**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,DC 20549**

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**FORM 10-Q**
| x      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH  27, 2007** |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|
|   | ** ** | ** **                                                                                                                                  |
| **o**  |       | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                               |

 

**CommissionFile Number 000-29643**

**GRANITE CITY FOOD & BREWERYLTD.**

(Exact Name ofRegistrant as Specified in Its Charter)
| **Minnesota**(State or Other Jurisdiction  of Incorporation or Organization) | ** ** | **41-1883639**(I.R.S. Employer  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   Accelerated filer 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 May 1, 2007, the issuer had outstanding 15,991,767 shares of common stock.

 

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**TABLE OFCONTENTS**
|                        | ** ** | ** **                                                                                                       | ** ** | ** ** |
|------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART I**             | ** ** | **FINANCIAL INFORMATION**                                                                                        |       |       |
| ** **             | ** ** | ** **                                                                                                       |       |       |
| ITEM 1                 |       | Financial Statements                                                                                             |       |       |
|                   |       |                                                                                                             |       |       |
|                   |       | Condensed  Consolidated Balance Sheets as of March 27, 2007 and December 26, 2006                                |       |       |
|                   |       |                                                                                                             |       |       |
|                   |       | Condensed  Consolidated Statements of Operations for the Thirteen Weeks ended March 27,  2007 and March 28, 2006 |       |       |
|                   |       |                                                                                                             |       |       |
|                   |       | Condensed  Consolidated Statements of Cash Flows for the Thirteen Weeks ended March 27,  2007 and March 28, 2006 |       |       |
|                   |       |                                                                                                             |       |       |
|                   |       | 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**

**ITEM 1  Financial Statements**

**GRANITECITY FOOD & BREWERY LTD.**

# **CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**
| ** **                                                                                                                                                                    | ** ** | **March 27,** | ** ** | **December 26,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| **ASSETS:**                                                                                                                                                                   | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                               |       |               |       |                  |       |
| Cash                                                                                                                                                                          |       | $                  | 12,385,804 |                  | $          | 7,671,750 |   |
| Inventory                                                                                                                                                                     |       | 467,218            |       | 511,146               |       |
| Prepaids and  other                                                                                                                                                           |       | 456,163            |       | 393,803               |       |
| Total current  assets                                                                                                                                                         |       | 13,309,185         |       | 8,576,699             |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Prepaid rent,  net of current portion                                                                                                                                         |       | 488,802            |       | 503,267               |       |
| Property and  equipment, net                                                                                                                                                  |       | 52,981,094         |       | 54,018,124            |       |
| Intangible  assets and other                                                                                                                                                  |       | 725,892            |       | 760,420               |       |
| Total assets                                                                                                                                                                  |       | $                  | 67,504,973 |                  | $          | 63,858,510 |   |
|                                                                                                                                                                          |       |               |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY:**                                                                                                                               | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                                                                         |       |               |       |                  |       |
| Accounts payable                                                                                                                                                              |       | $                  | 1,848,298  |                  | $          | 2,289,433 |   |
| Accrued expenses                                                                                                                                                              |       | 3,905,987          |       | 5,104,730             |       |
| Deferred rent,  current portion                                                                                                                                               |       | 135,729            |       | 143,928               |       |
| Long-term debt,  current portion                                                                                                                                              |       | 270,744            |       | 259,940               |       |
| Capital lease  obligations, current portion                                                                                                                                   |       | 933,420            |       | 1,885,388             |       |
| Total current  liabilities                                                                                                                                                    |       | 7,094,178          |       | 9,683,419             |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Deferred rent,  net of current portion                                                                                                                                        |       | 1,680,370          |       | 1,603,557             |       |
| Long-term debt,  net of current portion                                                                                                                                       |       | 1,934,147          |       | 2,004,986             |       |
| Capital lease  obligations, net of current portion                                                                                                                            |       | 32,164,280         |       | 37,501,605            |       |
| Total  liabilities                                                                                                                                                            |       | 42,872,975         |       | 50,793,567            |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                                                                |       |               |       |                  |       |
| Shareholders’  equity:                                                                                                                                                   |       |               |       |                  |       |
| Common stock,  $0.01 par value, 90,000,000 shares authorized; 15,987,665 and 13,370,331  shares issued and outstanding at March 27, 2007 and December 26, 2006,  respectively |       | 159,877            |       | 133,703               |       |
| Additional  paid-in capital                                                                                                                                                   |       | 42,062,661         |       | 29,122,306            |       |
| Accumulated  deficit                                                                                                                                                          |       | (17,590,540        | )          | (16,191,066           | )          |
| Total  shareholders’ equity                                                                                                                                              |       | 24,631,998         |       | 13,064,943            |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Total  liabilities and shareholders’ equity                                                                                                                              |       | $                  | 67,504,973 |                  | $          | 63,858,510 |   |

