UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission File No. 000-50052

Cosi, Inc.

(Exact name of registrant as specified in its charter)

1751 Lake Cook Road, Deerfield, Illinois 60015

Telephone Number (847) 597-8800

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Title of class

Common Stock

($.01 par value)

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $130,695,458 as of June 28, 2004 based upon the closing price of the registrant’s common stock on the Nasdaq National Market reported for June 28, 2004. Shares of voting stock held by each executive officer and director and by each person who, as of such date, may be deemed to have beneficially owned more than 5% of the outstanding voting stock have been excluded. This determination of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose.

      31,447,382 shares of the registrant’s common stock were outstanding on March 3, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

      Part III of this Form 10-K incorporates certain information from the Registrant’s definitive proxy statement for its Annual Meeting of Stockholders expected to be held on May 2, 2005. The definitive proxy statement will be filed by the Registrant with the Securities and Exchange Commission no later than 120 days from the end of the Registrant’s fiscal year ended January 3, 2005.

TABLE OF CONTENTS

PART I

Forward-Looking Statements

      We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained or incorporated by reference in this Form 10-K or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” and similar expressions identify forward-looking statements. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are subject to risks and uncertainties, including those described at the end of Item 7 of this Report. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially and adversely affected, and the trading price of our common stock could decline. We do not undertake to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

General

      Cosi, Inc., a Delaware corporation incorporated in October 1999, engages in the business of operating premium convenience restaurants which sell high-quality sandwiches, freshly tossed salads, Cosi bagels, pizzas, S’mores and other desserts, and a variety of coffees along with other soft drink beverages, teas and alcoholic beverages. Our restaurants are located in a wide range of markets and trade areas, including business districts and residential communities in both urban and suburban locations. We believe that we have created significant brand equity in our markets and that we have demonstrated the appeal of our concept to a wide variety of customers.

      As of January 3, 2005 we operated 92 restaurants in 16 states and the District of Columbia, including eight restaurants and a coffee kiosk operated within Federated Department Stores under our foodservice partnership. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 hereof.

      Our internet website is www.getcosi.com. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form  10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission (“SEC”). In addition, our internet website includes, among other things, our corporate governance principles, charters of various committees of the Board of Directors, and our code of business conduct and ethics applicable to all employees, officers and directors. Copies of these documents may be obtained free of charge from our internet website. Any stockholder also may obtain copies of these documents, free of charge, by sending a request in writing to: Cosi, Inc., c/o Secretary, 1751 Lake Cook Road, Suite 600; Deerfield, Illinois 60015.

Business Strategy

      Our vision is to become a premier quality convenience national restaurant company by providing customers authentic, innovative, savory food while remaining an affordable luxury. We expect to achieve this vision by developing a national network of company-owned restaurants, franchised locations and partnership restaurants. We expect that restaurants we own will always be an important part of our new restaurant growth. Additionally, we believe that incorporating a franchising and area developer model into our strategy will position us to maximize the market potential for the Cosi brand in new markets. Currently, we have secured agreements with four area developers under our franchising program. Our partnership restaurants may expand either through our existing Federated Department Stores alliance or through the introduction of new partners.

We believe these three growth avenues will enable us to make effective use of our available capital and thus maximize stockholder value.

Cosi Product Offerings

      We offer proprietary bread and coffee products for all five dayparts — breakfast, lunch, afternoon coffee, dinner and dessert. Our food menu includes Cosi bagels, sandwiches, salads, soups, and appetizers, Warm n’ Cosi Melts^tm, pizzas, S’mores and other desserts. Our beverage menu features a full line of coffee beverages, teas, Arctic smoothies, mochas and lattes, and our signature coffee cocktails.

      We periodically introduce new menu segments and products in order to keep our product offerings relevant to consumers in each daypart. New recipes are developed by our food and beverage team. These recipes are thoroughly evaluated, both internally and through consumer focus groups.

People

      On January 3, 2005, we operated 92 stores and had approximately 2,431 employees, of whom approximately 78 served in administrative or executive capacities, 220 served as restaurant management employees and 2,133 were hourly restaurant employees. None of our employees are covered by a collective bargaining agreement and we have never experienced an organized work stoppage or strike. We believe that our compensation packages are competitive and our relations with our employees are good.

Restaurant Operations

      Management Structure. The restaurant operations team is built around regional centers, led by a Regional Vice President, who reports to the Vice President of Company Operations and People, who then reports to the Chief Executive Officer. Each Regional Vice President is responsible for all operations, training, recruiting and human resources within his or her region. The Regional Vice Presidents are also responsible for the financial plan for their region and for the people development plan to support the growth in their region.

      Sales Forecasting. Each of the Regional Vice Presidents and their District Managers has real time access to sales forecast and actual sales information in their restaurants through our web based reporting system. This allows restaurant management teams to plan their staffing requirements on a weekly, daily and even hourly basis to effectively serve our customers.

      Product Quality. Our food and beverage quality is managed at three critical stages: sourcing, line readiness and product preparation. Products are delivered several times each week so that all restaurants maintain fresh, quality products. Because our restaurants serve a different variety of products during different dayparts, a specific line readiness checklist is completed to ensure that the products have been rotated, prepared and staged correctly. Finally, our partner-training program includes certification in both product knowledge and product preparation standards.

      Food and Labor Cost Controls. Our information system allows us to track actual versus theoretical cost of goods sold. Detailed reports are available at the restaurant level showing variances on an item-by-item basis. The system is fully integrated into our accounts payable and general ledger systems so that restaurant managers have control and can be held accountable for their results.

      Our labor management system helps our managers control labor and ensures that staffing levels are appropriate to meet our service standards. This labor management system provides our multi-unit managers with performance reports on a real time basis that help them make staffing adjustments during the course of the week. All labor scheduling is approved by a district manager and unit level performance is reviewed weekly.

      For manager and support controllables, we use a fixed dollar budget standard that budgets by line item, resulting in more effective expenditure planning, tracking, and accountability, and providing for weekly performance measurements by our operating team.

      We believe that the combination of these structured restaurant operating systems and technologies allow our operators to focus their time more effectively on the day-to-day drivers of our business.

Management Information Systems

      We use a select group of service providers to supplement our information technology infrastructure. This provides us access to up-to-date technology and the flexibility to adjust service levels as needed. Our strategy includes utilizing web-based technology to provide timely information to operate the business.

      The systems are structured for the integration of data from the point-of-sale and back office modules in the restaurants, to the company’s financial and inventory management systems. Key information relating to restaurant operations is uploaded onto a secure web site five times a day for review and pre-selected reports are distributed to our operations team electronically.

      We have a disaster recovery plan in place for all critical hardware, software, data and related processes. The plan encompasses scheduled back ups, off-site storage, security, data integrity and redundant facilities.

Purchasing

      We have relationships with some of the country’s leading food and paper providers to provide our restaurants with high quality proprietary food items at competitive prices. We source and negotiate prices directly with these suppliers and distribute these products to our restaurants primarily through one distributor. We do not utilize a commissary system. Our inventory control system allows each restaurant to place orders electronically with our master distributor and then transmit the invoice electronically to our accounts payable system. Our scalable system eliminates duplicate work and we believe gives our management tight control of costs while ensuring quality and consistency across all restaurants.

      We purchase coffee through a single supplier, Coffee Bean International, Inc. (“Coffee Bean International”), under an agreement that expires in June 2005. In the event of a business interruption, Coffee Bean International is required to utilize the services of a third party roaster to fulfill its obligations. If the services of a third party roaster are used, Coffee Bean International will guarantee that the pricing formula and product fulfillment standards stated in our contract will remain in effect throughout such business interruption period. Either party may terminate the agreement upon 180 days written notice.

      During fiscal 2002, we entered into a beverage marketing agreement with the Coca-Cola Company. Under this agreement, we are obligated to purchase approximately 2.0 million gallons of fountain syrups at annually published national chain account prices. In addition, we received approximately $600,000 in allowances under this agreement, which is being recognized ratably based on actual products purchased. We may receive additional amounts under the agreement if certain purchase levels are achieved. No additional amounts were received in fiscal 2004 or 2003.

      Currently, we do not have any long-term contracts with suppliers other than the beverage marketing agreement noted above. However, we do have a contract with Maines Paper and Food Service, Inc. (Maines) as the master distributor that expires in January 2006. Maines supplies us with approximately 90% of our food and paper products, primarily under pricing agreements that we negotiate directly with the suppliers.

      Our primary suppliers and master distributor, Maines Food and Paper Service, Inc., have parallel facilities and systems to minimize the risk of any disruption of our supply chain.

Competition

      The restaurant industry is intensely competitive and we compete with many well-established food service companies, including other sandwich retailers, specialty coffee retailers, bagel shops, fast food restaurants, delicatessens, cafes, bars, take-out food service companies, supermarkets and convenience stores. The principal factors on which we compete are taste, quality and price of product offered, customer service, atmosphere, location and overall guest experience. Our competitors change with each of the five dayparts, ranging from coffee bars and bakery cafes in the morning daypart, to fast food restaurants and cafes during the

lunch and afternoon dayparts, to casual dining chains during the dinner and dessert dayparts. Many of our competitors or potential competitors have substantially greater financial and other resources than we do which may allow them to react more quickly to changes in pricing, marketing and the quick service restaurant industry. We also compete with other employers in our markets for hourly workers and may be subject to higher labor costs. We believe that our concept, attractive price-value relationship and quality of products and service allow us to compete favorably with our competitors.

