**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**





(Mark
      One)





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





For
      the
      quarterly period ended June 25, 2006





OR





**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. 0-23226





GRILL
      CONCEPTS, INC.


(Exact
      name of registrant as specified in its charter)




Delaware
            
            13-3319172(State
                or other jurisdiction
            
            (IRS
                Employerof
                incorporation or organization)
            
            Identification
                No.)




11661
      San Vicente Blvd., Suite 404, Los Angeles, California 90049


(Address
      of principal executive offices)(Zip code)





(310)
      820-5559


(Registrant's
      telephone number, including area code)





_______________________________________________________________


(Former
      name, former address and former fiscal year, if changed since last
      report)





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




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





Large
      accelerated filer o   Accelerated
      filer o  Non-accelerated
      filer x





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


Yes
o   No
x





As
      of
      August 3, 2006, 6,388,212 shares of Common Stock of the issuer were
      outstanding.










**GRILL
      CONCEPTS, INC. AND SUBSIDIARIES**





**INDEX**





**Page**
              **Number****PART
                I - FINANCIAL INFORMATION**Item
                1. Financial StatementsCondensed
                Consolidated Balance Sheets -June
                25, 2006 (unaudited) and December 25, 2005
            
            
            3Condensed
                Consolidated Statements of Operations -For
                the three months and six months ended June25,
                2006 and June 26, 2005 (unaudited)
            
            
            5Condensed
                Consolidated Statements of Cash Flows -For
                the six months ended June 25, 2006 andJune
                26, 2005 (unaudited)
            
            
            6Notes
                to Condensed Consolidated Financial Statements
            
            
            7Item
                2. Management's Discussion and Analysis of Financial
                Conditionand Results of Operations
            
            
            20Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            
            34Item
                4. Evaluation of Disclosure Controls and Procedures
            
            
            34**PART
                II - OTHER INFORMATION**Item
                1A. Risk Factors
            
            
            35Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            
            35Item
                4. Submission of Matters to a Vote of Security Holders
            
            
            35Item
                6. Exhibits
            
            
            36**SIGNATURES**
            
            
            37










**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**




**GRILL
      CONCEPTS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**




**ASSETS**
 (in
        thousands, except share data)
 
 **June
                  25,2006**
              
              **December
                  25,2005****(Unaudited)**Current
                  assets:Cash
              
              $
              2,648
              
              $
              3,161Inventories
              
              
              744
              
              
              727Receivables,
                  net of reserve ($278 in2006
                  and $238 in 2005)
              
              
              1,026
              
              
              784Note
                  receivable - current portion
              
              
              12
              
              
              11Reimbursable
                  costs receivable
              
              
              725
              
              
              912Prepaid
                  expenses and other current assets
              
              
              865
              
              
              401Total
                  current assets
              
              
              6,020
              
              
              5,996Furniture,
                  equipment, and improvements, net
              
              
              14,599
              
              
              13,372Restricted
                  cash
              
              
              1,192
              
              
              1,042Note
                  receivable
              
              
              65
              
              
              79Liquor
                  licenses
              
              
              394
              
              
              426Deferred
                  tax asset
              
              
              2,763
              
              
              577Other
                  assets
              
              
              599
              
              
              276Goodwill,
                  net
              
              
              205
              
              
              205Total
                  assets
              
              $
              25,837
              
              $
              21,973




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




3




**GRILL
      CONCEPTS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


(Continued)


(in
      thousands, except share data)


**LIABILITIES,
      MINORITY INTEREST AND STOCKHOLDERS' EQUITY**





**June
                25,2006**
            
            **December
                25,2005**Current
                liabilities:
            
            
            **(unaudited)**Accounts
                payable
            
            $
            2,531
            
            $
            1,457Accrued
                expenses
            
            
            4,172
            
            
            4,533Accrued
                managed outlet operating expenses
            
            
            725
            
            
            912Current
                portion of liability for debt extinguishment
            
            
            50
            
            
            -Current
                portion of long-term debt
            
            
            40
            
            
            48Current
                portion notes payable - related parties
            
            
            155
            
            
            312Total
                current liabilities
            
            
            7,673
            
            
            7,262Long-term
                debt
            
            
            1,417
            
            
            206Notes
                payable - related parties
            
            
            -
            
            
            671Liability
                for debt extinguishment
            
            
            100
            
            
            -Other
                long-term liabilities
            
            
            8,039
            
            
            7,398Total
                liabilities
            
            
            17,229
            
            
            15,537Minority
                interest
            
            
            1,516
            
            
            1,630Stockholders'
                equity:Preferred
                Stock, 1,000,000 shares authorized,995,935
                shares undesignated in 2006 and 2005
            
            
            -
            
            
            -Series
                II, 10% Convertible Preferred Stock, $.001 parvalue;
                500 shares, authorized, 500 sharesissued
                and outstanding in 2006 and 2005
            
            
            -
            
            
            -Common
                stock, $.00004 par value; 12,000,000 sharesauthorized
                in 2006 and 2005, 6,159,384 sharesissued
                and outstanding in 2006, 5,728,495 sharesissued
                and outstanding in 2005
            
            
            -
            
            
            -Additional
                paid-in capital
            
            
            13,980
            
            
            13,686Accumulated
                deficit
            
            
            (6,888
            )
            
            (8,880
            )Total
                stockholders' equity
            
            
            7,092
            
            
            4,806Total
                liabilities, minority interest andstockholders'
                equity
            
            $
            25,837
            
            $
            21,973




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




4





**GRILL
      CONCEPTS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


(Unaudited)


(in
      thousands, except share data)




**Three
                Months Ended**
            
            **Six
                Months Ended****June
                25, 2006**
            
            **June
                26, 2005**
            
            **June
                25, 2006**
            
            **June
                26, 2005**Revenues:Sales
            
            $
            14,512
            
            $
            13,417
            
            $
            29,574
            
            $
            26,804Cost
                reimbursements
            
            
            3,796
            
            
            3,120
            
            
            7,614
            
            
            6,589Management
                and license fees
            
            
            418
            
            
            369
            
            
            838
            
            
            725Total
                revenues
            
            
            18,726
            
            
            16,906
            
            
            38,026
            
            
            34,118Operating
                expenses:Cost
                of sales
            
            
            4,104
            
            
            3,814
            
            
            8,278
            
            
            7,552Restaurant
                operating
            
            
            8,639
            
            
            8,047
            
            
            17,579
            
            
            15,748Reimbursed
                costs
            
            
            3,796
            
            
            3,120
            
            
            7,614
            
            
            6,589General
                and administrative
            
            
            1,621
            
            
            1,224
            
            
            2,862
            
            
            2,270Depreciation
                and amortization
            
            
            530
            
            
            482
            
            
            1,061
            
            
            943Pre-opening
                costs
            
            
            124
            
            
            153
            
            
            124
            
            
            244Total
                operating expenses
            
            
            18,814
            
            
            16,840
            
            
            37,518
            
            
            33,346Income
                (loss) from operations
            
            
            (88
            )
            
            66
            
            
            508
            
            
            772Interest
                expense, net
            
            
            (86
            )
            
            (43
            )
            
            (107
            )
            
            (80
            )Debt
                extinguishment costs
            
            
            (279
            )
            
            -
            
            
            (279
            )
            
            -Income
                (loss) before provision forincome
                taxes and minority interest
            
            
            (453
            )
            
            23
            
            
            122
            
            
            692Benefit
                (provision) for income taxes
            
            
            2,043
            
            
            (131
            )
            
            1,975
            
            
            (209
            )Minority
                interest in net (profit)loss
                of subsidiaries
            
            
            (80
            )
            
            233
            
            
            (105
            )
            
            324Net
                income
            
            
            1,510
            
            
            125
            
            
            1,992
            
            
            807Preferred
                dividends accrued
            
            
            (12
            )
            
            (12
            )
            
            (25
            )
            
            (25
            )Net
                income applicable tocommon
                stock
            
            $
            1,498
            
            $
            113
            
            $
            1,967
            
            $
            782Net
                income per share applicableto
                common stock:Basic
                net income
            
            $
            0.26
            
            $
            0.02
            
            $
            0.34
            
            $
            0.14Diluted
                net income
            
            $
            0.23
            
            $
            0.02
            
            $
            0.31
            
            $
            0.13Weighted
                average shares outstanding:Basic
            
            
            5,837,306
            
            
            5,652,230
            
            
            5,795,036
            
            
            5,651,188Diluted
            
            
            6,456,751
            
            
            6,064,781
            
            
            6,415,287
            
            
            6,018,508




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




5




**GRILL
      CONCEPTS, INC. AND SUBSIDIARIES**


**CONDENSED**  **CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(Unaudited)


(in
      thousands)




**Six
                Months Ended****June
                25,2006**
            
            **June
                26,2005**Cash
                flows from operating activities:Net
                income
            
            $
            1,992
            
            $
            807Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Depreciation
                and amortization
            
            
            1,061
            
            
            943Amortized
                deferred rent and lease incentives
            
            
            (318
            )
            
            (329
            )Amortization
                of debt issuance costs
            
            
            35
            
            
            -Deferred
                tax asset
            
            
            (2,186
            )
            
            -Stock
                based compensation
            
            
            108
            
            
            -Provision
                for doubtful accounts
            
            
            40
            
            
            39Loss
                on debt extinguishment
            
            
            219
            
            
            -Gain
                on sale of assets
            
            
            (19
            )
            
            -Minority
                interest in net profit (loss) of subsidiaries
            
            
            105
            
            
            (324
            )Changes
                in operating assets and liabilities:Inventories
            
            
            (17
            )
            
            (55
            )Receivables
            
            
            (282
            )
            
            (63
            )Prepaid
                expenses and other current assets
            
            
            (158
            )
            
            (75
            )Tenant
                improvement allowances
            
            
            653
            
            
            1,772Other
                assets
            
            
            51
            
            
            (4
            )Accounts
                payable
            
            
            1,074
            
            
            (329
            )Accrued
                expenses
            
            
            (423
            )
            
            419Net
                cash provided by operating activities
            
            
            1,935
            
            
            2,801Cash
                flows from investing activities:Proceeds
                from sale of liquor license
            
            
            55
            
            
            -Collections
                on note receivable
            
            
            15
            
            
            15Restricted
                cash
            
            
            (150
            )
            
            (160
            )Purchase
                of liquor license
            
            
            -
            
            
            (61
            )Purchase
                of furniture, equipment and improvements
            
            
            (2,283
            )
            
            (3,248
            )Net
                cash used in investing activities
            
            
            (2,363
            )
            
            (3,454
            )Cash
                flows from financing activities:Capital
                contributions from minority interests in LLCs
            
            
            25
            
            
            976Debt
                issuance costs
            
            
            (413
            )
            
            -Return
                of capital and profits to minority shareholder
            
            
            (184
            )
            
            (143
            )Proceeds
                from line of credit and equipment financing
            
            
            1,233
            
            
            118Proceeds
                from exercise of stock options and warrants
            
            
            186
            
            
            24Payments
                on notes payable - to member of Chicago Grill
            
            
            (902
            )
            
            (68
            )Payments
                on long-term debt
            
            
            (30
            )
            
            (124
            )Net
                cash provided by financing activities
            
            
            (85
            )
            
            783Net
                increase (decrease) in cash
            
            
            (513
            )
            
            130Cash,
                beginning of period
            
            
            3,161
            
            
            1,407Cash,
                end of period
            
            $
            2,648
            
            $
            1,537Supplemental
                cash flow information:Cash
                paid during the period for:Interest
            
            $
            113
            
            $
            81Income
                taxes
            
            
            709
            
            
            129





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


6





**GRILL
      CONCEPTS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**** (Unaudited)





**1.** **INTERIM
      FINANCIAL PRESENTATION**





The
      interim condensed consolidated financial statements of Grill Concepts, Inc.
      (the
“Company”) are prepared pursuant to the requirements for reporting on Form 10-Q.
      These financial statements have not been audited by our independent registered
      public accounting firm. The December 25, 2005 balance sheet data was derived
      from audited financial statements but does not include all disclosures required
      by generally accepted accounting principles. The interim financial statements
      and notes thereto should be read in conjunction with the financial statements
      and notes included in the Company’s Form 10-K for the year ended December 25,
      2005. In the opinion of management, these interim financial statements reflect
      all adjustments of a normal recurring nature necessary for a fair presentation
      of the results for the interim periods presented. The current period results
      of
      operations are not necessarily indicative of results, which ultimately will
      be
      reported for the full year ending December 31, 2006.





