Cosi 10Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2008


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

For the transition period from to

Commission File No. 000-50052

COSÌ, INC.

(Exact name of registrant as specified in its charter)


Delaware		06-1393745

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1751 Lake Cook Road
Deerfield, Illinois 60015
(Address of principal executive offices) (Zip Code)

(847) 597-8800
(Registrant’s telephone number, including area code)

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. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filerþ	Non-accelerated filero (Do not check if a smaller reporting company)			Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Number of shares of Common Stock, $.01 par value, outstanding at November 1, 2008: 41,016,755.

COSI, INC.

Index to Form 10-Q
For the nine month period ended September 29, 2008


	Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets – as of September 29, 2008 and December 31, 2007		3

Consolidated Statements of Operations – Three and nine month periods ended September 29, 2008 and October 1, 2007		4

Consolidated Statement of Stockholders’ Equity – Nine month period ended September 29, 2008		5

Consolidated Statements of Cash Flows – Nine month periods ended September 29, 2008 and October 1, 2007		6

Notes to Condensed Consolidated Financial Statements		7-13

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-28

Item 3. Quantitative and Qualitative Disclosures about Market Risk		28

Item 4. Controls and Procedures		29

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		29

Item 1A. Risk Factors		29

Item 5. Other Information		30

Item 6. Exhibits		30

SIGNATURES		31

EXHIBIT INDEX		32

CERTIFICATIONS		46-48
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Cosi, Inc.

Consolidated Balance Sheets
As of September 29, 2008 and December 31, 2007
(dollars in thousands, except share and per share data)


	September 29, 2008			December 31, 2007
	(Unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	6,179		$	6,309
Accounts receivable, net		862			658
Inventories		1,008			1,045
Prepaid expenses and other current assets		2,570			3,796
Assets held for sale		—			122
Assets of discontinued operations		—			35

Total current assets		10,619			11,965

Furniture and fixtures, equipment and leasehold improvements, net		37,408			42,477
Intangibles, security deposits and other assets, net		1,904			1,970

Total assets	$	49,931		$	56,412


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,914		$	2,106
Accrued expenses		10,540			9,014
Deferred franchise revenue		509			783
Current liabilities of discontinued operations		12			285
Current portion of other long-term liabilities		428			465

Total current liabilities		13,403			12,653

Deferred franchise revenue		2,391			2,730
Other long-term liabilities, net of current portion		6,796			7,183

Total liabilities		22,590			22,566


Commitments and contingencies

Stockholders’ equity:
Common stock — $.01 par value; 100,000,000 shares authorized, 41,016,755 and 41,047,985 shares issued, respectively		410			411
Additional paid-in capital		276,535			275,187
Treasury stock, 239,543 shares at cost		(1,198	)		(1,198	)
Accumulated deficit		(248,406	)		(240,554	)

Total stockholders’ equity		27,341			33,846

Total liabilities and stockholders’ equity	$	49,931		$	56,412

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

Cosi, Inc.

Consolidated Statements of Operations
For the Three and Nine Month Periods Ended September 29, 2008 and October 1, 2007
(dollars in thousands, except share and per share data)


	Three Months Ended						Nine Months Ended
	September 29,			October 1,			September 29,			October 1,
	2008			2007			2008			2007
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues:
Restaurant net sales	$	33,975		$	34,226		$	102,641		$	99,959
Franchise fees and royalties		955			611			2,203			1,448

Total revenues		34,930			34,837			104,844			101,407


Costs and expenses:
Cost of food and beverage		7,611			8,099			23,408			23,161
Restaurant labor and related benefits		11,540			11,913			34,557			34,638
Occupancy and other restaurant operating expenses		10,485			9,924			30,169			28,588

		29,636			29,936			88,134			86,387
General and administrative expenses		5,429			5,849			16,537			17,971
Depreciation and amortization		2,152			2,283			6,319			6,550
Restaurant pre-opening expenses		—			56			100			637
Provision for losses on asset impairments and disposals		800			365			1,067			1,310
Closed store costs (benefit)		6			(62	)		53			200
Lease termination expense		55			84			298			277

Total costs and expenses		38,078			38,511			112,508			113,332


Operating loss		(3,148	)		(3,674	)		(7,664	)		(11,925	)

Interest income		18			105			90			449
Interest expense		(2	)		(2	)		(5	)		(6	)
Other Income		37			716			39			716

Loss from continuing operations		(3,095	)		(2,855	)		(7,540	)		(10,766	)
Discontinued operations:
Loss from discontinued operations		—			(147	)		(312	)		(3,842	)


Net loss	$	(3,095	)	$	(3,002	)	$	(7,852	)	$	(14,608	)


Per Share Data:
Loss per share, basic and diluted
Continuing operations	$	(0.08	)	$	(0.07	)	$	(0.19	)	$	(0.27	)
Discontinued operations	$	—		$	(0.01	)	$	(0.01	)	$	(0.10	)

Net loss	$	(0.08	)	$	(0.08	)	$	(0.20	)	$	(0.37	)


Weighted average shares outstanding:		40,103,956			39,613,931			40,021,556			39,179,557

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

Cosi, Inc.

Consolidated Statement of Stockholders’ Equity
For the Nine Months Ended September 29, 2008
(unaudited)
(dollars in thousands, except share data)


	Common Stock							Treasury Stock
						Additional
	Number of					Paid In		Number of					Accumulated
	Shares			Amount		Capital		Shares		Amount			Deficit			Total
Balance, December 31, 2007		41,047,985		$	410	$	275,187		239,543	$	(1,198	)	$	(240,554	)	$	33,846

Exercise of options		23,971			—		54		—		—			—			54
Net forfeitures of restricted stock		(55,330	)		—		—		—		—			—			—
Stock-based compensation		—			—		1,294		—		—			—			1,294
Exercise of warrants		129			—		—		—		—			—			—
Net loss		—			—		—		—		—			(7,852	)		(7,852	)


Balance, September 29, 2008		41,016,755		$	410	$	276,535		239,543	$	(1,198	)	$	(248,406	)	$	27,342

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

Cosi, Inc.

Consolidated Statements of Cash Flows
For the Nine Month Periods Ended September 29, 2008 and October 1, 2007
(dollars in thousands)


	September 29,			October 1,
	2008			2007
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net loss	$	(7,852	)	$	(14,608	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization		6,324			6,944
Non-cash portion of asset impairments and disposals		1,155			3,215
Non-cash portion of store closing costs		24			1,393
Provision for bad debts		2			1
Stock-based compensation expense		1,294			1,095
Changes in operating assets and liabilities:
Accounts receivable		(206	)		1,186
Inventories		65			(32	)
Prepaid expenses and other current assets		1,227			1,359
Other assets		64			91
Accounts payable and accrued expenses		1,227			(542	)
Deferred franchise revenue		(613	)		160
Other long-term liabilities		(545	)		(620	)

Net cash provided by (used in) operating activities		2,166			(358	)


Cash flows from investing activities:
Capital expenditures		(2,389	)		(12,104	)
Proceeds from sale of assets		30			—
Purchases of investments		—			(20,777	)
Redemptions of investments		—			39,738
Net refunds of security deposits		10			411

Net cash (used in) provided by investing activities		(2,349	)		7,268


Cash flows from financing activities:
Net proceeds from exercise of stock options		53			1,856

Net cash provided by financing activities		53			1,856


Net (decrease) increase in cash and cash equivalents		(130	)		8,766
Cash and cash equivalents, beginning of period		6,309			938

Cash and cash equivalents, end of period	$	6,179		$	9,704


Supplemental disclosure of cash flow information:
Cash paid for:
Corporate franchise and income taxes	$	90		$	58

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

COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Basis of Presentation

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the requirements of Form 10-Q and, therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements reflect all adjustments that are necessary for a fair presentation of the results of operations for the periods shown. All such adjustments are of a normal recurring nature. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.

As used in this quarterly report on Form 10-Q, unless the context requires otherwise, the terms “we,” “our,” “Company” or “Cosi” refer to Cosi, Inc. and its consolidated subsidiaries.

The balance sheet at December 31, 2007 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The results for the three and nine month periods ended September 29, 2008 and October 1, 2007 are not indicative of the results for the full fiscal year.

Certain amounts in the October 1, 2007 consolidated statement of operations have been reclassified to conform to the September 29, 2008 presentation.

This Report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission (“SEC”).