Intellectual Property

      We have the following U.S. Trademark registrations: “COSI,” “Totally Toasted Almond Mocha,” “Mocha Kiss,” “Squagels,” “Xando,” our sun and moon logo, “Wake Up Call to Last Call,” “Symphony Blend,” “King of Hearts Blend,” “Xandwich,” “Generation XO,” “Cosi Corners,” and “Warm ‘n Cosi Melts.” We have a U.S. Trademark application pending for “Cosi Downtown.” “Arctic” is an unregistered trademark.

      We have registered the trademark “COSI” in seven foreign jurisdictions with respect to goods and services. We also have applications pending for registration for the trademark “COSI” in four other foreign jurisdictions

Governmental Regulation

      Our restaurants are subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, building, zoning, safety, fire and other departments relating to the development and operation of restaurants. These regulations include matters relating to environmental, building, construction and zoning requirements, franchising and the preparation and sale of food and alcoholic beverages. In addition, our facilities are licensed and subject to regulation under state and local fire, health and safety codes.

      Many of our restaurants are required to obtain a license to sell alcoholic beverages on the premises from a state authority and, in certain locations, county and/or municipal authorities. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, and storage and dispensing of alcoholic beverages. We have not encountered any material problems relating to alcoholic beverage licenses to date. The failure to receive or retain a liquor license in a particular location could adversely affect that restaurant and our ability to obtain such a license elsewhere.

      We are subject to “dram shop” statutes in the states in which our restaurants are located. These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated individual. We carry liquor liability coverage as part of our existing comprehensive general liability insurance, which we believe is consistent with coverage carried by other entities in the restaurant industry. Although we are covered by insurance, a judgment against us under a dram-shop statute in excess of our liability coverage could have a material adverse effect on us.

      Our operations are also subject to federal and state laws governing such matters as wages, working conditions, citizenship requirements and overtime. Some states have set minimum wage requirements higher than the federal level. Significant numbers of hourly personnel at our restaurants are paid at rates related to the federal minimum wage and, accordingly, increases in the minimum wage will increase labor costs. We are also subject to the Americans with Disabilities Act of 1990, which, among other things, prohibits discrimination on the basis of disability in public accommodations and employment. We are required to comply with the Americans with Disabilities Act and regulations relating to accommodating the needs of the disabled in connection with the construction of new facilities and with significant renovations of existing facilities.

      Our principal executive offices are located at 1751 Lake Cook Road, Suite 600, Deerfield, Illinois 60015. The lease for our executive offices is for three years expiring in September 2007. We believe the offices are adequate to accommodate our anticipated growth.

      All of our restaurants are located on leased properties. Each lease typically has a 10-year base rent period, with various renewal options. Each lease requires a base rent, and some locations provide for contingent rental payments. At most locations, we reimburse the landlord for a proportionate share of either the landlord’s taxes or yearly increases in the landlord’s taxes.

      The nine restaurants we opened in fiscal 2004 under our foodservice partnership with Federated Department Stores, Inc. operate under restaurant license agreements. These agreements are for an initial one year term with multiple renewal options. The agreements also provide for contingent rental payments.

      The following table depicts existing restaurants, by region as of January 3, 2005:

      From time to time, we are a defendant in litigation arising in the ordinary course of our business, including claims resulting from “slip and fall” accidents, claims under federal and state laws governing access to public accommodations, employment related claims and claims from guests alleging illness, injury or other food quality, health or operational concerns. To date, none of such litigation, some of which is covered by insurance, has had a material adverse effect on our consolidated financial position, results of operations or cash flows.

      On February 5, 2003, a purported shareholder class action complaint was filed in the United States District Court for the Southern District of New York (the “Court”), alleging that Cosi and various of our officers and directors and the underwriter of our IPO violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, by misstating, and by failing to disclose, certain financial and other business information (Sheel Mohnot v. Cosi, Inc., et al., No. 03 CV 812). At least eight additional class action complaints with substantially similar allegations were later filed. These actions have been consolidated in In re Cosi, Inc. Securities Litigation (collectively, the “Securities Act Litigation”). On July 7, 2003, lead plaintiffs filed a Consolidated Amended Complaint, alleging on behalf of a purported class of purchasers of our stock allegedly traceable to our November 22, 2002 IPO, that at the time of the IPO, our offering materials failed to disclose that the funds raised through the IPO would be insufficient to implement our expansion plan; that it was improbable that we would be able to open 53 to 59 new restaurants in 2003; that at the time of the IPO, we had negative working capital and therefore did not have available working capital to repay certain debts; and that the principal purpose for going forward with the IPO was to repay certain existing shareholders and members of the Board of Directors for certain debts and to operate our existing restaurants.

      The plaintiffs in the Securities Act Litigation generally seek to recover recessionary damages, expert fees, attorneys’ fees, costs of Court and pre- and post-judgment interest. Based on the allegations set forth in the

complaint, we believe that the amount of recessionary damages that could be awarded to the plaintiffs, if a judgment is rendered against us, would not exceed $24 million. In addition, the underwriter is seeking indemnification from us for any damages assessed against it in the Securities Act Litigation. On August 22, 2003, lead plaintiffs filed a Second Consolidated Amended Complaint, which was substantially similar to the Consolidated Amended Complaint.

      On September 22, 2003, we filed motions to dismiss the Second Consolidated Amended Complaint in the Securities Act Litigation. Plaintiffs filed their opposition to our motion to dismiss on October 23, 2003. We filed reply briefs on November 12, 2003.

      On July 30, 2004, the Court granted plaintiffs permission to replead their complaint against us. On September 10, 2004, plaintiffs filed their Third Consolidated Amended Complaint. Plaintiffs abandoned their claim that we misled investors about our ability to execute our growth plans. Instead, plaintiffs claim that our offering materials failed to disclose that, at the time of the IPO, we were researching the possibility of franchising our restaurants. On October 12, 2004, we filed a motion to dismiss plaintiffs’ Third Consolidated Amended Complaint.

      On November 19, 2004, plaintiffs filed their opposition to our motion to dismiss. On January 11, 2005, we filed a reply brief in further support of our motion to dismiss plaintiffs’ Third Consolidated Complaint. We have requested that the court hear an oral argument on the matter. If our request for oral argument is granted, the judge will take the arguments under submission. We have no way of predicting when the judge will issue a ruling on the case.

      We cannot predict what the outcome of these lawsuits will be. It is possible that we may be required to pay substantial damages or settlement costs in excess of our insurance coverage, which could have a material adverse effect on our financial condition or results of operations. We could also incur substantial legal costs, and management’s attention and resources could be diverted from our business.

      No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this annual report.

PART II

      On November 22, 2002, our common stock began trading on the Nasdaq National Market System under the symbol “COSI.” The closing price of our common stock on Nasdaq was $7.19 on March 3, 2005.

Stock Price Information

      Set forth below are the high and low closing sale prices for shares of our common stock for each quarter during fiscal 2004 and 2003 as reported by the Nasdaq National Market System.

Stockholders

      The number of our common stockholders of record as of March 3, 2005 was 180. This number excludes stockholders whose stock is held in nominee or street name by brokers.

Dividend Policy

      We have never paid cash dividends on our common stock and we do not currently intend to pay any dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

      The information relating to securities authorized for issuance under our equity compensation plans is disclosed in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.

Recent Sales of Unregistered Securities

      (a) Issuances of Shares of Common Stock.

      On August 11, 2004, 1,482 shares of restricted stock were issued to Mr. Forrest pursuant to his employment agreement.

      (b) Issuances and Exercises of Warrants.

      On January 12, 2004, we sold 660 shares of our common stock to six shareholders for an aggregate consideration of $6.60 pursuant to the exercise of outstanding warrants.

      On January 28, 2004, we sold 385 shares of our common stock to a shareholder for an aggregate consideration of $3.85 pursuant to the exercise of outstanding warrants.

      On February 2, 2004, we sold 96 shares of our common stock to a shareholder for an aggregate consideration of $0.96 pursuant to the exercise of outstanding warrants.

      On February 11, 2004, we sold 38 shares of our common stock to a shareholder for an aggregate consideration of $0.38 pursuant to the exercise of outstanding warrants.

      On May 24, 2004, we sold 46 shares of our common stock to a shareholder for an aggregate consideration of $0.46 pursuant to the exercise of outstanding warrants.

      On July 23, 2004, we sold 2,200 shares of our common stock to three shareholders for an aggregate consideration of $22.00 pursuant to the exercise of outstanding warrants.

      The following table sets forth our summary of selected consolidated financial data, which should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this Report. The selected statement of operations data for fiscal 2004, 2003 and 2002 and selected balance sheet data for fiscal 2004 and 2003 are derived from our audited consolidated financial statements that are included in this Report. The following historical results of consolidated operations are not necessarily indicative of results to be expected for any subsequent period.

      The following discussion and analysis of our financial condition and results of operations for the fiscal years ended January 3, 2005, December 29, 2003 and December 30, 2002 should be read in conjunction with “Selected Consolidated Financial Data” and our audited consolidated financial statements and the notes to those statements that are included elsewhere in this Report. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements” below and elsewhere in this report.

Business Overview

      We currently own and operate 92 premium convenience restaurants in 16 states and the District of Columbia. Our restaurants are all-day cafes that feature signature bread and coffee products in an environment we adjust appropriately throughout the day. The majority of our restaurants offer breakfast, lunch, afternoon coffee, dinner and dessert menus.

