**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-Q**

 

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

 

**FOR THE QUARTERLY PERIOD ENDED JUNE 27, 2006**

 

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

 

**Commission File Number 000-29643**

 

**GRANITE CITY FOOD & BREWERYLTD.**

(Exact Name of Registrantas Specified in Its Charter)

 

| **Minnesota**                      |   | **41-1883639**       |
|------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction      |   | (I.R.S. Employer     |
| of Incorporation  or Organization) |   | Identification  No.) |

 

**5402 Parkdale Drive, Suite 101**

**Minneapolis, Minnesota  55416**

**(952) 215-0660**

(Address of PrincipalExecutive Offices and Issuer’s

Telephone Number,including Area Code)

 

Indicate by check markwhether the registrant:  (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes x     No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.  (Check one):

 

Large acceleratedfiler  o        Acceleratedfiler o        Non-acceleratedfiler  x

 

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

 

Yes o     No x

 

Asof August 4, 2006, the issuer had outstanding 13,238,642 shares of commonstock.

 

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**TABLE OFCONTENTS**
| **PART I**            | **FINANCIAL  INFORMATION**                                                                                                   | ** ** |
|-----------------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **            | ** **                                                                                                                   | ** ** |
| ITEM  1               | Financial  Statements                                                                                                        |       |
|                  |                                                                                                                         |       |
|                  | Condensed Consolidated Balance Sheets as of June 27,  2006 and December 27, 2005                                             |       |
|                  |                                                                                                                         |       |
|                  | Condensed Consolidated Statements of Operations for  the Thirteen and Twenty-six Weeks ended June 27, 2006 and June 28, 2005 |       |
|                  |                                                                                                                         |       |
|                  | Condensed Consolidated Statements of Cash Flows for  the Twenty-six Weeks ended June 27, 2006 and June 28, 2005              |       |
|                  |                                                                                                                         |       |
|                  | Notes to Condensed Consolidated Financial Statements                                                                         |       |
|                  |                                                                                                                         |       |
| ITEM 2                | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                  |       |
|                  |                                                                                                                         |       |
| ITEM 3                | Quantitative and Qualitative Disclosures about Market  Risk                                                                  |       |
|                  |                                                                                                                         |       |
| ITEM  4               | Controls  and Procedures                                                                                                     |       |
|                  |                                                                                                                         |       |
| **PART  II**          | **OTHER  INFORMATION**                                                                                                       | ** ** |
| ** **            | ** **                                                                                                                   | ** ** |
| ITEM  1               | Legal Proceedings                                                                                                            |       |
|                  |                                                                                                                         |       |
| ITEM 1A               | Risk Factors                                                                                                                 |       |
|                  |                                                                                                                         |       |
| ITEM 2                | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                 |       |
|                  |                                                                                                                         |       |
| ITEM 3                | Defaults upon Senior Securities                                                                                              |       |
|                  |                                                                                                                         |       |
| ITEM 4                | Submission of Matters to a Vote of Security Holders                                                                          |       |
|                  |                                                                                                                         |       |
| ITEM  5               | Other Information                                                                                                            |       |
|                  |                                                                                                                         |       |
| ITEM 6                | Exhibits                                                                                                                     |       |
|                  |                                                                                                                         |       |
| **SIGNATURES**        |                                                                                                                         |
|                  |                                                                                                                         |       |
| **INDEX TO EXHIBITS** |                                                                                                                         |
|                       |                                                                                                                              |            |  |

 

i

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**PARTI        FINANCIAL INFORMATION**

**ITEM1  Financial Statements**

**GRANITECITY FOOD & BREWERY LTD.**

# **CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                      | ** ** | **June 27,**                  | ** ** | **December 27,**              | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **2006**                           | ** ** | **2005**                           | ** ** |
| **ASSETS:**                                                                                                                                     |       |                               |       |                               |       |
| Current assets:                                                                                                                                 |       |                               |       |                               |       |
| Cash                                                                                                                                            |       | $    6,603,529 |       | $    9,836,231 |       |
| Inventory                                                                                                                                       |       | 319,331                            |       | 243,180                            |       |
| Prepaids and  other                                                                                                                             |       | 306,457                            |       | 218,960                            |       |
| Total current  assets                                                                                                                           |       | 7,229,317                          |       | 10,298,371                         |       |
|                                                                                                                                            |       |                               |       |                               |       |
| Prepaid rent,  net of current portion                                                                                                           |       | 506,273                            |       | —                             |       |
| Property and  equipment, net                                                                                                                    |       | 41,474,281                         |       | 33,767,282                         |       |
| Intangible  assets and other                                                                                                                    |       | 418,709                            |       | 416,937                            |       |
| Total assets                                                                                                                                    |       | $  49,628,580            |       | $  44,482,590            |       |
|                                                                                                                                            |       |                               |       |                               |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY:**                                                                                                 |       |                               |       |                               |       |
| Current  liabilities:                                                                                                                           |       |                               |       |                               |       |
| Accounts payable                                                                                                                                |       | $    2,603,335 |       | $    1,007,437 |       |
| Accrued expenses                                                                                                                                |       | 3,481,568                          |       | 3,156,455                          |       |
| Deferred rent,  current portion                                                                                                                 |       | 87,544                             |       | 76,437                             |       |
| Long-term debt,  current portion                                                                                                                |       | 1,559,966                          |       | 241,747                            |       |
| Capital lease  obligations, current portion                                                                                                     |       | 728,489                            |       | 679,738                            |       |
| Total current  liabilities                                                                                                                      |       | 8,460,902                          |       | 5,161,814                          |       |
|                                                                                                                                            |       |                               |       |                               |       |
| Deferred rent,  net of current portion                                                                                                          |       | 1,289,546                          |       | 1,119,458                          |       |
| Long-term debt,  net of current portion                                                                                                         |       | 824,829                            |       | 2,262,180                          |       |
| Capital lease  obligations, net of current portion                                                                                              |       | 23,459,016                         |       | 18,585,630                         |       |
| Total  liabilities                                                                                                                              |       | 34,034,293                         |       | 27,129,082                         |       |
|                                                                                                                                            |       |                               |       |                               |       |
| Shareholders’ equity:                                                                                                                      |       |                               |       |                               |       |
| Common stock,  $0.01 par value, 90,000,000 shares authorized;  13,226,526 shares issued and outstanding at June 27, 2006 and December 27,  2005 |       | 132,265                            |       | 132,265                            |       |
| Additional  paid-in capital                                                                                                                     |       | 28,286,432                         |       | 27,881,089                         |       |
| Accumulated  deficit                                                                                                                            |       | (12,824,410                        | )          | (10,659,846                        | )          |
| Total  shareholders’ equity                                                                                                                |       | 15,594,287                         |       | 17,353,508                         |       |
|                                                                                                                                            |       |                               |       |                               |       |
| Total liabilities and  shareholders’ equity                                                                                                |       | $  49,628,580            |       | $  44,482,590            |       |

 

See notes to condensed consolidated financialstatements.

1

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**GRANITE CITY FOOD & BREWERY LTD.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                              | ** ** | **Thirteen Weeks Ended**                                       | ** ** | **Twenty-six Weeks Ended**                                     | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **June 27,**                                                        | ** ** | **June 28,**                                                        | ** ** | **June 27,** | ** ** | **June 28,** | ** ** |
| ** **                                              | ** ** | **2006**                                                                 | ** ** | **2005**                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                    |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Restaurant  revenues                                    |       | $  14,417,118                                                  |       | $   8,534,251                                             |       | $  26,309,437 |   | $  16,404,588 |   |
|                                                    |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Cost of sales:                                          |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Food, beverage and retail                               |       | 4,258,148                                                                |       | 2,532,927                                                                |       | 7,773,083 |   | 4,888,315 |   |
| Labor                                                   |       | 4,990,804                                                                |       | 2,973,957                                                                |       | 9,257,632 |   | 5,750,541 |   |
| Direct restaurant operating                             |       | 1,646,558                                                                |       | 962,795                                                                  |       | 3,240,075 |   | 1,946,607 |   |
| Occupancy                                               |       | 795,873                                                                  |       | 423,609                                                                  |       | 1,477,528 |   | 859,785 |   |
| Total cost of sales                                     |       | 11,691,383                                                               |       | 6,893,288                                                                |       | 21,748,318 |   | 13,445,248 |   |
|                                                    |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Pre-opening                                             |       | 262,572                                                                  |       | 220,399                                                                  |       | 1,074,374 |   | 228,111 |   |
| General and  administrative                             |       | 1,621,374                                                                |       | 1,179,056                                                                |       | 3,076,434 |   | 2,131,409 |   |
| Depreciation and  amortization                          |       | 814,489                                                                  |       | 491,388                                                                  |       | 1,566,945 |   | 935,784 |   |
|                                                    |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Operating income  (loss)                                |       | 27,300                                                                   |       | (249,880                                                                 | )          | (1,156,634 | ) | (335,964 | ) |
|                                                    |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Interest:                                               |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Income                                                  |       | 24,114                                                                   |       | 31,085                                                                   |       | 56,164 |   | 69,346 |   |
| Expense                                                 |       | (563,648                                                                 | )          | (320,895                                                                 | )          | (1,061,677 | ) | (644,883 | ) |
| Other expense,  net                                     |       | (6,287                                                                   | )          | (39,632                                                                  | )          | (2,414 | ) | (50,475 | ) |
| Net other expense                                       |       | (545,821                                                                 | )          | (329,442                                                                 | )          | (1,007,927 | ) | (626,012 | ) |
|                                                    |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Net loss                                                |       | $     (518,521                                  | )          | $     (579,322                                  | )          | $  (2,164,561 | ) | $     (961,976 | ) |
|                                                    |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Loss per common  share, basic and diluted               |       | $           (0.04 | )          | $           (0.05 | )          | $           (0.16 | ) | $           (0.08 | ) |
|                                                    |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Weighted average shares  outstanding, basic and diluted |       | 13,226,526                                                               |       | 11,621,140                                                               |       | 13,226,526 |   | 11,617,708 |   |

 

See notes to condensedconsolidated financial statements.