 

See notes to condensed consolidated financialstatements.

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**GRANITECITY FOOD & BREWERY LTD.**

# **CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                              | ** ** | **Thirteen Weeks Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                              | ** ** | **March 27,**                 | ** ** | **March 28,** | ** ** |
| ** **                                              | ** ** | **2007**                           | ** ** | **2006** | ** ** |
|                                                    |       |                               |       |   |   |
| Restaurant  revenues                                    |       | $                                  | 18,182,192 |   | $ | 11,892,319 |   |
|                                                    |       |                               |       |   |   |
| Cost of sales:                                          |       |                               |       |   |   |
| Food, beverage and retail                               |       | 5,394,722                          |       | 3,514,935 |   |
| Labor                                                   |       | 6,606,903                          |       | 4,266,821 |   |
| Direct restaurant operating                             |       | 2,442,939                          |       | 1,594,651 |   |
| Occupancy                                               |       | 1,171,544                          |       | 681,655 |   |
| Total cost of sales                                     |       | 15,616,108                         |       | 10,058,062 |   |
|                                                    |       |                               |       |   |   |
| Pre-opening                                             |       | 95,841                             |       | 811,802 |   |
| General and  administrative                             |       | 1,734,052                          |       | 1,449,560 |   |
| Depreciation and  amortization                          |       | 1,120,323                          |       | 752,456 |   |
|                                                    |       |                               |       |   |   |
| Operating loss                                          |       | (384,132                           | )          | (1,179,561 | ) |
|                                                    |       |                               |       |   |   |
| Interest:                                               |       |                               |       |   |   |
| Income                                                  |       | 32,476                             |       | 32,050 |   |
| Expense                                                 |       | (1,045,565                         | )          | (498,029 | ) |
| Interest expense, net                                   |       | (1,013,089                         | )          | (465,979 | ) |
|                                                    |       |                               |       |   |   |
| Loss before  income tax                                 |       | (1,397,221                         | )          | (1,645,540 | ) |
| Income tax  provision                                   |       | (2,253                             | )          | (500 | ) |
| Net loss                                                |       | $                                  | (1,399,474 | ) | $ | (1,646,040 | ) |
|                                                    |       |                               |       |   |   |
| Loss per common  share, basic and diluted               |       | $                                  | (0.10      | ) | $ | (0.12 | ) |
|                                                    |       |                               |       |   |   |
| Weighted average shares  outstanding, basic and diluted |       | 13,945,569                         |       | 13,226,526 |   |

 

See notes to condensedconsolidated financial statements.