      We currently operate our restaurants in two formats: Cosi and Cosi Downtown. The majority of our restaurants offer breakfast, lunch and afternoon coffee in a counter service format. Cosi Downtown restaurants, which are located in non residential central business districts, close for the day in the early evening, while Cosi restaurants offer dinner and dessert in a casual dining atmosphere. The atmosphere of Cosi is appropriately managed for each day part by changing the music and lighting throughout the day. All of our restaurants are designed to be welcoming and comfortable, featuring oversized sofas, chairs and tables, and faux painted walls. The design scheme of our counters and bars, menu boards as well as condiment counters and server stations incorporate warm colors and geometric patterns, intended to create a visual vocabulary that can be easily identified by our customers.

      Our objective is to build a nationwide system of distinctive restaurants that generate attractive unit economics by appealing to a broad range of customers. During fiscal 2003, we announced our intention to incorporate a franchising and area developer model into our business strategy and we conducted a study of our target customers and their geographic distribution to determine our market potential in different real estate sites. We determined that our target customer base skewed towards females, metro elites and upscale suburbanites of all ages. Additionally, we found the age and situation of our target demographic included adults 18-24 years of age without children. We utilized these results to determine our overall market potential. As a result, we believe we can more accurately assess the viability of different real estate sites. Our study suggested the potential for up to 1,400 units in the top 25 markets and up to 1,900 units in the top 75 markets. We also developed a store design prototype that enhances our customers’ experience. This prototype was unveiled in Avon, Connecticut in March 2004.

      During fiscal 2004, we launched our franchising program. We have completed our franchise offering circular and are currently eligible to offer franchises in 44 states. We will seek to offer franchises to area developers and individual franchise operators. The initial franchise fee, payable to us, for an area developer is $40,000 for the first restaurant and $35,000 for each additional restaurant. The initial franchise fee, payable to us, for an individual franchise operator is $40,000 for the first restaurant and $35,000 for each additional restaurant.

      We believe that offering Cosi franchised restaurants to area developers and individual franchisees offers attractive economics. By franchising, we believe we will be able to increase the presence of our restaurants in various markets throughout the country and generate additional revenue without the large upfront capital commitments and risk associated with opening company-owned restaurants. As of January 3, 2005, we have secured franchise agreements with four area developers.

      We expect that company-owned restaurants (restaurants that we own as opposed to franchised restaurants) will always be an important part of our new restaurant growth, and we believe that incorporating a franchising and area developer model into our strategy will position us to maximize the market potential for the Cosi brand and concept consistent with our available capital and thus maximize stockholder value.

      During the fourth quarter of fiscal 2004, we opened 9 new restaurants under our previously announced foodservice partnership with Federated Department Stores, Inc. These restaurants are located in some of the largest Federated Department Stores locations in Seattle, Atlanta, Miami, Memphis and California. Also, during fiscal 2004, we closed six underperforming restaurants.

Restatement of Financial Statements

      On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) issued a letter to the American Institute of Certified Public Accountants expressing its view regarding certain lease accounting issues and their application under accounting principles generally accepted in the United States of America (“GAAP”). In addition, a number of companies within the restaurant industry have announced adjustments to their financial statements related to lease accounting issues. In light of this information, we reviewed our methods of accounting for leases and determined that our practice regarding amortization of leasehold improvements is properly in accordance with GAAP. We also reviewed our methods of (1) accounting for landlord allowances to fund leasehold improvements and (2) rent expense prior to commencement of operations and determined that while consistent with common industry practices, our methods were not in accordance with GAAP. We also evaluated the materiality of the corrections to our financial statements and concluded that the incremental impact of the corrections is not material to any quarter or annual period consolidated statements of operations; however, the cumulative effect of the corrections is material to the consolidated balance sheets. As a result, we have restated our consolidated financial statements for each of the fiscal years ended December 30, 2002 and December 29, 2003, and the first three quarters of fiscal 2004 include in this report. The resulting adjustments are all non-cash and will have no material impact on our cash flows, cash position, revenues, comparable store sales, operating losses or net losses.

      Historically, our accounting practice has been to record landlord allowances as a reduction of leasehold improvements on the consolidated balance sheet and capital expenditures in investing activities on the consolidated statements of cash flows. We have determined that Financial Accounting Standards Board Technical Bulletin No. 88-1, “Issues Relating to Accounting for Leases,” requires these allowances to be recorded as deferred rent in other long-term liabilities on the consolidated balance sheets and as a component of operating activities on the consolidated statements of cash flows. In addition, this adjustment results in a reclassification of the amortization of the landlord allowance from depreciation and amortization expense to restaurant expenses on the consolidated statements of operations and is included as an additional cost component of capital expenditures in investing activities on the consolidated statements of cash flows. Since our leases generally have an initial term of ten years which is shorter than the expected lives of the leasehold improvements, the net impact of this reclassification to the consolidated statements of operations is not material.

      Finally, we have historically recognized rent expense on a straight line basis over the lease term commencing on the restaurant opening date. The restaurant opening date coincides with the commencement of business operations, which is the intended use of the property. We have determined that under Financial Accounting Standards Board Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” the lease term should commence on the date we take possession and include the pre-opening period of construction, renovation and fixturing. The correction of this error requires us to record additional deferred rent in other long-term liabilities and to adjust retained earnings on the consolidated balance sheet, as well as to restate rent expense in restaurant expenses on the consolidated statements of operations.

      The effect of these corrections is a cumulative increase in the accumulated deficit of $0.9 million as of the beginning of fiscal 2000, an increase in the net loss of $0.6 million for fiscal 2000, an increase in the net loss of $0.3 million for fiscal 2001, an increase in the net loss of $0.5 million for fiscal 2002 and decreases in the net loss of $0.2 million and $0.4 million for fiscal years 2003 and 2004, respectively.

      See Note 2 to the consolidated financial statements for a summary of the effects of this restatement on our consolidated balance sheet as of December 29, 2003 as well as our consolidated statements of operations and cash flows for fiscal 2003 and 2002, respectively.

Critical Accounting Policies

      The preparation of the consolidated financial statements in conformity with GAAP requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

      We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable and generally accepted for companies in the restaurant industry. We believe that the following addresses the more critical accounting policies used in the preparation of our consolidated financial statements and require management’s most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

      Long lived assets: Statement of Financial Accounting Standards (“SFAS”) 144, Accounting for the Impairment or Disposal of Long Lived Assets, supercedes SFAS 121, Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of, and APB Opinion No. 30, Reporting Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 144 retains the fundamental provisions of SFAS 121 for recognition and measurement of impairment, but amends the accounting and reporting standards for segments of a business to be disposed of. SFAS 144 requires management judgments regarding the future operating and disposition plans for marginally performing assets, and estimates of expected realizable values for assets to be sold. Actual results may differ from those estimates. The application of SFAS 144, and previously SFAS 121, has affected the amount and timing of charges to operating results that have been significant in recent years. We evaluate possible impairment at the individual restaurant level and record an

impairment loss whenever we determine impairment factors are present. We have developed and implemented an operational improvement plan, and we undertake impairment reviews periodically. We consider a history of restaurant operating losses to be the primary indicator of potential impairment for individual restaurant locations. A lack of improvement at the restaurants we are monitoring, or deteriorating results at other restaurants, could result in additional impairment charges. Historically, we have not recorded material additional impairment charges subsequent to the initial determination of impairment. During fiscal 2004, we identified two units that had been impaired and recorded a charge of approximately $0.5 million and also recorded a charge of $0.8 million related to the write-down on the disposal of fixed assets, primarily the closing of the New York corporate office in the latter half of fiscal 2004.

      Lease termination costs: For all exit activities prior to December 31, 2002, we estimated our likely liability under contractual leases for restaurants that have been, or will be, closed. Such estimates have affected the amount and timing of charges to operating results that have been significant in recent years and are impacted by management’s judgments about the time it may take to find a suitable subtenant or assignee, or the terms under which a termination of the lease agreement may be negotiated with the landlord.

      In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan. SFAS 146 has been applied prospectively to exit or disposal activities initiated after December 31, 2002. During fiscal 2004, we recognized $1.5 million of lease termination income related to the reversal of certain lease termination accruals deemed no longer required, which was partially offset by charges of $0.9 million resulting in a net reversal of approximately $0.6 million

      Stock options: In December 2002, the FASB issued SFAS 148, Accounting for Stock Based Compensation — Transition and Disclosure. SFAS 148 amends SFAS 123, Accounting for Stock Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The additional disclosure requirements of SFAS 148 are effective for fiscal years ending after December 15, 2002, and have been incorporated into the accompanying financial statements and footnotes. We have elected to continue to follow the intrinsic value method of accounting as prescribed by APB 25 to account for employee stock options. Pursuant to a stock option repricing approved by stockholders, on December 29, 2003, 1,246,164 options with exercise prices ranging from $2.37 to $12.25 were repriced at $2.26 per share. In accordance with APB 25, these options are subject to variable accounting, which resulted in recording a charge of approximately $2.2 million for fiscal 2004.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004). Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. We will adopt the new standard in the third quarter of fiscal 2005. We have not yet assessed the impact of adopting this new standard.

      Property and Equipment: Our property and equipment is stated at cost. We compute depreciation and amortization of property and equipment on a straight-line basis over the estimated useful lives of the related assets. We amortize leasehold improvements over the shorter of the estimated useful life or term of the lease.

