GENERAL

      Panera Bread Company (including its wholly owned subsidiaries) may be referred to as the “Company,” “Panera Bread” or in the first person notation of “we,” “us,” and “ours” in the following discussion.

      The Company was originally organized in March 1981 as a Massachusetts corporation under the name Au Bon Pain Co., Inc. and reincorporated in Delaware in June 1998. Originally the Company consisted of three Au Bon Pain bakery-cafes and one cookie store. The Company continued to grow the Au Bon Pain concept domestically, primarily on the east coast, and internationally throughout the 1980’s and 1990’s. On December 22, 1993, the Company purchased the Saint Louis Bread Company. At the time, the Saint Louis Bread Company consisted of 19 Company-owned and one franchised bakery-cafe primarily located in the Saint Louis, Missouri area. In August 1998, the Company entered into a Stock Purchase Agreement to sell the Au Bon Pain Division to ABP Corporation for $73.0 million in cash before contractual purchase price adjustments of $1.0 million. The sale was completed May 16, 1999. At that time, the Company changed its name to Panera Bread Company. As of December 25, 2004, the Company operates, directly and through area development agreements with 39 franchisee groups, bakery-cafes under the names Panera Bread and Saint Louis Bread Company. The Company operates as three business segments for accounting purposes. See Note 17 of the Company’s Consolidated Financial Statements for segment information. The Company is a Delaware corporation with its principal executive offices at 6710 Clayton Road, Richmond Heights, Missouri 63117.

      As of December 25, 2004, the Company’s retail operations consist of 226 Company-owned bakery-cafes and 515 franchise-operated bakery-cafes, all in the United States. The Company specializes in meeting consumer dining needs by providing high quality food, including fresh baked goods, made-to-order sandwiches on freshly baked breads, soups, salads, custom roasted coffees, and other cafe beverages, and targets suburban dwellers and workers by offering a premium specialty bakery and cafe experience with a neighborhood emphasis.

      Bakery-cafes are principally located in suburban strip mall and regional mall locations and currently operate in 35 states. The Company’s revenues were $479.1 million, consisting of $362.1 million of bakery-cafe sales, $44.4 million of franchise royalties and fees, and $72.6 million of fresh dough sales to franchisees. Franchisee bakery-cafe sales were $879.1 million for the fiscal year ended December 25, 2004.

      The following table sets forth certain bakery-cafe data relating to Company-owned and franchise-operated bakery-cafes:

RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

      Following disclosure by several restaurant companies late in calendar 2004 and in connection with performing its 2004 year-end reporting control processes, the Company performed a comprehensive review of its lease accounting practices. Historically, the Company recorded rent expense on a straight-line basis over the initial non-cancelable term commencing upon location opening. The Company concluded that its calculation of straight-line rent should be based on the reasonably assured lease term as defined in SFAS 98, “Accounting for Leases,” which in most cases exceeds the initial non-cancelable lease term. The Company further concluded that any construction period and other rent holidays should also be included in its determination of straight-line rent expense. Additionally, the Company reassessed the depreciable lives of leasehold improvements at all locations to be the shorter of their estimated useful life or the reasonably assured lease term at the inception of the lease. The Company also concluded that landlord allowances for normal tenant improvements, which had previously been recorded as a reduction to related leasehold improvements, should be reflected as deferred rent and amortized over the reasonably assured lease term as a reduction to rent expense rather than depreciation.

      The Company evaluated the materiality of these corrections on its financial statements and concluded that the incremental impact of these corrections is not material to any quarterly or annual period; however, the cumulative effect of these corrections is material to the fourth quarter of fiscal 2004. As a result, the Company has recorded the cumulative effect as of the end of fiscal year 2001 and has restated previously issued consolidated financial statements for the fiscal years ended December 27, 2003 and December 28, 2002 to recognize the impact of recording rent expense over the reasonably assured lease period, to record depreciation on leasehold improvements over the shorter of their estimated useful lives or the reasonably assured lease term, and to classify landlord allowances for normal tenant improvements as deferred rent and amortize them over the reasonably assured lease term as a reduction to rent expense rather than depreciation. See Note 3 to the Consolidated Financial Statements for further information on the Company’s accounting for its leases.