Note 2 – Stock-Based Compensation Expense

A summary of non-cash, stock-based compensation expense is as follows:


	For the Three Months Ended				For the Nine Months Ended
	(in thousands)				(in thousands)
	September 29,		October 1,		September 29,		October 1,
	2008		2007		2008		2007
Stock option compensation expense	$	33	$	88	$	135	$	314
Restricted stock compensation expense, net of forfeitures		267		409		1,159		781

Total non-cash, stock-based compensation expense, net of forfeitures	$	300	$	497	$	1,294	$	1,095

As of September 29, 2008, there was approximately $0.2 million of total unrecognized compensation expense related to stock options granted under the Company’s various incentive plans which will be recognized over the remaining vesting period of the options through fiscal 2010. In addition, as of September 29, 2008, there was approximately $2.1 million of total unrecognized compensation expense related to restricted stock granted under the Cosi, Inc. 2005 Omnibus Long-Term Incentive Plan (the “2005 Plan”). The expense related to restricted stock grants will be recognized on a straight-line basis from the date of each grant through fiscal 2012.

There were no issuances of restricted stock grants during the third quarter of fiscal 2008. During the third quarter of

COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

fiscal 2007, pursuant to the 2005 Plan and in accordance with the terms and conditions prescribed by the Compensation Committee of our Board of Directors, we granted and issued 515,000 shares of our authorized but unissued common stock to a key employee and a non-employee consultant.

Pursuant to the terms of his employment agreement, dated September 15, 2007 and in accordance with the 2005 Plan, we granted to James Hyatt, President and Chief Executive Officer, on September 15, 2007 a sign-on restricted stock grant of 200,000 shares (the “Sign-on Grant”) and an initial restricted stock grant of 275,000 shares (the “Initial Grant”) of our authorized but unissued common stock on September 15, 2007. Mr. Hyatt’s rights in the shares granted pursuant to the Sign-on Grant vested 50% at September 15, 2008 and the remaining 50% will vest at September 15, 2009 provided that at such date, Mr. Hyatt is in the employ of Cosi. Mr. Hyatt’s rights in the shares granted in the Initial Grant vested 20% on the grant date and an additional 20% will vest on each anniversary of the grant date provided that at each such date, Mr. Hyatt remains in the continuous employ of Cosi from and after the grant date and through each such anniversary date. The value of Mr. Hyatt’s shares, based on the closing price of our common stock on the date of the grants, was approximately $0.6 million and $0.9 million for the Sign-On Grant and Initial Grant, respectively.

In addition, during the third quarter of fiscal 2007, pursuant to the 2005 Plan and in accordance with the terms and conditions prescribed by the Compensation Committee of our Board of Directors, we granted and issued 40,000 shares of our authorized but unissued common stock to a non-employee consultant. The value of the shares, based on the closing price of our common stock on the date of the grant, was approximately $0.1 million. These shares vested 20% on the grant date and would have vested an additional 20% on each anniversary of the grant date provided that at each such date the non-employee consultant continued to be engaged to provide services to the Company. The non-employee consultant’s services were terminated during the third quarter of fiscal 2008 and all the unvested shares were forfeited at that time.

During the nine month periods ended September 29, 2008 and October 1, 2007, pursuant to the 2005 Plan and in accordance with the terms and conditions prescribed by the Compensation Committee of our Board of Directors, we granted and issued 50,000 and 698,250 shares, respectively, of our authorized but unissued common stock. The value of the shares for the grants made during the first nine months of fiscal 2008 and 2007, based on the closing price of our common stock on the date of the grants, was approximately $0.1 million and $2.6 million, respectively.

Stock-based compensation expense relating to restricted stock grants of approximately $0.4 million and $0.6 million is included in the accompanying consolidated statement of operations for the quarters ended September 29, 2008 and October 1, 2007, respectively. Stock-based compensation expense relating to restricted stock grants of approximately $1.3 million and $1.7 million, respectively, is included in the accompanying consolidated statement of operations for the nine month periods ended September 29, 2008 and October 1, 2007.

During the third quarter of fiscal 2008 and fiscal 2007, 139,500 and 163,050 shares, respectively, of previously issued restricted common stock were forfeited. The value of the forfeited shares, based on the closing price of our common stock on the date of the grants, was approximately $0.8 million and $1.0 million, respectively. The accompanying consolidated statement of operations for the three month periods ended September 29, 2008 and October 1, 2007 reflects the reversal of approximately $0.1 million and $0.2 million of previously amortized costs related to these forfeited shares in fiscal 2008 and fiscal 2007, respectively.

During the nine month periods ended September 29, 2008 and October 1, 2007, 152,150 and 566,850 shares, respectively, of previously issued restricted common stock were forfeited. The value of the forfeited shares, based on the closing price of our common stock on the date of the grants, was approximately $0.9 million and $4.0 million, respectively. The accompanying consolidated statement of operations for the nine month periods ended September 29,

COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

2008 and October 1, 2007 reflects the reversal of approximately $0.2 million and $0.9 million of previously amortized costs related to these forfeited shares in fiscal 2008 and fiscal 2007, respectively.

NOTE 3 – Warrants

During the three-month period ended September 29, 2008, we sold 129 shares of our common stock for nominal consideration pursuant to the exercise of warrants, all of which were settled under the net exercise method. There were no exercises of warrants during the three-month period ended October 1, 2007. During the nine month period ended September 29, 2008, we sold 129 shares of our common stock for nominal consideration pursuant to the exercise of warrants, all of which were settled under the net exercise method. During the nine month period ended October 1, 2007, we sold 47,384 shares of our common stock for an aggregate consideration of $0.3 million pursuant to the exercise of warrants, all of which were settled under the net exercise method.

The exercise prices of the warrants are fixed as of the date of issuance, and the warrants are exercisable for a period of 10 years after the date of issuance. The aggregate exercise price may be payable by check or by surrender of shares based on market price equal in value to the aggregate exercise price. All of the warrants provide for adjustment of the number of warrant shares and the exercise price in the event we subdivide the outstanding common stock into a greater number of shares or combine the outstanding shares of common stock into a smaller number of shares. All of the warrants provide for anti-dilution adjustments in the event of stock splits, stock dividends, or recapitalization, reorganization, reclassification, consolidation, merger, stock exchange, sale of all or substantially all of the Company’s assets or other similar transactions. Some of these warrants also provide for anti-dilution adjustments in the event we sell our stock at, or issue options, warrants, rights or other convertible securities having an exercise price of less than the exercise price of such warrants or less than the market price as of the date of such issue or sale. All holders of these warrants are entitled to participate in any dividends declared upon shares of our common stock (other than dividends payable solely in shares of common stock) as if these holders had fully exercised such warrants.

As of September 29, 2008 there were 29,126 warrants outstanding, all of which had expiration dates in April 2008. The terms of these warrants required the Company to provide the holder with notice of the applicable expiration date and the Company provided such notice in August 2008. Subsequent to the end of the third quarter of fiscal 2008, 4,925 warrants were exercised and 24,201 warrants expired.

NOTE 4 – Earnings Per Share

Basic and diluted loss per common share is calculated by dividing the net loss by the weighted average common shares outstanding during the period. In-the-money stock options and warrants to purchase an aggregate of 29,786 and 541,037 shares of common stock, plus 543,550 and 1,063,150 unvested restricted shares, were outstanding at September 29, 2008, and October 1, 2007, respectively. As of September 29, 2008 there were 29,126 warrants outstanding all of which had expiration dates in April 2008. The terms of these warrants required the Company to provide the holder with notice of the applicable expiration date and the Company provided such notice in August 2008. Holders are allowed to exercise the warrants up to 30 days after notice. Subsequent to the end of the third quarter of fiscal 2008, 4,925 warrants were exercised and 24,201 warrants expired. These stock options, warrants and unvested restricted shares outstanding were not included in the computation of diluted earnings per share because we incurred a net loss in all periods presented and, hence, the impact would be anti-dilutive. Out-of-the-money stock options and warrants to purchase an aggregate of 1,399,960 and 3,084,499 shares of common stock were outstanding at September 29, 2008 and October 1, 2007, respectively.

NOTE 5 – Asset impairments

COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

recorded impairment charges of approximately $1.1 million related to three underperforming locations. In addition, during the nine month period ended September 29, 2008 we also recorded an impairment charge of approximately $0.09 million related to the Seattle locations, which is reported in discontinued operations. During the three month period ended October 1, 2007, we recorded an impairment charge of approximately $0.4 million related to one underperforming location where we exercised the early exit provision of the lease and closed the restaurant during the first quarter of fiscal 2008. During the nine month period ended October 1, 2007, we recorded impairment charges of approximately $1.3 million related to three underperforming restaurants as well as approximately $3.1 million related to the Seattle and Macy’s locations which is reported in discontinued operations.