Certain
      reclassifications have been made to the prior period financials to make them
      comparable.





**2.** **STOCK-BASED
      COMPENSATION**





We
      maintain performance incentive plans under which incentive stock options and
      non-qualified stock options may be granted to employees, consultants and
      non-employee directors. To date, we have granted both qualified and
      non-qualified stock options under these plans. Stock options are granted at
      the
      market price on the date of grant, generally vest at 20% per year, and generally
      expire ten years from the date of grant. We issue new shares of common stock
      upon exercise of stock options.





In
      March
      2006, the Company’s board of directors adopted the Grill Concepts, Inc. 2006
      Equity Incentive Plan (the “2006 Plan”). The shareholders approved the 2006 Plan
      in June 2006. Under the 2006 Plan, 500,000 shares are reserved for issuance
      pursuant to the exercise of stock options and awards of restricted stock, stock
      appreciation rights and other similar equity based award grants. At June 25,
      2006, there were 346,250 shares available for grant under the 2006 Plan and
      an
      additional 35,825 shares available for grant under predecessor
      plans.




Effective
      December 26, 2005, the first day of our 2006 fiscal year, we adopted Financial
      Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment”
(“SFAS 123R”), using the modified prospective transition method, and as a
      result, did not retroactively adjust results from prior periods. Under this
      transition method, stock-based compensation was recognized for expenses related
      to the options vesting in the first six months of 2006 based on the grant date
      fair value estimated in accordance with the provisions of SFAS 123R. We apply
      the Black-Scholes valuation model in determining the fair value of share-based
      payments to employees, non-employee directors and consultants. The resulting
      compensation expense is recognized over the requisite service period, which
      is
      generally the option vesting term of five years. Options issued to non-employee
      directors are vested 100% at grant date. Prior to fiscal 2006, stock-based
      compensation was included as a pro forma disclosure in the Notes to the
      Consolidated Financial Statements as permitted by SFAS 123.




7




Compensation
      expense is recognized only for those options expected to vest, with forfeitures
      estimated based on our historical experience and future expectations. Prior
      to
      the adoption of SFAS 123R, the effect of forfeitures on the pro forma expense
      amounts was recognized as the forfeitures occurred.




As
      a
      result of adopting SFAS 123R, the impact to the Condensed Consolidated Statement
      of Operations for the six months ended June 25, 2006 on income before income
      taxes and net income was $108,000 and $91,000, respectively, and $0.02 and
      $0.01
      on basic and diluted earnings per share, respectively.





The
      pro
      forma table below reflects net income and basic and diluted net income per
      share
      for the three and six month periods ended June 26, 2005, had we applied the
      fair
      value recognition provisions of SFAS 123:







**Three
                Months
                Ended**
            
            **Six
                Months
                Ended**
            ******(in
                thousands, except per share amounts)**
            ****
            **June
                26, 2005**
            ****
            **June
                26,2005**Net
                income, as reported
            
            $
            125
            
            $
            807Deduct:
                stock compensation expense under fair value method, net of
                taxes
            
            
            (36
            )
            
            (76
            )Net
                income, pro forma
            
            $
            89
            
            $
            731Net
                income per share, as reported:Basic
            
            $
            0.02
            
            $
            0.14Diluted
            
            $
            0.02
            
            $
            0.13Net
                income per share, pro forma:Basic
            
            $
            0.01
            
            $
            0.12Diluted
            
            $
            0.01
            
            $
            0.12




Pro
      forma
      disclosure for the three and six months ended June 25, 2006 is not presented
      because the amounts are recognized in the consolidated financial statements.




There
      were 153,750 options granted in the second quarter of 2006 and none granted
      in
      the second quarter of 2005. There were no options granted in the first
      quarter of either 2006 or 2005. For all of 2005 and 2006 we have utilized the
      Black-Scholes option pricing model for estimating our stock-based compensation
      cost. The weighted average fair value cost for options granted in 2006 was
      $1.83
      per share.




The
      Company has adopted the simplified method for determining the expected term
      of
      the options. For fiscal 2006, expected stock price volatility is based on the
      historical volatility of our stock. The risk-free interest rate is based on
      the
      U.S. Treasury yield in effect at the time of grant with an equivalent remaining
      term. The Company  has
      not
      paid dividends in the past and does not currently plan to pay any dividends
      in
      the near future.




8




Stock
      option activity during the six months ended June 25, 2006 was as follows:




**Shares**
            
            **Weighted
                Average****Exercise
                Price**
            
            **Weighted
                Average Remaining Contractual****Term
                (in years)**
            
            **Aggregate**
              **Intrinsic**
              **Value**Outstanding
                at December 25, 2005
            
            
            713,275
            
            $
            2.89Granted
            
            
            153,750
            
            
            3.17Exercised
            
            
            (17,400
            )
            
            2.06Cancelled
            
            
            (6,700
            )
            
            2.549Outstanding
                at June 25, 2006
            
            
            842,925
            
            
            2.96
            
            
            6.1
            
            $
            386,906Vested
                and expected to vest at June 25, 2006
            
            
            769,277
            
            
            2.71
            
            
            6.2
            
            $
            458,586Exercisable
                at June 25, 2006
            
            
            480,645
            
            
            2.83
            
            
            4.4
            
            $
            284,291




The
      aggregate intrinsic value in the table above represents the total pretax
      intrinsic value (the difference between our closing stock price on June 25,
      2006
      and the exercise price, multiplied by the number of in-the-money options) that
      would have been received by the option holders had all option holders exercised
      their options on June 25, 2006. This amount changes based on the fair market
      value of our stock. Total intrinsic value of options exercised for the six
      months ended June 25, 2006 was $16,110. As of June 25, 2006, total unrecognized
      stock-based compensation expense related to non-vested stock options was
      $543,619, which is expected to be recognized over a weighted average period
      of
      approximately 3 years. As of June 25, 2006 there were 382,075 shares of common
      stock available for issuance pursuant to future stock option grants.




9




Additional
      information regarding options outstanding as of June 25, 2006 is as follows:




**Options
                Outstanding.**
            ****
            **Options
                Exercisable****Range
                of**
              **Exercise
                Price**
            ****
            **Number**
              **Outstanding
                at**
              **June
                25,**
              **2006**
            ****
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual
                Life**
            ****
            **Weighted-**
              **Average**
              **Exercise
                Price**
            ****
            **Number**
              **Outstanding
                at**
              **June
                25,**
              **2006**
            ****
            **Weighted-**
              **Average**
              **Exercise
                Price**$
                1.25
            
            
            1,750
            
            
            4.0
            
            $
            1.25
            
            
            1,750
            
            $
            1.25$
                1.55
            
            
            41,000
            
            
            4.2
            
            $
            1.55
            
            
            41,000
            
            $
            1.55$
                1.65
            
            
            91,500
            
            
            5.0
            
            $
            1.65
            
            
            74,600
            
            $
            1.65$
                1.70
            
            
            34,750
            
            
            6.9
            
            $
            1.70
            
            
            20,050
            
            $
            1.70$
                2.19
            
            
            49,050
            
            
            5.2
            
            $
            2.19
            
            
            38,520
            
            $
            2.19$
                2.23
            
            
            50,000
            
            
            8.1
            
            $
            2.23
            
            
            10,000
            
            $
            2.23$
                2.46
            
            
            19,000
            
            
            1.3
            
            $
            2.46
            
            
            19,000
            
            $
            2.46$
                2.86
            
            
            69,250
            
            
            6.2
            
            $
            2.86
            
            
            42,850
            
            $
            2.86$
                3.14
            
            
            25,000
            
            
            2.8
            
            $
            3.14
            
            
            10,000
            
            $
            3.14$
                3.16
            
            
            203,750
            
            
            6.9
            
            $
            3.16
            
            
            121,000
            
            $
            3.16$
                3.19
            
            
            50,000
            
            
            9.7
            
            $
            3.19
            
            
            -
            
            $
            3.19$
                3.30
            
            
            18,500
            
            
            0.0
            
            $
            3.30
            
            
            18,500
            
            $
            3.30$
                3.45
            
            
            25,000
            
            
            9.4
            
            $
            3.45
            
            
            -
            
            $
            3.45$
                4.00 to $ 4.68
            
            
            146,750
            
            
            6.5
            
            $
            4.20
            
            
            65,750
            
            $
            4.17$
                5.36 to $14.00
            
            
            17,625
            
            
            0.7
            
            $
            6.40
            
            
            17,625
            
            $
            6.40




10





**3.** **PREPAID
      EXPENSES AND OTHER CURRENT ASSETS**





Most
      lease agreements contain one or more of the following; tenant improvement
      allowances, rent holidays, rent escalation clauses and/or contingent rent
      provisions.




Rent
      is
      recognized on a straight-line basis, including the restaurant build-out period.
      This period is normally prior to the commencement of rent payments and is
      commonly called the rent holiday period. The build-out period generally begins
      when the Company enters the space and begins to make improvements in preparation
      for intended use. The Company expenses rent on a straight-line basis during
      the
      build-out period. Tenant improvement allowances are also recognized on a
      straight-line basis beginning at the same time as the commencement of the
      straight-line rent expense.





Prepaid
      expenses and other current assets at June 25, 2006 and December 25, 2005 were
      comprised of:





(**in
                thousands)**
            
            **2006**
            
            **2005**Lease
                incentives receivable
            
            $
            306
            
            $
            -Prepaid
                expenses, other
            
            
            559
            
            
            401Total
                prepaid expenses and other current assets
            
            $
            865
            
            $
            401


**4.** **RESTRICTED
      CASH**





In
      January 2006 a $1,010,000 certificate of deposit was established at Union Bank
      to act as collateral for the Standby Letter of Credit opened to support our
      workers compensation insurance policy. Other restricted cash consisted of
      $72,000 held in escrow for the Daily Grill at Continental Park in El Segundo,
      California and $110,000 that was placed in escrow with our insurance claims
      processor in 2004 for workers compensation claims.





At
      December 25, 2005 restricted cash consisted of a $860,000 certificate of deposit
      serving as collateral for our Stand By Letter of Credit, $72,000 held in escrow
      for the Daily Grill at Continental Park and $110,000 that was placed in escrow
      with our insurance claims processor in 2004 for workers compensation claims.




**5.** **INCOME
      TAXES**





During
      the quarter ended June 25, 2006, the Company determined, based on an analysis
      of
      its taxable income over the preceding three years and the projected taxable
      income for the next three years, that it is more likely than not that the
      Company will recover the majority of its existing net deferred tax asset.
      Accordingly, during the period, most of the previously recorded valuation
      allowance with respect to the Company’s deferred tax asset was eliminated. As a
      result of the elimination of the valuation allowance, the Company realized
      a net
      tax benefit of $2.043 million during the quarter ended June 25, 2006 and the
      Company’s balance sheet reflected a deferred tax asset of $2.763 million at June
      25, 2006.





11




As
      of
      June 25, 2005, the amount of the valuation allowance is $1,322,000 , which
      represents a decrease of $2,026,000 from December 25, 2005, and consists of
      $722,000 for general business credits and $602,000 for net operating loss
      carryforwards (“NOLs”). These differences have been allowed for due to the
      limitations on usage. The NOLs have not been used to reduce current taxable
      income due to the Company not completing its analysis regarding limitations
      on
      usage. The Company intends to complete its analysis as to the portion of NOLs
      that can be utilized. The Company reviews all of the available evidence, both
      positive and negative, in evaluating adequacy of the valuation allowance each
      quarter.





**6.** **LIABILITY
      FOR DEBT EXTINGUISHMENT**





In
      March
      2006 the Company retired the collateralized subordinated notes and mandatorily
      redeemable capital obligations owed to the Michigan Avenue Group (“MAG”) a
      member of Chicago Grill on the Alley, LLC. As a result of the prepayment MAG
      required a $200,000 penalty for earlier extinguishment of the obligations.
      The
      penalty is payable in four annual installments of $50,000, the first which
      was
      paid upon repayment of the obligations. The Company guaranteed the payment
      of
      the debt extinguishment penalty. The balance due to MAG as of June 25, 2006
      is
      $150,000, which is included in current and long-term liabilities in the
      condensed consolidated balance sheet.