CONCEPT AND STRATEGY

      The Company’s concept focuses on the “Specialty Bread/ Bakery-Cafe” category. Its artisan breads, which are breads made with all natural ingredients and a craftsman’s attention to quality and detail, and overall award-winning bakery expertise are at the heart of the concept’s menu. The concept is designed to deliver against the key consumer trends of today, specifically the need for a more responsive and more special dining experience than that offered by traditional fast food. The Company’s goal is to make Panera Bread a nationally dominant brand name. Its menu, prototype, operating systems, design, and real estate strategy allow it to compete successfully in several sub-businesses: breakfast, lunch, PM “chill out,” lunch in the evening, and take home bread. The Company has achieved this success as evidenced by several awards it has received. The Company was rated the highest in customer satisfaction for the third consecutive year in the Sandelman and Associates survey of more than 67,000 consumers’ rating of 117 concepts. The Company also ranked number one in customer satisfaction in the J.D. Powers survey of 55,000 consumers in the midwest and northeast. Additionally, the Company has been rated number one in food quality in the Restaurant and Institutions magazine Choice in Chain survey in each of the last two years. On a system-wide basis, average weekly sales increased 1.1% to $36,008 for the fifty-two weeks ended December 25, 2004 compared to $35,617 for the fifty-two weeks ended December 27, 2003.

      The distinctive nature of the Company’s menu offerings (centered around the fresh artisan bread products), the quality of its bakery-cafe operations, the Company’s signature cafe design, and the prime locations of its cafes are integral to the Company’s success. The Company believes its concept has significant growth potential, which it hopes to realize through a combination of Company and franchisee efforts. Franchising is a key component of the Company’s success. Utilization of franchising has enabled the Company to grow more rapidly because of the added resources and capabilities they provide to implement the concepts and strategy developed by Panera. As of December 25, 2004, there were 515 franchised bakery-cafes operating and signed commitments to open an additional 406 bakery-cafes.

      The Company believes that providing bakery-cafe operators the opportunity to participate in the success of the bakery-cafe enables the Company to attract and retain experienced and highly motivated personnel, which will result in a better customer experience. As a result, the Company developed a program and began implementation in certain markets in 2003 to allow unit general managers and multi-unit managers to participate in the success of a bakery-cafe through a multi-year bonus structure. The Company expects to continue implementation of this bonus structure where appropriate as an alternative to its traditional Company-owned or franchised bakery-cafes to facilitate the development and operation of bakery-cafes.

MENU

      The menu is designed to provide the Company’s target customers with products which build on the strength of the Company’s bakery expertise. The key menu groups are fresh baked goods, made-to-order sandwiches and salads, soups, and cafe beverages. Included within these menu groups are a variety of freshly baked bagels, breads, muffins, scones, rolls, and sweet goods; made-to-order sandwiches; hearty, unique soups; custom roasted coffees and cafe beverages such as hot or cold espresso and cappuccino drinks. The Company’s concept emphasizes the sophisticated specialty and artisan breads that support a take-home bread business.

      The Company regularly reviews and revises its menu offerings to satisfy changing customer preferences. New menu items are developed in test kitchens and then introduced in a limited number of the Company’s bakery-cafes to determine customer response and verify that preparation and operating procedures maintain product consistency, high quality standards, and profitability. If successful, they are then introduced in the rest of the Company’s bakery-cafes and franchise bakery-cafes.

MARKETING

      The Company believes it competes on the basis of providing an entire experience rather than by price only. Pricing is structured so customers perceive good value with high quality food at reasonable prices to encourage frequent visits. The Company measures its average check per transaction. The total average check per transaction at the Company-owned bakery-cafes opened eighteen months or longer at December 25, 2004

was $6.97. Breakfast average check per transaction was $5.26, lunch average check per transaction was $7.99, PM “chill out” average check per transaction was $7.03, and lunch in the evening average check per transaction was $7.79. The Company attempts to increase its per location sales through menu development, product merchandising, and promotions at every day prices and by sponsorship of local community charitable events.

      Franchised bakery-cafes contribute to the Company 0.4% of their sales to a national advertising fund and 0.4% of their sales as a marketing administration fee and are required to spend 2.0% of their sales in their local markets on advertising. The Company contributes similar amounts from Company-owned bakery-cafes towards the national advertising fund and marketing administration. The national advertising fund and marketing administration contributions received from franchised bakery-cafes are consolidated with Company amounts in the Company’s financial statements. Liabilities for unexpended funds are included in accrued expenses in the consolidated balance sheets. The Company’s contributions to the national advertising fund and marketing administration as well as its own media costs are recorded as part of other operating expenses in the consolidated statements of operations. The Company may utilize external media when deemed appropriate and cost effective in specific markets.

SITE SELECTION AND BAKERY-CAFE ENVIRONMENT

      The bakery-cafe concept relies on a substantial volume of repeat business. In evaluating a potential location, the Company studies the surrounding trade area, demographic information within that area and information on breakfast and lunch competitors. Based on analysis of this information including utilization of predictive modeling using proprietary software, the Company determines projected sales and return on investment. The Panera concept has proven successful in a number of different types of real estate (i.e., in-line or end-cap locations in strip or power centers, regional malls, and free-standing).