In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, we evaluate possible impairment at the individual restaurant level periodically and record an impairment loss whenever we determine impairment factors are present. We consider a history of poor financial operating performance to be the primary indicator of potential impairment for individual restaurant locations. We determine whether a restaurant location is impaired based on expected undiscounted cash flows, generally for the remainder of the lease term, and then determine the impairment charge based on discounted cash flows for the same period. Restaurants are not considered for impairment during the period before they enter the comparable restaurant base, unless specific circumstances warrant otherwise.

NOTE 6 – Lease Termination Costs

During the third quarter of fiscal 2008, we recorded lease termination charges of $0.1 million related to one underperforming location that we closed during the quarter. During the nine month period ended September 29, 2008 we recorded lease termination charges of approximately $0.3 million related to one underperforming location that we closed during the third quarter and a location where we made the decision, subsequent to entering into a lease, not to build a restaurant and reached an agreement with the landlord to terminate the lease. During the third quarter of fiscal 2007, we recorded a lease termination charge of approximately $0.1 million related to a lease for an underperforming restaurant in Chicago for which we exercised the early exit provision of the lease and closed the restaurant during the first quarter of fiscal 2008. During the nine months ended October 1, 2007 we recorded lease termination charges of approximately $0.3 million related to (i) a lease for an underperforming restaurant in Chicago for which we exercised the early exit provision of the lease and (ii) a lease where, due to the enforcement of restrictions in a zoning overlay district, Cosi was denied the necessary permits to build a restaurant and, in accordance with the terms of the lease, Cosi exercised the exit provision.

Future store closings, if any, may result in additional lease termination charges. The incurrence of additional lease termination costs will be dependent on our ability to improve operations in those restaurants. If unsuccessful, lease termination costs will be determined through negotiating acceptable terms with our landlords to terminate the leases for those restaurants, or on our ability to locate sub-tenants or assignees for the leases at those locations.

NOTE 7 – Discontinued Operations

During the second quarter of fiscal 2008, Cosi sold the assets of the three company-owned locations formerly operated in the state of Washington. Under the terms of the agreement, Cosi transferred rights to the assets and leasehold improvements to a local restaurant development company for consideration of approximately $0.03 million. We ceased operating the restaurants as of the end of the first quarter of fiscal 2008. The current liabilities associated with discontinued operations are being paid by Cosi.

During the third quarter of fiscal 2007, the Company reached an agreement with Macy’s Inc. (“Macy’s”) relating to the six Cosi restaurants formerly operated within Macy’s stores. Under the terms of the agreement, Cosi ceased operations and closed those locations on August 19, 2007.

COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the Macy’s and Seattle locations qualify as discontinued operations, and accordingly, we have reported the results of operations of this group in discontinued operations in the accompanying consolidated financial statements for all periods presented.

The assets and liabilities associated with discontinued operations consisted of the following:


	As of
	September 29, 2008		December 31, 2007
	(dollars in thousands)
Current assets:
Inventories	$	—	$	27
Other current assets		—		8

Total assets of discontinued operations	$	—	$	35


Current liabilities:
Accrued expenses	$	12	$	161
Other current liabilities		—		124

Total current liabilities of discontinued operations	$	12	$	285

The following table shows the results of discontinued operations which include the results of operations for both the Seattle and Macy’s locations.


	Three Months Ended					Nine Months Ended
	September 29,		October 1,			September 29,			October 1,
	2008		2007			2008			2007
	(dollars in thousands)					(dollars in thousands)
Revenues
Restaurant net sales	$	—	$	777		$	373		$	2,833


Costs and expenses
Cost of food and beverage		—		228			107			834
Restaurant labor and related benefits		—		386			188			1,390
Occupancy and other restaurant operating expenses		—		294			181			982

		—		908			476			3,206
Depreciation and amortization		—		16			5			394
Closed store costs		—		—			116			—
Asset impairments		—		—			88			3,075

Total costs and expenses		—		924			685			6,675

Loss from discontinued operations	$	—	$	(147	)	$	(312	)	$	(3,842	)

During the first nine months of fiscal 2008, we recorded a charge of approximately $0.09 million related to the impairment of assets at the Seattle locations. During the three and nine month periods ended October 1, 2007, we recorded impairment charges of approximately $3.1 million related to assets at the Seattle and Macy’s locations.

COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 8 – Contingencies

From time to time, we are a defendant in litigation arising in the ordinary course of our business, including but not limited to claims resulting from “slip and fall” accidents, claims under federal and state laws governing access to public accommodations or other federal and state laws applicable to our business operations, employment-related claims, property damages, claims from guests alleging illness, injury or other food quality, health or operational concerns, and enforcement of intellectual property rights. We are currently involved in an employment related litigation matter with a former employee and our financial results for the quarter and nine month period ended September 29, 2008, reflect the impact of charges related to establishing a reserve for this litigation. We believe that our reserves are adequate to cover probable and estimable losses regarding this matter.

NOTE 9 – Income Taxes

We have recorded a full valuation allowance to reduce our deferred tax assets related primarily to net operating loss carryforwards. Our determination of the valuation allowance is based on an evaluation of whether it is more likely than not that we will be able to utilize the net operating loss carryforwards, based on the Company’s operating results. A positive adjustment to income will be recorded in future years if we determine that we could realize these deferred tax assets.

We have adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109(“FIN 48”) as of January 2, 2007. FIN 48 prescribes a comprehensive financial statement model of how a company should recognize, measure, present and disclose uncertain tax positions that the company has taken or expects to take in its income tax returns. FIN 48 requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to be recognized on the effective date. Initial recognition amounts would have been reported as a cumulative effect of a change in accounting principle.

No adjustment was made to the beginning retained earnings balance, as the ultimate deductibility of all tax positions is highly certain but there is uncertainty about the timing of such deductibility. No interest or penalties have been accrued relative to tax positions due to the Company having either a tax loss or net operating loss carryforwards to offset any taxable income in all subject years. As a result, no liability for uncertain tax positions has been recorded.

Should the Company need to accrue interest or penalties on uncertain tax positions, it would recognize the interest as interest expense and the penalties as a general and administrative expense.

NOTE 10 – New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measures. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FSP 157-2,“Effective Date of FASB Statement No. 157”which permits a one-year deferral for the implementation of SFAS 157 with regards to non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We have adopted the provisions of SFAS No. 157 related to financial assets and liabilities as of January 1, 2008. The application of this standard did not have a material impact on our results of operations or financial condition. We elected to defer adoption of SFAS No. 157 for non-financial assets and liabilities and we do not anticipate that full adoption in fiscal 2009 will have a material impact on our results of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial

COSI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Liabilities – Including an Amendment of FASB Statement No. 115.Under SFAS No. 159, a company may elect to measure eligible financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Cosi did not elect to begin reporting any financial assets or liabilities at fair value upon adoption of SFAS No. 159 on January 1, 2008 and we did not elect to report at fair value any new financial assets or liabilities entered during the quarter and nine month period ended September 29, 2008.

In December 2007, the FASB issued SFAS No. 141R,Business Combinations. SFAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Cosi will adopt this standard for our fiscal year 2009. At this point, we do not anticipate that SAFS No. 141R will have an impact on our consolidated financial statements when effective.

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51. SFAS No. 160 changes the accounting and reporting for minority interests. Minority interests will be reclassified as noncontrolling interests and reported as a component of equity separate from the parent company’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Cosi will adopt this standard for our fiscal year 2009. At this point, we do not anticipate that SAFS No. 160 will have an impact on our consolidated financial statements when effective.

Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations for the fiscal quarters ended September 29, 2008 and October 1, 2007 should be read in conjunction with “Selected Consolidated Financial Data” and our audited consolidated financial statements and the notes to those statements that are in our 2007 Annual Report on Form 10-K. 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 Quarterly Report.

