **                           | ** ** | **Year Ended September 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| 12% cumulative dividends             |       | $                                 | 3,900      |   | $ | 3,900 |   | $ | 3,900 |   |
| Accretion of 10%  redemption premium |       | 481                               |       | 769 |   | 1,022 |   |
| Accretion of original issue discount |       | 120                               |       | 170 |   | 255 |   |
|                                 |       | $                                 | 4,501      |   | $ | 4,839 |   | $ | 5,177 |   |

 

The ConvertibleRedeemable Preferred Stock balance consisted of the following (in thousands):

 
| ** **              | ** ** | **September 30,** | ** ** |
|-------------------------|------------|------------------------|------------|
| ** **              | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Original face amount    |       | $                      | 32,500     |   | $ | 32,500 |   |
| Accrued dividends       |       | 25,188                 |       | 21,288 |   |
| 10% redemption premium  |       | 3,012                  |       | 2,531 |   |
| Original issue discount |       | (348                   | )          | (468 | ) |
|                    |       | $                      | 60,352     |   | $ | 55,851 |   |

 

Farallon Partners,L.L.C., and its affiliates, which together own approximately 30.8% of our Series Cand Series D Stock, have a substantial equity interest in CapitalSourceHoldings LLC, which controls CapitalSource.  An affiliate of RosewoodCapital III, L.P., which also owns approximately 30.8% of the Series C andSeries D Stock, has a small (less than 2%) equity interest inCapitalSource Holdings LLC.  Two of our former directors are employed byan affiliate of Rosewood Capital III, L.P.  These directors resigned fromour Board of Directors effective October 4, 2004.

 

F-21

----

 

As discussed in Note 2,pursuant to our Plan, all shares of preferred stock will be canceled with nocompensation to the holders thereof. Accordingly, we eliminated the accrual ofdividends and the accretion of the redemption premium and the original issuediscount as of October 14, 2005, the date we filed our Chapter 11 Case.

 

**14.          INCOME TAXES**

 

We account for incometaxes under SFAS No. 109, “*Accounting for Income Taxes.” *We realize tax benefits as aresult of the exercise of non-qualified stock options and the exercise andsubsequent sale of certain incentive stock options (disqualifyingdispositions).  For financial reportingpurposes, any reduction in income tax obligations as a result of these taxbenefits is credited to additional paid-in capital.  There were no tax benefits realized relatedto stock options in fiscal 2005, 2004 or 2003.

 

Total deferred incometax assets were $31.8 million and $25.3 million at September 30, 2005 and2004, respectively, and deferred income tax liabilities were $1.0 million and$1.2 million, respectively, prior to the consideration of any valuationallowance.  Individually significantdeferred tax assets and liabilities were as follows (in thousands): 

 
| ** **                                        | ** ** | **September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Net operating loss carryforwards                  |       | $                      | 27,650     |   | $ | 23,376 |   |
| Accrued interest                                  |       | 2,398                  |       | — |   |
| Accrued profit sharing and retention              |       | 322                    |       | — |   |
| Provision for  trade promotions and discounts     |       | 309                    |       | 825 |   |
| Book/tax depreciation and amortization difference |       | (1,032                 | )          | (1,187 | ) |
| Other                                             |       | 1,107                  |       | 1,101 |   |
|                                              |       | 30,754                 |       | 24,115 |   |
| Valuation allowance                               |       | (30,754                | )          | (24,115 | ) |
| Net deferred tax balance                          |       | $                      | —     |   | $ | — |   |

 

In accordance with SFAS No. 109,we have recorded a valuation allowance against the entire amount of netdeferred tax assets as of September 30, 2005 and 2004 as a result ofrecurring operating losses in recent years.

 

We have tax net operating loss carryforwards, totaling $72.0 million, which expire as follows: 2012: $1.4 million; 2018: $10.4 million; 2019: $31.6 million; 2020: $3.0 million; 2021: $4.4 million; 2022: $0.6 million; 2023: $6.8 million; 2024: $5.2 million; and 2025: $8.6 million.  However, in conjunction with the redemption of our Series A and Series B Convertible Redeemable Preferred Stock and the issuance of our Series C and Series D Convertible Redeemable Preferred Stock in January 2002, we experienced an ownership change as defined in the Internal Revenue Code and, accordingly, the use of our pre-January 2002 net operating losses are subject to an annual limitation of approximately $2.4 million. Our net operating losses may be limited further in the future due to additional changes in the ownership of Gardenburger.