      The Company designs each bakery-cafe to provide a differentiated environment, using in many cases fixtures and materials complementary to the neighborhood location of the bakery-cafe. Many locations incorporate the warmth of a fireplace and cozy seating areas and groupings which facilitate utilization as a gathering spot. The design visually reinforces the distinctive difference between the Company’s bakery-cafes and other bakery-cafes serving breakfast and lunch. Many of the Company’s cafes also feature outdoor cafe seating and free wifi internet access. In addition, the Company began its “Via Panera” catering business in 2004. The average construction, equipment, furniture and fixture, and signage cost for the 54 Company bakery-cafes opened in 2004 was $0.95 million per bakery-cafe after landlord allowances.

      The average bakery-cafe size is 4,480 square feet. The Company leases substantially all of its bakery-cafe locations. Lease terms are typically ten years with one, two, or three five-year renewal option periods thereafter. Leases typically have charges for minimum base occupancy, a proportionate share of building and common area operating expenses and real estate taxes, and contingent percentage rent based on sales above a stipulated sales level. Certain of the Company’s lease agreements provide for scheduled rent increases during the lease terms or for rental payments commencing at a date other than the date of initial occupancy. See Note 3 to the Consolidated Financial Statements for further information on the Company’s accounting for its leases.

BAKERY-CAFE SUPPLY CHAIN

      Bakery-cafes in the system use fresh dough for their artisan and sourdough breads and bagels. Fresh dough is supplied daily by a fresh dough facility to both Company-owned and franchise-operated bakery-cafes. The following table sets forth the number of fresh dough facilities:

      The Company believes its fresh dough facility system provides a competitive advantage. The fresh dough facilities ensure consistent quality and supply of fresh dough products to both Company-owned and franchised bakery-cafes. The Company focuses its growth in areas that allow it to continue to gain efficiencies through leveraging the fixed cost of the fresh dough facility structure and to selectively enter new markets which require the construction of additional facilities when sufficient numbers of bakery-cafes may be opened that permit efficient distribution of the fresh dough. The fresh dough distribution system delivers product daily to the bakery-cafes. Distribution is accomplished through a leased fleet of temperature controlled trucks operated by Company personnel. At December 25, 2004, 112 trucks were leased by the Company. The optimal distribution is approximately 200 miles, however, when necessary, distribution range may be 450 miles. An average distribution route delivers dough to 6 bakery-cafes. The Company is not dependent upon one or a few suppliers as there are numerous suppliers of needed product ingredient.

      The Company has contracted externally for the supply of the remaining baked goods in the bakery-cafes, referred to as sweet goods. In March 1998, the Company entered into a multi-year supply agreement with Bunge Food Corporation (“Bunge”) for the supply of substantially all of its sweet goods. The Company’s pricing was structured as a cost plus arrangement. In November 2002, the Company signed an agreement with Dawn Food Products, Inc. (“Dawn”) to provide sweet goods for the period 2003-2007. The agreement with Dawn is also structured as a cost plus agreement. The transition from Bunge to Dawn was completed in the first quarter of fiscal 2003.

COMPETITION

      The Company experiences competition from numerous sources in its trade areas. The Company’s bakery-cafes compete based on customers’ needs for breakfast, lunch, daytime “chill-out,” lunch in the evening, and take home bread sales. The competitive factors include location, environment, customer service, price, and quality of products. The Company competes for leased space in desirable locations. Certain of the Company’s competitors may have capital resources exceeding those available to the Company. Our primary competitors include specialty food and casual dining and quick service restaurant retailers including national, regional, and locally-owned concepts.

MANAGEMENT INFORMATION SYSTEMS

      Each Company-operated bakery-cafe has computerized cash registers to collect point-of-sale transaction data which is used to generate pertinent transactional information, including product mix and average check. All product prices are programmed into the system from the Company’s corporate office. The Company allows franchisees who elect to do so access to certain of its proprietary bakery-cafe systems and systems support.

      The Company’s in-store information system is designed to assist in labor scheduling and food cost management, to provide corporate and retail operations management quick access to retail data, and to reduce managers’ administrative time. The system supplies sales, bank deposit, and variance data to the Company’s accounting department on a daily basis. The Company uses this data to generate daily and weekly consolidated reports regarding sales and other key elements, as well as detailed profit and loss statements for each

Company-owned bakery-cafe every four weeks. Additionally, the Company monitors the average check, customer count, product mix, and other sales trends. The fresh dough facilities have computerized systems which allow the fresh dough facilities to accept electronic orders from the bakery-cafes and deliver the ordered product back to the bakery-cafes.

      The Company has network/integration systems which are corporate office electronic systems and tools which link various information subsystems and databases, encompassing e-mail and all major financial systems, such as general ledger database systems, and all major operational systems, such as store operating performance database systems.