OVERVIEW

System wide restaurants:


	For the Three Months Ended
	September 29, 2008						October 1, 2007
	Company-						Company-
	Owned		Franchise		Total		Owned			Franchise		Total
Restaurants at beginning of period		102		43		145		113	(a)		22		135
New restaurants opened		—		—		—		1			6		7
Restaurants permanently closed		1		—		1		7			1		8

Restaurants at end of period		101		43		144		107	(b)		27		134


(a)		Includes nine locations that are classified as discontinued operations

(b)		Includes three locations that are classified as discontinued operations


	For the Nine Months Ended
	September 29, 2008							October 1, 2007
	Company-							Company-
	Owned			Franchise		Total		Owned			Franchise		Total
Restaurants at beginning of period		107	(b)		34		141		110	(a)		13		123
New restaurants opened		1			10		11		5			15		20
Restaurants permanently closed		7			1		8		8			1		9

Restaurants at end of period		101			43		144		107	(b)		27		134


(a)		Includes nine locations that are classified as discontinued operations

(b)		Includes three locations that are classified as discontinued operations

There are currently 101 company-owned and 50 franchised premium convenience restaurants operating in 18 states, the District of Columbia, and the United Arab Emirates (UAE). Subsequent to the third quarter of fiscal 2008, seven new franchised Cosi restaurants have opened, including one located in the UAE. During the third quarter of fiscal 2008, we closed one underperforming company-owned restaurant in Chicago. One new company-owned restaurant and seventeen franchised restaurants have opened during the first nine months of fiscal 2008, including four franchised restaurants in the UAE. During the first nine months of fiscal 2008, we closed seven company-owned restaurants, of which three were underperforming locations, one location where the lease expired and we were unable to negotiate acceptable renewal terms, and three were locations in Seattle, Washington where we exited the market and sold the assets at those locations to a local restaurant development company that will operate them under a different brand.

Our restaurants offer innovative, savory, made-to-order products featuring our authentic hearth-baked crackly crust signature Cosi bread and fresh distinctive ingredients. We maintain a pipeline of new menu offerings that are introduced seasonally through limited time offerings to keep our products relevant to our target customers.

Our menu features high-quality sandwiches, freshly tossed salads, Cosi bagels, Flatbread pizzas, S’mores and other desserts. We feature our authentic hearth-baked crackly crust signature Cosi bread in two varieties, our original Rustica and our Etruscan Whole Grain. Our beverage menu features a variety of house coffees and other specialty coffee drinks, soft drinks, bottled beverages including premium still and sparkling water and teas. We also offer beer and wine at most of our locations and an additional limited selection of alcoholic beverages at some of our locations. Our restaurants offer lunch and afternoon coffee in a counter service format, with most offering breakfast and/or dinner and dessert menus as well. We operate our company-owned restaurants in two formats: Cosi and Cosi Downtown. Cosi Downtown restaurants, which are located in nonresidential central business districts, close for the day in the early evening, while Cosi restaurants offer dinner and dessert in a fast casual dining atmosphere. All our restaurants offer our catering services which include breakfast baskets, lunch buffets, dessert and fruit platters, and many of our core menu offerings.

We are currently eligible to offer franchises in 47 states and the District of Columbia. We offer franchises to area developers and individual franchise operators. The initial franchise fee, payable to us, for both an area developer and an individual franchise operator, is $40,000 for the first restaurant and $35,000 for each additional restaurant.

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; however, our franchising and area developer models will be key components of our growth strategy. We believe that our concept, growth potential and strong unit-level economics will enable us to attract experienced well-capitalized area developers. 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.

We also continue to explore strategic opportunities with our Cosi Pronto (our grab-and-go concept) and full-service concepts in educational establishments, airports, train stations and other public venues that meet our operating and financial criteria.

RECENT EVENTS

On November 4, 2008, the Board of Directors of the Company unanimously elected Robert S. Merritt, currently a member of the Board of Directors and our former Interim Chief Executive Officer, to serve as non-executive Chairman of the Board of the Company succeeding William D. Forrest. Mr. Forrest resigned as a member of the Board of Directors and as non-executive Chairman of the Board of Directors of the Company on November 4, 2008. Mr. Forrest’s resignation is not a result of a disagreement with the Company or with any of its operations, policies, or practices. In connection with his resignation, the Company’s Board of Directors expressly acknowledged his extraordinary efforts in serving as a director and as Chairman of the Board since 2003.

CRITICAL ACCOUNTING POLICIES

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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. Actual results may differ from those estimates.

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: SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, 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. The application of SFAS 144 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 periodically and record an impairment loss whenever we determine impairment factors are present. We consider a history of poor financial operating performance to be the primary indicator of potential impairment for individual restaurant locations. We determine whether a restaurant location is impaired based on expected undiscounted cash flows, generally for the remainder of the lease term, and then determine the impairment charge based on discounted cash flows for the same period. Restaurants are not considered for impairment during the period before they enter the comparable restaurant base, unless specific circumstances warrant otherwise.

During the three month period ended September 29, 2008, we recorded an impairment charge of $0.8 million related to two underperforming locations. During the nine month period ended September 29, 2008, we recorded an impairment charge of approximately $1.1 million related to three underperforming locations. In addition, during the nine month period ended September 29, 2008 we also recorded an impairment charge of approximately $0.09 million related to the Seattle locations, which is reported in discontinued operations. During the three month period ended October 1, 2007, we recorded an impairment charge of approximately $0.4 million related to one underperforming location where we exercised the early exit provision of the lease, during the third quarter of fiscal 2007, and closed the restaurant during the first quarter of fiscal 2008. During the nine month period ended October 1, 2007, we recorded impairment charges of approximately $1.3 million related to three underperforming restaurants as well as approximately $3.1 million related to the Seattle and Macy’s locations which is reported in discontinued operations.

Lease Termination Charges: SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities, requires companies to recognize costs associated with exit or disposal activities when they are incurred, rather than at the end of a commitment to an exit or disposal plan. For all exit activities, we estimate our likely liability under contractual leases for restaurants that have been closed. Such estimates have affected the amount and timing of charges to operating results 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.

During the third quarter of fiscal 2008, we recorded lease termination charges of approximately $0.1 million related to one underperforming location that we closed during the quarter. During the nine month period ended September 29, 2008, we recorded lease termination charges of approximately $0.3 million related to one underperforming location that we closed during the third quarter and a location where we made the decision, subsequent to entering into a lease, not to build a restaurant and reached an agreement with the landlord to terminate the lease. During the third quarter of fiscal 2007, we recorded a lease termination charge of approximately $0.1 million related to a lease for an underperforming restaurant in Chicago for which we exercised the early exit provision of the lease. During the nine months ended October 1, 2007 we recorded lease termination charges of approximately $0.3 million related to (i) a lease for an underperforming restaurant in Chicago for which we exercised the early exit provision of the lease and (ii) a lease where, due to the enforcement of restrictions in a zoning overlay district, Cosi was denied the necessary permits to build a restaurant and, in accordance with the terms of the lease, Cosi exercised the exit provision.

Stock-Based Compensation Expense: We recognize stock-based compensation expense according to the fair value recognition provision of SFAS 123R,Share-Based Payment, which generally requires, among other things, that all employee share-based compensation be measured using a fair value method and that all the resulting compensation expense be recognized in the financial statements. Stock-based compensation expense that we recognized for the quarter ended September 29, 2008 included: (a) compensation expense for all share-based payments granted prior to, but not yet vested, as of June 30, 2008, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123,Accounting for Stock-Based Compensation, and (b) compensation expense for all share-based payments granted on or after June 30, 2008, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Under SFAS 123R, our stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the award, which is the vesting term. SFAS 123R also requires the Company to estimate forfeitures in calculating the expense relating to share-based compensation as opposed to recognizing forfeitures as an expense reduction as they occur. We recognized stock-based compensation expense of $0.3 million and $0.5 million for the quarters ended September 29, 2008 and October 1, 2007, respectively. For the nine month periods ended September 29, 2008 and October 1, 2007, we recognized stock-based compensation expense of $1.3 million and $1.1 million respectively.

We measure the estimated fair value of our granted stock options using a Black-Scholes pricing model and of our restricted stock based on the fair market value of a share of registered stock on the date of grant. The weighted average fair values of the stock options granted through 2005, the last time we issued options, calculated in accordance with SFAS 123R were determined using the Black-Scholes option-pricing model with the following weighted average assumptions:


Expected dividend yield		0	%
Expected stock price volatility		68	%
Average risk-free interest rate		3.79	%
Average expected life of options	5.0 years

We estimate forfeitures in calculating the expense relating to share-based compensation. Pre-vesting forfeiture rates are estimated based on historical data. The expected volatility is based on an average of the historical volatility of the Company’s stock, the implied volatility of market options, peer company volatility, and other factors. The average expected life represents the period of time that stock option grants are expected to be outstanding and is derived from historical terms and other factors. The risk-free interest rate is based on the rate of U.S. Treasury zero-coupon issues with remaining term equal to the expected life of option grants.

Accounting for Lease Obligations:In accordance with FASB Technical Bulletin No. 85-3,Accounting for Operating Leases with Scheduled Rent Increases, we recognize rent expense on a straight-line basis over the lease term commencing on the date we take possession. We include any rent escalations, rent abatements during the construction period and any other rent holidays in our straight-line rent expense calculation.