 

The reconciliationbetween the effective tax rate and the statutory federal income tax rate was asfollows:

 
| ** **                                     | ** ** | **Year Ended September 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                     | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Statutory federal income tax rate              |       | (34.0                             | )%         | (34.0 | )% | (34.0 | )% |
| State taxes, net of federal income tax benefit |       | (4.4                              | )          | (4.4 | ) | (4.4 | ) |
| Preferred dividends                            |       | 12.4                              |       | 15.5 |   | 18.4 |   |
| Slotting fees                                  |       | —                            |       | 2.9 |   | — |   |
| Effect of change in valuation allowance        |       | 26.0                              |       | 19.9 |   | 20.2 |   |
| Other                                          |       | —                            |       | 0.1 |   | (0.2 | ) |
| Effective tax rate                             |       | 0.0                               | %          | 0.0 | % | 0.0 | % |

 

F-22

----

 

**15.          SHAREHOLDERS’ EQUITY**

 

***PreferredStock***

 

We have authorized5,000,000 shares of preferred stock, of which 650,000 shares have been issued(see Note 13).  Such stock may be issuedby the Board of Directors in one or more series, with the preferences, limitationsand rights of each series to be determined by the Board of Directors.

 

***PreferredShare Purchase Rights***

 

In April 1996, wedeclared a dividend distribution of one preferred share purchase right on eachoutstanding share of our common stock. Each right, when exercisable, will entitle shareholders to buy oneone-hundredth of a share of Series A Junior Participating Preferred Stockat an exercise price of $47 per share. The rights will become exercisable if aperson or group (an “Acquiring Person”) acquires 15% or more of our commonstock (with certain exceptions) or announces a tender offer for 15% or more ofthe common stock. With the exception of certain cash tender offers, if a personbecomes an Acquiring Person, or in the event of certain mergers with anAcquiring Person, the rights will become exercisable for shares of common stockwith a market value of two times the exercise price of the right. Our Board ofDirectors is entitled to redeem the rights at $.01 per right at any time beforean Acquiring Person has acquired 15% or more of the outstanding common stock.

 

***Restrictions on Dividends***

 

No cash dividends may bepaid on our common stock unless dividends have been paid on all outstandingshares of our Series C Stock and Series D Stock in an amount equal to12% cumulative dividends accrued on such preferred shares through the recorddate for the common stock dividend (or, if greater, the amount of the commonstock dividend payable on the preferred shares on an as-converted basis).  In addition, we are prohibited from payingcash dividends or redeeming any of our capital stock under the terms of theLoan Agreement and the Convertible Note.

 

***StockPlan Options***

 

In February 2001,our shareholders approved the 2001 Stock Incentive Plan (the “2001 Plan”) toreplace our 1992 First Amended and Restated Combination Stock Option Plan (the “1992Plan”), which was scheduled to expire in January 2002. Upon approval ofthe 2001 Plan, we no longer granted awards under the 1992 Plan.  The 2001 Plan provides for stock-based awardsto employees, officers, directors and consultants.  Awards that may be granted under the 2001Plan include stock options, in the form of incentive stock options (“ISOs”) andnon-statutory stock options (“NSOs”), stock appreciation rights, restrictedawards, performance awards and other stock-based awards.

 

The exercise price pershare generally must be at least 100% of the fair market value of a share ofcommon stock on the date the option is granted for ISOs, 75% for NSOs and 25%for deferred compensation options. The Executive Personnel and CompensationCommittee of our Board of Directors determines the vesting and other terms ofthe awards under the 2001 Plan. Vesting for certain options may accelerate upona change in control. Options granted under the 2001 Plan and the 1992 Plangenerally vest over a three to five year period.