2

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**GRANITE CITY FOOD & BREWERY LTD.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                 | ** ** | **June 27,**                    | ** ** | **June 28,** | ** ** |
| ** **                                                                                 | ** ** | **2006**                             | ** ** | **2005** | ** ** |
|                                                                                       |       |                                 |       |   |   |
| Cash flows from  operating activities:                                                     |       |                                 |       |   |   |
| Net loss                                                                                   |       | $  (2,164,561              | )          | $    (961,976 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:               |       |                                 |       |   |   |
| Depreciation and amortization                                                              |       | 1,566,945                            |       | 935,784 |   |
| Stock option compensation expense                                                          |       | 407,484                              |       | 12,780 |   |
| Loss on disposal of asset                                                                  |       | 2,414                                |       | 50,475 |   |
| Deferred rent                                                                              |       | 181,195                              |       | (24,009 | ) |
| Decrease (increase) in:                                                                    |       |                                 |       |   |   |
| Inventory                                                                                  |       | (76,151                              | )          | — |   |
| Prepaids and other                                                                         |       | (593,770                             | )          | 3,404 |   |
| Increase (decrease) in:                                                                    |       |                                 |       |   |   |
| Accounts payable                                                                           |       | 253,990                              |       | (239,015 | ) |
| Accrued expenses                                                                           |       | 344,783                              |       | (244,962 | ) |
| Net cash used in operating activities                                                      |       | (77,671                              | )          | (467,519 | ) |
|                                                                                       |       |                                 |       |   |   |
| Cash flows from  investing activities:                                                     |       |                                 |       |   |   |
| Purchase of:                                                                               |       |                                 |       |   |   |
| Property and equipment                                                                     |       | (2,580,432                           | )          | (2,680,688 | ) |
| Intangible assets and other                                                                |       | (11,112                              | )          | (11,164 | ) |
| Net cash used in investing activities                                                      |       | (2,591,544                           | )          | (2,691,852 | ) |
|                                                                                       |       |                                 |       |   |   |
| Cash flows from  financing activities:                                                     |       |                                 |       |   |   |
| Payments on capital lease obligations                                                      |       | (442,214                             | )          | (273,892 | ) |
| Payments on long term-debt                                                                 |       | (119,132                             | )          | (111,552 | ) |
| Payment of dividends                                                                       |       | —                               |       | (41,068 | ) |
| Proceeds/(cost incurred) from issuance of stock                                            |       | (2,141                               | )          | 31,349 |   |
| Net cash used in financing activities                                                      |       | (563,487                             | )          | (395,163 | ) |
|                                                                                       |       |                                 |       |   |   |
| Net decrease in  cash                                                                      |       | (3,232,702                           | )          | (3,554,534 | ) |
| Cash, beginning                                                                            |       | 9,836,231                            |       | 9,297,247 |   |
| Cash, ending                                                                               |       | $   6,603,529         |       | $  5,742,713 |   |
|                                                                                       |       |                                 |       |   |   |
| Supplemental  disclosure of non-cash investing and financing activities:                   |       |                                 |       |   |   |
| Land and buildings acquired under capital lease  agreements                                |       | $   5,364,351         |       | $  1,262,956 |   |
| Equipment and  intangibles purchased and included in accounts payable and accrued expenses |       | $   1,322,239         |       | $       35,518 |   |

 

See notes to condensed consolidated financialstatements.

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**GRANITE CITY FOOD & BREWERY LTD.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

Thirteen and twenty-six weeks ended June 27, 2006 andJune 28, 2005

**1.     Basis of Presentation**

GraniteCity Food & Beverage Ltd. (the “Company”) develops and operates casualdining restaurants known as Granite City Food & Brewery®.  The restaurant theme is upscale casual diningwith a wide variety of menu items that are prepared fresh daily, combined withfreshly brewed hand-crafted beers finished on-site.  The first Granite City restaurant opened inSt. Cloud, Minnesota in July 1999 and the Company subsequently expanded toother Midwest markets while pursuing its national expansion plans.  The Company opened its fourteenth restaurantin West Wichita, Kansas in July 2006. The Company also operates a beerproduction facility which is used to provide raw material support to itsrestaurants to create consistent quality and operational efficiencies.

TheCompany’s current expansion strategy focuses on development of restaurants inmarkets where management believes the Company’s concept will have broad appealand attractive restaurant-level economics.

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America and regulations of the Securities and ExchangeCommission.  Accordingly, they do notinclude all the information and footnotes required by U.S. generally acceptedaccounting principles for complete financial statements.  In the opinion of management, alladjustments, consisting of normal recurring adjustments, which are necessaryfor a fair statement of its financial position as of June 27, 2006 and theresults of operations for the interim periods ended June 27, 2006 and June 28,2005 have been included.

The balance sheetat December 27, 2005 has been derived from the audited financial statements atthat date, but does not include all of the information and notes required bygenerally accepted accounting principles for complete financial statements.  Certain information and note disclosuresnormally included in the Company’s annual financial statements have beencondensed or omitted.  These condensedfinancial statements should be read in conjunction with the financialstatements and notes thereto included in the Company’s Annual Report on Form10-KSB for the fiscal year ended December 27, 2005, filed with the Securitiesand Exchange Commission on March 27, 2006.

The results ofoperations for the thirteen and twenty-six weeks ended June 27, 2006 are not necessarilyindicative of the results to be expected for the entire year.

**2.     Summary of Significant Accounting Policies**

Stock-BasedCompensation:

On December 16, 2004, the FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 123 (revised 2004) (“SFAS 123(R)”),*Share-Based Payment*, which is arevision of SFAS 123, *Accounting forStock-Based Compensation*. SFAS 123(R) supersedes AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees,*and amends SFAS No. 95, *Statement of Cash Flows*.  Generally, SFAS 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values determinedat the date of grant.  On April 14, 2005,the Securities and Exchange Commission adopted a new rule that amended thecompliance dates for SFAS 123(R). The Company adopted SFAS 123(R) using the modified prospectivemethod effective

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December 28, 2005, the first day of its 2006 fiscal year.

In all prior periods, the Company accounted for stock-basedcompensation awards to employees using the intrinsic value method prescribed byAPB Opinion No. 25 and, as such, generally recognized no compensation cost foremployee stock options.  Accordingly, theadoption of SFAS 123(R)’s fair value method affects the Company’s reportedresults of operations, although it does not affect the Company’s overallfinancial position.  If the Company hadbeen accounting for stock-based compensation under SFAS 123(R) during thesecond quarter of fiscal year 2005, the impact of that standard would haveapproximated the impact of SFAS 123 as described in the pro formadisclosure set forth below:

|                                                                                                                                             | ** ** | **Thirteen Weeks Ended**                                                                                                                                                                     | ** ** | **Twenty-six Weeks Ended**                                                                                                                                                                   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **June 28,**                                                                                                                                                                                      | ** ** | **June 28,**                                                                                                                                                                                      | ** ** |
| ** **                                                                                                                                  | ** ** | **2005**                                                                                                                                                                                               | ** ** | **2005**                                                                                                                                                                                               | ** ** |
| Net loss:                                                                                                                                   |       |                                                                                                                                                                                                   |       |                                                                                                                                                                                                   |       |
| As reported                                                                                                                                 |       | $                          (579,322                                  | )          | $                          (961,976                                  | )          |
| Less: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | $                          (192,466                                  | )          | $                          (769,863                                  | )          |
| Pro forma                                                                                                                                   |       | $                          (771,788                                  | )          | $                       (1,731,839                                                  | )          |
|                                                                                                                                        |       |                                                                                                                                                                                                   |       |                                                                                                                                                                                                   |       |
| Net loss per  common share                                                                                                                  |       |                                                                                                                                                                                                   |       |                                                                                                                                                                                                   |       |
| Basic and diluted as reported                                                                                                               |       | $                                (0.05 | )          | $                                (0.08 | )          |
| Basic and  diluted pro forma                                                                                                                |       | $                                (0.07 | )          | $                                (0.15 | )          |

 

The fair value ofoptions at date of grant was estimated using the Black-Scholes option-pricingmodel with the following assumptions for the second quarter of 2005:  (a) no dividend yield, (b) 46.1% expectedvolatility, (c) expected life of options of five to ten years and (d) arisk-free interest rate of 3.6% to 4.5%.