The
      penalty on early extinguishment will be deemed to be a cash distribution of
      the
      LLC to MAG if the lease for the restaurant location of the Chicago Grill on
      the
      Alley is renewed. After renewal, the Company will receive the next $200,000
      of
      cash distributions from the Chicago Grill on the Alley, LLC, prior to any
      distributions being made to MAG. The Company will record this cash distribution
      when received.





**7.** **LONG-TERM
      DEBT**





In
      March
      2006 we signed a new financing agreement with Diamond Creek Investment Partners,
      LLC, (the “Lender”) at which time the previous line was terminated. The Credit
      Agreement provides for a revolving term loan (the “Loan” or “Credit Agreement”)
      to the Company of the lesser of (1) $8.0 million, or (2) 2.25 times the
      Company’s trailing 12 month EBITDA. Funds may be borrowed under the Credit
      Agreement, subject to satisfaction of all conditions of funding, in monthly
      advances in minimum increments of $500,000. Proceeds of the Loan may be used
      to
      pay expenses of the Loan and for general corporate purposes. The interest rate
      on the Loan is, at the option of the Company and subject to certain limitations
      on the use of London Interbank Offered Rate (“LIBOR”) based loans, equivalent to
      either (1) prime rate, but not less than 7%, plus an applicable margin, or
      (2)
      the LIBOR, but not less than 4%, plus an applicable margin. The margin, in
      each
      case, varies based upon the Company’s leverage ratio (funded debt to EBITDA,
      each as defined) and ranges from 2.75% to 3.50% with respect to prime rate
      loans
      and 5.50% to 6.25% with respect to LIBOR loans. The current interest rate is
      equal to 10.7% and will be adjusted quarterly commencing in the fourth quarter
      of 2006.





The
      Credit Agreement provides that the Company will pay all expenses incurred in
      connection with the Loan, including expenses incurred by the Lender. By separate
      agreement, the Company agreed to pay certain fees associated with the Loan,
      including a loan initiation fee of $120,000, an unused line fee of 0.5% of
      the
      unused portion of the credit facility payable monthly and a loan servicing
      fee
      of $3,000 per month. In March 2006, we borrowed $210,000 under the line of
      credit to pay costs associated with obtaining the financing.




12




On
      March
      31, 2006, the Company borrowed $1 million under the terms of the Credit
      Agreement with Diamond Creek Investment Partners, LLC. The borrowed funds were
      primarily used to retire $930,132 of collateralized subordinated notes and
      manditorily redeemable capital obligations owed to The Michigan Avenue Group
      (“MAG”) by the Company’s subsidiary Chicago Grill on the Alley, LLC (“Chicago
      Grill, LLC”), and guaranteed by the Company, with the balance used for general
      working capital. The retired obligations related to the initial funding provided
      by MAG, as a member/investor in Chicago Grill LLC, with respect to the Company’s
      The Grill on the Alley restaurant in Chicago.




The
      Loan
      matures, and is payable in full, on March 9, 2011 subject to mandatory
      prepayment to the extent, if any, that the outstanding principal balance of
      the
      Loan exceeds 2.25 times trailing 12 month EBITDA or upon the occurrence of
      certain defined extraordinary events. The Company may prepay amounts owing
      under
      the Credit Agreement subject to payment of a prepayment premium of (1) 3% with
      respect to prepayments occurring on or before March 9, 2007, and (2) 1% with
      respect to prepayments occurring after March 9, 2007 and on or before March
      9,
      2008.





The
      Company’s obligations under the Credit Agreement are secured by a first lien on
      all of the Company’s assets, including all of the capital stock and other equity
      interests held by the Company in its subsidiaries, subject to existing liens
      on
      such assets. The Loan requires the Company to comply with certain ordinary
      lending covenants. These include, among others, financial covenants relating
      to
      maximum debt to EBITDA ratio, minimum EBITDA and maximum capital expenditures.
      The Company must also comply with certain information requirements, including
      providing periodic financial statements and projections as well as notices
      of
      defaults, litigation and other matters, maintenance of insurance and compliance
      with laws as well as limitations on liens and encumbrances, indebtedness,
      dispositions, dividends and retirement of capital stock, consolidations and
      mergers, changes in nature of business and other operating, financial and
      structural limitations.





Events
      of
      default in the Credit Agreement include, among others, (a) the failure to pay
      when due the obligations owing under the Credit Agreement, (b) the failure
      to
      perform and not timely remedy certain covenants, (c) certain cross defaults
      or
      cross accelerations, (d) the occurrence of bankruptcy or insolvency events,
      (e)
      the failure to make certain payments, or the occurrence of certain events,
      relating to retirement plans, (f) certain adverse judgments against the Company
      or any of its subsidiaries, (g) certain changes in ownership of the Company’s
      stock or the board of directors, or (h) the occurrence of, and failure to
      remedy, a Material Adverse Effect (as defined in the Credit Agreement). Upon
      the
      occurrence of an event of default, the Lender may terminate the Loan commitment
      and declare the Loan due and payable in full.





**8.** **OTHER
      LONG-TERM LIABILITIES**





In
      connection with certain of the Company's leases, the landlord has provided
      the
      Company with tenant improvement allowances. These lease incentives have been
      recorded as long-term liabilities and are being amortized over the life of
      the
      lease. Additionally, the Company records deferred rent where lease payments
      are
      lower than rental expense recognized on a straight-line basis.





13




Other
      Long-Term Liabilities at June 25, 2006 and December 25, 2005 were comprised
      of:





**(in
                thousands)**
            
            **2006**
            
            **2005**Lease
                Incentives
            
            $
            5,828
            
            $
            5,140Deferred
                Rent
            
            
            2,211
            
            
            2,258Total
                Other Long-Term Liabilities
            
            $
            8,039
            
            $
            7,398




**9.** **RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      July
      2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation
      ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation
      of FASB Statement No. 109." This interpretation prescribes a recognition
      threshold and measurement attribute for the financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax return,
      and provides
      guidance on recognition, classification, interest and penalties,
      accounting in
      interim periods, disclosure, and transition. This Interpretation will be
      effective for the Company
      on January 1, 2007, with the cumulative effect of the change in accounting principle
      recorded as an adjustment to opening retained earnings. The Company is currently
      assessing the impact of the adoption of the Interpretation on its
      financial statements.





In
      November 2005, the FASB issued FASB Staff Position (“FSP”) FAS123(R)-3,
      Transition Election to Accounting for the Tax Effects of Share-Based Payment
      Awards. This FSP requires an entity to follow either the transition guidance
      for
      the additional-paid-in-capital pool as prescribed in SFAS No. 123(R),
      Share-Based Payment, or the alternative transition method as described in the
      FSP. An entity that adopts SFAS No. 123(R) using the modified prospective
      application may make a one-time election to adopt the transition method
      described in this FSP. An entity may take up to one year from the later of
      its
      initial adoption of SFAS No. 123(R) or the effective date of this FSP to
      evaluate its available transition alternatives and make its one-time election.
      This FSP became effective in November 2005. The Company has until December
      31,
      2006 to make its election. We continue to evaluate the impact that the adoption
      of this FSP could have on our financial statements.





In
      October 2005, the FASB posted FASB Staff Position (“FSP”) 13-1, which requires
      that rental costs incurred during and after a construction period for the right
      to control the use of a leased asset during and after construction of a lessee
      asset to be recognized as rental expense. The provisions of FSP 13-1 shall
      be
      applied to the first reporting period beginning after December 15, 2005. The
      Company’s existing accounting policy for rental costs incurred during and after
      the construction period conforms to FSP 13-1. The adoption of FSP 13-1 did
      not
      have a material impact on the Company’s consolidated financial
      statements.





14




**10.** **RELATED
      PARTY TRANSACTIONS**





Terms
      of the Michigan Avenue Group Obligations Extinguishment





In
      March
      2006 the Company retired the collateralized subordinated notes and mandatorily
      redeemable capital obligations owed to the Michigan Avenue Group (“MAG”) a
      member of Chicago Grill on the Alley, LLC. As a result of the prepayment MAG
      required a $200,000 penalty for earlier extinguishment of the obligations.
      The
      penalty is payable in four annual installments of $50,000, the first which
      was
      paid upon repayment of the obligations. The Company guaranteed the payment
      of
      the debt extinguishment penalty. The balance due to MAG as of June 25, 2006
      is
      $150,000, which is included in current and long-term liabilities in the
      consolidated condensed balance sheet.





The
      penalty on early extinguishment will be deemed to be a cash distribution of
      the
      LLC to MAG if the lease for the restaurant location of the Chicago Grill on
      the
      Alley is renewed. After renewal, the Company will receive the next $200,000
      of
      cash distributions from the Chicago Grill on the Alley, LLC, prior to any
      distributions being made to MAG. The Company will record this cash distribution
      when received.





Amendment
      to Starwood Development Agreement





On
      June
      21, 2006, the Company entered into a First Amendment to the Development
      Agreement (the “First DA Amendment”) with Starwood Hotels and Resorts Worldwide,
      Inc. (“Starwood”). The First DA Amendment amends the Company’s July 27, 2001
      Development Agreement with Starwood to (1) eliminate the Company’s obligation to
      issue warrants to Starwood following the opening of ten, fifteen and twenty
      restaurants under the terms of the Development Agreement and (2) modify the
      exercise price of warrants issued following the opening of five restaurants
      under the terms of the Development Agreement.





Under
      the
      terms of the First DA Amendment, if a fifth restaurant is opened under the
      terms
      of the Development Agreement before April 1, 2008, the Company will issue to
      Starwood warrants to purchase a number of shares of common stock equal to 4%
      of
      the then outstanding shares. If the fifth restaurant is opened after April
      1,
      2008, the Company will issue to Starwood warrants to purchase a number of shares
      of common stock equal to 4% of the shares outstanding at December 25, 2005.





The
      warrants will have an exercise price equal to (1) if the fair market value
      of
      the common stock as of the date of issuance of the warrants (the “Threshold Date
      Value”) is greater than the fair market value of the common stock as of the date
      of the original Development Agreement (the “Closing Date Value”), the greater of
      (a) 75% of the Threshold Date Value, or (b) the Closing Date Value, or (2)
      if
      the Threshold Date Value of the common stock is less than the Closing Date
      Value, the Threshold Date Value.





Amendment
      to Starwood Stockholders’ Agreement





On
      June
      21, 2006, the Company entered into a First Amendment to Stockholders’ Agreement
      (the “First SA Amendment”) with Starwood. The First SA Amendment amends the July
      27, 2001 Stockholders’ Agreement between the Company, Starwood and certain
      stockholders of the Company to (1) eliminate the Company’s obligation to cause
      at least two nominees of Starwood to be elected to the Company’s board of
      directors if ten or more restaurants are operated under the Development
      Agreement, and (2) modify certain provisions limiting the size of the Company’s
      board of directors.





15




Under
      the
      terms of the First SA Amendment, so long as Starwood continues to hold at least
      333,334 shares of Company common stock, the Company shall take all actions
      reasonably necessary to assure that at least one nominee of Starwood is elected
      to the board of directors and to limit the size of the board of directors to
      no
      more than nine persons.




**11.** **DISTRIBUTION
      OF CAPITAL AND PREFERRED RETURNS**







The
      Company’s San Jose Grill, Chicago Grill on the Alley, The Grill on Hollywood,
      South Bay Daily Grill and Downtown Daily Grill restaurants are each owned by
      limited liability companies (the “LLCs”) in which the Company serves as manager
      and owns a controlling interest. Each of the LLCs has minority interest owners
      (“members”) some of whom have participating rights in the joint venture such as
      the ability to approve operating and capital budgets and the borrowing of money.
      In connection with the financing of each of the LLCs, the minority members
      may
      have certain rights to priority distributions of capital until they have
      received a return of their initial investments (“Return of Member Capital”) as
      well as rights to receive defined preferred returns on their invested capital
      (“Preferred Return”).