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**GRANITECITY FOOD & BREWERY LTD.**

# **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                                                      | ** ** | **Thirteen Weeks Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                      | ** ** | **March 27,**                 | ** ** | **March 28,** | ** ** |
| ** **                                                                                                      | ** ** | **2007**                           | ** ** | **2006** | ** ** |
|                                                                                                            |       |                               |       |   |   |
| Cash flows from  operating activities:                                                                          |       |                               |       |   |   |
| Net loss                                                                                                        |       | $                                  | (1,399,474 | ) | $ | (1,646,040 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                                    |       |                               |       |   |   |
| Depreciation and amortization                                                                                   |       | 1,120,323                          |       | 752,456 |   |
| Stock option compensation expense                                                                               |       | 181,248                            |       | 180,101 |   |
| Loss/(gain) on disposal of asset                                                                                |       | 54,289                             |       | (3,873 | ) |
| Deferred rent                                                                                                   |       | 68,614                             |       | 202,403 |   |
| Changes in operating assets and liabilities:                                                                    |       |                               |       |   |   |
| Inventory                                                                                                       |       | 43,928                             |       | (58,893 | ) |
| Prepaids and other and prepaid rent                                                                             |       | (47,895                            | )          | 47,180 |   |
| Accounts payable                                                                                                |       | (237,352                           | )          | 151,297 |   |
| Accrued expenses                                                                                                |       | (1,198,743                         | )          | (443,296 | ) |
| Net cash used in operating activities                                                                           |       | (1,415,062                         | )          | (818,665 | ) |
|                                                                                                            |       |                               |       |   |   |
| Cash flows from  investing activities:                                                                          |       |                               |       |   |   |
| Purchase of:                                                                                                    |       |                               |       |   |   |
| Property and equipment                                                                                          |       | (367,617                           | )          | (2,416,940 | ) |
| Intangible assets and other                                                                                     |       | (6,617                             | )          | (11,668 | ) |
| Net cash used in investing activities                                                                           |       | (374,234                           | )          | (2,428,608 | ) |
|                                                                                                            |       |                               |       |   |   |
| Cash flows from  financing activities:                                                                          |       |                               |       |   |   |
| Payments on capital lease obligations                                                                           |       | (6,289,293                         | )          | (212,551 | ) |
| Payments on long term-debt                                                                                      |       | (60,035                            | )          | (59,579 | ) |
| Proceeds/(costs incurred) from issuance of stock                                                                |       | 12,852,678                         |       | (4,181 | ) |
| Net cash provided by (used in) financing activities                                                             |       | 6,503,350                          |       | (276,311 | ) |
|                                                                                                            |       |                               |       |   |   |
| Net increase  (decrease) in cash                                                                                |       | 4,714,054                          |       | (3,523,584 | ) |
| Cash, beginning                                                                                                 |       | 7,671,750                          |       | 9,836,231 |   |
| Cash, ending                                                                                                    |       | $                                  | 12,385,804 |   | $ | 6,312,647 |   |
|                                                                                                            |       |                               |       |   |   |
| Supplemental  disclosure of non-cash investing and financing activities:                                        |       |                               |       |   |   |
| Land, buildings and equipment acquired under capital  lease agreements                                          |       | $                                  | —     |   | $ | 5,054,800 |   |
| Property and equipment, intangibles and stock  issuance costs included in accounts payable and accrued expenses |       | $                                  | 203,783    |   | $ | 1,283,867 |   |
| Income taxes  paid                                                                                              |       | $                                  | 2,253      |   | $ | 500 |   |

 

 See notes tocondensed consolidated financial statements.

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**GRANITE CITY FOOD & BREWERY LTD.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

Thirteen weeks ended March 27, 2007 and March 28, 2006

**1.****              Summary ofsignificant accounting policies**

Background

Granite City Food &Brewery Ltd. (the “Company”) develops and operates casual dining restaurantsknown as Granite City Food & Brewery®.  The restaurant theme is upscale casual dining with a wide variety ofmenu items that are prepared fresh daily, combined with freshly brewedhand-crafted beers finished on-site.  Thefirst Granite City restaurant opened in St. Cloud, Minnesota in July 1999 andthe Company subsequently expanded to other Midwest markets, bringing the totalnumber of restaurants it operates to 18, while pursuing its national expansionplans.  The Company also operates a beerproduction facility which is used to provide raw material support to itsrestaurants to create consistent quality and operational efficiencies.