During the secondquarter of 2006, the Company granted an aggregate of 18,000 options, estimatingthe fair value of such options using the Black-Scholes option-pricing modelwith the following assumptions:  (a) nodividend yield, (b) 31.3% to 33.2% expected volatility, (c) expected life ofoptions of five to ten years and (d) a risk-free interest rate of 4.99% to5.00%.  The Company recorded totalstock-based compensation expense of $227,383 and $407,484 in the second quarterand first half of fiscal year 2006, respectively.  See Note 4 for further discussion of theCompany’s stock-based compensation.

Accounting for Leases:

On October 6, 2005, theFASB issued Staff Position No. FAS 13-1, *Accounting for Rental Costs Incurred During a Construction Period*.  Generally, the staff position requirescompanies to expense rental costs incurred during a construction period.  The Company was required to adopt FASB StaffPosition No. FAS 13-1 beginning in fiscal year 2006, and as a result,included $45,253 and $267,210 of such rental costs in pre-opening expenseduring the second quarter and first half of fiscal year 2006,respectively.  Prior to the adoption ofFASB Staff Position No. FAS 13-1, the Company did not expense rental costs duringthe construction period, but rather capitalized such costs as then permittedunder GAAP.  The Company believes theadoption of the staff position will increase average per-unit pre-opening costsby $50,000 to $125,000 depending upon the lease term and length of constructionperiod.

Principles of consolidation and presentation:

The Company’s consolidated financial statements include the accountsand operations of the Company and its subsidiary corporations under which itsKansas locations are operated.  Fifty-onepercent of the stock of each of the subsidiary corporations is owned by aGranite City restaurant manager and the Company owns the remainder of the stockof each corporation.  Each manager-ownerof the stock of these entities has entered into a buy-sell agreement with eachcorporation providing, among other things, that transfer of the shares isrestricted and that the shareholder must sell his shares to the corporationupon certain events, including

5

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termination of employment or any event which disqualifies the managerfrom owning the shares under applicable laws and regulations of the state.  The Company has entered into a masteragreement with each separate corporation that permits the operation of therestaurants and leases to each corporation the Company’s property andfacilities.  Each corporation pays all ofits operating expenses and obligations, and the Company retains, asconsideration for the operating arrangements and the lease of property andfacilities, the net profit from its operations. The Company has determined that the foregoing ownership structure willcause these separate corporations to be treated as variable interest entitiesin which the Company has a controlling financial interest for the purpose ofFASB Interpretation 46 (R), *Consolidation of VariableInterest Entities*(FIN46R). As such, the corporations are consolidated with the Company’s financialstatements and the Company’s financial statements do not reflect a minorityownership in those separate corporations. All references to the Company in these financial statements relate tothe consolidated entity.

Reclassification:

Certain reclassifications have been made to the financial statementsfor the second quarter and first half of 2005 in order for them to conform tothe presentation of the financial statements for the second quarter and firsthalf of 2006.  These reclassificationshave no effect on the accumulated deficit or net loss previously reported.

**3.****                                Commitmentand Contingencies**

West Wichita, Kansas lease:

In January 2006, the Company entered into a 20-yearnet lease relating to the restaurant it opened in West Wichita, Kansas underthe same terms specified in the multi-site development agreement the Companyhas entered into with Dunham Capital Management L.L.C. (“Dunham”), itscommercial developer.  The restaurant wasconstructed for the Company on a build-to-suit basis and the annual rent isequal to $315,000, which is 10.5% of the construction cost including landcost.  The annual rent on the landportion of this lease is $97,650 and is classified as an operating leasebecause the fair value of the land is more than 25% of the property to beleased.  The annual rent on the buildingportion of this lease is $217,350 and is classified as a capital lease becauseits present value is greater than 90% of the estimated fair value at thebeginning of the lease.  The Company isresponsible for any real-estate taxes and all operating costs.  The term of the lease commenced when operationsbegan July 18, 2006.  The lease may beextended at the Company’s option for up to five additional five-year periods onthe same terms and conditions, except the rent may increase based on a formulausing the Consumer Price Index during any such extension, or the Company maypurchase the premises for the fair market value during the last year of theoriginal term.  Rental costs associatedwith the operating lease incurred during the construction period have beenrecognized as pre-opening costs, and will be included in income from continuingoperations in the Company’s third quarter 2006 financial statements.

St. Louis Park, Minnesota lease:

In March 2006, the Company entered into a 10-year net lease with anindependent third party relating to the restaurant it plans to open in St.Louis Park, Minnesota.  The leaseincludes land and an existing building of approximately 7,250 square feet whichthe Company will convert into a Granite City Food & Breweryrestaurant.  This lease was not enteredinto under the development agreement with Dunham, but Dunham is providingproject management and oversight in connection with this conversion.  The lease is classified as an operating leaseas the present value of the minimum lease payments was less than 90% of theestimated fair value of the property at the beginning of the lease.  Annual rent is $148,625 per year pluspercentage rent based upon restaurant sales. The Company is responsible for any real-estate taxes and all operatingcosts.  The term of the lease commencedMarch 17, 2006 and may be extended at the Company’s option for up to three additionalfive-year periods on the same terms and conditions, except the base rent willincrease approximately $1.00 per square foot during each such extension.  Rental costs associated with this operatinglease that are incurred during the construction period will continue to berecognized as pre-opening costs, and included in income from continuingoperations.  The Company paidapproximately $573,776 in lease acquisition costs for this property andanticipates incurring an aggregate of approximately $1.8 million inconstruction, furniture, fixtures and equipment costs.

6

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Roseville, Minnesota and Omaha, Nebraska leases:

In May 2006, the Company entered into 20-year net leases relating torestaurants it plans to open in Roseville, Minnesota and Omaha, Nebraska underthe terms specified in the development agreement with Dunham.  Each restaurant will be constructed for theCompany on a build-to-suit basis.  Theannual rent of each will be equal to 10.5% of the construction cost includingland cost.  The Company will beresponsible for any real-estate taxes and all operating costs.  The term of each lease will commence whenoperations begin and may be extended at the Company’s option for up to fiveadditional five-year periods on the same terms and conditions, except the rentmay increase based on a formula using the Consumer Price Index during any suchextension.  Rental costs associated withthe operating leases that are incurred during the construction period will berecognized as pre-opening costs, and included in income from continuingoperations.

St. Cloud, Minnesota lease:

In May 2006, the Company entered into an amendment to its leaseagreement with the landlord of its St. Cloud restaurant.  In connection with this amendment, theCompany exercised its option to extend the term of the lease for one additionalfive year period.  The amendment alsorequires the landlord pay up to $400,000 in construction costs of agreed uponimprovements to the property.  EffectiveAugust 1, 2006, the base rent for this property increased $41,446 per yearthroughout the term of the lease, subject to adjustment as provided in thelease, and the gross threshold over which the Company pays percentage rent wasincreased from $3.2 million to approximately $3.8 million.  The lease may be extended at the Company’soption for up to two additional five-year periods.

**4.****             ****Stock-Based Compensation**

In July 1997, theCompany adopted the 1997 Stock Option Plan for employees and non-employees,including consultants to the Company, to purchase the Company’s common stock atan exercise price that equals or exceeds the fair market value on the date ofgrant.   The number of shares authorizedfor issuance under the plan as of June 27, 2006 was 400,000, of which 35,500 sharesremained available for future issuance. Although vesting schedules may vary, option grants under this plangenerally vest evenly over a four-year period and options are exercisable forno more than ten years from the date of grant.

The Company hasreserved 590,000 shares of common stock for issuance under the 1997 DirectorStock Option Plan, of which 148,500 remained available for issuance at June 27,2006.  Under this plan, the Companyautomatically grants an option to each outside director on the date such personbecomes a director for the purchase of 15,000 shares of common stock andthereafter on each successive anniversary of the grant of the first option forthe purchase of 15,000 shares.  Eachoption vests one year after the option is granted and is exercisable for fiveyears from the date of grant. Options are granted at fair market value.

In August 2002,the Company adopted the 2002 Equity Incentive Plan for employees, prospectiveemployees, officers and members of the Company’s board of directors, as well asconsultants and advisors to the Company, to purchase shares of the Company’scommon stock at an exercise price that equals or exceeds the fair market valueon the date of grant.  The number ofshares authorized for issuance as of June 27, 2006 was 1,558,839, of which 552,839shares remained available for future issuance. Although vesting schedules may vary, option grants under this plangenerally vest evenly over a three or four-year period and options areexercisable for no more than ten years from the date of grant.