The
      Universal CityWalk Daily Grill is owned by a partnership (the “CityWalk
      Partnership”) for which we serve as manager. Our partner has certain rights to
      priority distribution of capital from the CityWalk Partnership until they have
      received their initial investment.





The
      following tables set forth a summary for each of the LLCs and the CityWalk
      Partnership of (1) the distributions of capital to the Members and/or the
      Company during the six months ended June 25, 2006, (2) the unreturned balance
      of
      the capital contributions of the Members and/or the Company at June 25, 2006,
      and (3) the accrued but unpaid preferred returns due to the Members and/or
      the
      Company at June 25, 2006:





**(in
                thousands)**
            
            **San
                Jose Grill, LLC**
            
            **Chicago
                Grill On The Alley, LLC**
            
            **The
                Grill On Hollywood,****LLC****Members**
            ****
            **Company**
            ****
            **Members**
            ****
            **Company**
            ****
            **Members**
            ****
            **Company**Distributions
                of profit and note repayments during the quarter ended June 25,
                2006:
            
            $
            184
            
            $
            184
            
            $
            972
                (a
            )
            
            -
            
            
            -
            
            
            -Unreturned
                Initial Capital Contributions at June 25, 2006:
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            1,200
            
            $
            250Preferred
                Return rate:
            
            
            10
            %
            
            10
            %
            
            8
            %
            
            -
            
            
            12
            %
            
            12
            %Accrued
                but unpaid Preferred Returns at June 25, 2006:
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (b
            )
            
            (b
            )




16





**South
                Bay Daily Grill**
              **(Continental
                Park, LLC)**
            
            **Universal
                Citywalk Daily Grill**
            
            **Downtown
                Daily Grill**
              **(612
                Flower Daily Grill, LLC)****Members**
            ****
            **Company**
            ****
            **Members**
            ****
            **Company**
            ****
            **Members**
            ****
            **Company**
              **(d)**Distributions
                of profit during the quarter ended June 25, 2006:
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Unreturned
                Initial and Additional Capital Contributions at June 25,
                2006:
            
            $
            1,100
            
            $
            450
            
            $
            1,396
            
            $
            296
            
            $
            1,400
            
            $
            313Preferred
                Return rate:
            
            
            10
            %
            
            10%
                (c
            )
            
            -
            
            
            -
            
            
            9
            %
            
            9
            %Accrued
                but unpaid Preferred Returns at June 25, 2006:
            
            
            (b
            )
            
            (b
            )
            
            (b
            )
            
            -
            
            $
            91
            
            $
            23





(a)
            Distribution
                of capital and note repayments as of June 25, 2006 includes $902,000
                of
                retirement of collateralized subordinated notes and mandatorily redeemable
                capital obligations and $70,000 of interest and preferred return.





(b)
            Due
                to the under performance of the restaurants the preferred return
                is not
                being accrued. The Company is not liable to pay the preferred return
                distributions, such that they represent a non-recourse obligation
                of the
                subsidiary entity. If preferred returns were accrued for The Grill
                on
                Hollywood the member would have an accrued preferred return of $866,000
                and the Company would have an accrued preferred return of $180,000.
                If
                preferred returns were accrued for the South Bay Daily Grill the
                member
                would have an accrued preferred return of $427,000 and the Company
                would
                have an accrued preferred return of $167,000.If
                preferred returns were accrued for the CityWalk Partnership the Member
                would have an accrued preferred return of $611,000.





(c)
            The Company’s preferred return with respect to the South
              Bay Daily Grill is based on unrecovered capital contribution and accrued
              but unpaid management fees.





(d)
            The Company is a non-managing member, and a wholly
              owned
              subsidiary of the Company is the Manager of this
              restaurant




**12.** **PER
      SHARE DATA**





Pursuant
      to SFAS No. 128, “Earnings Per Share,” basic net income per share is computed by
      dividing the net income attributable to common shareholders by the
      weighted-average number of common shares outstanding during the period. Diluted
      net income per share is computed by dividing the net income attributable to
      common shareholders by the weighted-average number of common and common
      equivalent shares outstanding during the period. Common share equivalents
      included in the diluted computation represent shares issuable upon assumed
      exercise of stock options, warrants and convertible preferred stocks using
      the
      treasury stock method.





17




A
      reconciliation of earnings available to common stockholders and diluted earnings
      available to common stockholders and the related weighted average shares for
      the
      six and three-month periods ended June 25, 2006 and June 26, 2005
      follow:





**Six
                months**
            ****
            **2006**
            ****
            **2005**
            ******(in
                thousands, except share data)**
            ****
            **Earnings**
            ****
            **Shares**
            ****
            **Earnings**
            ****
            **Shares**Net
                income
            
            $
            1,992
            
            
            
            
            $
            807Less:
                preferred stock dividend
            
            
            (25
            )
            
            
            
            
            (25
            )Earnings
                available for common stockholders
            
            
            1,967
            
            
            5,795,036
            
            
            782
            
            
            5,651,188Dilutive
                securities:Stock
                options
            
            
            -
            
            
            96,264
            
            
            -
            
            
            93,196Warrants
            
            
            -
            
            
            398,988
            
            
            -
            
            
            274,124Convertible
                Preferred Stock
            
            
            -
            
            
            125,000
            
            
            -
            
            
            -Dilutive
                earnings available to common stockholders
            
            $
            1,967
            
            
            6,415,287
            
            $
            782
            
            
            6,018,508





For
      the
      six months ended June 25, 2006, 214,250 options and 26,562 warrants were
      excluded from the calculation because they were anti-dilutive. For the six
      months ended June 26, 2005, 303,375 options, 58,620 warrants and 500 shares
      of
      convertible preferred stock were excluded from the calculation because they
      were
      anti-dilutive.





**Three
                months**
            ****
            **2006**
            ****
            **2005**
            ******(in
                thousands, except share data)**
            ****
            **Earnings**
            ****
            **Shares**
            ****
            **Earnings**
            ****
            **Shares**Net
                income
            
            $
            1,510
            
            
            
            
            $
            125Less:
                preferred stock dividend
            
            
            (12
            )
            
            
            
            
            (12
            )Earnings
                available for common stockholders
            
            
            1,498
            
            
            5,837,306
            
            
            113
            
            
            5,652,230Dilutive
                securities:Stock
                options
            
            
            -
            
            
            102,133
            
            
            -
            
            
            99,561Warrants
            
            
            -
            
            
            392,312
            
            
            -
            
            
            312,990Convertible
                preferred stock
            
            
            -
            
            
            125,000
            
            
            -
            
            
            -Dilutive
                earnings available to common stockholders
            
            $
            1,498
            
            
            6,456,751
            
            $
            113
            
            
            6,064,781





For
      the
      three months ended June 25, 2006, 195,750 options and 26,562 warrants were
      excluded from the calculation because they were anti-dilutive. For the three
      months ended June 26, 2005, 303,375 options, 58,620 warrants and 500 shares
      of
      convertible preferred stock were excluded from the calculation because they
      were
      anti-dilutive.




18




**13.** **ISSUANCES
      OF COMMON STOCK**





During
      the six months ended June 25, 2006, the Company issued 413,489 shares of common
      stock pursuant to the exercise, by 8 holders, of 1,044,336 warrants originally
      issued in a 2001 private placement. The Company received $150,003 from the
      exercise of 66,668 warrants at $2.25 per share. The remaining 977,668 shares
      were issued pursuant to the cashless exercise of 666,667 warrants at $2.00
      and
      311,001 warrants at $2.25 per share.





During
      the six months ended June 25, 2006, the Company issued 52,500 shares of common
      stock pursuant to the exercise of stock options for aggregate consideration
      of
      $35,812.




**14.** **LITIGATION
      CONTINGENCIES**




In
      June
      2004, one of our former hourly restaurant employees filed a class action lawsuit
      against us in the Superior Court of California of Orange County. We requested
      and were granted a motion to move the suit from Orange County to Los Angeles
      County. The lawsuit was then filed in the Superior Court of California of Los
      Angeles in December 2004. The plaintiff has alleged violations of California
      labor laws with respect to providing meal and rest breaks. The lawsuit sought
      unspecified amounts of penalties and other monetary payments on behalf of the
      plaintiffs and other purported class members. We believe that all of our
      employees were provided with the opportunity to take all required meal and
      rest
      breaks. The case has been placed in a stay status pending the outcome of a
      review by the California Supreme Court of appealed cases of the same nature
      that
      is expected to happen in the first half of 2007. We intend to vigorously defend
      our position in all of these matters although the outcome cannot be ascertained
      at this time.




A
      Class
      Action complaint was filed in the Superior Court of the State of California
      for
      the County of Los Angeles on March 15, 2006. The plaintiff and those
      similarly situated (Servers) complain that the company has violated
      the labor code by having Servers "Tip Out" Bartenders and Expeditors a
      percentage of their tips to these employees who provide no direct table service.
      The complaint has labeled this act as "Tip-pooling." The Company has filed
      Demurrers to the first amended complaint and a Motion to Strike All Causes
      of
      Action. The next hearing is scheduled for August 25, 2006.




**15.** **SUBSEQUENT
      EVENTS**





Seattle
      Management Agreement





On
      June
      27, 2006 the Company signed a management agreement to operate a hotel-based
      full
      service Daily Grill restaurant in the Sheraton Hotel in Seattle, Washington.
      The
      agreement has an initial term of ten years with two five-year options. The
      Company may contribute approximately $450,000 of the initial remodel costs
      if
      total construction costs exceed $1,500,000. The Company will earn a preferred
      return of 9% per annum on the contribution in addition to management and
      incentive fees. The restaurant is scheduled to open in the spring of
      2007.




19




Issuance
      of Common Stock





Subsequent
      to June 25, 2006, the Company issued 228,828 shares of common stock pursuant
      to
      the exercise, by 9 holders, of 288,998 warrants originally issued in a 2001
      private placement. The Company received $462,746 from the exercise of 205,665
      warrants at $2.25 per share. The remaining 23,163 shares were issued pursuant
      to
      the cashless exercise of warrants at $2.25 per share.





Management
      Changes





In
      June
      2006, following the Company’s annual stockholders meeting, Robert Spivak retired
      as the Company’s President and Chief Executive Officer and Philip Gay, the
      Company’s Chief Financial Officer, assumed the positions of President and Chief
      Executive Officer. In July 2006, Wayne Lipschitz was appointed as Chief
      Financial Officer.




**Item
      2.**  **Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations** .





The
      following discussion and analysis should be read in conjunction with the
      Company’s financial statements and notes thereto included elsewhere in this Form
      10-Q. Except for the historical information contained herein, the discussion
      in
      this Form 10-Q contains certain forward looking statements that involve risks
      and uncertainties, such as statements of the Company’s plans, objectives,
      expectations and intentions. The cautionary statements made in this Form 10-Q
      should be read as being applicable to all related forward looking statements
      wherever they appear in this Form 10-Q. The Company’s actual results could
      differ materially from those discussed here. For a discussion of certain factors
      that could cause actual results to be materially different, refer to the
      Company’s Annual Report on Form 10-K for the year ended December 25,
      2005.





**Current
      Year Developments**





*Restaurant
      Openings, Leasing and Management.* The
      Company opened no new restaurants during the six months ended June 25, 2006.
      At
      June 25, 2006, the Company continued the build-out of a Grill on the Alley
      restaurant in Dallas, Texas that opened in July 2006.





In
      April
      2006, the
      Company signed a management agreement for a hotel-based Daily Grill to open
      at
      the Westin Memphis Beale Street in Memphis, Tennessee. The restaurant owner
      will
      pay all construction and pre-opening costs. The Company will receive a
      management fee with an annual guaranteed minimum fee. The restaurant is
      scheduled to open in the spring of 2007.





In
      June
      2006, the Company signed a management agreement for a hotel-based Daily Grill
      to
      open at the Sheraton Seattle, in Seattle, Washington. The restaurant owner
      will
      pay substantially all construction and pre-opening costs, other than
      approximately $450,000 of remodeling costs to be contributed by the Company
      if
      the total construction costs exceed $1,500,000 which contribution will be
      entitled to a 9% preferred return to the Company. The Company will receive
      management and incentive fees. The restaurant is scheduled to open in the spring
      of 2007.