 

The 2001 Plan permitsthe issuance of up to 1,400,000 shares of our common stock plus 1,951,023shares available under the 1992 Plan.  Inaddition, if awards granted under the 1992 Plan are forfeited or expire, sharesof common stock reserved for such forfeited or expired awards become availablefor issuance under the 2001 Plan. As of September 30, 2005, we had 3,351,023 shares of common stockreserved for issuance under the 2001 Plan and the 1992 Plan combined.

 

F-23

----

 

Activity under the 1992Plan and the 2001 Plan is summarized as follows (in thousands, except per shareamounts):

 
| ** **                            | ** ** | **Shares Available  for Grant** | ** ** | **Shares Subject to  Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|
| **Balances, September 30, 2002** |       | 109                             |       | 3,242                          |       | $                                    | 3.05       |   |
| Options canceled                      |       | 606                             |       | (606                           | )          | 1.87                                 |       |
| **Balances, September 30, 2003** |       | 715                             |       | 2,636                          |       | 3.32                                 |       |
| Options canceled                      |       | 902                             |       | (902                           | )          | 3.10                                 |       |
| **Balances, September 30, 2004** |       | 1,617                           |       | 1,734                          |       | 3.50                                 |       |
| Options canceled                      |       | 592                             |       | (592                           | )          | 5.76                                 |       |
| **Balances, September 30, 2005** |       | 2,209                           |       | 1,142                          |       | $                                    | 2.34       |   |

 

***Non-PlanOptions***

 

On March 10, 1992,we granted a non-statutory stock option to our then Chief Executive Officerexercisable for 1,650,000 shares of our common stock.  Such option was exercisable for a period often years from the date of grant at an exercise price of $1.00 per share, thefair market value of our common stock on the date of grant.  On May 8, 2001, we extended the exerciseperiod of the non-statutory stock option for an additional two years and on December 3,2003, for an additional three years and this option now expires January 31,2007.  We did not recognize anycompensation expense upon making any of the changes to the expiration date ofthis stock option since the individual was still an employee and director andthe exercise price of the stock option was greater than the fair market valueof our common stock on the dates that the changes were made.

 

Portions of the optionhave been exercised as follows:

 
| **Fiscal Year** | ** ** | **Shares Received  Upon Exercise** | ** ** |
|-----------------|------------|------------------------------------|------------|
| 1996            |       | 625,000                            |       |
| 2000            |       | 45,000                             |       |
| 2001            |       | 30,000                             |       |

 

At September 30,2005, an option to purchase 950,000 shares of common stock remained outstandingand exercisable in full and 950,000 shares of our common stock were reservedfor issuance under this option grant.

 

On April 14, 1996,we granted an option to our then Chief Executive Officer exercisable for300,000 shares of our common stock. Pursuant to the terms of the original grant, such option was exercisablefor a period of five years from the Chief Executive Officer’s termination dateof August 4, 2000 at an exercise price of $8.69 per share.  As of September 30, 2005, the option hadexpired unexercised.

 

During 1999, we grantedoptions to certain employees and two consultants covering a total of 80,000shares of our common stock at an average exercise price of $11.16 per share.

 

Activity related to theseoptions was as follows:

 
| **Fiscal Year** | ** ** | **Shares  Cancelled** | ** ** | **Average  Exercise  Price** | ** ** |
|-----------------|------------|-----------------------|------------|------------------------------|------------|
| 2000            |       | 15,332                |       | $                            | 11.63      |   |
| 2001            |       | 22,001                |       | 11.35                        |       |
| 2002            |       | 6,667                 |       | 11.63                        |       |
| 2003            |       | —                |       | —                       |       |
| 2004            |       | 3,000                 |       | 11.63                        |       |
| 2005            |       | —                |       | —                       |       |
|                 |            |                       |            |                              |            |  |

 

At September 30,2005, options covering 33,000 shares of common stock remained outstanding at anaverage exercise price of $10.68 and 33,000 shares of our common stock werereserved for issuance for these options. The fair value of options granted tonon-employees was not material.