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A summary of the status of the Company’s stock options as of June 27,2006 is presented below:

 

|                                                                    | ** ** | ** **                                                                                      | ** ** | ** **                                                                                      | ** ** | **Weighted**              | ** ** | ** **                                                     | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|---------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                         | ** ** | ** **                                                                                      | ** ** | **Weighted**                                                                                    | ** ** | **Average**               | ** ** | **Aggregate**                                                  | ** ** |
| ** **                                                         | ** ** | ** **                                                                                      | ** ** | **Average**                                                                                     | ** ** | **Remaining**             | ** ** | **Intrinsic**                                                  | ** ** |
| **Fixed Options**                                             | ** ** | **Shares**                                                                                      | ** ** | **Exercise Price**                                                                         | ** ** | **Contractual Life** | ** ** | **Value**                                                      | ** ** |
| Outstanding at  December 27, 2005                                  |       | 1,590,000                                                                                       |       | $               3.58 |       | 6.7 years                 |       |                                                           |       |
| Granted                                                            |       | 133,000                                                                                         |       | 4.27                                                                                            |       | 8.6 years                 |       |                                                           |       |
| Exercised                                                          |       | —                                                                                          |       | —                                                                                          |       | —                    |       |                                                           |       |
| Forfeited                                                          |       | —                                                                                          |       | —                                                                                          |       | —                    |       |                                                           |       |
| Outstanding at  June 27, 2006                                      |       | 1,723,000                                                                                       |       | $               3.63 |       | 6.4 years                 |       | $      1,096,910                 |       |
|                                                               |       |                                                                                            |       |                                                                                            |       |                      |       |                                                           |       |
| Options  exercisable at December 27, 2005                          |       | 1,015,750                                                                                       |       | $               3.29 |       | 5.9 years                 |       |                                                           |       |
| Options  exercisable at June 27, 2006                              |       | 1,131,336                                                                                       |       | $               3.32 |       | 5.6 years                 |       | $         983,900 |       |
|                                                               |       |                                                                                            |       |                                                                                            |       |                      |       |                                                           |       |
| Weighted-average fair  value of options granted during the quarter |       | $               4.27 |       |                                                                                            |       |                      |       |                                                           |       |

 

The aggregate intrinsic value in the table above represents the totalpretax intrinsic value (the difference between the closing price of the Company’sstock on June 27, 2006 and the exercise price, multiplied by the number ofin-the-money options) that would have been received by the option holders hadall option holders exercised their options on June 27, 2006.  As of June 27, 2006, there was approximately$673,829 of total unrecognized compensation cost related to unvestedshare-based compensation arrangements, of which $466,706 is expected to berecognized during the remainder of fiscal year 2006, $193,363 in fiscal year2007, $13,449 in fiscal year 2008 and $311 in fiscal year 2009.

**5.        Long-term Debt**

In August 2003, the Company obtained a $750,000 loan from an independentfinancial institution for the purchase of equipment for its restaurant locatedin Des Moines, and in January 2004, the Company obtained a $750,000 loan fromthe same financial institution for the purchase of equipment at its restaurantin Davenport.  These loans were eachsecured by substantially all of the Company’s personal property.    In June 2006, the Company entered intoamendments to the security agreements of each of these loans.  As a result of these amendments, each loan issecured only by the personal property and fixture property at its respectivelocation.  All other terms and conditionsof these loans remain the same as the original agreements.

**ITEM 2       Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

*This discussion and analysis contains variousnon-historical forward-looking statements within the meaning of Section 21E ofthe Exchange Act.  Although we believethat, in making any such statement, our expectations are based on reasonableassumptions, any such statement may be influenced by factors that could causeactual outcomes and results to be materially different from thoseprojected.  When used in the followingdiscussion, the words “anticipates,” “believes,” “expects,” “intends,” “plans,”“estimates” and similar expressions, as they relate to us or our management,are intended to identify such forward-looking statements.  You are cautioned not attribute unduecertainty to such forward-looking statements, which are qualified in theirentirety by the cautions and risks described herein.  Please refer to our Annual Report on Form10-KSB for the fiscal year ended December 27, 2005, filed with the Securitiesand Exchange Commission on March 27, 2006, for additional factors known to usthat may cause actual results to vary.*

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**Overview**

We operate fourteencasual dining restaurants featuring on-premises breweries under the nameGranite City Food & Brewery®.  Withthe exception of the building at our Fargo location, we lease the land andbuilding at each of our restaurants.  Thelocation of each restaurant and the month and year of its opening appear in thefollowing chart:

| Unit | ** ** | **Location**               | ** ** | **Opened** |
|------|------------|----------------------------|------------|------------|
| 1    |       | St. Cloud,  Minnesota      |       | Jun-99     |
| 2    |       | Sioux Falls,  South Dakota |       | Dec-00     |
| 3    |       | Fargo, North  Dakota       |       | Nov-01     |
| 4    |       | Des Moines, Iowa           |       | Sep-03     |
| 5    |       | Cedar Rapids,  Iowa        |       | Nov-03     |
| 6    |       | Davenport, Iowa            |       | Jan-04     |
| 7    |       | Lincoln,  Nebraska         |       | May-04     |
| 8    |       | Maple Grove,  Minnesota    |       | Jun-04     |
| 9    |       | East Wichita,  Kansas      |       | Jul-05     |
| 10   |       | Eagan, Minnesota           |       | Sep-05     |
| 11   |       | Kansas City,  Missouri     |       | Nov-05     |
| 12   |       | Kansas City,  Kansas       |       | Jan-06     |
| 13   |       | Olathe, Kansas             |       | Mar-06     |
| 14   |       | West Wichita,  Kansas      |       | Jul-06     |

 

We developed theforegoing restaurants using proceeds from the sale of our securities, buildingand equipment leases, debt and equipment financing and cash flow fromoperations.  We built units 4-9 and 11-14based upon the prototype we developed in early 2003.  In 2004 and 2005, we retrofitted units 1-3 toconform to this prototype model.  In2005, we developed unit 10 which was a conversion of an existingrestaurant.  With the exception of units1-3, we developed all of our units under our multi-site development agreementwith a commercial developer that provides us with assistance in site selection,construction management and financing for new restaurants.  Under this agreement, we lease the land andbuilding of each new restaurant from our developer.

In June 2005, we opened our beer production facility in Ellsworth, Iowato facilitate the initial stage of our brewing process— the production of non-alcoholicwort— using our patent-pending brewing process called Fermentus InterruptusTM.  Until we opened our beer production facility,our first two units, which were built with fully equipped and functioningbreweries, supplied hand-crafted beers to all existing units.  We believe that Fermentus Interruptus and theuse of a centrally located beer production facility improves the economics ofmicrobrewing as it eliminates the initial stages of brewing and storage atmultiple locations, thereby reducing equipment and development costs at newrestaurant locations.  Additionally,having a common starting point for the production of wort creates consistencyof taste for our product from unit to unit. The wort produced at our beerproduction facility is transported via truck to the fermentation vessels ateach of our restaurants where the brewing process is completed.  We believe that our current beer productionfacility has the capacity to service 30 to 35 restaurant locations.

The training of each of our managers takes place under the instructionof full-time, dedicated trainers at Granite City University, located within ourMaple Grove restaurant.  Our eight-weektraining program consists of both “hands on” as well as classroom training forall aspects of management.  All costsrelated to Granite City University, including trainer and trainee salaries aswell as trainee meals and lodging expenses, are recorded as a component ofcorporate general and administrative costs.

Our new store opening team, which consists of experienced restaurantmanagers, is responsible for the opening of each of our new restaurants.  Generally, this team arrives at a newrestaurant site two to three months

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inadvance of the restaurant opening date and coordinates all staffing and trainingmatters for that new restaurant.  Webelieve that a dedicated team delivers a more disciplined opening process andensures adherence to our company’s exacting standards and culture.

Webelieve that our operating results will fluctuate significantly because ofseveral factors, including the timing of new restaurant openings and relatedexpenses, profitability of new restaurants, changes in food and labor costs,increases or decreases in comparable restaurant sales, general economicconditions, consumer confidence in the economy, changes in consumerpreferences, competitive factors, the skill and experience of ourrestaurant-level management teams and weather conditions.  Additionally, we expect to incur the most significantportion of pre-opening costs associated with a new restaurant within the twomonths immediately preceding, and the month of, the opening of such restaurant.