The Company’s expansion strategy focuses ondevelopment of restaurants in markets where management believes the Company’sconcept will have broad appeal and attractive restaurant-level economics.

Principles of consolidation and presentation

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United 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.  These statements include the accounts andoperations 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 aresident of Kansas and the Company owns the remainder of the stock of eachcorporation.  Each resident-owner of thestock 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 termination of employment (if employed by theCompany) or any event which disqualifies the resident-owner from owning theshares 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.

In the opinion of management, alladjustments, consisting of normal recurring adjustments, which are necessaryfor a fair statement of its financial position as of March 27, 2007 and theresults of operations for the interim periods ended March 27, 2007 and March28, 2006 have been included.

The balance sheet at December 26, 2006, has been derived from theaudited financial statements at that date, but does not include all of theinformation and notes required by generally accepted accounting principles forcomplete financial statements.  Certaininformation and note disclosures normally included in the Company’s annualfinancial statements have been condensed or omitted.  These condensed financial statements shouldbe read in conjunction with the financial statements and notes thereto includedin the Company’s Annual Report

4

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on Form 10-K forthe fiscal year ended December 26, 2006, filed with the Securities and ExchangeCommission on February 21, 2007.

The results ofoperations for the thirteen weeks ended March 27, 2007 are not necessarilyindicative of the results to be expected for the entire year.

Reclassification

Certain reclassifications have been made to the financial statementsfor the first quarter of 2006 in order for them to conform to the presentationof the financial statements for the first quarter of 2007.  These reclassifications have no effect on theaccumulated deficit or net loss previously reported.

Revenue recognition

Revenue is derived from thesale of prepared food and beverage and select retail items.  Revenue is recognized at the time of sale andis reported on the Company’s statement of operations net of sales taxescollected.  Revenue derived from giftcard sales is recognized at the time the gift card is redeemed.  Until the redemption of gift cards occurs,the outstanding balances on such cards are included in accrued expenses in theaccompanying consolidated balance sheets. The Company recognizes gift card breakage amounts based upon historicalredemption patterns, which represent the balance of gift cards for which theCompany believes the likelihood of redemption by the customer is remote.

Stock-based compensation

The Company records stock-based compensation in accordance with theprovisions of Financial Accounting Standards Board (“FASB”) Statement ofFinancial Accounting Standard (“SFAS”) No. 123 (revised 2004) (“SFAS 123(R)”),*Share-Based Payment*, and SECStaff Accounting Bulletin No. 107 (“SAB 107”), *Share-BasedPayment,* requiring the measurement and recognition of allshare-based compensation under the fair value method.  The Company implemented SFAS 123(R) using themodified prospective method, effective December 28, 2005, the first day of its2006 fiscal year.

Accounting for leases

The Company leases most of its restaurant properties.  Leases are accounted for under the provisionsof SFAS No. 13 and SFAS No. 98, *Accounting for Leases,*aswell as other subsequent amendments and authoritative literature including FASBStaff Position No. FAS 13-1, *Accountingfor Rental Costs Incurred During a Construction Period. *For leases that contain rent escalations, the Company records the totalrent payable during the lease term on a straight-line basis over the initiallease term, including the “build-out” or “rent-holiday” period where no rentpayments are typically due under the terms of the lease.  Any difference between minimum rent andstraight-line rent is recorded as deferred rent.  Contingent rent expense, which is based on apercentage of revenue, is also recorded to the extent it exceeds minimum baserent per the lease agreement.  Deferredrent also includes a tenant improvement allowance the Company received which isbeing amortized as a reduction of rent expense on a straight-line basis overthe initial term of the lease.

Earnings (loss) per share

Basic loss per common share is calculated by dividing net loss bythe weighted average number of common shares outstanding in each year.