*Credit
      Facilities.* During
      the six months ended June 25, 2006, the Company entered into a financing
      agreement with Diamond Creek Investment Partners, LLC, at which time the
      previous line was terminated. The Credit Agreement provides for a revolving
      term
      loan (the “Loan”) to the Company of the lesser of (1) $8.0 million, or (2) 2.25
      times the Company’s trailing 12 month EBITDA. Funds may be borrowed under the
      Credit Agreement, subject to satisfaction of all conditions of funding, in
      monthly advances in minimum increments of $500,000. Proceeds of the Loan may
      be
      used to pay expenses of the Loan and for general corporate purposes. The
      interest rate on the Loan is, at the option of the Company and subject to
      certain limitations on the use of LIBOR based loans, equivalent to either (1)
      prime rate, but not less than 7%, plus an applicable margin, or (2) the London
      Interbank Offered Rate, but not less than 4%, plus an applicable margin. The
      margin, in each case, varies based upon the Company’s leverage ratio (funded
      debt to EBITDA, each as defined) and ranges from 2.75% to 3.50% with respect
      to
      prime rate loans and 5.50% to 6.25% with respect to LIBOR loans. The current
      interest rate is equal to 10.7% and will be adjusted quarterly commencing in
      the
      fourth quarter of 2006.





20




The
      Credit Agreement provides that the Company will pay all expenses incurred in
      connection with the Loan, including expenses incurred by the Lender. By separate
      agreement, the Company agreed to pay certain fees associated with the Loan,
      including a loan initiation fee of $120,000, an unused line fee of 0.5% of
      the
      unused portion of the credit facility payable monthly and a loan servicing
      fee
      of $3,000 per month. In March 2006, we borrowed $210,000 under the line of
      credit to pay costs associated with obtaining the financing.





The
      Loan
      matures, and is payable in full, on March 9, 2011 subject to mandatory
      prepayment to the extent, if any, that the outstanding principal balance of
      the
      Loan exceeds 2.25 times trailing 12 month EBITDA or upon the occurrence of
      certain defined extraordinary events. The Company may prepay amounts owing
      under
      the Credit Agreement subject to payment of a prepayment premium of (1) 3% with
      respect to prepayments occurring on or before March 9, 2007, and (2) 1% with
      respect to prepayments occurring after March 9, 2007 and on or before March
      9,
      2008.





The
      Company’s obligations under the Credit Agreement are secured by a first lien on
      all of the Company’s assets, including all of the capital stock and other equity
      interests held by the Company in its subsidiaries, subject to existing liens
      on
      such assets. The Loan requires the Company to comply with certain ordinary
      lending covenants. These include, among others, financial covenants relating
      to
      maximum debt to EBITDA ratio, minimum EBITDA and maximum capital expenditures.
      The Company must also comply with certain information requirements, including
      providing periodic financial statements and projections as well as notices
      of
      defaults, litigation and other matters, maintenance of insurance and compliance
      with laws as well as limitations on liens and encumbrances, indebtedness,
      dispositions, dividends and retirement of capital stock, consolidations and
      mergers, changes in nature of business and other operating, financial and
      structural limitations.





On
      March
      31, 2006, the Company borrowed $1 million under the terms of the Credit
      Agreement with Diamond Creek Investment Partners LLC. The borrowed funds were
      primarily used to retire $874,192 of collateralized subordinated notes and
      manditorily redeemable capital obligations owed to The Michigan Avenue Group
      (“MAG”) by the Company’s subsidiary Chicago The Grill on the Alley, LLC
      (“Chicago Grill LLC)”, $5,940 of interest and $50,000 for the first annual
      penalty payment and guaranteed by the Company, with the balance used for general
      working capital. The retired obligations related to the initial funding provided
      by MAG, as a member/investor in Chicago Grill LLC, with respect to the Company’s
      The Grill on the Alley restaurant in Chicago.





*Management
      Changes.* In June
      2006, following the Company’s annual stockholders meeting, Robert Spivak retired
      as the Company’s President and Chief Executive Officer and Philip Gay, the
      Company’s Chief Financial Officer, assumed the positions of President and Chief
      Executive Officer. In July 2006, Wayne Lipschitz was appointed as Chief
      Financial Officer.





21




*Income
      Taxes.* During
      the quarter ended June 25, 2006, the Company determined, based on an analysis
      of
      its taxable income over the preceding three years and the projected taxable
      income for the next three years, that it is more likely than not that the
      Company will recover the majority of its existing net deferred tax asset.
      Accordingly, during the period, most of the previously recorded valuation
      allowance with respect to the Company’s deferred tax asset was eliminated. As a
      result of the elimination of the valuation allowance, the Company realized
      a net
      tax benefit of $2,043,000 during the quarter ended June 25, 2006 and the
      Company’s balance sheet reflected a deferred tax asset of $2,763,000 at June 25,
      2006.





The
      Company still has a valuation allowance of $1,322,000 consisting of $722,000
      for
      general business credits and $602,000 for net operating losses (“NOLs”). There
      is still some analysis to be done as to whether the Company can utilize all of
      the NOLs and the general business credits as both of these have limitations.
      The
      Company will continue to review the valuation allowance each quarter to see
      if
      any further adjustments are necessary.





*Stock
      Based Compensation Expense* .
      Effective December 26, 2005, the first day of the Company’s 2006 fiscal year,
      the Company adopted
      Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based
      Payment” (“SFAS 123R”), using the modified prospective transition method, and as
      a result, did not retroactively adjust results from prior periods. Under this
      transition method, stock-based compensation was recognized for expenses related
      to the options vesting in the first six months of 2006 based on the grant date
      fair value estimated in accordance with the provisions of SFAS 123R. We apply
      the Black-Scholes valuation model in determining the fair value of share-based
      payments to employees, non-employee directors and consultants. The resulting
      compensation expense is recognized over the requisite service period, which
      is
      generally the option vesting term of five years. Prior to fiscal 2006,
      stock-based compensation was included as a pro forma disclosure in the Notes
      to
      the Consolidated Financial Statements as permitted by SFAS 123.





As
      a
      result of the adoption of SFAS 123R, during the six months ended June 25, 2006,
      the Company recorded compensation expense relating to stock option grants of
      $108,000. The Company recorded no compensation expense during the fiscal 2005
      period relating to stock option grants. Had the Company reported stock based
      compensation expense under SFAS 123R during 2005, the Company’s pro forma
      compensation expense associated with options grants during the six months ended
      June 26, 2005 would have been $76,000.





There
      were no modifications made to outstanding share options prior to the adoption
      of
      SFAS 123R. There have been no changes made to the quantity or type of incentive
      awards granted since the adoption of SFAS 123R. Terms for incentive compensation
      awards have remained the same in 2006 as they were in 2005.





As
      of
      June 25, 2006, total unrecognized stock-based compensation expense related
      to
      non-vested stock options was $543,619, which is expected to be recognized over
      a
      weighted average period of approximately 3 years.





In
      March
      2006, the Company’s board of directors adopted the Grill Concepts, Inc. 2006
      Equity Incentive Plan (the “2006 Plan”). The shareholders approved the 2006 Plan
      in June 2006. Under the 2006 Plan, 500,000 shares are reserved for issuance
      pursuant to the exercise of stock options and awards of restricted stock, stock
      appreciation rights and other similar equity based award grants. There were
      153,750 and zero options granted in the first two quarters of 2006 and 2005
      respectively. At June 25, 2006, there were 346,250 shares available for grant
      under the 2006 Plan and an additional 35,825 shares available for grant under
      predecessor plans.





22




*Issuances
      of Common Stock* . During
      the six months ended June 25, 2006, the Company issued 413,489 shares of
      restricted common stock pursuant to the exercise, by 8 holders, of 1,044,336
      warrants originally issued in a 2001 private placement. The Company received
      $150,003 from the exercise of 66,668 warrants at $2.25 per share. The remaining
      346,821 shares were issued pursuant to the cashless exercise of 666,667 warrants
      at $2.00 and 311,001 warrants at $2.25 per share.





During
      the six months ended June 25, 2006, the Company issued 52,500 shares of common
      stock pursuant to the exercise of stock options for aggregate consideration
      of
      $35,812.





Subsequent
      to June 25, 2006, the Company issued 228,828 shares of common stock pursuant
      to
      the exercise, by 9 holders, of 288,998 warrants originally issued in a 2001
      private placement. The Company received $462,746 from the exercise of 205,665
      warrants at $2.25 per share. The remaining 23,163 shares were issued pursuant
      to
      the cashless exercise of warrants at $2.25 per share.





*Amendment
      of Starwood Agreements* .
      On June
      21, 2006, the Company entered into a First Amendment to the Development
      Agreement (the “First DA Amendment”) with Starwood Hotels and Resorts Worldwide,
      Inc. (“Starwood”). The First DA Amendment amends the Company’s July 27, 2001
      Development Agreement with Starwood to (1) eliminate the Company’s obligation to
      issue warrants to Starwood following the opening of ten, fifteen and twenty
      restaurants under the terms of the Development and (2) modify the exercise
      price
      of warrants issued following the opening of five restaurants under the terms
      of
      the Development Agreement.





Under
      the
      terms of the First DA Amendment, if a fifth restaurant is opened under the
      terms
      of the Development Agreement before April 1, 2008, the Company will issue to
      Starwood warrants to purchase a number of shares of common stock equal to 4%
      of
      the then outstanding shares. If the fifth restaurant is opened after April
      1,
      2008, the Company will issue to Starwood warrants to purchase a number of shares
      of common stock equal to 4% of the shares outstanding at December 25, 2005.





The
      warrants will have an exercise price equal to (1) if the fair market value
      of
      the common stock as of the date of issuance of the warrants (the “Threshold Date
      Value”) is greater than the fair market value of the common stock as of the date
      of the original Development Agreement (the “Closing Date Value”), the greater of
      (a) 75% of the Threshold Date Value, or (b) the Closing Date Value, or (2)
      if
      the Threshold Date Value of the common stock is less than the Closing Date
      Value, the Threshold Date Value.





On
      June
      21, 2006, the Company entered into a First Amendment to Stockholders’ Agreement
      (the “First SA Amendment”) with Starwood. The First SA Amendment amends the July
      27, 2001 Stockholders’ Agreement between the Company, Starwood and certain
      stockholders of the Company to (1) eliminate the Company’s obligation to cause
      at least two nominees of Starwood to be elected to the Company’s board of
      directors if ten or more restaurants are operated under the Development
      Agreement, and (2) modify certain provisions limiting the size of the Company’s
      board of directors.





Under
      the
      terms of the First SA Amendment, so long as Starwood continues to hold at least
      333,334 shares of Company common stock, the Company shall take all actions
      reasonably necessary to assure that at least one nominee of Starwood is elected
      to the board of directors and to limit the size of the board of directors to
      no
      more than nine persons.





23




**Results
      of Operations**





The
      following table sets forth, for the periods indicated, information derived
      from
      the Company's condensed consolidated statements of operations expressed as
      a
      percentage of total revenues.