Thethirteen and twenty-six weeks ended June 27, 2006 included 169 and 320restaurant weeks, respectively, which is the sum of the actual number of weekseach restaurant operated. The thirteen and twenty-six weeks ended June 28, 2005included 104 and 208 restaurant weeks, respectively.  The source of the additional restaurant weeksin fiscal year 2006 is shown in the following chart:

| Location                           | ** ** | **Thirteen Weeks  Ended  June 27, 2006** | ** ** | **Twenty-six Weeks  Ended  June 27, 2006** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|--------------------------------------------|------------|
| Wichita, Kansas                    |       | 13                                       |       | 26                                         |       |
| Eagan, Minnesota                   |       | 13                                       |       | 26                                         |       |
| Kansas City,  Missouri             |       | 13                                       |       | 26                                         |       |
| Kansas City,  Kansas               |       | 13                                       |       | 21                                         |       |
| Olathe, Kansas                     |       | 13                                       |       | 13                                         |       |
| Total Additional  Restaurant Weeks |       | 65                                       |       | 112                                        |       |

 

Because we continue toexpand our operations and open new restaurants at various times throughout theyear, we provide this statistical measure to enhance the comparison of revenuesfrom period to period as changes occur in the number of units we are operating.

Ourrestaurant revenues are comprised almost entirely of the sales of food andbeverages.  The sale of retail items,such as cigarettes and promotional items, typically represents less than onepercent of total revenue.  Product costsinclude the costs of food, beverages and retail items.  Labor costs include direct hourly andmanagement wages, management bonus, taxes and benefits for restaurantemployees.  Direct restaurant operatingcosts include restaurant supplies, marketing costs, utilities, repairs andmaintenance and other related costs. Occupancy costs include rent on our operating leases, real estate taxesand insurance.  Pre-opening costs consistof direct costs related to hiring and training the initial restaurantworkforce, the salaries and related costs of our dedicated new store openingteam, rental costs incurred during the construction period, and other directcosts associated with opening new restaurants. General and administrative expenses are comprised of expenses associatedwith all corporate and administrative functions that support existingoperations which include management and staff salaries and bonuses, employeebenefits, travel, information systems, training, market research, professionalfees, supplies, corporate rent and excess production costs at our beerproduction facility.  Depreciation andamortization includes depreciation on capital expenditures at the restaurantand corporate levels and amortization of intangibles that do not haveindefinite lives.  Other income andexpense represents the cost of interest expense on debt and capital leases,interest income on invested assets and gain/loss on disposal of assets.

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**Resultsof Operations**

The following table compares operating resultsexpressed as a percentage of total revenue for the thirteen and twenty-sixweeks ended June 27, 2006 and June 28, 2005.
| ** **                     | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **June 27,**                  | ** ** | **June 28,**                    | ** ** | **June 27,** | ** ** | **June 28,** | ** ** |
| ** **                     | ** ** | **2006**                           | ** ** | **2005**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Restaurant revenues            |       | 100.0                              | %          | 100.0                                | %          | 100.0 | % | 100.0 | % |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Cost of sales:                 |       |                               |       |                                 |       |   |   |   |   |
| Food, beverage  and retail     |       | 29.5                               |       | 29.7                                 |       | 29.5 |   | 29.8 |   |
| Labor                          |       | 34.6                               |       | 34.8                                 |       | 35.2 |   | 35.1 |   |
| Direct  restaurant operating   |       | 11.4                               |       | 11.3                                 |       | 12.3 |   | 11.9 |   |
| Occupancy                      |       | 5.5                                |       | 5.0                                  |       | 5.6 |   | 5.2 |   |
| Total cost of  sales           |       | 81.1                               |       | 80.8                                 |       | 82.7 |   | 82.0 |   |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Pre-opening                    |       | 1.8                                |       | 2.6                                  |       | 4.1 |   | 1.4 |   |
| General and  administrative    |       | 11.2                               |       | 13.8                                 |       | 11.7 |   | 13.0 |   |
| Depreciation and  amortization |       | 5.6                                |       | 5.8                                  |       | 6.0 |   | 5.7 |   |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Operating income (loss)        |       | 0.2                                |       | (2.9                                 | )          | (4.4 | ) | (2.0 | ) |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Interest:                      |       |                               |       |                                 |       |   |   |   |   |
| Income                         |       | 0.2                                |       | 0.4                                  |       | 0.2 |   | 0.4 |   |
| Expense                        |       | (3.9                               | )          | (3.8                                 | )          | (4.0 | ) | (3.9 | ) |
| Other expense, net             |       | (0.0                               | )          | (0.5                                 | )          | (0.0 | ) | (0.3 | ) |
| Net other  expense             |       | (3.8                               | )          | (3.9                                 | )          | (3.8 | ) | (3.8 | ) |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Net loss                       |       | (3.6                               | )%         | (6.8                                 | )%         | (8.2 | )% | (5.9 | )% |

 

Certain percentage amounts do not sum due to rounding.

**Resultsof Operations for the Thirteen and Twenty-six Weeks Ended June 27, 2006 andJune 28, 2005**

**Revenue**

We generated $14,417,118 and $8,534,251 of revenuesduring the second quarter of 2006 and 2005, respectively.  During the first half of 2006 and 2005, wegenerated revenues of $26,309,437 and $16,404,588, respectively.  Average weekly sales increased from $82,060per week in the second quarter of 2005 to $85,308 per week in the secondquarter of 2006.  Average weekly salesincreased from $78,868 to $82,217 per week in the first half of 2006 comparedto the first half of 2005.  Comparablerestaurant sales, which include restaurants in operation over 18 months,increased 5.1% and 5.3% in the second quarter and first half of 2006 over thesame such periods of 2005, respectively. The twenty-six weeks ended June 27, 2006 included 320 restaurant weeks,which is the sum of the actual number of weeks each restaurant operated.  The twenty-six weeks ended June 27, 2005included 208 restaurant weeks.  Theincrease in sales of 60.4% for the first half of the fiscal year 2006 over thefirst half of fiscal year 2005 was the result of 112 additional restaurantweeks in 2006 and the increase in comparable restaurant sales.

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We anticipate that restaurant revenues will vary fromquarter to quarter.  We anticipateseasonal fluctuations in restaurant revenues due in part to increased outdoorseating and generally favorable weather conditions at our locations during thesummer months.  We expect the timing ofnew restaurant openings to cause fluctuations in restaurant revenues.  Additionally, consumer confidence in theeconomy and changes in consumer preferences may affect our future revenues.

**Restaurant Costs**

***Food and Beverage***

Our food and beverage costs decreased 0.2% as apercentage of revenue from 29.7% in the second quarter of 2005 to 29.5% in thesecond quarter of 2006.  These costsdecreased 0.3% as a percentage of revenue from 29.8% in the first half of 2005to 29.5% in the first half of 2006. These decreases were due primarily to our staff members becoming moreexperienced in our disciplined preparation and production methods,thereby generatingless waste.  Lower per-unit productprices due to higher volume company-wide purchasing also contributed to thesedecreases.

We expect that our food andbeverage costs will vary going forward due to numerous variables, includingseasonal changes in food and beverage costs and guest preferences.  We periodically create new menu offerings andintroduce new craft brewed beers based upon guest preferences.  Although such menu modifications maytemporarily result in increased food and beverage costs, we believe we are ableto offset such increases with our weekly specials which provide variety andvalue to our guests.  Our varieties ofcraft brewed beer, which we believe we can produce at lower cost than beers wepurchase for resale, also enable us to keep our food and beverage costs lowwhile fulfilling guest requests and building customer loyalty.  As we open additional restaurants, we believewe will experience increased purchasing power, partially offsetting food andbeverage cost increases, and maintain or reduce our food and beverage costs asa percentage of revenue.  Additionally,as we add new restaurants, we believe our brewing process, FermentusInterruptus, will allow us to keep our high quality beer products intact whileleveraging our fixed production costs, thereby enhancing overall companyprofitability.

***Labor***

Our labor costs expressed as a percentage of revenuedecreased 0.2% from 34.8% in the second quarter of 2005 to 34.6% in the secondquarter of 2006.  These costs increased0.1% as a percentage of revenue from 35.1% in the first half of 2005 to 35.2%in the first half of 2006.  We haveexperienced increases in labor costs as minimum wages haveincreased and as we have been required to compete more aggressively formanagement and hourly employees at our new restaurants.  However, our higher revenues company-widehave generally offset these higher costs as a percentage of revenue.

We expect that labor costswill vary as we add new restaurants. Minimum wage laws, local labor laws and practices, as well as unemploymentrates vary from state to state and will affect our labor costs, as will hiringand training expenses at our new restaurants. We believe that retaining good employees and more experienced staffensures high quality guest service and reduces hiring and training costs.

***Direct Restaurant Operating***

Our direct restaurant operating expenses increased0.1% as a percentage of revenues from 11.3% in the second quarter of 2005 to11.4% in the second quarter of 2006. These expenses increased 0.4% as a percentage of revenues from 11.9% inthe first half of 2005 to 12.3% in the first half of 2006.  Operating supplies, repairs and maintenance,promotions and restaurant-level administrative expense represent the majorityof our direct restaurant operating expenses, a portion of which is fixed orindirectly variable.  The increases indirect restaurant operating expenses were due primarily to an increase inexpenses related to credit card acceptance and repairs and maintenance.