      Income taxes: We have recorded a full valuation allowance to reduce our deferred tax assets related to net operating loss carry forwards. A positive adjustment to income will be recorded in future years if we determine that we could realize these deferred tax assets.

Net Sales

      Our sales are composed almost entirely of food and beverage sales.

Comparable Restaurant Sales

      In calculating comparable restaurant sales, we include a restaurant in the comparable restaurant base after it has been in operation for 15 full months. At fiscal years ended January 3, 2005, December 29, 2003 and December 30, 2002 there were 83, 70 and 57 restaurants in our comparable restaurant base, respectively.

Costs and Expenses

      Cost of goods sold. Cost of goods sold is composed of food and beverage costs. Food and beverage costs are variable and fluctuate with changes in sales volume.

      Restaurant operating expenses. Restaurant operating expenses include direct hourly and management wages, bonuses, taxes and benefits for restaurant employees, and other direct restaurant level operating expenses including the cost of supplies, restaurant repairs and maintenance, utilities, rents and related occupancy costs.

      General and administrative expenses. General and administrative expenses include all corporate and administrative functions that support our restaurants and provide an infrastructure to operate our business. Components of these expenses include executive management, supervisory and staff salaries, bonuses and related taxes and employee benefits, travel, information systems, training, support center rent and related occupancy costs and professional and consulting fees. The salaries and the related taxes and employee benefits costs included as general and administrative expenses are generally more fixed in nature and do not vary directly with the number of restaurants we operate.

      Stock compensation expense. Stock compensation expense includes the charge related to stock option repricing as well as the amortization of deferred compensation of restricted stock and compensation expense related to stock grants to certain members of the Board of Directors.

      Depreciation and amortization. Depreciation and amortization principally includes depreciation on restaurant assets.

      Restaurant pre-opening expenses. Restaurant pre-opening expenses, which are expensed as incurred, include the costs of recruiting, hiring and training the initial restaurant work force, travel, the cost of food and labor used during the period before opening, the cost of initial quantities of supplies and other direct costs related to the opening of, or remodeling of, a restaurant.

Results of Operations

      The following table sets forth our statement of operations data as a percent of net sales for the periods indicated:

Fiscal Year 2004 (53 weeks) compared to Fiscal Year 2003 (52 weeks)

Net Sales

      Net sales increased 3.1%, or $3.3 million, to $110.6 million in fiscal 2004, from $107.3 million in fiscal 2003. This increase was due primarily to an increase in comparable restaurant net sales, assuming a 52 week year, the 53rd week net sales in fiscal 2004 and net sales associated with the eight restaurants and one coffee kiosk opened under our pilot partnership with Federated Department Stores during the fourth quarter of fiscal 2004, partially offset by a decrease in net sales associated with locations closed during and subsequent to fiscal 2003. For fiscal 2004, comparable restaurant net sales increased 5.9% as compared to fiscal 2003, on a 52 week comparative basis. Our transaction count and average check in comparable restaurants was up 3.9% and 2.0%, respectively, in fiscal 2004 compared to fiscal 2003, on a 52 week comparative basis.

      During the third quarter of 2003, we identified 22 restaurants that had insufficient profit contribution from the breakfast daypart. As a result, we closed those restaurants during the breakfast daypart. While these breakfast closures had a negative impact on net sales in fiscal 2004, we believe it allowed us to optimize our labor costs and as a result contribute to the decrease, as a percentage of sales, in restaurant operating expenses during fiscal 2004.

Costs and Expenses

      Cost of goods sold. In fiscal 2004, cost of goods sold decreased by 5.7%, or $1.7 million, to $28.0 million from $29.7 million in fiscal 2003. As a percentage of net sales, cost of goods sold decreased to 25.3% of net sales in fiscal 2004, from 27.7% in fiscal 2003. The decrease in cost of goods sold as a percentage of sales was due primarily to a refinement of our food and beverage purchasing process as well as a pricing increase implemented in fiscal 2004. We reduced cost of goods sold by becoming a primary source buyer and by reducing distribution charges. Moreover, to stabilize these savings and eliminate the risk of sudden movements in commodity food prices, we have entered into several purchasing arrangements with our suppliers that include fixed pricing components based on defined quantity commitments over a period of time. We believe these purchasing arrangements adequately insulate us from increases in most commodity prices. We also anticipate that any movement in commodity food prices will have a minimal effect, in the short term, on cost of goods sold as the majority of our purchases are covered by these purchasing agreements.

      Restaurant operating expenses. Restaurant operating expenses decreased by $0.7 million, or 1.1%, to $66.6 million in fiscal 2004, compared to $67.3 million in fiscal 2003. This decrease is due primarily to a decrease in occupancy costs associated with locations closed during and subsequent to fiscal 2003 as well as cost reductions in paper and packaging as a result of an improved purchasing process and better management of supply. As a percentage of net sales, restaurant operating expenses decreased to 60.2% of net sales in fiscal 2004, from 62.8% in fiscal 2003. This decrease, as a percentage of sales, was primarily the result of improved labor scheduling and optimizing the deployment of employees during peak and non-peak hours as well as the closure of the breakfast daypart at 22 of our restaurants, as described above.

      General and administrative costs. General and administrative expenses decreased by 7.4%, or $1.6 million, to $20.7 million in fiscal 2004 as compared to $22.3 million in fiscal 2003. The decrease was due in large part to employee severance charges of $3.6 million recorded in fiscal 2003 partially offset by higher costs in fiscal 2004 for legal expenses, fees associated with our Sarbanes-Oxley 404 internal control compliance work and higher employee travel, recruiting and relocation costs. General and administrative costs, as a percentage of net sales, were 18.6% in fiscal 2004, as compared to 20.8% in fiscal 2003.

      Corporate office relocation. During fiscal 2004, we relocated our corporate office from New York, New York to Deerfield, Illinois and recorded approximately $1.1 million of expense for employee relocation, document and equipment transport costs, severance and travel associated with the move.

      Stock compensation expense. During fiscal 2004, we recorded a charge of approximately $2.2 million in accordance with APB 25 Accounting for Stock Issued to Employees, associated with 1,246,164 options repriced as of December 29, 2003. In addition, we recorded $1.0 million of expense in fiscal 2004 related to restricted stock grants to an employee and members of the Board of Directors. During fiscal 2003, we recorded $0.9 million of expense related to an employee restricted stock grant.

      Depreciation and amortization. Depreciation and amortization decreased 11.5%, or $0.9 million, to $6.9 million in fiscal 2004, from $7.8 million in fiscal 2003. The decrease was primarily due to the closure of 13 restaurants since the beginning of fiscal 2003 and impairment charges recorded in the latter half of fiscal 2003 and fiscal 2004. As a percentage of net sales, depreciation and amortization decreased to 6.3% of net sales in fiscal 2004, compared to 7.3% of net sales in fiscal 2003. This decrease, as a percentage of sales, is primarily due to the increase in comparable store net sales.

      Restaurant pre-opening expenses. Restaurant pre-opening expenses were $0.4 million in fiscal 2004, due primarily to pre-opening payroll, supplies and training costs for the nine new stores opened associated with the foodservice partnership with Federated Department Stores, Inc. Restaurant pre-opening costs were $0.4 million in fiscal 2003 related to six new restaurant openings and one remodel.

      Loss on impairment of property and equipment and restaurant disposals. During fiscal 2004, we recognized $1.4 million of asset impairment, disposals and store closure costs. This was due primarily to impairment charges of $0.5 million related to two underperforming restaurants, $0.8 million related to the disposal of fixed assets, primarily leaseholds and other equipment at the New York corporate office, and closure costs of $0.1 million related to the closing of one underperforming restaurant. During fiscal 2003, we

recognized $8.5 million of asset impairment and store disposal costs. Of this, approximately $0.6 million represents charges related to the closure of three under performing restaurants during the first quarter, approximately $1.3 million were charges taken on twenty-five locations which were in our development pipeline but have been cancelled, and approximately $6.6 million represents impairment charges taken on fourteen underperforming restaurants, three of which have been identified for closure.

      Lease termination costs. During fiscal 2004, we recognized $1.5 million of lease termination income related to the reversal of certain lease termination accruals, partially offset by $0.9 million of charges resulting in a net reversal for fiscal 2004 of $0.6 million. In fiscal 2003, we recognized $4.5 million of lease termination income related to the reversal of certain lease termination accruals where we were able to exit the lease on a more favorable basis than previously anticipated, which was partially offset by charges of $1.1 million for stores closed in 2003 resulting in a net reversal of $3.4 million.

      We announced previously that our Board of Directors had concluded that our financial performance would be strengthened by closing in an orderly fashion as many as thirteen restaurants, eight of which were closed during fiscal 2003 and five of which were closed during fiscal 2004.

      Interest income and expense. During fiscal 2004, we recognized approximately $0.2 million in interest income primarily from short term investments. Interest income was less than $0.1 million in fiscal 2003. Interest expense on notes payable was less than $0.1 million in fiscal 2004. Interest expense on notes payable was $0.2 in fiscal 2003.

      Reserve for notes receivable from stockholders. During fiscal 2004, we recorded a charge of approximately $1.3 million to establish a reserve for certain notes receivable from stockholders based on the market value of the common stock, as of January 3, 2005, that was pledged as collateral for the notes.