 

F-24

----

 

On March 1, 2000, wegranted options to the members of our Board of Directors covering a total of14,500 shares of our common stock.  Suchoptions are exercisable for a period of ten years from the date of grant at anexercise price of $5.69 per share. During fiscal 2005, 2004 and 2001, options covering 1,500, 1,500 and7,000 shares of common stock were canceled, respectively, and at September 30,2005, options covering 4,500 shares of common stock were outstanding andreserved for issuance pursuant to these option grants.

 

The following tablesummarizes information about all stock options outstanding at September 30,2005:

 
| **Options Outstanding**       | ** ** | **Options Exercisable**             | ** ** |
|-------------------------------|------------|-------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Number  Outstanding  at 9/30/05** | ** ** | **Weighted  Average  Remaining  Contractual  Life - Years** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares  Exercisable  at 9/30/05** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.4150 - $1.3563             |       | 1,720,500                           |       | 3.2 |   | $ | 0.8104 |   | 1,591,800 |   | $ | 0.8307 |   |
| 1.3564 - 2.7125               |       | 122,500                             |       | 4.7 |   | 1.7185 |   | 122,500 |   | 1.7185 |   |
| 5.4251 - 6.7813               |       | 145,500                             |       | 2.9 |   | 6.4885 |   | 145,500 |   | 6.4885 |   |
| 6.7814 - 8.1375               |       | 24,000                              |       | 2.9 |   | 7.7825 |   | 24,000 |   | 7.7825 |   |
| 8.1376 - 9.4938               |       | 25,500                              |       | 2.4 |   | 8.9565 |   | 25,500 |   | 8.9565 |   |
| 9.4939 - 10.8500              |       | 37,420                              |       | 3.5 |   | 10.0625 |   | 37,420 |   | 10.0625 |   |
| 10.8501 - 12.2063             |       | 28,000                              |       | 3.4 |   | 11.6027 |   | 28,000 |   | 11.6027 |   |
| 12.2064 - 13.1250             |       | 26,000                              |       | 0.6 |   | 12.6923 |   | 26,000 |   | 12.6923 |   |
| $0.4150 - $13.1250            |       | 2,129,420                           |       | 3.2 |   | $ | 1.8763 |   | 2,000,720 |   | $ | 1.9611 |   |

 

At September 30,2004 and 2003, options covering 2,640,620 and 2,910,919 shares of our commonstock, respectively, were exercisable at weighted average exercise prices of$3.71 per share and $4.14 per share, respectively.

 

***Warrants***

 

In January 2002, inconjunction with amendments to our Convertible Note and Convertible RedeemablePreferred Stock, we issued warrants exercisable for a total of 1,115,962 sharesof our common stock at an exercise price of $0.28 per share.  The warrants were immediately exercisable andexpire 10 years from the date of grant. As of September 30, 2005, none of these warrants had been exercisedand we had 1,115,962 shares of our common stock reserved for future issuancerelated to these warrants. The value of the warrants, utilizing theBlack-Scholes methodology, was $95,000 and was expensed during fiscal 2002.

 

**16.          401(k) PLAN**

 

We have a 401(k) SalaryDeferral Plan, which covers all eligible employees who have reached the age of18. The covered employees may elect to have an amount deducted from their wagesfor investment in a retirement plan. We match 100% of employee contributions upto 2% of compensation.  Our contributionto this plan was approximately $64,000 in 2005, $107,000 in 2004 and $117,000in 2003.

 

F-25

----

 

**17.****                               RELATEDPARTY TRANSACTIONS**

 

Farallon Partners, L.L.C.,and its affiliates, which together own approximately 30.8% of our Series CStock and Series D Stock, have a substantial equity interest inCapitalSource Holdings LLC, which controls CapitalSource (see Note 11). An affiliate of Rosewood Capital III, L.P., which also owns approximately 30.8%of our Series C Stock and Series D Stock, has a small (less than 2%)equity interest in CapitalSource Holdings LLC.  Two of our formerdirectors are employed by an affiliate of Rosewood Capital III, L.P. These directors resigned from our Board of Directors effective October 4,2004.