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***Occupancy***

Our occupancy costs, which include rent on ouroperating leases, common area maintenance, property taxes and insurance,increased 0.5% as a percentage of revenues from 5.0% in the second quarter of2005 to 5.5% in the second quarter of 2006. These costs increased 0.4% as a percentage of revenues from 5.2% in thefirst half of 2005 to 5.6% in the first half of 2006.  Such increases were due primarily toincreased rent and property taxes.  Ouroccupancy costs do not include payments on the portion of each restaurant leasewhich is classified as a capital lease. Under Financial Accounting Standards Board (FASB) Statement No. 13, *Accounting for Leases,* these payments are classified aspayments of principal and interest.  Suchpayments aggregated approximately $1,183,000 and $632,000 during the first halfof 2006 and 2005, respectively.

**Pre-**Opening

Pre-opening costs, which areexpensed as incurred, consist of expenses related to hiring and training theinitial restaurant workforce, wages and expenses of our dedicated new storeopening teams, rental costs incurred during the construction period and certainother direct costs associated with opening new restaurants.  Pre-opening costs in the second quarter of2006 related primarily to our West Wichita restaurant which we opened in July 2006and our St. Louis Park restaurant which we plan to open later in the thirdquarter of 2006.  In the first half offiscal year 2006, we included $107,043, $114,914 and $45,253 of rental costsincurred during construction periods for Kansas City, Olathe and St. LouisPark, respectively, in pre-opening expense in accordance with FASB StaffPosition No. FAS 13-1, *Accounting for RentalCosts Incurred during a Construction Period*(FSP FAS 13-1).  Based upon the costs of labor, travel,lodging, training and rent incurred prior to opening, we expect pre-openingexpenses to average between $400,000 and $425,000 per unit, of which weanticipate approximately $50,000 to $125,000 to be construction-periodrent.  Pre-opening costs are primarilyincurred in the month of, and two months prior to, the restaurant opening.

**General andAdministrative**

General and administrative expenses include allsalaries and benefits associated with our corporate staff that is responsiblefor overall restaurant quality, future expansion into new locations, financialcontrols and reporting, restaurant management recruiting, training at GraniteCity University that we opened in February 2005, excess capacity costs relatedto our beer production facility that we opened in June 2005, and salaries andexpenses of our new store opening team when it is not dedicated to a particularrestaurant opening.  Other general andadministrative expenses include advertising, professional fees, office administration,centralized accounting system costs, and travel by our corporate management tothe restaurant locations.

Generaland administrative expenses increased $442,318 from $1,179,056 in the secondquarter of 2005 to $1,621,374 in the second quarter of 2006.  These expenses increased $945,025 from$2,131,409 in the first half of 2005 to $3,076,434 in the first half of2006.  Of such increase, approximately$384,000 represented payroll costs due to the increase in our corporate staffin the areas of accounting, IT, Granite City University, the beer production facility and our newstore opening team.  Professional fees,including consulting, marketing, legal, accounting and investor relations, wereapproximately $213,000 higher in the first half of 2006 than in the first halfof 2005.

In December 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (revised 2004) (“SFAS 123(R)”),*Share-Based Payment*, which is arevision of SFAS 123, *Accounting forStock-Based Compensation*. Generally, effective with the first day of fiscal year 2006,SFAS 123(R) requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the income statementbased on their fair values determined at the date of grant.  In all prior periods, we accounted forstock-based compensation awards to employees using the intrinsic value methodprescribed by APB Opinion No. 25 and, as such, generally recognized nocompensation cost for employee stock options. In the second quarter and first half of 2006, our general andadministrative expenses included approximately $227,383 and $407,484 innon-cash stock-based compensation expense, respectively.

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Despite the foregoing increases in general andadministrative expenses, the increase in restaurant revenues associated withadditional locations and the increase in comparable sales caused our generaland administrative expenses to decrease as a percentage of revenue.  During the second quarter and first half of2006, these expenses decreased 2.6% and 1.3%, respectively, from such periodsin 2005.

Although general and administrative costs maycontinue to fluctuate as a percentage of restaurant revenues in the near term,we expect such expenses will decrease as a percentage of revenues in the longterm as we grow our restaurant chain.

**Depreciation and Amortization**

Depreciation andamortization expense increased $323,101 during the second quarter of 2006compared to the same period in 2005. During the first half of 2006, such expense increased $631,161 comparedto the first half of 2005, due principally to the additional depreciationrelated to the newly opened restaurants. As a percentage of revenues, depreciation expense increased 0.3% in thefirst half of 2006.  Under FinancialAccounting Standards Board (FASB) Statement No. 13, *Accountingfor Leases*, amortization expense related to assets held under acapital lease, which includes substantially all of our restaurant buildings, isto be included with depreciation and amortization expense.  Amortization expense related to assets heldunder capital leases was $605,612 and $324,400 in the first half of 2006 and2005, respectively, and was included in depreciation and amortization expense.

**Other Income and Expense**

Net interestexpense consists of interest expense on capital leases and long-term debt, netof interest earned from cash on hand. Interest expense related to capital leases increased $247,072 to$517,642 and increased $424,375 to $968,978 during the second quarter and firsthalf of 2006, respectively, due to the increase in capital leases as a resultof five additional restaurants.  Interestexpense related to long-term debt decreased $4,319 to $46,006 and decreased $7,581to $92,699 during the second quarter and first half of 2006, respectively, dueto the reduction of principal on such debt. Interest income related to unused cash decreased $6,971 to $24,114 and decreased$13,182 to $56,164 during the second quarter and first half of 2006,respectively, due to the reduction of cash on hand.  Management expects net interest expense will increase as we pursuefurther expansion.

As we remodeledour three older restaurants to conform to our prototype design in the firsthalf of 2005, we recorded a $50,475 loss on assets which had not been fullydepreciated.  During the first half of2006, we recognized a net loss on disposal of assets of $2,414 due to thedisposal of certain equipment which had not been fully depreciated, partiallyoffset by the sale of unused assets at our test kitchen.

**Liquidity and CapitalResources**

We have funded our capital requirements sinceinception through sales of securities, building and equipment leases, debtfinancing and cash flow from operations. As of June 27, 2006, we had $6,603,529 of cash and a $1,231,585 workingcapital deficit compared to $9,836,231 of cash and $5,136,557 of net workingcapital at December 27, 2005.

During the twenty-six weeks ended June 27, 2006, weused $77,671 of net cash in operating activities, $2,591,544 in net cash topurchase equipment and other assets primarily for our new restaurants and thoserestaurants under construction, and made payments aggregating $561,346 on ourdebt and capital lease obligations. Additionally, during the first half of 2006, we used $2,141 of net cashto pay expenses associated with the issuance of our common stock in the fourthquarter of 2005.

During the twenty-six weeks ended June 28, 2005, weused $467,519 of net cash in operating activities, $2,691,852 in net cash topurchase equipment and other assets primarily for our wort production facilityand our Wichita, Eagan and Kansas City locations, and made payments aggregating$385,444 on our debt and capital lease obligations.  Additionally, during the first quarter of2005, we paid cash dividends to shareholders of our

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preferred stockaggregating $41,068 and received net cash of $31,349 from the issuance of ourcommon stock upon the exercise of options and warrants.

Using the proceeds from thesale of our securities, debt and equipment financing and cash flows fromoperations, we intend to continue expansion in markets where we believe ourconcept will have broad appeal and attractive restaurant-level economics.  We plan to continue using our prototypicalmodel as we open future restaurants under our multi-site development agreement;however, where appropriate, we will convert existing restaurants to our GraniteCity concept as we did with our Eagan location and are in the process of doingwith our St. Louis Park location. Additionally, we intend to explore alternative restaurant designs toreduce the cost of our initial capital investment and we may alter ourprototypical model to meet various state and local regulatory requirements,including, but not limited to, pollution control requirements, liquor licenseordinances and smoking regulations.

Based upon our existingprototype, we anticipate that pre-opening costs, the initial purchase offurniture, fixtures and equipment and our restaurant design costs will requirean investment by us of approximately $1.0 million to $1.6 million for each newrestaurant.  We anticipate that our newrestaurants will require an investment by our developer of approximately $3.5million to $4.5 million each for land and building.  We expect these costs will vary from onemarket to another based on real estate values, zoning regulations, labormarkets and other variables.

In January 2006,we opened a restaurant in Kansas City, Kansas.  We are leasing this property from our developer under a 20-year leaseagreement.   Our annual lease paymentsare $404,250 with $262,500 classified as a capital lease and the remaining$141,750 classified as an operating lease. We have the option to extend this lease for up to five additionalfive-year periods or to purchase the restaurant real estate for its fair marketvalue during the last year of the original term.

In March 2006, weopened a restaurant in Olathe, Kansas.  We are leasing this property from our developer under a 20-year leaseagreement.   This is the tenth restaurantwe have opened in cooperation with our developer.  Our annual lease payments are $414,750 with$268,254 classified as a capital lease and the remaining $146,496 classified asan operating lease.  We have the optionto extend this lease for up to five additional five-year periods or to purchasethe restaurant real estate for its fair market value during the last year ofthe original term.