      Amortization of deferred financing costs. No deferred financing costs were recorded in fiscal 2004. During fiscal 2003, we recorded a charge of $0.1 million related to our equipment loan credit facility.

      Other income (expense). In fiscal 2004, we recorded a charge of $0.2 million for a fee to investors pursuant to the Securities Purchase Agreement in connection with our private equity placement because the registration statement was not declared effective by the staff of the Securities and Exchange Commission by July 29, 2004. In fiscal 2003, we recorded $0.1 million of other income primarily relating to final content loss insurance proceeds received for the World Financial Center.

Fiscal Year 2003 (52 weeks) compared to Fiscal Year 2002 (52 weeks)

Net sales

      Sales increased $22.8 million, or 27.0%, to $107.3 million in 2003, from $84.4 million in fiscal 2002. This increase was primarily due to the full period contribution of sales from the 20 restaurants opened during fiscal 2002, from sales of 6 restaurants opened during the first quarter of fiscal 2003 and from an increase in comparable restaurant sales.

      In fiscal 2003, comparable restaurant sales increased 4.7%. In our comparable restaurants, in fiscal 2003, our transaction count increased 3.5% and our average check increased 1.2% compared to last year.

      During the third quarter of 2003, we identified 22 restaurants that had insufficient profit contribution from the breakfast daypart. As a result, we closed those restaurants during the breakfast daypart.

Costs and Expenses

      Cost of goods sold. In fiscal 2003, cost of goods sold increased $7.0 million, or 30.9% to $29.7 million, from $22.7 million in 2002. As a percentage of sales, cost of goods sold increased to 27.7% of sales in fiscal 2003, from 26.9% in fiscal 2002. The increase in cost of goods sold as a percentage of sales was primarily due to a shift in our sales mix in 2003 when compared to 2002 as a percentage of sales and an increase in produce costs in the second quarter of fiscal 2003. Our food sales have a higher cost of sales when compared to our beverage sales. During fiscal 2003, food sales increased to 75.9% of total sales, from 70.7% during fiscal 2002,

with an offsetting reduction in our beverage sales, which were 24.1% of total sales during fiscal 2003, compared to 29.3% during fiscal 2002.

      Also, within the food category, the percentage of sales of salads increased during fiscal 2003. In fiscal 2003, sandwiches declined to 31.4% of total sales, from 34.8% in fiscal 2002 and salads increased to 23.0% of sales from 12.3% in fiscal 2002. Produce costs were higher in the second quarter of fiscal 2003 when compared to fiscal 2002 due to the adverse weather conditions in the spring and increased demand for produce. These higher produce costs, combined with the disproportionate increase in our salad sales also contributed to the increase in cost of goods sold. Late in the second quarter we adjusted our menu prices for salads upward in order to more appropriately price our salad products versus our competitors’ prices. In the second and third quarter of 2003, we shifted our standard in tracking actual versus theoretical cost of goods sold to a fixed dollar standard from a variable percentage of revenue. The change to a fixed dollar standard resulted in improved accountability and performance measurements by our operating team. With this new standard, our cost of goods sold as a percentage of sales decreased to 26.7% in the fourth quarter from 28.0% in the first three quarters of fiscal 2003, an improvement of 1.3% as a percentage of sales.

      Restaurant operating expenses. Restaurant operating expenses increased by $16.1 million, or 31.4%, to $67.3 million in fiscal 2003, from $51.2 million in fiscal 2002. This increase is primarily due to the increase in the number of restaurants in operation in fiscal 2003 versus fiscal 2002. As a percentage of sales, restaurant operating expenses increased to 62.8% of sales in fiscal 2003, from 60.7% in fiscal 2002. This increase, as a percentage of sales, was primarily due to increases in labor costs as a percentage of sales due to sales performance of new stores opened subsequent to the second quarter of 2002 that was less than we anticipated.

      General and administrative costs. General and administrative costs increased by $4.5 million, or 25.1%, to $22.3 million in fiscal 2003, from $17.8 million in fiscal 2002. This increase is primarily due to a $3.6 million employee severance charge recorded in fiscal 2003. As a percentage of sales, general and administrative costs increased to 20.8% of sales in fiscal 2003 from 21.1% in fiscal 2002.

      Stock compensation expense. During fiscal 2003, we recorded $0.9 million of expense related to an employee restricted stock grant. There was no stock compensation expense in fiscal 2002.

      Depreciation and amortization. In fiscal year 2003, depreciation and amortization increased $1.9 million, or 31.9%, to $7.8 million, from $5.9 million in fiscal 2002. This increase was primarily due to additional depreciation expense for restaurants opened subsequent to the third quarter of fiscal 2002. As a percentage of restaurant sales, depreciation and amortization increased to 7.3% of sales in fiscal 2003, compared to 7.0% of sales in fiscal 2002. This increase, as a percentage of sales, is primarily due to the lower per unit sales performance in restaurants opened since the second quarter of fiscal 2002.

      Restaurant pre-opening expenses. Restaurant pre-opening expenses decreased $1.4 million to $0.4 million in fiscal 2003, from $1.8 million in fiscal 2002. As a percentage of restaurant sales, restaurant pre-opening expenses decreased 1.8% to 0.4% of sales in fiscal 2003, from 2.2% of sales in fiscal 2002. This decrease is due to the decrease in the number of new restaurants opened or remodeled in fiscal 2003. Six new restaurants were opened and one remodeled in fiscal 2003 compared to 25 new restaurants and nine remodeled restaurants opened in fiscal 2002.

      Loss on impairment of property and equipment and restaurant disposals. We recognized $8.5 million of asset impairment and store disposal costs in fiscal 2003. Of this, approximately $0.6 million represents charges related to the closure of three under performing restaurants during the first quarter, approximately $1.3 million were charges taken on twenty-five locations which were in our development pipeline but have been cancelled, and approximately $6.6 million represents impairment charges taken on fourteen underperforming restaurants, three of which have been identified for closure. In 2002, we recognized $1.1 million of asset impairment costs (related to two underperforming restaurants).

      Lease termination costs. In fiscal 2003, we recognized $4.5 million of lease termination income related to the reversal of certain lease termination accruals where we were able to exit the lease on a more favorable basis than previously anticipated, which was partially offset by charges of $1.1 million for stores closed in 2003

resulting in a net reversal of $3.4 million. In 2002, we recorded a credit of $1.2 million, as we revised our estimates of the expected cost to terminate leases on locations that are closed, or are expected to close.

      We announced previously that our Board of Directors had concluded that our financial performance would be strengthened by closing in an orderly fashion as many as thirteen restaurants, three of which were closed in the first quarter of fiscal 2003, three of which were closed in the third quarter of fiscal 2003 and two of which were closed in the fourth quarter of fiscal 2003.

      Interest income and expense. During fiscal 2003 and fiscal 2002, interest income was less than $0.01 million. Fiscal 2003 interest expense has decreased $1.0 million to $0.2 million in fiscal 2003 from $1.2 million in fiscal 2002. The decrease in interest expense was primarily due to the repayment of borrowings under our 13% senior subordinated notes due 2006, which were outstanding during the first nine months of fiscal 2002. Those notes were repaid in December 2002 with proceeds from our initial public offering.

      Amortization of deferred financing costs. During fiscal 2002, we recorded $0.4 million in amortization of deferred financing costs, and accretion of debt discount on our senior secured credit facility, our senior subordinated credit facility and on our equipment loan credit facility. This compares to $0.1 million recorded fiscal 2003, primarily related to our equipment loan credit facility. The decrease is due to the repayment of our senior subordinated notes in connection with our initial public offering in November 2002.

      Other income. In fiscal 2003, we recorded $0.1 million of other income primarily relating to final content loss insurance proceeds received for the World Financial Center. In fiscal 2002, we recorded $0.4 million of other income, principally the receipt of business interruption proceeds related to our World Financial Center restaurant, which was closed from September 11, 2001 until early September 2002.

Liquidity and Capital Resources

      Cash and cash equivalents were $1.1 million on January 3, 2005, compared with $8.0 million on December 29, 2003. In addition, we had $10.0 million of short term investments as of January 3, 2005. We had working capital of $0.8 million on January 3, 2005, compared with a working capital deficit of $3.8 million as of December 29, 2003. Our principal requirements for cash are for funding working capital needs, financing construction of new restaurants and select restaurants within Federated Department Stores locations, maintaining or remodeling existing restaurants and funding the incorporation of a franchising and area developer model into our business strategy. During fiscal 2004, we financed our capital requirements with the proceeds from our rights offering, which was completed in December 2003 and our private equity placement, which was completed in April 2004.

      Cash flows from operating, investing and financing activities for fiscal 2004 are summarized below:

      Net cash used in operating activities for fiscal 2004 was $9.6 million, compared to $11.4 million for fiscal 2003. The decrease in cash used in operating activities was due primarily to a decrease in our net loss for fiscal 2004 as compared to fiscal 2003, adjusted for non cash items included in the net loss.

      Net cash used in investing activities was $17.3 million in fiscal 2004 compared to $3.8 million in fiscal 2003. The increase of $13.5 million is due primarily to the purchase of $10.0 million of certain government debt securities as investments and capital expenditures of $7.3 million in fiscal 2004 primarily related to eight restaurant locations and one coffee kiosk opened in conjunction with our foodservice partnership with Federated Department Stores, Inc.

      Net cash provided by financing activities was $20.0 million in fiscal 2004 compared to $10.1 million in fiscal 2003.