 

Richard L. Mazer, aDirector, is President and Chief Executive Officer of Ventura Foods, LLC.  We purchased barbecue sauce from VenturaFoods totaling $273,000, $668,000 and $735,000 in fiscal 2005, 2004 and 2003,respectively.  At September 30, 2005and 2004, we owed Ventura Foods LLC $26,000 and $0, respectively, related topurchases of the barbecue sauce. We believe that the price paid to VenturaFoods is fair in comparison with pricesthat would be paid to an independent third party for similar barbecue sauce.

 

Mr. Coleman, aformer Director who resigned from our Board of Directors effective March 14,2005, is Managing Partner of Annex Capital Management LLC to which we areindebted in the principal amount of approximately $17.2 million plus $6.2million of accrued but unpaid interest and $4.7 million of accrued but unpaidexit fees related to this debt.  Thisdebt currently bears interest at the annual rate of 15%.

 

## **We entered into a licensingagreement with Mr. Wenner, a Director, in fiscal 2004, which expires in May 2009.  Pursuant to the agreement, Mr. Wennergrants to us an exclusive, royalty-free, worldwide license to make use of,copy, reproduce, modify, adapt, distribute, transmit, broadcast, display,exhibit, project and otherwise exploit certain of Mr. Wenner’sproperty.  In exchange, we pay Mr. Wenner$75,000 per annum.  The agreement alsoprovides that, during the term of the agreement, Mr. Wenner shall make, atdates and times reasonably agreed to by each of Mr. Wenner and us, certainpersonal appearances for which Mr. Wenner shall be compensated at the rateof $500 per day, plus all reasonable and necessary expenses (including coachair travel, hotel accommodations and meal expenses) incurred by Mr. Wennerin connection with such personal appearances. Mr. Wenner received approximately $79,000 and $29,000 pursuant tothis agreement in fiscal 2005 and fiscal 2004, respectively.**

 

F-26

----

 

**18.****                               RETENTIONAND SEPARATION AGREEMENTS**

 

We entered into Retention Agreements with each of our three executiveofficers and with two key employees (the “Executives”) on January 27, 2005. TheExecutives are Scott C. Wallace, Chief Executive Officer, President andChairman of the Board, James W. Linford, Senior Vice President and ChiefOperating Officer, Robert T. Trebing, Jr., Chief Financial Officer, RobertDixon, Vice President of Sales and Lori Luke, Vice President of Marketing. The Retention Agreements provided incentivefor each of the Executives to continue to be employed by Gardenburger, Inc.through and following a change in control or going private transaction.  The agreements provided for payment of aretention bonus on the earlier of (1) the date of a change of control, (2) thedate of a going private transaction or (3) the second anniversary of theeffective date of the agreement.  If achange in control or going private transaction occurred during the firsteighteen months following the effective date of the agreement, the Executivewas to receive a lump sum payment equal to twelve months of base salary. If achange in control or going private transaction occurred after the eighteenmonth anniversary of the agreement or if the Executive remained continuouslyemployed by Gardenburger, Inc. through the second anniversary of theeffective date of the agreement, the Executive was to receive a lump sumpayment equal to sixteen months of base salary. These retention bonuses weresubject to certain conditions set forth in the agreements.

 

On March 24, 2005,we entered into amendments to these Retention Agreements in order to, amongother things, revise the definition of “Change in Control” and delete Section 4.3“Bankruptcy Limitation” in each of the agreements. On each of May 4, 2005and July 19, 2005, we entered into, respectively, an Amended and RestatedRetention Agreement and a Second Amended and Restated Retention Agreement (the “Agreement”)with each of the Executives. The Agreement provides incentive for each of the Executivesto continue to be employed by us through and following a Change in Control (asdefined in the Agreement) or a Sale Transaction (as defined in the Agreement).The Agreement provides for payment of 100% of the retention bonus immediatelyfollowing the date of a Change in Control. The Agreement also provides for payment of 75% of a retention bonus onthe date of our execution of a Sale Transaction, with the remaining 25% of theretention bonus payable following the date of the consummation of thetransactions contemplated by the Sale Transaction.   If the signing of a Sale Transaction orChange in Control does not occur by January 27, 2007, the full 100% of theretention bonus is payable to the Executive. The Agreement also provides forpayment of a retention bonus if the Executive’s employment by us is terminatedwithout Cause (as defined in the Agreement) other than in connection with theExecutive’s death or Disability (as defined in the Agreement). These retentionbonuses are subject to certain conditions set forth in the Agreement.****Declarationby the Bankruptcy Court of the effectiveness of our Plan would be considered aChange in Control.