Recentaccounting pronouncements

In July 2006, the Financial AccountingStandards Board (“FASB”) issued FASB Interpretation No. 48, *“Accounting for Uncertainty in Income Taxes,”* (“FIN 48,”)which clarifies the accounting and disclosures for uncertainty in income taxesrecognized in the financial statements in accordance with SFAS No. 109, *“Accounting for Income Taxes.”*  FIN 48 also provides guidance on thede-recognition of uncertain tax positions, financial statement classification,accounting for interest and penalties, accounting for interim periods and addsnew disclosure requirements.  Theadoption of FIN 48 did not have a material impact on the Company’s financialstatements or disclosures.  As ofDecember 26, 2006 and March 27, 2007 the Company did not recognize any assetsor liabilities for unrecognized tax benefits relative to uncertain taxpositions.  Upon review of the Company’snet operating loss carryforwards, management believes it is more likely than

5

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not that the Company’s tax positions takenwill be sustained.  Any interest or penaltiesresulting from examinations will be recognized as a component of the income taxprovision.  However, since there are nounrecognized tax benefits as a result of tax positions taken, there are noaccrued interest and penalties. 

In March 2006, the FASB Emerging Issues TaskForce issued Issue 06-3 (“EITF 06-3”), *HowSales Taxes Collected From Customers and Remitted to Governmental AuthoritiesShould Be Presented in the Income Statement.*  A tentative consensus was reached that acompany should disclose its accounting policy (i.e., gross or net presentation)regarding presentation of taxes within the scope of EITF 06-3.  If taxes are significant, a company shoulddisclose the amount of such taxes for each period for which an income statementis presented.  The guidance is effectivefor periods beginning after December 15, 2006.  The Company presents sales tax on a net basisin its consolidated financial statements.

In September 2006, the SECissued Staff Accounting Bulletin No. 108, *Considering the Effects of Prior Year Misstatements when quantifyingMisstatements in Current Year Financial Statements*(“SAB 108”).  SAB 108 requires companies to evaluatethe materiality of identified unadjusted errors on each financial statement andrelated financial statement disclosure using both the rollover approach and theiron curtain approach, as those terms are defined in SAB 108.  The rollover approach quantifiesmisstatements based on the amount of the error in the current year financialstatement, whereas the iron curtain approach quantifies misstatements based onthe effects of correcting the misstatement existing in the balance sheet at theend of the current year, irrespective of the misstatement’s year(s) oforigin.  Financial statements wouldrequire adjustment when either approach results in quantifying a misstatementthat is material.  Correcting prior yearfinancial statements for immaterial errors would not require previously filedreports to be amended.  If a companydetermines that an adjustment to prior year financial statements is requiredupon adoption of SAB 108 and does not elect to restate its previousfinancial statements, then it must recognize the cumulative effect of applyingSAB 108 in fiscal year 2006 beginning balances of the affected assets andliabilities with a corresponding adjustment to the fiscal year 2006 openingbalance in retained earnings. SAB 108 is effective for interim periods of the first fiscal yearending after November 15, 2006.  Theadoption of SAB 108 did not have a material impact on the Company’sconsolidated financial statements.

In September 2006, the FASBissued SFAS No. 157, *Fair ValueMeasurements*(“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assetsand liabilities.  The standard expandsrequired disclosures about the extent to which companies measure assets andliabilities at fair value, the information used to measure fair value, and theeffect of fair value measurements on earnings. SFAS 157 is effective forfiscal years beginning after November 15, 2007.  The Company is currently evaluating theimpact of adopting SFAS 157 on its consolidated financial statements.

In February 2007, the FASBissued SFAS 159, *The Fair Value Option forFinancial Assets and Financial Liabilities (as amended*(“SFAS 159”)*,* which permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The standard provides companies with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions.  Theprovisions of SFAS 159 are effective for fiscal years beginning after November15, 2007.  The Company is currentlyevaluating the impact of adopting SFAS 159 on its financial statements.