Landlord Allowances: In accordance with FASB Technical Bulletin No. 88-1,Issues Relating to Accounting for Leases, we record landlord allowances as deferred rent in other long-term liabilities on the consolidated balance sheets and amortize them on a straight-line basis over the term of the related leases.

Income Taxes: We have recorded a full valuation allowance to reduce our deferred tax assets related primarily to net operating loss carryforwards. Our determination of the valuation allowance is based on an evaluation of whether it is more likely than not that we will be able to utilize the net operating loss carryforwards, based on the Company’s operating results. A positive adjustment to income will be recorded in future years if we determine that we could realize these deferred tax assets.

We have adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109(“FIN 48”) as of January 2, 2007. FIN 48 prescribes a comprehensive financial statement model of how a company should recognize, measure, present and disclose uncertain tax positions that the company has taken or expects to take in its income tax returns. FIN 48 requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to be recognized on the effective date. Initial recognition amounts would be reported as a cumulative effect of a change in accounting principle.

No adjustment was made to the beginning retained earnings balance, as the ultimate deductibility of all tax positions is highly certain but there is uncertainty about the timing of such deductibility. No interest or penalties have been accrued relative to tax positions due to the Company having either a tax loss or net operating loss carry-forwards to offset any taxable income in all subject years. As a result, no liability for uncertain tax positions has been recorded.

Should the Company need to accrue interest or penalties on uncertain tax positions, it would recognize the interest as interest expense and the penalties as a general and administrative expense.

REVENUE

Restaurant Net Sales.Our company-owned and operated restaurant sales are composed almost entirely of food and beverage sales. We record revenue at the time of the purchase of our products by our customers.

Franchise Fees and Royalties.Franchise fees and royalties includes fees earned from franchise agreements entered into with area developers and franchise operators as well as royalties received based on sales generated at franchised restaurants. We recognize the franchise fee in the period in which a franchise location opens or when fees are forfeited as a result of a termination of an area development agreement. We recognize franchise royalties in the period in which sales are made by our franchise operators.

Gift Card Sales. We offer our customers the opportunity to purchase gift cards at our restaurants and through our website. Customers can purchase these cards at varying dollar amounts. At the time of purchase by the customer, we record a gift card liability for the face value of the card purchased. We recognize the revenue and reduce the gift card liability when the gift card is redeemed. We do not reduce our recorded liability for potential non-use of purchased gift cards.

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. We remove from the comparable restaurant base any restaurant that is temporarily shut down for remodeling for a complete period in the period that it is shut down. At September 29, 2008 and October 1, 2007, there were 98 and 96 restaurants in our comparable restaurant base, respectively.

COSTS AND EXPENSES

Cost of Food and Beverage.Cost of food and beverage is comprised of food and beverage costs. Food and beverage costs are variable and increase with sales volume.

Restaurant Labor and Related Benefits.The costs of labor and related benefits include direct hourly and management wages, bonuses, payroll taxes, health insurance and all other fringe benefits.

Occupancy and Other Restaurant Operating Expenses.Occupancy and other operating expenses include direct restaurant level operating expenses, including the cost of paper and packaging, 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 costs; supervisory and staff salaries; non-field stock-based compensation expense; non-field 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, bonuses 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-based compensation expense includes the charges related to recognizing the fair value of stock options and restricted stock as compensation for awards to certain key employees and non-employee directors, except the costs related to stock-based compensation for restaurant employees which are included in restaurant labor and related benefits.

Depreciation and Amortization.Depreciation and amortization consists principally of depreciation and amortization of 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 or remodeling of a restaurant. Pre-opening expenses also include rent expense recognized on a straight-line basis from the date we take possession through the period of construction, renovation and fixturing prior to opening the restaurant.

RESULTS OF OPERATIONS

Our operating results for the three and nine month periods ended September 29, 2008 and October 1, 2007, expressed as a percentage of total revenues (except where otherwise noted), were as follows:


	Three Months Ended						Nine Months Ended
	September 29,			October 1,			September 29,			October 1,
	2008			2007			2008			2007
Revenues:
Restaurant net sales		97.3	%		98.2	%		97.9	%		98.6	%
Franchise fees and royalties		2.7			1.8			2.1			1.4

Total revenue		100.0			100.0			100.0			100.0

Cost and expenses:
Cost of food and beverage (1)		22.4			23.7			22.8			23.2
Restaurant labor and related benefits (1)		34.0			34.8			33.7			34.7
Occupancy and other restaurant operating expenses (1)		30.8			29.0			29.4			28.6

		87.2			87.5			85.9			86.5
General and administrative expenses		15.5			16.8			15.8			17.7
Depreciation and amortization		6.2			6.6			6.0			6.5
Restaurant pre-opening expenses		—			0.2			0.1			0.6
Provision for losses on asset impairments and disposals		2.3			1.0			1.0			1.3
Closed store costs (benefit)		—			(0.2	)		0.1			0.2
Lease termination expense		0.2			2.0			0.3			0.3

Total costs and expenses		109.0			110.5			107.3			111.8

Operating loss		(9.0	)		(10.5	)		(7.3	)		(11.8	)
Other income (expense):
Interest income		—			0.3			0.1			0.4
Interest expense		—			—			—			—
Other income		0.1			2.0			—			0.8

Loss from continuing operations		(8.9	)		(8.2	)		(7.2	)		(10.6	)
Discontinued operations:
Loss from discontinued operations		—			(0.4	)		(0.3	)		(3.8	)

Net loss		(8.9	)		(8.6	)		(7.5	)		(14.4	)


(1)		These are expressed as a percentage of restaurant net sales versus all other items expressed as a percentage of total revenues.

Restaurant Net Sales


	Restaurant net sales
			as a % of total
	(in thousands)		revenues

Quarter ended September 29, 2008	$	33,975		97.3	%
Quarter ended October 1, 2007	$	34,226		98.2	%


			as a % of total
	(in thousands)		revenues

Nine months ended September 29, 2008	$	102,641		97.9	%
Nine months ended October 1, 2007	$	99,959		98.6	%

Restaurant net sales.Restaurant net sales decreased 0.7%, or approximately $0.3 million, during the third quarter of fiscal 2008 as compared to the third quarter of fiscal 2007. This decrease was due primarily to $0.9 million of net sales related to five company-owned restaurants closed subsequent to the third quarter of fiscal 2007, partially offset by $0.6 million of net sales at three new restaurants not yet in their sixteenth month of operation as of September 29, 2008, and a relatively flat sales performance at our comparable restaurant base. For comparable restaurants, during the third quarter of fiscal 2008, our average guest check increased 1.2% and our transaction count decreased 1.1% compared to fiscal 2007.

Restaurant net sales increased 2.7%, or approximately $2.7 million, during the first nine months of fiscal 2008 as compared to the first nine months of fiscal 2007. This increase was due primarily to $2.9 million of net sales at three new restaurants not yet in their sixteenth month of operation as of September 29, 2008, $0.9 million in net sales at restaurants that had been temporarily closed for remodeling for a period of time during the first nine months of fiscal 2007, and a 0.8% or $0.8 million increase in comparable restaurant net sales, partially offset by a decrease of approximately $1.9 million in net sales related to five company-owned restaurants closed subsequent to the third quarter of fiscal 2007. For comparable restaurants, during the first nine months of fiscal 2008, our average guest check increased 1.1% and our transaction count decreased 0.3% compared to fiscal 2007.

Franchise Fees and Royalties


	Franchise fees and royalties
			as a % of total
	(in thousands)		revenues

Quarter ended September 29, 2008	$	955		2.7	%
Quarter ended October 1, 2007	$	611		1.8	%


			as a % of total
	(in thousands)		revenues

Nine months ended September 29, 2008	$	2,203		2.1	%
Nine months ended October 1, 2007	$	1,448		1.4	%

Franchise fees and royalties.Franchise fees and royalties increased by 56.3% or $0.3 million to approximately $1.0 million in the third quarter of fiscal 2008, as compared to the third quarter of fiscal 2007, due to a $0.2 million (47.9%) increase in royalties as well as an increase in franchise fees in the quarter related to the termination of one area developer agreement partially offset by fewer openings this year as compared to last year.

Franchise fees and royalties for the first nine months of fiscal 2008 increased by 52.1% or $0.8 million due primarily to a $0.7 million (74.8%) increase in royalties as well as higher franchise fees for the first nine months of 2008, compared to the same period in 2007, as well as an increase in franchise fees during the period related to the termination of one area developer agreement partially offset by fewer openings this year as compared to last year.