 

We entered into aSeparation Agreement dated August 26, 2005 and a Consulting Agreementdated August 26, 2005 with Mr. Robert T. Trebing, Jr., ourformer Senior Vice President and Chief Financial Officer.  Pursuant to his previously existingemployment agreement, Mr. Trebing received $204,000, representing hisannual base salary, upon the date of his termination and the signing of theSeparation Agreement.  Pursuant to hisConsulting Agreement, Mr. Trebing received $25,500 upon signing of theagreement and receives $8,500 for his services every two week periodthereafter.  Pursuant to the ConsultingAgreement, Mr. Trebing serves as the Chief Financial Officer of theCompany, as well as the Principal Financial Officer. The Consulting Agreementremains in effect until the earlier of (i) the date of Gardenburger’semergence from bankruptcy under the United States Bankruptcy Code or (ii) terminationof the agreement by either party by giving the other party 30 days priorwritten notice.

 

On February 18,2005, we modified our debt agreements. Refer to Notes 12 and 13 for furtherinformation.

 

F-27

----

 

SCHEDULE II

 

GARDENBURGER, INC.

VALUATION AND QUALIFYINGACCOUNTS

YEARS ENDED SEPTEMBER 30,2005, 2004 AND 2003

(In thousands)

 
| **Column A**                             | ** ** | **Column B**     | ** ** | **Column C**     | ** ** | **Column D**         | ** ** | **Column E**     | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|----------------------|------------|------------------|------------|
| ** **                               | ** ** | **Balance**      | ** ** | **Charged**      | ** ** | **Charged to**       | ** ** | ** **       | ** ** | **Balance** | ** ** |
| ** **                               | ** ** | **at Beginning** | ** ** | **to Costs and** | ** ** | **Other Accounts -** | ** ** | **Deductions -** | ** ** | **at End** | ** ** |
| **Description**                          | ** ** | **of Period**    | ** ** | **Expenses**     | ** ** | **Describe**         | ** ** | **Describe (a)** | ** ** | **of Period** | ** ** |
|                                     |       |             |       |             |       |                 |       |             |       |   |   |
| **Year  Ended September 30, 2003:** |       |             |       |             |       |                 |       |             |       |   |   |
|                                     |       |             |       |             |       |                 |       |             |       |   |   |
| Reserves  deducted from asset accounts:  |       |             |       |             |       |                 |       |             |       |   |   |
|                                     |       |             |       |             |       |                 |       |             |       |   |   |
| Allowance for  uncollectible accounts    |       | $                | 200        |             | $          | —               |       | $                | —     |   | $ | 7 |   | $ | 193 |   |
|                                     |       |             |       |             |       |                 |       |             |       |   |   |
| **Year  Ended September 30, 2004:** |       |             |       |             |       |                 |       |             |       |   |   |
|                                     |       |             |       |             |       |                 |       |             |       |   |   |
| Reserves  deducted from asset accounts:  |       |             |       |             |       |                 |       |             |       |   |   |
|                                     |       |             |       |             |       |                 |       |             |       |   |   |
| Allowance for  uncollectible accounts    |       | $                | 193        |             | $          | —               |       | $                | —     |   | $ | 89 |   | $ | 104 |   |
|                                     |       |             |       |             |       |                 |       |             |       |   |   |
| **Year  Ended September 30, 2005:** |       |             |       |             |       |                 |       |             |       |   |   |
|                                     |       |             |       |             |       |                 |       |             |       |   |   |
| Reserves  deducted from asset accounts:  |       |             |       |             |       |                 |       |             |       |   |   |
|                                     |       |             |       |             |       |                 |       |             |       |   |   |
| Allowance for  uncollectible accounts    |       | $                | 104        |             | $          | —               |       | $                | —     |   | $ | 4 |   | $ | 100 |   |

 

----

(a)  Chargesto the account included in this column are for the purposes for which thereserve was created.

 

F-28

----