**Three
                  Months Ended**
              
              **Six
                  MonthsEnded****June
                  25,2006**
              
              **June
                  26,2005**
              
              **June
                  25,2006**
              
              **June
                  26,2005**Revenues:
              
              
              %
              
              
              %
              
              
              %
              
              
              %Sales
              
              
              77.5
              
              
              79.4
              
              
              77.8
              
              
              78.6Cost
                  reimbursements
              
              
              20.3
              
              
              18.5
              
              
              20.0
              
              
              19.3Management
                  and license fees
              
              
              2.2
              
              
              2.2
              
              
              2.2
              
              
              2.1Total
                  revenues
              
              
              100.0
              
              
              100.0
              
              
              100.0
              
              
              100.0Operating
                  expenses:Cost
                  of sales
              
              
              21.9
              
              
              22.6
              
              
              21.8
              
              
              22.1Restaurant
                  operating
              
              
              46.1
              
              
              47.6
              
              
              46.3
              
              
              46.2Reimbursed
                  costs
              
              
              20.3
              
              
              18.5
              
              
              20.0
              
              
              19.3General
                  and administrative
              
              
              8.7
              
              
              7.2
              
              
              7.5
              
              
              6.7Depreciation
                  and amortization
              
              
              2.8
              
              
              2.9
              
              
              2.8
              
              
              2.8Pre-opening
                  costs
              
              
              0.7
              
              
              0.9
              
              
              0.3
              
              
              0.7Total
                  operating expenses
              
              
              100.5
              
              
              99.6
              
              
              98.7
              
              
              97.7Income
                  (loss) from operations
              
              
              (0.5
              )
              
              0.4
              
              
              1.3
              
              
              2.3Interest
                  expense, net
              
              
              (0.5
              )
              
              (0.2
              )
              
              (0.3
              )
              
              (0.2
              )Extinguishment
                  of debt
              
              
              (1.5
              )
              
              -
              
              
              (0.7
              )
              
              -Income
                  (loss) before provision for incometaxes
                  and minority interest
              
              
              (2.4
              )
              
              0.2
              
              
              0.3
              
              
              2.1Benefit
                  (provision) for income taxes
              
              
              10.9
              
              
              (0.7
              )
              
              5.2
              
              
              (0.6
              )Minority
                  interest in net (profit) loss ofsubsidiaries
              
              
              (0.4
              )
              
              1.2
              
              
              (0.3
              )
              
              0.9Net
                  income
              
              
              8.1
              
              
              0.7
              
              
              5.2
              
              
              2.3




The
      following table sets forth, for the periods indicated, information derived
      from
      the Company’s condensed consolidated financial statements of operations
      expressed as a percentage of total restaurant sales.





**Three
                Months Ended******
            
            **Six
                Months Ended****June
                25,2006**
            
            **June
                26,2005**
            
            **June
                25,2006**
            
            **June
                26,2005**Revenues
            
            
            %
            
            
            %
            
            
            %
            
            
            %Sales
            
            
            100.0
            
            
            100.0
            
            
            100.0
            
            
            100.0Cost
                of sales
            
            
            28.3
            
            
            28.4
            
            
            28.0
            
            
            28.2Restaurant
                operating expenses
            
            
            60.0
            
            
            60.0
            
            
            59.5
            
            
            58.8





24





The
      following tables set forth certain unaudited financial information and other
      restaurant data relating to Company owned restaurants and Company managed and/or
      licensed restaurants.




**Second
                QuarterOpenings**
            
            **Year-to-dateOpenings**
            
            **Total
                open atEnd of Quarter****2006**
            
            **2005**
            
            **2006**
            
            **2005**
            
            **2006**
            
            **2005**Daily
                Grill restaurants:Company
                owned
            
            
            -
            
            
            1
            
            
            -
            
            
            2
            
            
            12
            
            
            13Managed
                and/or licensed
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8
            
            
            8Grill
                on the Alley restaurants:Company
                owned
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4
            
            
            4Total
            
            
            -
            
            
            1
            
            
            -
            
            
            2
            
            
            24
            
            
            25




**Three
                Months Ended**
            
            **Six Months Ended****June
                25,2006**
            
            **June
                26,2005**
            
            **June
                25,2006**
            
            **June
                26,2005**Weighted
                average weekly salesper
                company owned restaurant:Daily
                Grill
            
            $
            59,200
            
            $
            58,824
            
            $
            64,964
            
            $
            61,792Grill
                on the Alley
            
            
            86,697
            
            
            79,939
            
            
            89,476
            
            
            80,826Change
                in comparable restaurant sales (1):Daily
                Grill
            
            
            6.8
            %
            
            (1.5
            )%
            
            5.3
            %
            
            (1.3
            )%Grill
                on the Alley
            
            
            8.5
            %
            
            13.4
            %
            
            10.7
            %
            
            9.5
            %Total
                sales (in thousands):Daily
                Grill
            
            $
            10,004
            
            $
            9,260
            
            $
            20,269
            
            $
            18,398Grill
                on the Alley
            
            
            4,508
            
            
            4,157
            
            
            9,305
            
            
            8,406Total
                consolidated sales
            
            $
            14,512
            
            $
            13,417
            
            $
            29,574
            
            $
            26,804




(1)
            When
                computing comparable restaurant sales, restaurants open for at least
                12
                months are compared from period to
                period.





We
      also
      earn management and license fee revenue based on a percentage of gross sales
      at
      restaurants under management and licensing arrangements. Our management and
      license fee revenue typically is earned at a rate of five to eight percent
      of
      reported sales at these restaurants. The sales of managed and licensed
      restaurants are not included in our statements of operations. However, we
      consider the disclosure of these sales to be a key indicator of brand strength
      and important to understanding how changes in sales at the managed and licensed
      restaurants impact our revenue.





25




Sales
      at
      non-Company owned Grill Concepts-branded restaurants, categorized as, managed
      and licensed restaurants were as follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****(in
                thousands)**
            
            **June
                25,2006**
            
            **June
                26,2005**
            
            **June
                25,2006**
            
            **June
                26,2005**Managed
                Daily Grills
            
            $
            5,196
            
            $
            4,512
            
            $
            10,497
            
            $
            9,113Licensed
                Daily Grills
            
            
            1,988
            
            
            1,961
            
            
            3,685
            
            
            3,770$
            7,184
            
            $
            6,473
            
            $
            14,182
            
            $
            12,883Management
                and license fees
            
            $
            418
            
            $
            369
            
            $
            838
            
            $
            725Percent
                of gross sales
            
            
            5.8
            %
            
            5.7
            %
            
            5.9
            %
            
            5.6
            %




**Material
      Changes in Results of Operations for the Three and Six Months Ended June 25,
      2006 as compared to the Three and Six Months Ended June 26,
      2005**





*Revenues* .
      Total
      revenues increased 10.8% to $18.7 million for the 2006 second quarter from
      $16.9
      million in the 2005 second quarter and increased 11.5% to $38.0 million for
      the
      2006 year-to-date period from $34.1 million for the 2005 year-to-date period.
      For the quarter, total revenues consisted of sales revenues of $14.5 million,
      up
      8.2% from $13.4 million in the 2005 quarter, management and license fees of
      $418,000, up 13.3% from $369,000 in the 2005 quarter, and reimbursed managed
      outlet expenses of $3.8 million, up 21.7% from $3.1 million in the 2005 quarter.
      For the year-to-date period, total revenues consisted of sales revenues of
      $29.6
      million, up 10.3% from $26.8 million in the 2005 year-to-date period, management
      and license fees of $838,000, up 15.6% from, $725,000 in the 2005 year-to-date
      period, and reimbursed managed outlet expenses of $7.6 million, up 15.6% from
      $6.6 million in the 2005 year-to-date period.





Sales
      for
      Daily Grill restaurants increased by 8.0% from $9.3 million in the 2005 quarter
      to $10.0 million in the 2006 period. The increase in sales revenues for the
      Daily Grill restaurants from 2005 to 2006 was primarily attributable to a full
      six months of operations at the Downtown Daily Grill ($0.7 million) and an
      increase in same  store
      sales of 6.8% ($0.5 million) for restaurants open for the entire 26 weeks in
      both 2005 and 2006 partially offset by a decrease in sales at the La Cienega
      Daily Grill ($0.5 million) due to closure of the restaurant in July 2005.





Sales
      for
      Daily Grill restaurants increased by 10.2% from $18.4 million for the six months
      in 2005 to $20.3 million in 2006. The increase in sales revenues for the Daily
      Grill restaurants from 2005 to 2006 was primarily due to the 2005 opening of
      the
      Santa Monica Daily Grill and the Downtown Daily Grill ($2.2 million) combined
      with improved sales at the comparable restaurants of 5.3% ($0.9 million)
      partially offset by a decrease at the La Cienega Daily Grill ($1.2 million)
      due
      to closure of the restaurant in July 2005. Management considers performance
      of
      same store or comparable store sales to be an important measure of growth when
      evaluating performance. Weighted average weekly sales at the Daily Grill
      restaurants increased 5.1% from $61,792 in 2005 to $64,964 in 2006. Comparable
      restaurant sales and weighted average weekly sales at the Daily Grill
      restaurants in 2006 reflected a menu price increase in November of 2005. The
      increase in same store sales was principally attributable to an increase in
      check averages partially offset by a decrease in guest counts.





26




Sales
      for
      Grill restaurants increased by 8.4% from $4.2 million in the 2005 quarter to
      $4.6 million in the 2006 quarter. The increase in sales revenues for the Grill
      restaurants from 2005 to 2006 was primarily attributable to an increase in
      guest
      counts.





Sales
      for
      Grill restaurants increased 10.7% from $8.4 million for the six months in 2005
      to $9.3 million for the six-months in 2006. The increase in sales revenues
      for
      the Grill restaurants from 2005 to 2006 was attributable to improved guest
      counts. Weighted average weekly sales at the Grill restaurants increased 10.7%
      from $80,826 in 2005 to $89,476 in 2006.





Management
      and license fee revenues were attributable to hotel restaurant management
      services which accounted for $346,000 of management fees during the 2006 quarter
      as compared to $300,000 during the 2005 quarter and licensing fees of $72,000
      during the 2006 quarter compared to $69,000 during the 2005 quarter. The
      increase in management and license fees during 2006 was attributable to improved
      sales at almost every restaurant.





For
      the
      year-to-date period, management and license fee revenues were attributable
      to
      hotel restaurant management services which accounted for $715,000 of management
      fees during the 2006 period as compared to $605,000 during the 2005 period
      and
      licensing fees of $123,000 during the 2006 period as compared to $120,000 during
      the 2005 period. The increase in management and license fees during 2006 was
      attributable to improved sales at almost every restaurant **.**





Cost
      reimbursements represent amounts incurred by the Company on behalf of managed
      outlets for which the Company receives reimbursement from the owner. The
      increase in revenues attributable to cost reimbursements for both the quarter
      and year-to-date periods were attributable to increased sales at managed
      restaurants.





*Operating
      Expenses and Operating Results* .
      Total
      operating expenses, including cost of sales, restaurant operating expenses,
      reimbursed costs, general and administrative expenses, depreciation and
      amortization, and pre-opening costs, increased 11.7% to $18.8 million in the
      2006 quarter (representing 100.5% of revenues) from $16.8 million in 2005
      (representing 99.6% of revenues). For the six months, total operating expenses
      increased 12.5% to $37.5 million (representing 98.7% **** of
      revenues) from $33.3 million in 2005 (representing 97.7% of
      revenues).





*Cost
      of Sales.* While
      sales revenues increased by 8.2% ($1.1 million) in the 2006 quarter and 10.3%
      ($2.8 million) for the six months as compared to 2005, total cost of sales
      increased by 7.6%, or $0.3 million, for the quarter and 9.61% or $0.7 million,
      for the six months ended June 25, 2006 as compared to the same periods in 2005.
      The dollar increase in cost of sales is primarily due to the increase in sales.
      Cost of sales as a percentage of restaurant sales was 28.3% for the quarter
      and
      28.0% for the  six
      months ended June 25, 2006 as compared to 28.4% for the second quarter and
      28.2%
      for the year-to-date period in 2005.





*Restaurant
      operating expenses.* Restaurant
      operating expenses increased by $0.6 million, or 7.6%, for the quarter and
      $1.8
      million, or 11.8%, for the six months as compared to the same periods in 2005.
      The dollar increase in restaurant operating expenses for the quarter was
      primarily attributable to the opening of the Downtown Daily Grill ($0.4 million)
      and payroll and related costs at comparable restaurants ($0.3 million). The
      dollar increase in operating expenses for the six months was primarily
      attributable to a full 26 weeks of operations at the Downtown Daily Grill
      compared to 4 weeks in 2005, a full 26 weeks of operations at the Santa Monica
      Daily Grill compared to 15 weeks in 2005, and increased wages and related
      benefits at the comparable restaurants. Restaurant operating expenses, as a
      percentage of restaurant sales, were flat at 60.0% in the second quarter of
      2006
      and 2005. For the six months, the percentages were 59.5% in 2006 and 58.8%
      in
      2005.