Costs and Expenses


	Cost of food and beverage
			as a % of restaurant
	(in thousands)		net sales

Quarter ended September 29, 2008	$	7,611		22.4	%
Quarter ended October 1, 2007	$	8,099		23.7	%


			as a % of restaurant
	(in thousands)		net sales

Nine months ended September 29, 2008	$	23,408		22.8	%
Nine months ended October 1, 2007	$	23,161		23.2	%

Cost of food and beverage. The decrease in food and beverage costs as a percentage of net sales during the third quarter and first nine months of fiscal 2008 as compared to the same periods of fiscal 2007 is due primarily to lower costs associated with our promotional menu offerings during the third quarter of fiscal 2008 as compared to the same period in 2007 as well as the impact of menu price increases taken during the second quarter of fiscal 2008, partially offset by continued year-over-year pricing pressure on certain commodities, primarily wheat, and higher fuel costs.


	Restaurant labor and related benefits
			as a % of restaurant
	(in thousands)		net sales

Quarter ended September 29, 2008	$	11,540		34.0	%
Quarter ended October 1, 2007	$	11,913		34.8	%


			as a % of restaurant
	(in thousands)		net sales

Nine months ended September 29, 2008	$	34,557		33.7	%
Nine months ended October 1, 2007	$	34,638		34.7	%

Restaurant labor and related benefits.The decrease in restaurant labor and related benefits as a percentage of restaurant net sales during the third quarter and the first nine months of fiscal 2008, as compared to the same periods in fiscal 2007, is due primarily to more effective labor management during both peak and non-peak hours of operations.


	Occupancy and other restaurant
	operating expenses
			as a % of restaurant
	(in thousands)		net sales

Quarter ended September 29, 2008	$	10,485		30.9	%
Quarter ended October 1, 2007	$	9,924		29.0	%


			as a % of restaurant
	(in thousands)		net sales

Nine months ended September 29, 2008	$	30,169		29.4	%
Nine months ended October 1, 2007	$	28,588		28.6	%

Occupancy and other restaurant operating expenses. The increase in occupancy and other restaurant operating expenses during the third quarter and first nine months of fiscal 2008, as compared to the same periods of fiscal 2007,

is due primarily to higher utility costs, the deleveraging of occupancy costs against relatively flat sales at our comparable restaurant base, and slightly higher costs for repairs and maintenance.


	General and administrative expenses
			as a % of total
	(in thousands)		revenues

Quarter ended September 29, 2008	$	5,429		15.5	%
Quarter ended October 1, 2007	$	5,849		16.8	%


			as a % of total
	(in thousands)		revenues

Nine months ended September 29, 2008	$	16,537		15.8	%
Nine months ended October 1, 2007	$	17,971		17.7	%

General and administrative expenses. The decrease in general and administrative costs during the third quarter of fiscal 2008, as compared to the third quarter of fiscal 2007, is due to labor savings resulting from administrative workforce reductions, lower stock-based compensation costs, and lower corporate travel costs, partially offset by severance costs related to the workforce reductions. Additionally, during the quarter, we booked an additional charge related to a reserve for pending litigation. The decrease in general and administrative costs during the first nine months of fiscal 2008, as compared to the first nine months of fiscal 2007, is due to labor savings resulting from administrative workforce reductions, lower recruiting costs resulting from our search to select and appoint a permanent Chief Executive Officer during 2007 and lower travel costs associated with corporate activities, partially offset by severance costs related to the workforce reductions. In addition during fiscal 2008, we have booked charges related to a reserve for pending litigation.


	Depreciation and amortization
			as a % of total
	(in thousands)		revenues

Quarter ended September 29, 2008	$	2,152		6.2	%
Quarter ended October 1, 2007	$	2,283		6.6	%


			as a % of total
	(in thousands)		revenues

Nine months ended September 29, 2008	$	6,319		6.0	%
Nine months ended October 1, 2007	$	6,550		6.5	%

Depreciation and amortization. The lower depreciation and amortization costs during the third quarter and first nine months of fiscal 2008, as compared the same periods in fiscal 2007 is due primarily to the impact of impairments recorded during and subsequent to the third quarter of fiscal 2007 as well as the continued depreciation and amortization of our comparable restaurant base, partially offset by higher depreciation and amortization costs related to three new restaurants that opened during and subsequent to the third quarter of fiscal 2007.


	Restaurant pre-opening expenses
			as a % of total
	(in thousands)		revenues

Quarter ended September 29, 2008	$	—	0.0		%
Quarter ended October 1, 2007	$	56		0.2	%


			as a % of total
	(in thousands)		revenues

Nine months ended September 29, 2008	$	100		0.1	%
Nine months ended October 1, 2007	$	637		0.6	%

Restaurant pre-opening expenses. The restaurant pre-opening expenses for the first nine months of fiscal 2008 are related to a new company-owned restaurant that opened during the second quarter of fiscal 2008. Restaurant pre-opening expenses during the third quarter of fiscal 2007 were related to one new restaurant that opened during the third quarter of fiscal 2007 and one restaurant that opened during the fourth quarter of fiscal 2007. During the first nine months of fiscal 2007, restaurant pre-opening expenses were related to five new restaurants that opened during the period and one additional restaurant that opened during the fourth quarter of fiscal 2007. During fiscal years 2008 and 2007, approximately 49.5% and 59.7%, respectively, of restaurant pre-opening expenses were for occupancy costs incurred prior to the opening of the restaurants.


	Provision for losses on asset
	impairments and disposals
			as a % of total
	(in thousands)		revenues

Quarter ended September 29, 2008	$	800		2.3	%
Quarter ended October 1, 2007	$	365		1.0	%


			as a % of total
	(in thousands)		revenues

Nine months ended September 29, 2008	$	1,067		1.0	%
Nine months ended October 1, 2007	$	1,310		1.3	%

Provision for losses on asset impairments and disposals. Impairment charges of $0.8 million during the third quarter of fiscal 2008 are related to two underperforming locations. Impairment charges during the first nine months of fiscal 2008 of $1.1 million are related to three underperforming locations. Impairment charges booked during the third quarter of fiscal 2007 are related to one underperforming location which closed during the first quarter of fiscal 2008. During the first nine months of fiscal 2007, we recorded impairment charges of $1.3 million related to the impairment of three underperforming restaurants, one of which closed in the first quarter of fiscal 2008. In addition, during the first nine months of fiscal 2008 and fiscal 2007, we recorded impairment charges of $0.9 million and $3.1 million, respectively, related to the Seattle and Macy’s locations which are reported in discontinued operations.


	Closed store costs (benefit)
				as a % of total
	(in thousands)			revenues

Quarter ended September 29, 2008	$	6			0.0	%
Quarter ended October 1, 2007	$	(62	)		(0.2	%)


			as a % of total
	(in thousands)		revenues

Nine months ended September 29, 2008	$	53		0.1	%
Nine months ended October 1, 2007	$	200		0.2	%

Closed store costs. The closed store costs for the three-month period ended September 29, 2008 are related to one underperforming location that closed during the quarter, partially offset by the reversal of accruals deemed no longer necessary for locations that closed earlier in the year. During the nine month period ended September 29, 2008, closed store costs are related to two underperforming locations that closed during the first quarter at the expiration of their operating leases and two additional underperforming locations that closed one each during the second and third quarters of fiscal 2008. In addition, during the first nine months of fiscal 2008, we recorded approximately $0.1 million in closed store costs related to the Seattle locations which is reported in discontinued operations. The closed store costs for the three and nine month periods ended October 1, 2007 are related to one underperforming restaurant that closed during the second quarter of fiscal 2007.


	Lease termination expense
			as a % of total
	(in thousands)		revenues

Quarter ended September 29, 2008	$	55		0.2	%
Quarter ended October 1, 2007	$	84		0.2	%


			as a % of total
	(in thousands)		revenues

Nine months ended September 29, 2008	$	298		0.3	%
Nine months ended October 1, 2007	$	277		0.3	%

Lease termination expense. Lease termination charges recorded during the third quarter of fiscal 2008 are related to one underperforming location that closed during the quarter. During the first nine months of fiscal 2008, we recorded lease termination charges of approximately $0.3 million related to a location where we made the decision to not build a restaurant, subsequent to entering into a lease, and we reached an agreement with the landlord to exit the lease and to one underperforming location closed during the third quarter of fiscal 2008. During the third quarter of fiscal of fiscal 2007 we recorded lease termination charges of approximately $0.1 million related to one underperforming location where we exercised the early exit provision of the lease in the third quarter of fiscal 2007 and closed the location during the first quarter of fiscal 2008. During the first nine months of fiscal 2007, we recorded lease termination charges of approximately $0.3 million related to a lease for a location where, due to the enforcement of restrictions in a zoning overlay district, Cosi was denied the necessary permits to build a restaurant and, in accordance with the terms of the lease, Cosi exercised the exit provision and to one underperforming location where we exercised the early exit provision of the lease in the third quarter of fiscal 2007 and closed the location during the first quarter of fiscal 2008.