**2.****             ****Non-current assets**

Property and equipment

The cost of property and equipment is depreciated over the estimateduseful lives of the related assets.  Thecost of leasehold improvements is depreciated over the initial term of the relatedlease.  Depreciation is computed on thestraight-line method for financial reporting purposes and accelerated methodsfor income tax purposes.  Amortization ofassets acquired under capital lease is included in depreciation expense.  The following is a summary of the Company’sproperty and equipment at March 27, 2007 and December 26, 2006:

6

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|                                | ** ** | **March 27, 2007** | ** ** | **December 26, 2006** | ** ** |
|--------------------------------|------------|------------------------------|------------|---------------------------------|------------|
|                           |       |                         |       |                            |       |
| Land                           |       | $                            | 18,000     |                            | $          | 18,000 |   |
| Buildings                      |       | 33,851,945                   |       | 33,851,945                      |       |
| Leasehold  improvements        |       | 8,238,133                    |       | 8,220,963                       |       |
| Equipment and  furniture       |       | 20,967,997                   |       | 20,728,013                      |       |
| Construction in  progress*     |       | 424,796                      |       | 624,422                         |       |
|                           |       | 63,500,871                   |       | 63,443,343                      |       |
| Less accumulated  depreciation |       | 10,519,777                   |       | 9,425,219                       |       |
|                           |       | $                            | 52,981,094 |                            | $          | 54,018,124 |   |

 

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*Construction inprogress includes the following approximate amounts for items yet to be placedin service:
|                                                     | ** ** | **March 27, 2007** | ** ** | **December 26, 2006** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Architecture  fees for future locations             |       | $                            | 182,000    |                            | $          | 100,000 |   |
| Equipment at  future locations                      |       | $                            | 222,000    |                            | $          | 400,000 |   |
| Equipment at the  beer production facility          |       | —                       |       | $                               | 125,000    |   |
| Cost to secure property  leases at future locations |       | $                            | 21,000     |                            | —     |   |

 

Included in property and equipment are the following assets held undercapital leases:
|                                       | ** ** | **March 27, 2007** | ** ** | **December 26, 2006** | ** ** |
|---------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Land                                  |       | $                            | 18,000     |                            | $          | 18,000 |   |
| Building                              |       | 33,851,945                   |       | 33,851,945                      |       |
| Equipment and  leasehold improvements |       | 1,624,533                    |       | 7,807,724                       |       |
|                                  |       | 35,494,478                   |       | 41,677,669                      |       |
| Less accumulated  depreciation        |       | 3,887,230                    |       | 3,718,654                       |       |
|                                  |       | $                            | 31,607,248 |                            | $          | 37,959,015 |   |

 

Intangible assets and other

 

Intangible assets and otherassets consisted of the following:
|                               | ** ** | **March 27, 2007** | ** ** | **December 26, 2006** | ** ** |
|-------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Intangible  assets:           |       |                         |       |                            |       |
| Liquor licenses               |       | $                            | 264,415    |                            | $          | 264,415 |   |
| Trademarks                    |       | 119,251                      |       | 109,741                         |       |
| Other:                        |       |                         |       |                            |       |
| Capitalized loan costs        |       | 175,379                      |       | 205,054                         |       |
| Security deposits             |       | 272,279                      |       | 279,427                         |       |
|                          |       | 831,324                      |       | 858,637                         |       |
| Less accumulated amortization |       | 105,432                      |       | 98,217                          |       |
|                          |       | $                            | 725,892    |                            | $          | 760,420 |   |

 

**3.****                        ****Accrued expenses**

Accrued expenses consisted of the following:
|                                   | ** ** | **March 27, 2007** | ** ** | **December 26, 2006** | ** ** |
|-----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Payroll related                   |       | $                            | 1,450,032  |                            | $          | 2,205,712 |   |
| Deferred revenue  from gift cards |       | 851,491                      |       | 1,355,773                       |       |
| Sales taxes                       |       | 472,316                      |       | 493,772                         |       |
| Interest                          |       | 248,078                      |       | 278,131                         |       |
| Real estate  taxes                |       | 314,988                      |       | 245,299                         |       |
| Insurance                         |       | 222,023                      |       | 89,646                          |       |
| Other                             |       | 347,059                      |       | 436,397                         |       |
|                              |       | $                            | 3,905,987  |                            | $          | 5,104,730 |   |

 

7

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**4.****                        ****Capital leases**

In March 2007, the Company completed a private placement of commonstock to accredited investors described in Note 7 below.  Utilizing approximately $6.0 million of theseproceeds, the Company retired the entire balance of capital lease debt due DHWLeasing, L.L.C. (“DHW”) pursuant to the master lease agreement entered into inSeptember 2006.