27


*Reimbursed
      Costs.* Reimbursed
      costs increased 21.7% from $3.1 million to $3.8 million for the quarter and
      15.6% from $6.6 million in to $7.6 million in 2006 for the six months. These
      expenses represent the operating costs for which we are the primary obligor
      of
      the restaurants we do not consolidate. The increase is primarily due to
      increased cost of goods and variable expenses resulting from a 12.6% increase
      in
      sales.





*General
      and Administrative.* General
      and administrative expense increased 32.4% for the current quarter and 26.1%
      for
      the six months as compared to the same periods in 2005. As a percentage of
      revenues, general and administrative expense totaled 8.7% for the quarter and
      7.5% for the six months as compared to 7.2% for the current quarter and 6.7%
      for
      the six months in 2005. The increase in total general and administrative expense
      of $0.3 million, or 32.4%, for the 2006 quarter was primarily attributable
      to
      increases in travel related to potential site visits and transition of
      management ($98,000), stock related compensation expenses ($70,000), outside
      accounting services ($59,000), establishment of the training department
      ($54,000), non-recurring legal fees ($41,000), as well as, salaries and related
      benefits ($31,000). The increase in total general and administrative expense
      of
      $592,000, or 26.1%, for the 2006 six month period is attributable to travel
      related to potential site visits and the transition of management ($125,000),
      salaries and related benefits ($132,000), stock related compensation expenses
      ($108,000), establishment of the training department ($93,000), consulting
      fees
      ($68,000), and non-recurring legal fees ($41,000).





*Depreciation
      and Amortization.* Depreciation
      and amortization expense increased by 10.0% for the current quarter and
      increased 12.5% for the six months of 2006 compared to 2005, representing 3.6%
      of restaurant sales for the six months of 2006 and 3.5% of sales in 2005. The
      increase in depreciation and amortization expense for the six months was
      primarily due to the opening of the Santa Monica and Downtown Daily Grills
      in
      2005.





*Pre-opening
      Costs.* Pre-opening
      costs totaled $124,000 in the 2006 quarter as compared to $153,000 in the 2005
      quarter and $124,000 in the 2006 six month period as compared with $244,000
      in
      2005. The 2006 pre-opening costs were attributable to the Dallas Grill opening
      and the 2005 costs were attributable to the opening of the Santa Monica and
      Downtown Daily Grills.





*Interest
      Expense* .
      Total
      net interest expense increased by $43,000, or 100.0%, during the current quarter
      and $27,000, or 33.85%, during the current six months compared to the same
      periods in 2005. The increase in interest expense was primarily attributable
      to
      the amortization of deferred loan costs related to the new line of
      credit.





*Debt
      Extinguishment Costs.* On March
      31, 2006 the Company retired the collateralized subordinated note payable and
      mandatorily redeemable capital obligations payable to the Michigan Avenue Group.
      The Company recorded a debt extinguishment loss on retirement of $279,000.
      A
      condition of the early debt retirement was a $200,000 penalty to be paid out
      in
      four annual installments of $50,000 each. Additionally $69,000 of warrant costs
      and $10,000 of deferred loan costs associated with the debt were written off. **  **




*Income
      Tax Provision/Benefit* .
      During
      the quarter and six months ended June 25, 2006, the Company reported a tax
      benefit of $2,043,000 and $1,975,000, respectively. During the quarter ended
      June 26, 2005, the Company reported a tax benefit of $35,500 and for the six
      months a tax provision of $210,500. The favorable change in taxes reported
      during 2006 was attributable to the elimination of the majority of the valuation
      allowance with respect to the Company’s deferred tax asset. The benefit realized
      by the Company during 2006 was attributable to the determination, based on
      its
      taxable income over the preceding three years and its taxable income projected
      for the next three years, that it is more likely than not that the Company
      will
      recover its existing net deferred tax asset.





28




*Minority
      Interest* .
      We
      reported a minority interest in the profit of consolidated affiliates of $80,000
      during the 2006 second quarter as compared to a minority interest in the loss
      of
      our majority owned subsidiaries of $233,000 during the 2005 quarter. For the
      six
      months, we reported a minority interest in the profit of majority owned
      subsidiaries of $105,000 during 2006 as compared to a minority interest in
      the
      loss of consolidated affiliates of $324,000 during 2005. The change in minority
      interest for the quarter and six months was primarily attributable to improved
      operations at the San Jose Grill, the Downtown Daily Grill, the CityWalk Daily
      Grill and having fully utilized our allocation of minority interest for the
      Hollywood Grill.





*Net
      Income.* We
      reported net income of $1.5 million for the second quarter and net income of
      $2.0 million for the six months of 2006 as compared to net income of $0.1
      million for the second quarter and $0.8 million  for
      the
      six months in 2005.





**Material
      Changes in Financial Condition, Liquidity and Capital
      Resources** .





At
      June
      25, 2006 we had negative working capital of $1.7 million and a cash balance
      of
      $2.6 million compared to negative working capital of $1.3 million and a cash
      balance of $3.2 million at December 25, 2005.





The
      change in our cash position reflects the following cash flows:





(in
                thousands)
            
            **2006**
            ****
            **2005**Net
                cash provided by operating activities
            
            $
            1,935
            
            $
            2,801Net
                cash used in investing activities
            
            
            (2,363
            )
            
            (3,454
            )Net
                cash provided by (used in) financing activities
            
            
            (85
            )
            
            783Net
                increase (decrease) in cash
            
            $
            (513
            )
            $
            130





Included
      in cash flows from operating activities were tenant improvement allowances
      of
      $0.7 million and $1.8 million in 2006 and 2005, respectively.





The
      negative change in working capital position was principally attributable a
      $1.1
      million increase in accounts payable, a $0.5 million dollar increase in prepaid
      and other current assets offset by a $0.5 million decrease in cash, a $0.4
      million dollar decrease in accrued expenses and a $0.2 million increase in
      accounts receivable.





Our
      need
      for capital resources historically has resulted from, and for the foreseeable
      future is expected to relate primarily to, the construction and opening of
      new
      restaurants. Funds necessary to operate restaurants under management agreements
      are usually funded by cash generated by the restaurants. Sales from these
      outlets are deposited into an agency account belonging to the owner and we
      pay
      the outlet operating expenses, including our fee, from this agency account.
      Historically, we have funded our day-to-day operations through operating cash
      flows that have ranged from $1.8 to $4.6 million over the past three fiscal
      years. Growth has been funded through a combination of bank borrowing, loans
      from stockholders/officers, the sale of debentures and stock, loans and tenant
      allowances from certain of our landlords, and, beginning in 1999, through joint
      venture arrangements .




*Issuances
      of Common Stock* .
      During
      the six months ended June 25, 2006, the Company received aggregate proceeds
      of
      $185,815 from the sale of 119,168 shares of common stock pursuant to the
      exercise of outstanding warrants and options. The Company issued an additional
      346,821 shares of common stock during the six months ended June 25, 2006 as
      a
      result of the exercise of 977,668 warrants pursuant to cashless exercise
      provisions by which the Company received no cash. The warrants exercised during
      the period were issued pursuant to a 2001 private placement and were exercisable
      at $2.00 or $2.25 per share. Subsequent to June 25, 2006, an additional 228,828
      shares were issued pursuant to the exercise of the warrants resulting in net
      proceeds to the Company of $462,746 and after which no warrants remain
      outstanding .





29




*Financing
      Facilities* .
      At June
      25, 2006, the Company had $1.2 million owing under our line of credit, $0.1
      million owing under equipment lease financing transactions, loans from
      stockholders/officers of $0.2 million, and loans/advances from a landlord,
      the
      SBA and others of $0.1 million. As of June 25, 2006, $0.6 million of the tenant
      improvement allowance on the Dallas Grill has been received. These tenant
      incentive allowances have been recorded in other long-term liabilities and
      are
      being amortized against rent expense over the lease terms.




On
      March
      31, 2006, the Company borrowed $1 million under the terms of the Credit
      Agreement with Diamond Creek Investment Partners LLC. The borrowed funds were
      primarily used to retire $874,192 of collateralized subordinated notes and
      manditorily redeemable capital obligations owed to The Michigan Avenue Group
      (“MAG”) by the Company’s subsidiary Chicago - The Grill on the Alley LLC
      (“Chicago Grill LLC)”, $5,940 of interest and $50,000 for the first annual
      penalty payment and guaranteed by the Company, with the balance used for general
      working capital. The retired obligations related to the initial funding provided
      by MAG, as a member/investor in Chicago Grill LLC, with respect to the Company’s
      The Grill on the Alley restaurant in Chicago.


****


*Operating
      Leases and Contractual Obligations* .
      At June
      25, 2006, we were obligated under eighteen leases covering the premises in
      which
      our Daily Grill and Grill Restaurants are located as well as a lease on our
      executive office. Such restaurant leases and the executive office lease contain
      minimum rent provisions which provide for the payment of minimum aggregate
      rental payments of approximately $30.1 million over the life of those leases,
      with minimum annual rental payments of $3.6 million in 2006, $7.3 million
      between 2007 and 2008, $6.1 million between 2009 and 2010, and $13.1 million
      thereafter.





The
      following table details our contractual obligations as of June 25,
      2006:





**Payments
                due by period (in thousands)**
            ********
            ****
            **Total**
            ****
            **2006**
            ****
            **2007
                - 2008**
            ****
            **2009
                - 2010**
            ****
            **Thereafter**Long-term
                debt
            
            $
            1,612
            
            $
            193
            
            $
            82
            
            $
            1,299
            
            $
            38Capital
                lease obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                lease commitments
            
            
            30,139
            
            
            3,647
            
            
            7,324
            
            
            6,061
            
            
            13,107Other
                contractual purchase
              Obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Other
                long-term liabilities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            31,751
            
            $
            3,840
            
            $
            7,406
            
            $
            7,360
            
            $
            13,145





*Capital
      Expenditures* .
      During
      the six months ended June 25, 2006, the Company’s capital expenditures totaled
      $2.3 million. Capital expenditures during the period related principally to
      the
      opening of a Grill restaurant in Dallas, Texas. $0.6 million of the capital
      expenditures during the period in connection with the Dallas Grill were funded
      by tenant improvement allowances.





30





*Commitments
      Relating to Managed Restaurants and LLCs.* Under
      certain of our operating and management agreements we have an obligation to
      potentially make additional cash advances and/or contributions and may not
      realize any substantial returns for some time. The agreements and arrangements
      under which we may be required to make cash advances or contributions, guarantee
      obligations or defer receipt of cash are described in the Company’s Form 10-K
      for the year ended December 25, 2005. There were no material developments with
      respect to those agreements and arrangements during the quarter and six months
      ended June 25, 2006.