      On December 29, 2003, we consummated a rights offering. We raised an aggregate of approximately $7.5 million ($6.8 million net cash proceeds) in cash from the sale of common stock in connection with the rights offering and pursuant to an investment agreement among us and certain investors that was approved by our stockholders at our 2003 Annual Meeting. We issued approximately 3.6 million shares of common stock pursuant to the rights offering. In addition, we issued approximately 1.4 million shares of common stock pursuant to the investment agreement and approximately 3 million shares of common stock pursuant to the

conversion of $4.5 million of senior secured notes held by certain of the parties to the investment agreement in connection with the rights offering. In January 2004, pursuant to the investment agreement, a shareholder purchased an additional 693,963 shares for approximately $1.0 million.

      On April 30, 2004, we issued 3,550,000 shares of common stock to a limited number of institutional investors at a price of $5.65 per share pursuant to a private placement under Section 4(2) of the Securities Act of 1933, as amended. This issuance provided us with gross proceeds of approximately $20.0 million. Pursuant to the Securities Purchase Agreement relating to the private placement, we filed a registration statement with the SEC covering the resale of the shares purchased in the private placement. The registration statement was declared effective by the SEC on August 11, 2004.

      We plan to fund our working capital needs, the maintenance and remodel of our existing restaurants and our franchising program primarily through our investments, cash and cash equivalents on hand at the beginning of the period and our expected internally generated cash flows produced by our restaurants. We anticipate that our current investments, cash and cash equivalents and expected internally generated cash flows will be sufficient to fund these cash requirements for the next twelve months. Although we believe that we have sufficient liquidity to fund our working capital requirements for the next twelve months, if cash flows from existing restaurants or cash flow from new restaurants that we open do not meet our expectations or are otherwise insufficient to satisfy our cash needs, we may have to seek additional financing from external sources to continue funding our operations or reduce or cease our plans to franchise new restaurants.

      Our new restaurant capital requirements will depend on the number and timing of those openings within the given year. For fiscal 2005, we currently expect to open up to 11 new restaurants. The cash required for these new restaurants would be funded by internally generated cash flows produced by our existing restaurants and additional financing from external sources. If cash flows from our existing restaurants do not meet our expectations or are otherwise insufficient to satisfy our new restaurant capital requirements or we are unable to secure additional external financing under terms acceptable to us, we would have to reduce the number of new restaurants or defer the timing of new restaurant openings. We cannot predict whether additional external financing will be available on terms acceptable to us, or at all.

      We have entered into agreements that create contractual obligations. These obligations will have an impact on future liquidity and capital resources. The tables set forth below present a summary of these obligations as of January 3, 2005.

Contractual Obligations:

Off-Balance Sheet Arrangements

      We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Selected Quarterly Financial Data

      Quarterly results are determined in accordance with the accounting policies used for annual data and include certain items based upon estimates for the entire year. All quarters in fiscal 2004 and 2003 include results for 13 weeks, except for the fourth quarter of fiscal 2004 which was 14 weeks.

      In addition, as more fully described in Note 2 to the consolidated financial statements, we have changed our accounting methods for leasehold improvements funded by landlord allowances and rent expense prior to the commencement of operations. The following information reflects the effects of these changes on our quarterly consolidated statements of operations.

      The unaudited selected quarterly results for fiscal 2004 and 2003 are shown below:

New Accounting Pronouncements

      In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The additional disclosure requirements of SFAS 148 are effective for fiscal years ending after December 15, 2002 and have been incorporated into the accompanying financial statements and footnotes. We have elected to continue to follow the intrinsic value method of accounting as prescribed by APB 25 to account for employee stock options. Pursuant to a stock option repricing approved by stockholders, on December 29, 2003, 1,364,326 options with exercise prices ranging from $2.37 to $12.25 were repriced at $2.26 per share. In accordance with APB 25, these options are subject to variable accounting, which may result in material charges.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004). Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for us in the first interim or annual reporting period

beginning after June 15, 2005, which is the third quarter of fiscal 2005. We have not yet assessed the impact of adopting this new standard.

      In December 2003, FASB issued a revised interpretation of FIN 46 (FIN -R), which supercedes FIN 46 and clarifies and expands current accounting guidance for variable interest entities. FIN 46 and FIN 46-R are effective immediately for all variable interest entities created after January 31, 2003, and for variable interest entities prior to February 1, 2003, no later than the end of the first reporting period after March 15, 2004. The adoption of FIN 46 and FIN 46-R did not have a material impact on our financial position or results of operations.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs: an amendment of ARB No. 43, Chapter 4,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs 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 results of operations.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

      We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained or incorporated by reference in this Form 10-K or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Forward-looking statements are based on management’s beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to management. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to differ materially from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. Factors that could contribute to these differences include, but are not limited to:

      The words “believe,” “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive,” “project” or similar words, or the negatives of these words, identify forward-looking statements. We qualify any forward-looking statements entirely by these cautionary factors.

RISK FACTORS

      Our results from operations may be affected by the risk factors set forth below. All investors should consider the following risk factors before deciding to purchase our securities.

Risks Particular to Cosi

      Our ability to successfully execute our business strategy will depend on a number of factors, some of which are beyond our control, including:

      In addition, we contemplate entering new markets in which we have no operating experience. These new markets may have different demographic characteristics, competitive conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause our new restaurants to be less successful in these new markets than in our existing markets.

      The first Xando Coffee and Bar was opened in October 1994 and the first Cosi Sandwich Bar was opened in February 1996. As of January 3, 2005, we are operating 92 restaurants, of which nine were opened during the last quarter of fiscal 2004. Accordingly, limited information is available with which to evaluate our business and prospects. As a result, forecasts of our future revenues, expenses and operating results may not be as accurate as they would be if we had a longer history of operations and of combined operations. Since we were formed, we have incurred net losses of approximately $170 million through the end of fiscal 2004 primarily due to the costs of hiring and employing senior management, funding operating losses, new restaurant opening expenses, impairment charges, the cost of our merger in 1999, and the relocation of our corporate support center to Deerfield, Illinois. We intend to continue to expend significant financial and management resources on the development of additional restaurants, both company-owned and franchised

restaurants. We cannot predict whether we will be able to achieve or sustain revenue growth, profitability or positive cash flow in the future. See the financial statements included in this annual report on Form 10-K for information on the history of our losses.

      Our cash resources, and therefore our liquidity, are highly dependent upon the level of internally generated cash from operations and upon future financing transactions. Although we believe that we have sufficient liquidity to fund our working capital requirements for the next twelve months, if cash flows from our existing restaurants or cash flow from new restaurants that we open do not meet our expectations or are otherwise insufficient to satisfy our cash needs or expansion plans, we may have to seek additional financing from external sources to continue funding our operations or reduce or cease our plans to open or franchise new restaurants. We cannot predict whether such financing will be available on terms acceptable to us, or at all.

      Our business may require significant additional capital in the future to, among other things, fund our operations, increase the number of company-owned or franchised restaurants, expand the range of services we offer and finance future acquisitions and investments. There is no assurance that financing will be available on terms favorable to us, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financings unattractive to us. If we are unable to raise additional capital, our business, results of operations and financial condition could be materially adversely affected.

      We plan to incorporate a franchising and area developer model into our business strategy in certain selected markets. We have not used a franchising or area developer model in the past and may not be as successful as predicted in attracting franchisees and developers to the Cosi concept or identifying franchisees and developers that have the business abilities or access to financial resources necessary to open our restaurants or to successfully develop or operate our restaurants in a manner consistent with our standards. Incorporating a franchising and area developer model into our strategy will also require us to devote significant management and financial resources to support the franchise of our restaurants. If we are not successful in incorporating a franchising or area developer model into our strategy, we may experience delays in our growth, or may not be able to expand and grow our business.

      Our growth depends in part upon our ability to establish a successful and effective franchise program and to attract qualified franchisees. If our franchisees are unable to locate suitable sites for new restaurants, negotiate acceptable lease or purchase terms, obtain the necessary financial or management resources, meet construction schedules or obtain the necessary permits and government approvals, our growth plans may be negatively affected.

      Franchisees are independent contractors and are not our employees. Although we have developed criteria to evaluate and screen prospective franchisees, we are limited in the amount of control we can exercise over our licensed franchisees and the quality of franchised restaurant operations may be diminished by any number of factors beyond our control. Franchisees may not have the business acumen or financial resources necessary to successfully operate restaurants in a manner consistent with our standards and requirements and may not hire and train qualified managers and other restaurant personnel. Poor restaurant operations may affect each

restaurant’s sales. Our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could significantly decline if our franchisees do not operate successfully.

      We have entered into an agreement with Federated Department Stores to open ten restaurants within selected Federated department stores on a trial basis. This strategic alliance is complex and requires substantial personnel and resource commitments by us. As a result, such alliance may disrupt our ongoing business, including by diverting management focus on existing businesses, impairing our other relationships and creating variability in revenue and income from entering into, amending or terminating such alliance. If the trial period is not successful, either we or Federated Department Stores may decide not to continue the relationship. Such events could have a material adverse effect on our business, results of operations and financial condition.

      Some of our future franchised restaurants and company-owned restaurants, including those in certain Federated Department Stores, will be located in areas where we have little or no meaningful experience. Those markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets that may cause our new restaurants to be less successful than restaurants in our existing markets. An additional risk in expansion into new markets is the lack of market awareness of the Cosi brand. Restaurants opened in new markets may open at lower average weekly sales volumes than restaurants opened in existing markets and may have higher restaurant-level operating expense ratios than in existing markets. Sales at restaurants opened in new markets may take longer to reach average annual company-owned restaurant sales, if at all, thereby affecting the profitability of these restaurants.