	Interest income					Interest expense
			as a % of total					as a % of total
	(in thousands)		revenues			(in thousands)		revenues

Quarter ended September 29, 2008	$	18		0.0	%	$	2		0.0	%
Quarter ended October 1, 2007	$	105		0.3	%	$	2		0.0	%


			as a % of total					as a % of total
	(in thousands)		revenues			(in thousands)		revenues

Nine months ended September 29, 2008	$	90		0.1	%	$	5		0.0	%
Nine months ended October 1, 2007	$	449		0.4	%	$	6		0.0	%

Interest income and expense. During the third quarter and the first nine months of fiscal 2008, we held no short-term investments, resulting in lower interest income for the third quarter and first nine months of fiscal 2008 as compared to the same periods in fiscal 2007. During the third quarter and first nine months of both fiscal 2008 and fiscal 2007, interest expense was insignificant.


	Other income
			as a % of total
	(in thousands)		revenues

Quarter ended September 29, 2008	$	37		0.1	%
Quarter ended October 1, 2007	$	716		2.0	%


			as a % of total
	(in thousands)		revenues

Nine months ended September 29, 2008	$	39		0.0	%
Nine months ended October 1, 2007	$	716		0.8	%

Other income.During the third quarter and first nine months of fiscal 2008, we recorded other income of

approximately $0.04 million. During the third quarter and first nine months of fiscal 2007, we recorded other income of approximately $0.7 million related to a settlement received for an insurance claim.


	Loss from continuing operations
			as a % of total
	(in thousands)		revenues

Quarter ended September 29, 2008	$	3,095		8.9	%
Quarter ended October 1, 2007	$	2,855		8.2	%


			as a % of total
	(in thousands)		revenues

Nine months ended September 29, 2008	$	7,540		7.2	%
Nine months ended October 1, 2007	$	10,776		10.6	%

Loss from continuing operations. The $0.2 million increase in our loss from continuing operations during the third quarter of fiscal 2008, as compared to the third quarter of fiscal 2007, is due primarily to higher charges for asset impairments and closed store costs, offset by lower general and administrative expenses and slightly improved restaurant operating margins driven primarily by lower food costs. The $3.2 million decrease in our loss from continuing operations during the first nine months of fiscal 2008, as compared to the same period last year, is due primarily to a reduction in general and administrative expenses, improved restaurant operating margins driven primarily by lower labor costs, lower charges for asset impairments, and lower restaurant pre-opening costs offset by higher stock-based compensation expense.

Discontinued operations. During the third quarter of fiscal 2007, the Company reached an agreement with Macy’s Inc. (“Macy’s”) relating to the six Cosi restaurants operated within Macy’s stores. Under the terms of the agreement, Cosi ceased operations and closed those locations on August 19, 2007.

In addition, Cosi sold the assets of the three underperforming company-owned locations that operated in the state of Washington to a local restaurant development company. Under the terms of the agreement, Cosi transferred rights to the assets and leasehold improvements for minimal cash consideration and the new owner assumed the tenant obligations under the real estate operating leases and will operate those locations under a different brand. We ceased operating these restaurants as of the end of the first quarter of fiscal 2008.

In accordance with SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the disposal of the Macy’s and Seattle locations qualify as discontinued operations and, accordingly, we have reported the results of operations of this group in discontinued operations in the accompanying consolidated financial statements for all periods presented.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were approximately $6.2 million on September 29, 2008, compared with $6.3 million on December 31, 2007. We had negative working capital of ($2.8) million on September 29, 2008, compared with negative working capital of ($0.7) million as of December 31, 2007. The decrease in working capital was primarily a function of deploying capital to build a new company-owned restaurant, maintaining existing company-owned restaurants, and funding the operating loss for the period. Our principal requirements for cash are for working capital needs, maintaining existing restaurants, and financing construction of new restaurants.

Net cash provided by operating activities during the nine month period ended September 29, 2008 was approximately $2.2 million compared to $0.4 million of net cash used in operating activities in the nine month period ended October 1, 2007. The increase in cash provided by operating activities during the first nine months of fiscal 2008 was the result of a lower year-over-year operating loss.

Total cash used in investing activities was $2.3 million during the first nine months of fiscal 2008, compared to cash provided by investing activities of $7.3 million during the first nine months of fiscal 2007. The year-over-year

decrease was due primarily to the decline in net redemptions of short-term investments, partially offset by lower capital expenditures in the first nine months of fiscal 2008 as compared to the first nine months of fiscal 2007. During the first nine months of fiscal 2007, we had net redemptions of short term investments of $19.0 million compared to none during fiscal 2008 as we held no short-term investments.

Total capital expenditures during the first nine months of fiscal 2008 were approximately $2.4 million, compared to expenditures of $12.0 million during the first nine months of fiscal 2007. Capital expenditures during fiscal 2008 were primarily for the construction of a new restaurant and maintenance of existing restaurants. Capital expenditures during the first nine months of fiscal 2007 were primarily associated with the construction of nine new company-owned restaurants that opened during and subsequent to the fourth quarter of fiscal 2006 including one restaurant that opened during the fourth quarter of fiscal 2007 and remodel and maintenance costs associated with existing company-owned locations.

Cash provided by financing activities of approximately $0.05 million and $1.9 million during the first nine months of fiscals 2008 and 2007, respectively, was from proceeds associated with the exercise of stock options.

We opened one new company-owned restaurant during the first nine months of fiscal 2008, and will not open any additional company-owned restaurants in fiscal 2008. We estimate the cost to open a company-owned restaurant is approximately $800,000, net of landlord contributions and including pre-opening expenses. We do not expect to incur any significant remodeling capital costs during the balance of fiscal 2008. However, we do expect to incur additional capital maintenance costs on existing company-owned restaurants. As we currently have no credit facility or available line of credit, we expect to fund any required capital maintenance costs on existing company-owned locations, and any restaurant construction costs for 2009 new company-owned locations, from cash and cash equivalents on hand, expected cash flows generated by both existing and new company-owned restaurants and expected franchise fees and royalties.

We believe that our current cash and cash equivalents, and expected cash flows from company-owned restaurant operations and franchise fees and royalties will be sufficient to fund our cash requirements for working capital needs in existing restaurant locations for the next twelve months. In analyzing our capital cash outlays during fiscal 2008, 53.2% of our capital cash outlay was spent on construction of new company-owned restaurants and another 39.0% of our cash outlay was spent on maintenance costs associated with existing company-owned locations. We currently do not anticipate significant levels of cash outlays for capital expenditures during the remainder of fiscal 2008. We expect cash and cash equivalent levels to remain relatively constant during the fourth quarter. However, if our existing and new company-owned restaurants do not generate the cash flow levels that we expect, if new franchised restaurants do not open according to our expectations, or if we do not generate the franchise fees and royalties that we currently expect, then we may have to initiate further labor reductions in general and administrative support functions, seek to sell certain company-owned locations to franchisees or other third parties or seek other sources of debt or equity financing.

We have entered into agreements that create contractual obligations. These obligations will have an impact on future liquidity and capital resources. The table below presents a summary of these obligations as of September 29, 2008:


Contractual Obligations	Payments Due by Period (in thousands)
			Due 4th		Due Fiscal		Due Fiscal
	Total		Quarter of		2009 through		2011 through		Due After
Description	Obligations		Fiscal 2008		Fiscal 2010		Fiscal 2012		Fiscal 2012
Long-term debt (1)	$	100	$	25	$	50	$	25	$	—
Operating leases (2) (3)		80,081		3,953		29,851		23,215		23,062

Total contractual cash obligations	$	80,181	$	3,978	$	29,901	$	23,240	$	23,062


(1)		Amounts shown include aggregate scheduled interest payments of $0.02 million. The principal amount of the debt, net of interest obligations, is included in the Other long-term liabilities, in the attached cosolidated balance sheets. This obligation is related to a trademark infringement settlement.