DISTRIBUTION

      The Company uses independent distributors to distribute sweet goods products and other materials to bakery-cafes. With the exception of fresh dough products supplied by the fresh dough facilities, virtually all other food products and supplies for retail operations, including paper goods, coffee, and smallwares, are contracted for by the Company and delivered by the vendors to the distributor for delivery to the bakery-cafes. The individual bakery-cafes order directly from a distributor two to three times per week.

      Franchised bakery-cafes operate under individual contracts with one of the Company’s distributors or other regional distributors. As of December 25, 2004, there were three primary distributors serving the Panera Bread system.

FRANCHISE OPERATIONS

      The Company began a broad-based franchising program in 1996. The Company is actively seeking to extend its franchise relationships beyond its current franchisees and annually files a Uniform Franchise Offering Circular to facilitate sale of additional franchise development agreements. The franchise agreement typically requires the payment of a franchise fee of $35,000 per bakery-cafe (broken down into $5,000 at the signing of the area development agreement and $30,000 at or before the bakery-cafe opens) and continuing royalties of 4-5% on sales from each bakery-cafe. Franchise-operated bakery-cafes follow the same standards for in store operating standards, product quality, menu, site selection, and bakery-cafe construction as do Company-owned bakery-cafes. The franchisees are required to purchase all of their dough products from sources approved by the Company. The Company’s fresh dough facility system supplies fresh dough products to substantially all franchise-operated bakery-cafes. The Company does not finance franchisee construction or Area Development Agreement (ADA) purchases. In addition, the Company does not hold an equity interest in any of the franchised bakery-cafes.

      The Company had entered into franchise ADAs with 39 franchisee groups as of December 25, 2004. Also, as of December 25, 2004, there were 515 franchised bakery-cafes open and commitments to open 406 additional franchised bakery-cafes. The Company expects these bakery-cafes to open according to the timetables established in the various ADAs with franchisees, with the majority opening in the next four to five years. The ADAs require a franchisee to develop a specified number of bakery-cafes on or before specific dates. If a franchisee fails to develop bakery-cafes on schedule, the Company has the right to terminate the ADA and develop Company-owned locations or develop locations through new area developers in that market. At the present time, the Company does not have any international franchise development agreements.

EMPLOYEES

      As of December 25, 2004, the Company had 4,746 full-time associates (defined as associates who average 25 hours or more per week), of whom 381 were employed in general or administrative functions principally at or from the Company’s support centers (executive offices); 761 were employed in the Company’s fresh dough facility operations; and 3,604 were employed in the Company’s bakery-cafe operations as bakers, managers, and associates. The Company also had 4,741 part-time hourly associates at the bakery-cafes at December 25, 2004. The Company does not have any collective bargaining agreements with its employees. The Company considers its employee relations to be good. The Company places a priority on

staffing its bakery-cafes, fresh dough facilities, and support center operations with skilled associates and invests in training programs to ensure the quality of its operations.

TRADEMARKS

      The Panera Bread® and Saint Louis Bread Co.® names are of material importance to the Company and are trademarks registered with the United States Patent and Trademark Office. In addition, other marks of lesser importance have been filed with the United States Patent and Trademark Office.

ACCESS TO INFORMATION

      Our Internet address is www.panerabread.com. We make available at this address, free of charge, nutritional information, press releases, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC).

GOVERNMENT REGULATION

      Each fresh dough facility and Company-operated and franchised bakery-cafe is subject to regulation and licensing by federal agencies as well as to licensing and regulation by state and local health, sanitation, safety, fire, and other departments. Difficulties or failures in obtaining and retaining the required licensing or approval could result in delays or cancellations in the opening of fresh dough facilities and bakery-cafes as well as fines and possible closure relating to existing fresh dough facilities and bakery-cafes. In addition, the Company is subject to the Fair Labor Standards Act and various state laws governing such matters as minimum wages, overtime, and other working conditions.

      The Company is also subject to federal and a substantial number of state laws regulating the offer and sale of franchises. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of the franchises and may also apply substantive standards to the relationship between franchisor and franchisee.

      The Company and its fresh dough facilities are subject to various federal, state, and local environmental regulations. Compliance with applicable environmental regulations is not believed to have a material effect on capital expenditures, financial condition, results of operations, or the competitive position of the Company.

      The Americans with Disabilities Act prohibits discrimination in employment and public accommodations on the basis of disability. Under the Americans with Disabilities Act, the Company could be required to expend funds to modify its Company-owned bakery-cafes to provide service to, or make reasonable accommodations for the employment of, disabled persons. Compliance with the requirements of the Americans with Disabilities Act is not believed to have a material effect on the Company’s financial condition or results of operations.