In March 2006, wecommenced leasing a property in St. Louis Park, Minnesota under a 10-yearoperating lease agreement.  Our annuallease payments are $148,625 plus percentage rent based upon restaurantsales.  This lease may be extended at our option for up tothree additional five-year periods.  Wepaid approximately $573,776 in lease acquisitions costs for this property.

With our existing capital resources, cash generated from operations andthe proceeds from at least $3.0 million in additional debt and/or equipmentfinancing that we are currently pursuing, we believe that we will havesufficient funds to complete our 2006 openings and provide sufficient workingcapital for our operations.  If we do notgenerate the cash needed from operations and/or are not able to obtainsufficient debt and/or equipment financing, we may have to reduce or delay ourplanned fourth quarter 2006 openings.  Wewill require further funding to open additional restaurants.  We are continually evaluating our developmentplans and we are exploring options relative to the pace of our growth.  Further, our liquidity will be affected byour need to refinance a balloon payment of approximately $1.3 million due inFebruary 2007 on a loan associated with our Fargo restaurant’s building.  If we do not have enough funds based upon ourcapital resources, anticipated equipment financing and expected cash flows fromoperations, we may be required to obtain additional financing through the saleof securities and/or increase our borrowings. We may not be able to accomplish either of these alternatives on termsacceptable to us, or at all.

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**Commitments and Contingent Liabilities**

*Development Agreement:*

We have entered into a development agreement with Dunham CapitalManagement L.L.C. (“Dunham”) for the development of restaurants.  Dunham is controlled by Donald A. Dunham,Jr., who is an affiliate of Granite Partners, a beneficial owner of less than 2%of our securities.  The agreement givesDunham the right to develop, construct and lease up to 22 restaurants for usprior to December 31, 2012.  As of June27, 2006, ten restaurants, namely units 4-13, had been constructed for us underthis development agreement.  We are notbound to authorize the construction of restaurants during the term of thedevelopment agreement, but generally cannot use another developer to develop orown a restaurant as long as the development agreement is in effect.  We can use another developer if Dunhamdeclines to build a particular restaurant, if the agreement is terminatedbecause of a default by Dunham, or if our company is sold or merged intoanother company.  In the case of a mergeror sale of our company, the development agreement may be terminated.

The development agreement provides for a cooperative process betweenDunham and our company for the selection of restaurant sites and thedevelopment of restaurants on those sites, scheduling for the development andconstruction of each restaurant once a location is approved, and controls onthe costs of development and construction using bidding and guaranteed maximumcost concepts.  The development agreementprovides that restaurants will be leased to us on the basis of a triple netlease.  The rental rate of each leasewill be calculated using a variable formula which is based on approved andspecified costs of development and construction and an indexed interest rate.  Generally, the land portion of each lease isclassified as an operating lease because the fair value of the land is morethan 25% of the property to be leased. The building portion of the lease is classified as a capital leasebecause its present value is greater than 90% of the estimated fair value atthe beginning of the lease.  The term ofeach lease is 20 years and may be extended at our option for up to fiveadditional five-year periods, or we may purchase the restaurant real estate forthe fair market value during the last year of the original term.

Dunham also has the right to sell the underlying land and building tothird parties or assign our leases.  Asof June 27, 2006, Dunham had sold two of our restaurants sites to thirdparties.

*Operating and Capital Lease Relating to Restaurants:*

As of June 27, 2006, we operated 13 restaurants, 12 under land andbuilding lease agreements and one under a land lease only as we own thebuilding at our Fargo location.  Underthree of the leases, we are required to pay additional percentage rent basedupon restaurant sales.

Of the 12 restaurants we operate under land and building leaseagreements, 10 originated with our developer. Of these 12 leases, one expires in 2020, two in 2023, four in 2024,three in 2025 and the remaining two expire in 2026, all with renewable optionsfor additional periods.  The land portionof these leases is classified as an operating lease because the fair value ofthe land was more than 25% of the leased property at the inception of eachlease.  The building portion of theseleases is classified as a capital lease because its present value was greaterthan 90% of the estimated fair value at the beginning of the lease.  As of June 27, 2006, future obligationsrelating to the land portion of these 12 leases aggregated $28,294,697 pluspercentage rent.  The scheduled rentincreases for the land during the life of each lease are recognized on astraight-line basis.  Future obligationsrelating to the building portion of these 12 leases aggregated $46,907,442 asof June 27, 2006.

In 2001, we entered into a 20-year operating lease for the land uponwhich we built our Fargo restaurant.  Asof June 27, 2006, future obligations under the terms of this lease aggregated$1,107,800 plus percentage rent.

In March 2006, we entered into a lease agreement for the land andbuilding where we will operate our St. Louis Park restaurant.  This lease expires in 2016 with renewaloptions for additional periods.  Thislease is classified as an operating lease as the present value of the minimumlease payments was less than 90% of the estimated fair value of the property atthe beginning of the lease.  During theconstruction period, this lease will

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continueto be recognized as pre-opening expense. As of June 27, 2006, future obligations relating to this lease aggregated$1,449,094 plus percentage rent.

As of June 27, 2006, we had an additional capital lease obligationoutstanding of $274,816 for an equipment lease expiring in 2008.

As of June 27, 2006, we had entered into 20-year net leases with ourdeveloper for restaurants in West Wichita, Kansas, Omaha, Nebraska andRoseville, Minnesota, a suburb of the Twin Cities.  The annual rent for each of these leases willbe equal to 10.5% of the sum of the construction cost and land cost.  The term of the West Wichita lease commencedwhen we began operations July 18, 2006. Currently the Roseville and Omaha restaurants are under construction,and we anticipate opening these restaurants in the fourth quarter of 2006, atwhich time the terms of each lease will commence.

Our developer, in cooperation with our chief executive officer,continues to explore opportunities for the development of additional restaurantsites, and where necessary, enters into letters of intent or leases to securesuch sites on our behalf.  As of June 27,2006, our developer had entered into a lease to secure a site for us inMadison, Wisconsin where we plan to open a restaurant in the fourth quarter of 2006.  Our developer has also entered into threeletters of intent for restaurant sites that we are pursing for potential 2007openings.

*Other Operating and Capital Leases:*

In December 2004, we entered into a land and building lease agreementfor our beer production facility.  Thisten-year lease commenced February 1, 2005, and is classified as a capital leaseas it contains a bargain purchase option. As of June 27, 2006, future obligations under the terms of this leaseaggregated $741,604.

In August 2005, we entered into a 38-month lease agreement for officespace for our corporate offices.  Thelease commenced October 1, 2005.  Annualrent is $38,666, with scheduled annual increases throughout the term of thelease.  Such scheduled rent increases arerecognized on a straight-line basis over the term of the lease.  Future obligations under the terms of thislease aggregated $99,307 at June 27, 2006.

In November 2005, we entered into an agreement for a facility inMinneapolis, Minnesota which we use as a test kitchen.  Obligations under this three-year lease agreementbegan November 1, 2005.  The agreementcalls for annual rent of $42,000 and has an option for a three-yearrenewal.  Future obligations under thislease aggregated $98,000 at June 27, 2006.

*Related Party Guaranties:*

Two of our directors and one former director have personally guaranteedcertain of our leases and loan agreements. In connection with the $1.5 million loan we obtained in July 2001 tofinance our Fargo restaurant, we entered into an agreement concerning guarantywhich provides, among other things, that such guarantors will be indemnifiedfrom any liabilities they may incur by reason of their guaranties of ourindebtedness. The agreement contains various covenants, one of which requiresus to use our best efforts to obtain a release of one individual’s guaranteeobligation by January 1, 2006.  As ofJune 27, 2006, we had not obtained a release of such obligation, and as suchhave been paying him a monthly guarantee fee in the amount of $1,000.  Additionally, at a meeting held in March2004, our board of directors agreed to compensate our president and chiefexecutive officer for his personal guaranties of equipment loans entered intoin August 2003 and January 2004.  Theamount of annual compensation is 3% of the balance of such loans.  This amount is calculated and accrued basedon the weighted average daily balances of such loans at the end of each monthlyaccounting period.  During the first halfof 2006 and 2005, we accrued $16,111 and $19,022 of such fees, respectively,and paid $15,000 and $0 of such fees, respectively.

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*Employment Agreement:*

In June 2005, we entered into a three-year employment agreement withSteven J. Wagenheim, our president and chief executive officer, who is also adirector of our company.  The agreementprovided for a minimum base salary of $225,000, commencing January 1, 2005,cash incentive compensation for 2005 ranging from $0 to $125,550 based onperformance, and a stock option for the purchase of 150,000 shares of commonstock.  In February 2006, we amended thecompensatory arrangements under the agreement by adopting our 2006 CEOCompensation Plan.  This plan providesfor a base salary of $275,000, commencing January 1, 2006, cash incentivecompensation for 2006 ranging from $0 to $167,400 based on performance, and astock option for the purchase of 100,000 shares of common stock.  In addition to annual compensation terms andother provisions, the agreement includes change in control provisions thatwould entitle him to receive severance pay equal to 18 months of salary ifthere is a change in control of our company and his employment terminates.