(2)		Amounts shown are net of an aggregate $0.3 million of sub-lease rental income due under non-cancelable subleases and include accrued contractual lease increases of approximately an aggregate $4.9 million, which are included in Other long-term liabilities in the attached consolidated balance sheets.

(3)		Amounts include approximately an aggregate $0.1 million of obligations on leases for restaurants that have been closed as of September 29, 2008.

We are obligated under non-cancelable operating leases for our restaurants and our administrative offices. Lease terms are generally ten years with renewal options and generally require us to pay a proportionate share of real estate taxes, insurance and common area and other operating costs. Some restaurant leases provide for contingent rental payments which are not included in the above table.

PURCHASE COMMITMENTS

Currently, we do not have any long-term contracts with suppliers other than the agreements noted above. However, we do have an agreement with Distribution Market Advantage, Inc. (“DMA”) that provides us access to a national network of independent distributors. Under this agreement, which expires in November 2010, the independent distributors will supply us with approximately 77% of our food and paper products, primarily under pricing agreements that we negotiate directly with the suppliers.

We have a long-term beverage marketing agreement with the Coca-Cola Company. We received a marketing allowance under this agreement, which is being recognized as a reduction to expense ratably based on actual products purchased. Although we are eligible to receive additional amounts under the agreement if certain purchase levels are achieved, no additional amounts have been received as of September 29, 2008.

We purchase all contracted coffee products through a single supplier, Coffee Bean International, Inc. (“Coffee Bean International”), under an agreement that expires in June 2010. 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 product fulfillment standards stated in our contract will remain in effect throughout such business interruption period. Either party may terminate the agreement by written notice in accordance with and subject to the terms of the agreement.

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-Q 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. 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 in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. 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 our future changes make it clear that any projected results expressed or implied therein will not be realized. Listed below are just some of the factors that would impact our forward-looking statements:

	•		the cost of our principal food products and supply and delivery shortages or interruptions;

	•		labor shortages or increased labor costs;

	•		changes in demographic trends and consumer tastes and preferences, including changes resulting from concerns over nutritional or safety aspects of beef, poultry, produce or other foods or the effects of food-borne illnesses such as “mad cow disease” and avian influenza or “bird flu;”

	•		competition in our markets, both in our business and locating suitable restaurant sites;

	•		our operation and execution in new and existing markets;

	•		expansion into new markets, including foreign countries;

	•		our ability to attract and retain qualified franchisees;

	•		our ability to locate suitable restaurant sites in new and existing markets and negotiate acceptable lease terms;

	•		the rate of our internal growth, and our ability to generate increased revenue from our existing restaurants;

	•		our ability to generate positive cash flow from existing and new restaurants;

	•		fluctuations in our quarterly results due to seasonality;

	•		increased government regulation and our ability to secure required governmental approvals and permits;

	•		our ability to create customer awareness of our restaurants in new markets;

	•		the reliability of our customer and market studies;

	•		cost effective and timely planning, design and build-out of new restaurants;

	•		our ability to recruit, train and retain qualified corporate and restaurant personnel and management;

	•		market saturation due to new restaurant openings;

	•		inadequate protection of our intellectual property;

	•		adverse weather conditions which impact customer traffic at our restaurants; and

	•		adverse economic conditions.

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our market risk exposures primarily relate to our cash and cash equivalents. We have no market investments or derivative financial instruments or derivative commodity instruments. All of our transactions are conducted, and our accounts are denominated, in United States’ dollars. Accordingly, we are not exposed to foreign currency risk.

The primary inflationary factors affecting our business are food and labor costs. Some of our food costs are subject to fluctuations in commodity prices. Volatility in the commodity markets such as the wheat and dairy markets can have an adverse impact on our results from operations. Some of our hourly personnel at our restaurants 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. Historically, inflation has not had a material impact on our results of operation.

Item 4. Controls and Procedures

Our management, with the participation of both our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, both our chief executive officer and chief financial officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective (i) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed by us in the reports that we submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

There have been no 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 third fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1: LEGAL PROCEEDINGS

From time to time, we are a defendant in litigation arising in the ordinary course of our business, including but not limited to, claims resulting from “slip and fall” accidents, claims under federal and state laws governing access to public accommodations or other federal and state laws applicable to our business operations, employment-related claims, property damages, claims from guests alleging illness, injury or other food quality, health or operational concerns, and enforcement of intellectual property rights.

On January 4, 2005, a former officer of the Company filed a complaint (Charles R. Gray, Plaintiff, vs. Cosi, Inc., Defendant) in the Superior Court in the Judicial District of Stamford/Norwalk in Stamford in the State of Connecticut (the “Court”), alleging claims against us relating to the vesting, valuation, and entitlement to employee stock options. A trial was held on July 29, 2008 and thereafter a verdict was rendered awarding damages to the plaintiff in the amount of approximately $127,000 which were trebled and may result in an additional award of attorney’s fees and interest under Connecticut law. As of September 29, 2008 various matters relating to the verdict and the calculation of damages, attorney’s fees and interest are under dispute. Currently, post verdict motions are pending before the Court and a final judgment has not been entered.

We have increased our legal reserve to a level we believe adequate to cover the probable and estimable losses related to this matter. While we believe our reserves are adequate for this matter, the resolution of such matters may result in liabilities higher or lower than the reserves we establish.

Item 1A: RISK FACTORS

In addition to the other information set forth in this report, the factors discussed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for our 2007 fiscal year could materially affect the Company’s business, financial condition or operating results. The following update to our risk factors should be read in conjunction with the risk factors included in our Annual Report on Form 10-K for the year ended December 30, 2007:

We may be adversely affected by the deterioration of the credit markets.

The credit markets have been experiencing volatility and disruption for more than 12 months. In recent weeks, the volatility and disruption has reached unprecedented levels. The current credit markets are highly unpredictable. If the current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience adverse effects, which may be material, on our ability to access capital and on our results of operations. In addition, further deterioration of the credit markets may impact the ability of our franchisees and prospective franchisees to obtain financing to acquire, expand or operate franchises.

Item 5: OTHER INFORMATION

On November 4, 2008, William D. Forrest resigned as a member of the Board of Directors of the Company and as non-executive Chairman of the Board of Directors of the Company. Mr. Forrest’s resignation is not a result of a disagreement with the Company or with any of its operations, policies or practices. In connection with his resignation, the Company’s Board of Directors expressly acknowledged his extraordinary efforts in serving as a director and as Chairman of the Board since March 2003.

On November 4, 2008, the Board of Directors of the Company unanimously elected Robert S. Merritt, currently a member of the Board of Directors, to serve as non-executive Chairman of the Board of the Company.

Mr. Merritt has been a director of the Company since October 2005. From March 12, 2007 to September 15, 2007, Mr. Merritt served as the Company’s Interim Chief Executive Officer and President, while continuing to serve as a director of the Company. In 2005, Mr. Merritt retired from Outback Steakhouse, Inc., where he served as Senior Vice President-Finance, Chief Financial Officer, Treasurer and Secretary since February 1991, and served as Vice President and Chief Financial Officer from January 1990 to February 1991. From 1988 to 1989, he served as Executive Vice President of Administration and Chief Financial Officer of JB’s Restaurants, Inc., a restaurant operator. From 1985 to 1988, he was Vice President of Finance for JB’s Restaurants. From 1981 to 1985, Mr. Merritt was employed by Vie de France Corporation, a restaurant and specialty baking company, as Vice President of Finance and Accounting and Chief Financial Officer. He received his B.B.A. in Accounting from George Washington University.

Item 6: EXHIBITS

(a)Exhibits:


Exhibit Number		Description

Exhibit 10.1		General Separation and Release Agreement by and between the Company and Christopher Ames, dated August 26, 2008.

Exhibit 10.2		General Separation and Release Agreement by and between the Company and Christopher Carroll, dated August 26, 2008.

Exhibit 31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


	COSI, INC.
Date: November 6, 2008	By:	/s/ JAMES HYATT
		James Hyatt
		President, Chief Executive Officer, and Director


Date: November 6, 2008	By:	/s/ WILLIAM KOZIEL
		William Koziel
		Chief Financial Officer (chief accounting officer) Treasurer and Secretary

EXHIBIT INDEX


Exhibit 10.1		General Separation and Release Agreement by and between the Company and Christopher Ames, dated August 26, 2008.

Exhibit 10.2		General Separation and Release Agreement by and between the Company and Christopher Carroll, dated August 26, 2008.

Exhibit 31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Positive
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Legalese
Litigious
Readability	H.S. freshman Avg

Cosi (COSIQ) Inactive 10-Q2008 Q3 Quarterly report

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