      Failure to manage our growth effectively could harm our business. We have grown significantly since our inception and intend to grow substantially in the future both through a franchising strategy and opening new company-owned restaurants. We have increased the number of our restaurants from 36 restaurants as of December 31, 1999 to 92 restaurants as of January 3, 2005. Our existing restaurant management systems, financial and management controls and information systems may not be adequate to support our planned expansion. Our ability to manage our growth effectively will require us to continue to enhance these systems, procedures and controls and to locate, hire, train and retain operating personnel. We cannot assure that we will be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and on our existing infrastructure. If we are unable to manage our growth effectively, our business, results of operations and financial condition could be materially adversely impacted.

      We currently operate 59 restaurants in Northeastern and Mid-Atlantic states, of which 15 are located in the New York City area, the majority of which are located in New York Central Business Districts. As a result, we are particularly susceptible to adverse trends and economic conditions in these areas. In addition, given our geographic concentration, negative publicity regarding any of our restaurants could have a material adverse effect on our business and operations, as could other regional occurrences impacting the local economies in these markets.

      A number of factors have historically affected, and will continue to affect, our average unit sales, including, among other factors:

      It is not reasonable to expect our average unit volumes to increase at rates achieved over the past several years. Changes in our average sales results could cause the price of our common stock to fluctuate substantially.

      In accordance with our expansion strategy, we intend to open new restaurants primarily in our existing markets. Since we typically draw customers from a relatively small radius around each of our restaurants, the sales performance and customer counts for restaurants near the area in which a new restaurant opens may decline due to cannibalization, which could result in restaurant closures.

      Our business is subject to seasonal and weather influences on consumer spending and dining out patterns. Inclement weather may result in reduced frequency of dining at our restaurants. Customer counts (and consequently revenues) are generally highest in spring and summer months and lowest during the winter months because of the high proportion of our restaurants located in the Northeast where inclement weather affects customer visits.

      Our business is subject to significant seasonal fluctuations. Revenues in our restaurants have historically been higher in the summer months of each year and lower during the winter months. As a result, our quarterly and yearly results have varied in the past, and we believe that our quarterly operating results will vary in the future. Other factors such as inclement weather and unanticipated increases in labor, commodity, energy, insurance or other operating costs may cause our quarterly results to fluctuate. For this reason, you should not rely upon our quarterly operating results as indications of future performance.

      We are subject to extensive federal, state and local government regulations, including regulations relating to alcoholic beverage control, the preparation and sale of food, public health and safety, sanitation, building, zoning and fire codes. Our business depends on obtaining and maintaining required food service and/or liquor licenses for each of our restaurants. If we fail to hold all necessary licenses, we may be forced to delay or cancel new restaurant openings and close or reduce operations at existing locations. In addition, our sale of alcoholic beverages subjects us to “dram shop” statutes in some states. These statutes allow an injured person

to recover damages from an establishment that served alcoholic beverages to an intoxicated person. Although we take significant precautions to ensure that all employees are trained in the responsible service of alcohol and maintain insurance policies in accordance with all state regulations regarding the sale of alcoholic beverages, the misuse of alcoholic beverages by customers may create considerable risks for us. If we are the subject of a judgment substantially in excess of our insurance coverage, or if we fail to maintain our insurance coverage, our business, financial condition, operating results or cash flows could be materially and adversely affected. See “Business — Governmental Regulation” for a discussion of the regulations with which we must comply.

      We own certain common law trademark rights and a number of federal and international trademark and service mark registrations, and proprietary rights to certain of our core menu offerings. We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We, therefore, devote appropriate resources to the protection of our trademarks and proprietary rights. The protective actions that we take, however, may not be enough to prevent unauthorized usage or imitation by others, which might cause us to incur significant litigation costs and could harm our image or our brand or competitive position.

      We also cannot assure you that third parties will not claim that our trademarks or offerings infringe the proprietary rights of third parties. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.

      A certain portion of our assets, such as leasehold improvements and equipment, is relatively illiquid. These assets cannot be converted into cash quickly and easily. We may be compelled to dispose of these illiquid assets on unfavorable terms, which could have an adverse effect on our business.

      On February 5, 2003, a purported shareholder class action complaint was filed in the United States District Court for the Southern District of New York (the “Court”), alleging that Cosi and various of our officers and directors and the underwriter of our IPO violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, by misstating, and by failing to disclose, certain financial and other business information (Sheel Mohnot v. Cosi, Inc., et al., No. 03 CV 812). At least eight additional class action complaints with substantially similar allegations were later filed. These actions have been consolidated in In re Cosi, Inc. Securities Litigation (collectively, the “Securities Act Litigation”). On July 7, 2003, lead plaintiffs filed a Consolidated Amended Complaint, alleging on behalf of a purported class of purchasers of our stock allegedly traceable to our November 22, 2002 IPO, that at the time of the IPO, our offering materials failed to disclose that the funds raised through the IPO would be insufficient to implement our expansion plan; that it was improbable that we would be able to open 53 to 59 new restaurants in 2003; that at the time of the IPO, we had negative working capital and therefore did not have available working capital to repay certain debts; and that the principal purpose for going forward with the IPO was to repay certain existing shareholders and members of the Board of Directors for certain debts and to operate our existing restaurants.

      The plaintiffs in the Securities Act Litigation generally seek to recover recessionary damages, expert fees, attorneys’ fees, costs of Court and pre- and post-judgment interest. Based on the allegations set forth in the complaint, we believe that the amount of recessionary damages that could be awarded to the plaintiffs, if a judgment is rendered against us, would not exceed $24 million. In addition, the underwriter is seeking

indemnification from us for any damages assessed against it in the Securities Act Litigation. On August 22, 2003, lead plaintiffs filed a Second Consolidated Amended Complaint, which was substantially similar to the Consolidated Amended Complaint.

      On September 22, 2003, we filed motions to dismiss the Second Consolidated Amended Complaint in the Securities Act Litigation. Plaintiffs filed their opposition to our motion to dismiss on October 23, 2003. We filed reply briefs on November 12, 2003.

      On July 30, 2004, the Court granted plaintiffs permission to replead their complaint against us. On September 10, 2004, plaintiffs filed their Third Consolidated Amended Complaint. Plaintiffs abandoned their claim that we misled investors about our ability to execute our growth plans. Instead, plaintiffs claim that our offering materials failed to disclose that, at the time of the IPO, we were researching the possibility of franchising our restaurants. On October 12, 2004, we filed a motion to dismiss plaintiffs’ Third Consolidated Amended Complaint.

      On November 19, 2004, plaintiffs filed their opposition to our motion to dismiss. On January 11, 2005, we filed a reply brief in further support of our motion to dismiss plaintiffs’ Third Consolidated Complaint. We have requested that the court hear an oral argument on the matter. If our request for oral argument is granted, the judge will take the arguments under submission. We have no way of predicting when the judge will issue a ruling on the case.

      We cannot predict what the outcome of these lawsuits will be. It is possible that we may be required to pay substantial damages or settlement costs in excess of our insurance coverage, which could have a material adverse effect on our financial condition or results of operations. We could also incur substantial legal costs, and management’s attention and resources could be diverted from our business.

      A significant portion of our management team, including our Chief Financial Officer, has been in place for only a relatively short period of time. The new executives do not have previous experience with us and we cannot assure you that they will fully integrate themselves into our business or that they will effectively manage our business affairs. Our failure to assimilate the new executives, or the failure of the new executives to perform effectively, or the loss of any of the new executives, could have a material adverse effect on our business, financial condition and results of operations.

      The market price of our common stock has fluctuated significantly in the past, and is likely to continue to be highly volatile. In addition, the trading volume in our common stock has fluctuated, and significant price variations can occur as a result. More generally, the U.S. equity markets have from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the stocks of emerging-growth companies such as ours. These broad market fluctuations may be the result of changes in the trading characteristics that prevail in the market for our common stock, including low trading volumes, trading volume fluctuations and other similar factors that are particularly common among highly volatile securities of emerging-growth companies. Variations also may be the result of changes in our business, operations or prospects, announcements or activities by our competitors, new contractual relationships with key suppliers or manufacturers by us or our competitors, proposed acquisitions by us or our competitors, financial results that fail to meet public market analysts’ expectations, changes in stock market analysts’ recommendations regarding us, other retail companies or the retail industry in general, and domestic and international market and economic conditions.

Risks Relating to the Food Service Industry

      Our success depends, in part, upon the popularity of our food products and our ability to develop new menu items that appeal to consumers. Shifts in consumer preferences away from our restaurants or cuisine,

our inability to develop new menu items that appeal to consumers or changes in our menu that eliminate items popular with some consumers could harm our business.

      Our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience declines in sales during economic downturns or during periods of uncertainty like that which followed the September 11, 2001 terrorist attacks on the United States. In addition, economic uncertainty due to military action overseas, such as the war in Iraq and post-war military, diplomatic or financial responses, may lead to further declines in sales. Any material decline in the amount of discretionary spending could have a material adverse effect on our sales, results of operations, business and financial condition.