Detailed
      information regarding the initial capital contributions to the LLCs and the
      CityWalk Partnership, Preferred Returns for each, management fees payable to
      the
      Company and principal distribution provisions are included in the Company’s Form
      10-K for the year ended December 25, 2005. The following tables set forth a
      summary for each of the LLCs and the CityWalk Partnership of (1) the
      distributions of capital to the Members and/or the Company during the six months
      ended June 25, 2006, (2) the unreturned balance of the capital contributions
      of
      the Members and/or the Company at June 25, 2006, and the accrued but unpaid
      preferred returns due to the Members and/or the Company at June 25, 2006:




(in
                thousands)
            
            **San
                Jose Grill, LLC**
            
            **Chicago
                Grill On The Alley, LLC**
            
            **The
                Grill On**
              **Hollywood,********LLC****Members**
            ****
            **Company**
            ****
            **Members**
            ****
            **Company**
            ****
            **Members**
            ****
            **Company**Distributions
                of profit and note repayments during the quarter ended June 25,
                2006:
            
            $
            184
            
            $
            184
            
            $
            972
                (a
            )
            
            -
            
            
            -
            
            -Unreturned
                Initial Capital Contributions at June 25, 2006:
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            1,200
            
            $250Preferred
                Return rate:
            
            
            10
            %
            
            10
            %
            
            8
            %
            
            -
            
            
            12
            %
            12%Accrued
                but unpaid Preferred Returns at June 25, 2006:
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (b
            )
            (b)








31




**South
                Bay Daily Grill**
              **(Continental
                Park, LLC)**
            
            **Universal
                Citywalk Daily Grill**
            
            **Downtown
                Daily Grill**
              **(612
                Flower Daily Grill, LLC)****Members**
            ****
            **Company**
            ****
            **Members**
            ****
            **Company**
            ****
            **Members**
            ****
            **Company(d)**Distributions
                of profit during the quarter ended June 25, 2006:
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Unreturned
                Initial and Additional Capital Contributions at June 25,
                2006:
            
            $
            1,100
            
            $
            450
            
            $
            1,396
            
            $
            296
            
            $
            1,400
            
            $
            313Preferred
                Return rate:
            
            
            10
            %
            
            10%
                (c
            )
            
            -
            
            
            -
            
            
            9
            %
            
            9
            %Accrued
                but unpaid Preferred Returns at June 25, 2006
            
            
            (b
            )
            
            (b
            )
            
            (b
            )
            
            -
            
            $
            91
            
            $
            23




a)
            Distribution
                of capital and note repayments as of June 25, 2006 includes $902,000
                of
                retirement of collateralized subordinated notes and mandatorily redeemable
                capital obligations and $70,000 of interest and preferred
                return.





b)
            Due
                to the under performance of the restaurants the preferred return
                is not
                being accrued. The Company is not liable to pay the preferred return
                distributions, such that they represent a non-recourse obligation
                of the
                subsidiary entity. If preferred returns were accrued for The Grill
                on
                Hollywood the Member would have an accrued preferred return of $866,000
                and the Company would have an accrued preferred return of $180,000.
                If
                preferred returns were accrued for the South Bay Daily Grill the
                Member
                would have an accrued preferred return of $427,000 and the Company
                would
                have a preferred return of $167,000. If preferred returns were accrued
                for
                the CityWalk Partnership the Member would have an accrued preferred
                return
                of $611,000.





c)
            The Company’s preferred return with respect to the South
              Bay Daily Grill is based on unrecovered capital contribution and accrued
              but unpaid management fees.





d)
            The Company is a non-managing member and a wholly
              owned
              subsidiary of the Company is the Manager of this
              restaurant.




In
      addition to existing contractual and other commitments with respect to managed
      restaurants, the Company has entered into agreements to manage Daily Grill
      restaurants in Memphis, Tennessee and Seattle, Washington. Both of those
      restaurants are expected to open in the spring of 2007. The Company is obligated
      to contribute approximately $450,000, if construction exceeds
      $1,500,000, toward the initial remodeling cost of the Seattle Daily Grill.
      The Company has no required contribution to the Memphis Daily
      Grill.





32




**Critical
      Accounting Policies**





The
      Company's discussion and analysis of its financial condition and results of
      operations are based upon the Company's financial statements, which have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America. The Company believes certain critical accounting
      policies affect its more significant judgments and estimates used in the
      preparation of its financial statements. A description of the Company’s critical
      accounting policies is set forth in the Company’s Form 10-K for the year ended
      December 25, 2005.




We
      maintain a large deductible insurance policy related to workers’ compensation
      coverage. Predetermined loss limits have been arranged with insurance companies
      to limit our per occurrence cash outlay. Accrued expenses and other liabilities
      include estimated costs to settle unpaid claims and estimated incurred, but
      not
      reported, claims using actuarial methodologies. During the quarter and six
      months ended June 25, 2006, we recorded a provision to increase the reserve
      for
      workers compensation claims of $26,000 and $358,000, respectively.





With
      the
      adoption for stock-based compensation in accordance with the provisions of
      SFAS
      123R at the beginning of fiscal 2006, we added a new critical accounting policy
      to the previous disclosure included in Item 7, “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” of our Annual Report
      on Form 10-K for the fiscal year ended December 25, 2005.





***Stock-Based
      Compensation.*** We
      account for stock-based compensation in accordance with the provisions of SFAS
      123R. We use the Black-Scholes option-pricing model, which requires the input
      of
      highly subjective assumptions. These assumptions include estimating the
      estimated volatility of the Company’s common stock price over the vesting term
      and the number of options that will ultimately not complete their vesting
      requirements (“forfeitures”). Changes in the subjective assumptions can
      materially affect the estimated fair value of stock-based compensation and
      consequently, the related amount recognized on the Condensed Consolidated
      Statements of Operations. See Note 2 of the Notes to the Condensed Consolidated
      Financial Statements in this Form 10-Q for further discussion of stock-based
      compensation.





Except
      as
      noted above, there have been no material changes to the other critical
      accounting policies previously reported in our Annual Report on Form 10-K for
      the fiscal year ended December 25, 2005.




**Certain
      Factors Affecting Future Operating Results**





This
      Form
      10-Q contains forward-looking statements within the meaning of Section 27A
      of
      the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
      1934. Our actual results could differ materially from those set forth in the
      forward-looking statements. Certain factors that might cause such a difference
      include the following: adverse weather conditions and other conditions affecting
      agricultural output which may cause shortages of key food ingredients and
      volatility of food prices and which, in turn, may reduce operating margins;
      changes in consumer tastes, demographics and adverse economic conditions which
      may result in reduced frequency of dining at our restaurants; the dependence
      on
      key personnel and ability to attract and retain qualified management and
      restaurant personnel to support existing operations and future growth;
      regulatory developments, particularly relating to labor matters (i.e., minimum
      wage, health insurance and other benefit requirements), health and safety
      conditions, service of alcoholic beverages and taxation, which could increase
      the cost of restaurant operations; establishment of market position and consumer
      acceptance in new markets in light of intense competition in the restaurant
      industry and the geographic separation of senior management from such markets;
      potential delays in securing sites for new restaurants and delays in opening
      restaurants which may entail additional costs and lower revenues than would
      otherwise exist in the absence of such delays; the availability of capital
      to
      fund future restaurant openings; rising energy costs and the occurrence of
      rolling blackouts in California which may result in higher occupancy costs
      and
      periodic restaurant closures; national terrorist attacks; earthquakes in
      California; and, other risks described more fully in "Risk Factors" in Part
      I,
      Item 1A of the Company’s Form 10-K for the year ended December 31, 2005 and in
      Part II, Item 1A of this Form 10-Q.





33





**Item
      3.**  **Quantitative and Qualitative Disclosures About Market Risk**





The
      Company is exposed to market risk from changes in interest rates on funded
      debt.
      This exposure relates to our credit line facility. There were $1,233,000
      borrowings outstanding under the Credit Line Facility at June 25, 2006.
      Borrowings under the Credit Facility bear interest at the LIBOR rate plus a
      margin ranging from 5.5% to 6.25%. A hypothetical 1% interest rate change would
      not have a material impact on the Company's results of operations.





**Item
      4. Evaluation of Disclosure Controls and Procedures**




We
      maintain disclosure controls and procedures (as defined in Exchange Act Rule
      13a-15(e) and 15d-15(e)) that are designed to ensure that information required
      to be disclosed in our Exchange Act reports is recorded, processed, summarized
      and reported within the time periods specified in the Securities and Exchange
      Commission's rules and forms, and that such information is accumulated and
      communicated to our management, including our Chief Executive Officer and Chief
      Financial Officer, as appropriate, to allow timely decisions regarding the
      required disclosure.




In
      designing and evaluating the disclosure controls and procedures, management
      recognizes that any controls and procedures, no matter how well designed and
      operated, can provide only reasonable assurance of achieving the desired control
      objectives, and management necessarily is required to apply its judgment in
      evaluating the cost-benefit relationship of possible controls and
      procedures.




An
      evaluation as of the end of the period covered by this report was carried out
      under the supervision and with the participation of our management, including
      our principal executive officer and principal financial officer, of the
      effectiveness of our disclosure controls and procedures, as such term is defined
      under Rule 13a-15(e) and Rule 15d -15(e) promulgated under the Securities
      Exchange Act of 1934, as amended (the "Exchange Act"). Based
      on
      their evaluation, our certifying officers concluded that these disclosure
      controls and procedures are effective in providing reasonable assurance that
      the
      information required to be disclosed by us in our periodic reports filed with
      the Securities and Exchange Commission (“SEC”) is recorded, processed,
      summarized and reported within the time periods specified by the SEC’s rules and
      SEC reports.





There
      have been no changes in our internal control over financial reporting that
      occurred during the period covered by this report that have materially affected,
      or are reasonably likely to materially affect, our internal control over
      financial reporting.





34




**PART
      II - OTHER INFORMATION**


**Item
      1A. Risk Factors**





There
      have been no material changes in our Risk Factors disclosed in our 2005 Annual
      Report on Form 10-K.





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





During
      the six months ended June 25, 2006, the Company issued 413,489 shares of common
      stock (including 413,489 shares issued as previously reported on Form 8-K dated
      June 20, 2006 and filed June 26, 2006) pursuant to the exercise, by 8 holders,
      of 1,044,336 warrants originally issued in a 2001 private placement. The Company
      received $150,003 from the exercise of 66,668 warrants at $2.25 per share.
      The
      remaining 346,821 shares were issued pursuant to the cashless exercise of
      666,667 warrants at $2.00 and 311,001 warrants at $2.25 per share.





Subsequent
      to June 25, 2006, the Company issued 228,828 shares of common stock pursuant
      to
      the exercise, by 9 holders, of 288,998 warrants originally issued in a 2001
      private placement. The Company received $462,746 from the exercise of 205,665
      warrants at $2.25 per share. The remaining 23,163 shares were issued pursuant
      to
      the cashless exercise of warrants at $2.25 per share.





The
      shares were issued pursuant to Section 4(2) of the Securities Act and the rules
      and regulations promulgated thereunder on the basis that such transaction did
      not involve a public offering and the offerees were sophisticated, accredited
      investors with access to the the kind of information that registration would
      provide. No sales were commissions were paid.





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





The
      annual meeting of shareholders of Grill Concepts, Inc. was held on June 21,
      2006, at which the stockholders voted on three proposals: the election of
      directors, approval of the 2006 Equity Incentive Plan and ratification of the
      appointment of Moss Adams LLP as the Company’s independent registered public
      accounting firm.





The
      first
      matter voted on was a proposal to elect Robert Spivak, Michael Weinstock, Glenn
      Golenberg, Stephen Ross, Bruce Schwartz, Richard Dantas and Philip Gay, as
      directors of the Company. All director nominees were elected. The following
      table sets forth the votes in such election:




**Votes
                For**
            
            **Votes
                Against**
            
            **Votes
                Abstai**nedRobert
                Spivak
            
            
            3,678,508
            
            
            261
            
            
            304Michael
                Weinstock
            
            
            3,677,908
            
            
            861
            
            
            304Glenn
                Golenberg
            
            
            3,678,508
            
            
            261
            
            
            304Stephen
                Ross
            
            
            3,678,503
            
            
            266
            
            
            304Bruce
                Schwartz
            
            
            3,678,480
            
            
            289
            
            
            304Richard
                Dantas
            
            
            3,678,480
            
            
            289
            
            
            304Philip
                Gay
            
            
            3,678,480
            
            
            289
            
            
            304





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In
      addition to the election of directors as noted above, the following matters
      were
      voted upon at such meeting:





The
      second matter voted on was a proposal to approve the 2006 Equity Incentive
      Plan
      was approved with 2,266,729 votes cast for, 45,754 votes cast against and 604
      votes abstained.





The
      third
      matter votes on was a proposal to ratify the appointment of Moss Adams, LLP
      as
      the Company’s independent registered  public
      accounting firm was approved with 3,669,501 votes cast for, 9,536 votes cast
      against, and 36 votes abstained.








**Item
      6. Exhibits**





(a)
            Exhibits




Exhibit
                No.
            
            Description31.1
            
            Section
                302 Certification of CEO31.2
            
            Section
                302 Certification of Principal Financial Officer32.1
            
            Certification
                of CEO Pursuant to 18.U.S.C. Section 1350, as Adopted Pursuant to
                Section
                906 of the Sarbanes-Oxley Act of 2002.32.2
            
            Certification
                of Principal Financial Officer Pursuant to 18.U.S.C. Section 1350,
                as
                Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





36





**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





**GRILL
        CONCEPTS, INC.**


Signature
            
            Title
            
            Date/s/Philip GayPhilip Gay
            
            President and Chief
            
            August 9, 2006Executive Officer(Principal
                Executive and Financial Officer)




37