In August 2005, we entered into an at-will employment agreement withour chief financial officer which became effective September 13, 2005.  The employment agreement provides for aminimum base salary of $215,000 per year, performance-based cash bonus of up to$75,000 per year for years 2005 and 2006, and a stock option for the purchaseof 175,000 shares of common stock.  Amongother provisions, the employment agreement includes change in controlprovisions that would entitle him to receive severance pay equal to 12 monthsof base salary and a pro-rata portion of any bonus earned as of the date oftermination if there is a change in control of our company and his employment terminates.

*Summary of Contractual Obligations:*

The following table summarizes our obligations under contractualagreements as of June 27, 2006 and the time frame within which payments on suchobligations are due.  This table does notinclude amounts related to percentage rent as such future amounts are notdeterminable.  In addition, whether wewould incur any additional expense on our employment agreements depends uponthe existence of a change in control of the company.  Therefore, no percentage rent nor severanceexpense has been included in the following table.
| ** **                                       | ** ** | **Payments due by period** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                 | ** ** | **Total**                                 | ** ** | **Fiscal Year  2006** | ** ** | **Fiscal Years  2007-2008** | ** ** | **Fiscal Years  2009-2010** | ** ** | **Fiscal Years  Thereafter** | ** ** |
| Long-term debt,  principal                       |       | $                                         | 2,384,795  |   | $ | 122,614 |   | $ | 1,773,595 |   | $ | 477,557 |   | $ | 11,029 |   |
| Interest on long-term debt                       |       | 231,130                                   |       | 90,390 |   | 109,309 |   | 31,374 |   | 57 |   |
| Capital lease  obligations, including interest   |       | 47,923,862                                |       | 1,382,897 |   | 5,454,836 |   | 5,269,910 |   | 35,816,218 |   |
| Operating lease  obligations, including interest |       | 31,048,898                                |       | 952,168 |   | 3,804,409 |   | 3,667,361 |   | 22,624,959 |   |
| Loan guarantee                                   |       | 98,556                                    |       | 42,183 |   | 42,284 |   | 14,089 |   | — |   |
| Total obligations                                |       | $                                         | 81,687,240 |   | $ | 2,590,253 |   | $ | 11,184,432 |   | $ | 9,460,291 |   | $ | 58,452,265 |   |

 

Certain amounts do notsum due to rounding.

Based on our cash position at June 27, 2006,we believe we have sufficient capital to meet our current obligations.

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**Critical Accounting Policies**

This discussion andanalysis is based upon our consolidated financial statements, which wereprepared in conformity with generally accepted accounting principles.  These principles require management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and accompanying notes. We believe our estimates and assumptions are reasonable; however, actualresults and the timing of the recognition of such amounts could differ fromthose estimates.  We have identified thefollowing critical accounting policies and estimates utilized by management inthe preparation of our financial statements:

*Property and Equipment*

The cost of property and equipment isdepreciated over the estimated useful lives of the related assets ranging fromthree to 20 years.  The cost of leaseholdimprovements is depreciated over the initial term of the related lease, whichis generally 20 years.  Depreciation iscomputed on the straight-line method for financial reporting purposes andaccelerated methods for income tax purposes. Amortization of assets acquired under capital lease is included indepreciation expense.  We review property and equipment, includingleasehold improvements, for impairment when events or circumstances indicatethese assets might be impaired pursuant to Statement of Financial AccountingStandard (SFAS) No. 144.  We base thisassessment upon the carrying value versus the fair market value of the assetand whether or not that difference is recoverable.  Such assessment is performed on arestaurant-by-restaurant basis and includes other relevant facts andcircumstances including the physical condition of the asset.

Our accountingpolicies regarding property and equipment include certain management judgmentsregarding the estimated useful lives of such assets and the determination as towhat constitutes enhancing the value of or increasing the life of existingassets.  These judgments and estimatesmay produce materially different amounts of depreciation and amortizationexpense than would be reported if different assumptions were used.

We continually reassess our assumptions andjudgments and make adjustments when significant facts and circumstancesdictate.  Historically, actual resultshave not been materially different than the estimates we have made.

*Stock-Based Compensation*

We have granted stockoptions to certain employees and non-employee directors.  We account for stock-based compensation inaccordance with the fair value recognition provisions of SFAS 123(R).  Under such provisions, stock-based compensationis measured at the grant date based on the value of the award and is recognizedas an expense over the vesting period. Determining the fair value of stock-based compensation at the grant daterequires judgment, including but not limited to the expected volatility of ourstock.  If actual results differsignificantly from these estimates, stock-based compensation expense and ourresults of operations could be materially impacted.

**Seasonality**

We expect that our sales and earnings will fluctuatebased on seasonal patterns.  Weanticipate that our highest sales and earnings will occur in the second andthird quarters due to the milder climate and availability of outdoor seatingduring those quarters in our existing and proposed markets.

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**Inflation**

Theprimary inflationary factors affecting our operations are food, supplies andlabor costs.  A large number of ourrestaurant personnel are paid at rates based on the applicable minimum wage,and increases in the minimum wage directly affect our labor costs.  In the past, we have been able to minimizethe effect of these increases through menu price increases and otherstrategies.  To date, inflation has nothad a material impact on our operating results.

**ITEM3   Quantitative and QualitativeDisclosures about Market Risk**

Our company isexposed to market risk from changes in interest rates on debt and changes incommodity prices.

*Changesin Interest Rate:*

In February 2007, we will have a balloon payment due of approximately$1,325,000 on the loan we obtained from an independent financial institution inJuly 2001.  Currently, this loan bears afixed interest rate of 8.75%. If it becomes necessary to refinance such balloonbalance, we may not be able to secure financing at the same interest rate.  The effect of a higher interest rate woulddepend upon the negotiated financing terms.

*Changesin Commodity Prices:*

Many of the food products we purchase are affected by commodity pricingand are, therefore, subject to unpredictable price volatility.   These commodities are generally purchasedbased upon market prices established with vendors.  Extreme fluctuations in commodity pricesand/or long-term changes could have an adverse affect on us.  Although SYSCO Corporation is our primarysupplier of food, substantially all of the food and supplies we purchase are availablefrom several sources, which helps to control commodity price risks.  Additionally, we have the ability to increasemenu prices, or vary the menu items offered, in response to a food productprice increase.  If, however, competitivecircumstances limit our menu price flexibility, margins could be negativelyimpacted.

Our company doesnot enter into derivative contracts either to hedge existing risks or forspeculative purposes.

**ITEM 4   Controls and Procedures**

We maintain a system of disclosure controls and procedures that isdesigned to ensure that information required to be disclosed in our ExchangeAct reports is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosures.

Under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, we conductedan evaluation of our disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, our Chief Executive Officer and our ChiefFinancial Officer concluded that, as of June 27, 2006, our disclosure controlsand procedures were effective.

There were no changes in our internal control over financial reportingthat occurred during the quarter ended June 27, 2006 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

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**PART II********OTHER INFORMATION**

**ITEM 1****                                                    ****Legal Proceedings**

Not applicable.

**ITEM 1A****                                           ****Risk Factors**

Pleaserefer to the Cautionary Statement set forth in our Annual Report on Form 10-KSBfor the fiscal year ended December 27, 2005, filed with the Securities andExchange Commission on March 27, 2006.

**ITEM 2****                                                    ****Unregistered Sales of EquitySecurities and Use of Proceeds**

Not applicable.

**ITEM 3****                                                    ****Defaults upon Senior Securities**

Not applicable.

**ITEM 4****                                                    ****Submission of Matters to a Voteof Security Holders**

Not applicable.

**ITEM 5****                                                    ****Other Information**

Not applicable.

**ITEM 6****                                                    ****Exhibits**

See “Index to Exhibits.”

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                                               | GRANITE CITY FOOD & BREWERY LTD. |
|-----------------------------------------------|--------------------------------------|
|                                          |                                 |   |
| Date:    August  10, 2006 | By:                                  | /s/ Daniel H. Bauer |   |
|                                          | Daniel H. Bauer                      |
|                                          | Chief Financial  Officer             |
|                                               |                                      |  |  |  |

 

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**INDEX TO EXHIBITS**

 
| Exhibit Number | ** ** | **Description**                                                                                                                                                                                               |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                                                          |
| 31.1           |       | Certification by Steven J. Wagenheim, President and  Chief Executive Officer of the Company, pursuant to Exchange Act Rule  13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|           |       |                                                                                                                                                                                                          |
| 31.2           |       | Certification by Daniel H. Bauer, Chief Financial  Officer of the Company, pursuant to Exchange Act Rule 13a-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                    |
|           |       |                                                                                                                                                                                                          |
| 32.1           |       | Certification by Steven J. Wagenheim, President and  Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.      |
|           |       |                                                                                                                                                                                                          |
| 32.2           |       | Certification by Daniel H. Bauer, Chief Financial  Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                         |

 

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