      The restaurant industry is intensely competitive and we compete with many well-established food service companies on the basis of taste, quality and price of product offered, customer service, atmosphere, location and overall guest experience. We compete with other sandwich retailers, specialty coffee retailers, bagel shops, fast-food restaurants, delicatessens, cafes, bars, take-out food service companies, supermarkets and convenience stores. Our competitors change with each of the five dayparts (breakfast, lunch, afternoon coffee, dinner and dessert), ranging from coffee bars and bakery cafes to casual dining chains. Aggressive pricing by our competitors or the entrance of new competitors into our markets could reduce our sales and profit margins.

      Many of our competitors or potential competitors have substantially greater financial and other resources than we do, which may allow them to react to changes in pricing, marketing and the quick service restaurant industry better than we can. As competitors expand their operations, we expect competition to intensify. We also compete with other employers in our markets for hourly workers and may be subject to higher labor costs.

      The price of coffee, one of our main products, can be highly volatile. Although most coffee trades on the commodity markets, coffee of the quality we seek tends to trade on a negotiated basis at a substantial premium above commodity coffee pricing, depending on supply and demand at the time of the purchase. Supplies and prices of green coffee can be affected by a variety of factors, such as weather, politics and economics in the producing countries. An increase in pricing of specialty coffees could have a significant adverse effect on our profitability. To mitigate the risks of increasing coffee prices and to allow greater predictability in coffee pricing, we typically enter into fixed price purchase commitments for a portion of our green coffee requirements. We cannot assure you that these activities will be successful or that they will not result in our paying substantially more for our coffee supply than we would have been required to pay absent such activities.

      Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs. We rely on a single primary distributor of our food and paper goods. Although we believe that alternative distribution sources are available, any increase in distribution prices or failure by our distributor to perform could adversely affect our operating results. In addition, we are susceptible to increases in food costs as a result of factors beyond our control, such as weather conditions and government regulations. Failure to anticipate and adjust our purchasing practices to these changes could negatively impact our business.

      Food service businesses can be adversely affected by litigation and complaints from customers or government authorities resulting from food quality, illness, injury or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants. Adverse publicity about these allegations

may negatively affect us, regardless of whether the allegations are true, by discouraging customers from buying our products. We could also incur significant liabilities if a lawsuit or claim results in a decision against us or litigation costs, regardless of the result.

      Labor is a primary component in the cost of operating our business. We devote significant resources to recruiting and training our managers and employees. Increased labor costs, due to competition, increased minimum wage or employee benefits costs or otherwise, would adversely impact our operating expenses. In addition, our success depends on our ability to attract, motivate and retain qualified employees, including restaurant managers and staff, to keep pace with our needs. If we are unable to do so, our results of operations may be adversely affected.

Interest Rate Risk

      Our market risk exposures are related to our cash, cash equivalents, investments and interest that we pay on our debt. We have no derivative financial instruments or derivative commodity instruments in our cash, cash equivalents and investments. We invest our excess cash in investment grade, highly liquid, short-term investments. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations. In fiscal 2004 and 2003, interest income was less than $0.2 million.

Foreign Currency Risk

      All of our transactions are conducted, and our accounts are denominated, in U.S. dollars. Accordingly, we are not exposed to foreign currency risk.

Inflation

      The primary inflationary factors affecting our business are food and labor costs. A large number of our restaurant personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage will directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. We believe that inflation has not had a material impact on our results of operations.

      The consolidated financial statements required to be filed hereunder are set forth on pages 39 through 67 of this Report.

      None.

Disclosure Controls and Procedures

      Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the fiscal year covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective for the purpose of ensuring that the information required to

be disclosed in the reports that we file or submit under the Exchange Act with the Securities and Exchange Commission (1) is recorded, processed, summarized and reported on a timely basis, and (2) is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

      We are responsible for the preparation and integrity of the consolidated financial statements appearing in this our Annual Report on Form 10-K. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include amounts based on management’s estimates and judgments. All other financial information in this report has been presented on a basis consistent with the information included in the financial statements.

      We are also responsible for establishing and maintaining adequate internal controls over financial reporting. We maintain a system of internal controls that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements, as well as to safeguard assets from unauthorized use or disposition.

      Our control environment is the foundation for our system of internal controls over financial reporting and is embodied in our Corporate Governance Policy. It sets the tone of our organization and includes factors such as integrity and ethical values. Our internal controls over financial reporting are supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations.

      The Audit Committee of the Board of Directors, on behalf of the shareholders, oversees management’s financial reporting responsibilities. The Audit Committee, which is composed solely of outside directors, meets periodically with the independent auditors, management and our internal auditor to review matters relating to financial reporting, internal accounting controls and auditing. The independent registered public accountants, the Internal Auditor and our Chief Compliance Officer advise the committee of any significant matters resulting from their audits or reviews and have free access to the committee without management being present. The Chief Compliance Officer, the independent registered public accountants and the Internal Auditor have free and full access to senior management and the Audit Committee at any time.

      We assessed the effectiveness of our internal control over financial reporting as of January 3, 2005 and this assessment identified a material weakness in our internal controls. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The material weakness related to the accounting for leases, specifically, recording expense in the period in which we had access to the property but rent payment and business operations had not commenced. Although our prior accounting method was common industry practice, it was determined not to be in accordance with accounting principles generally accepted in the United States of America. Accordingly, we have restated the previously issued consolidated financial statements. See Note 2 to the consolidated financial statements for a full discussion of the effects of these changes on the consolidated balance sheet as of December 29, 2003, as well as on the consolidated statements of operations and cash flows for fiscal years 2003 and 2002. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, we concluded that, as of January 3, 2005, due solely to the material weakness related to the accounting for leases, our internal control over financial reporting was not effective based on those criteria.

      Our assessment of the effectiveness of internal control over financial reporting as of January 3, 2005 has been audited by BDO Seidman LLP, the independent registered public accounting firm who also audited our consolidated financial statements. BDO Seidman’s attestation report on management’s assessment of internal control over financial reporting is included herein.

Changes in Internal Control Over Financial Reporting

      There were not any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended January 3, 2005 to which this report relates that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

Report of Independent Registered Public Accounting Firm on

Internal Control over Financial Reporting

The Board of Directors and Stockholders

Cosi, Inc.

      We have audited management’s assessment, on Internal Controls Over Financial Reporting, that Cosi, Inc. did not maintain effective internal control over financial reporting as of January 3, 2005, because of the effect of a control weakness over accounting for leases, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cosi, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

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

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

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

      A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment. Subsequent to January 3, 2005, Company management determined that historic methods of accounting for leases were not in accordance with U.S. generally accepted accounting principles. Assessment of these issues has resulted in restatement of previously issued financial statements. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the fiscal 2004 consolidated financial statements, and this report does not affect our report dated March 11, 2005 on those consolidated financial statements.

      In our opinion, management’s assessment that Cosi, Inc. did not maintain effective internal control over financial reporting as of January 3, 2005, is fairly stated, in all material respects, based on the COSO control criteria. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Cosi, Inc. has not maintained effective internal control over financial reporting as of January 3, 2005, based on the COSO control criteria.

Chicago, Illinois

March 11, 2005

      None.

PART III

      The information required by this Item will be set forth in our definitive proxy statement for our Annual Meeting of Stockholders expected to be held on May 2, 2005 (the “Proxy Statement”), and is incorporated herein by reference.

      The information required by this Item will be set forth in the Proxy Statement, and is incorporated herein by reference.

      The information required by this Item will be set forth in the Proxy Statement, and is incorporated herein by reference.

      The information required by this Item will be set forth in the Proxy Statement, and is incorporated herein by reference.

      The information required by this Item will be set forth in the Proxy Statement, and is incorporated herein by reference.

PART IV

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

      (b). Exhibits

      (c). Consolidated financial statement schedule included herein at page 67.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Cosi, Inc.

Deerfield, Illinois

      We have audited the accompanying consolidated balance sheet of Cosi, Inc. as of January 3, 2005 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the year then ended. We have also audited the schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

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

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cosi, Inc. at January 3, 2005, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

      Also, in our opinion, the 2004 schedule presents fairly, in all material respects, the information set forth therein.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Cosi, Inc’s. internal control over financial reporting as of January 3, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 11, 2005 expressed an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of internal control over financial reporting.

Chicago, Illinois

March 11, 2005

Report of Independent Registered Public Accounting Firm

To the Board of Directors

Cosí, Inc.

      We have audited the accompanying consolidated balance sheet of Cosí, Inc. as of December 29, 2003 and the related consolidated statements of operations, redeemable securities and stockholders’ equity and cash flows for each of the two years in the period ended December 29, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cosí, Inc. at December 29, 2003, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 29, 2003 in conformity with US generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole presents fairly in all material respects the information set forth therein.

      As discussed in Note 6, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002.

      As described in Note 2, the Company has restated its financial statements to correct its accounting for leases.

New York, New York

March 18, 2004 except for Note 2,

     as to which the date is March 14, 2005

Cosi, Inc.

Consolidated Balance Sheets

As of January 3, 2005 and December 29, 2003

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

Cosi, Inc.

Consolidated Statements of Operations

For the Fiscal Years Ended January 3, 2005, December 29, 2003 and December 30, 2002

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

Cosi, Inc.

Consolidated Statement of Redeemable Securities and Stockholders’ Equity

For the Fiscal Years Ended January 3, 2005, December 29, 2003 and December 30, 2002

The accompanying notes are an integral part of the consolidated financial statements

Cosi, Inc.

Common Stock and Treasury Stock