Minimum future leasepayments under all capital leases as of March 27, 2007 are:
|                                              | ** ** | **Capital** | ** ** |
|----------------------------------------------|------------|-------------|------------|
| **Year ended:**                         | ** ** | **Leases**  | ** ** |
| 2007                                         |       | $           | 3,120,764  |   |
| 2008                                         |       | 4,075,768   |       |
| 2009                                         |       | 4,008,950   |       |
| 2010                                         |       | 3,839,235   |       |
| 2011                                         |       | 3,737,719   |       |
| Thereafter                                   |       | 52,462,327  |       |
| Total minimum  lease payments                |       | 71,244,763  |       |
|                                         |       |        |       |
| Less amount  representing interest           |       | 38,147,063  |       |
| Present value of  net minimum lease payments |       | 33,097,700  |       |
| Less current  portion                        |       | 933,420     |       |
| Long-term  portion of obligations            |       | $           | 32,164,280 |   |

 

Amortizationexpense related to the assets held under capital leases is included with depreciationexpense on the Company’s statements of operations.

**5.****                        ****Commitments and contingencies**

Rockford, Illinois:

In January 2007, the Company entered into a 15-year net lease agreementrelating to the restaurant it anticipates opening during 2007 in Rockford,Illinois, under the terms specified in the development agreement with DunhamCapital Management L.L.C. (“Dunham”). The restaurant will be constructed for the Company on a build-to-suitbasis and the annual rent of will be equal to 10.5% of the construction costincluding land cost and will escalate 10% at the end of each five-yearperiod.  The Company will be responsiblefor any real-estate taxes and all operating costs.  The term of the lease will commence whenoperations begin and may be extended at the Company’s option for up to threeadditional 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 lease incurred during the construction period are recognized aspre-opening costs and escalated rent will be recognized as expense on astraight-line basis over the term of the lease.

East Peoria and Orland Park, Illinois:

In January and February 2007, the Company entered into 20-year netlease agreements relating to restaurants it anticipates opening during 2007 inEast Peoria and Orland Park, Illinois, under the terms specified in thedevelopment agreement with Dunham.  Eachrestaurant will be constructed for the Company on a build-to-suit

8

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basis.  The annual rent of eachwill be equal to 10.5% of the construction cost including land cost and willescalate 10% at the end of each five-year period.  The Company will be responsible for anyreal-estate taxes and all operating costs. The term of each lease will commence when operations begin and 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.  Rental costs associated with the operatingleases incurred during the construction period are recognized as pre-openingcosts and escalated rent will be recognized as expense on a straight-line basisover the term of the leases.

**6.****                        ****Long-termdebt**

As of the end of the first quarter of fiscal year 2007, the Company hadtwo outstanding long-term loans with an independent financial institution forthe purchase of equipment for its restaurants located in Des Moines andDavenport.  These loans are secured onlyby the personal property and fixture property at the respective locations.  In addition to these two loan agreements, theCompany had a long-term loan outstanding with the same independent financialinstitution secured by the tangible personal property and fixtures at the Fargorestaurant.  Such loan is guaranteed bySteven J. Wagenheim, the Company’s president, chief executive officer and oneof its directors.  As of March 27, 2007,the balances, interest rates and maturity dates of these loans were:
|                       | ** ** | **Des Moines** | ** ** | **Davenport**   | ** ** | **Fargo**       | ** ** |
|-----------------------|------------|---------------------|------------|-----------------|------------|-----------------|------------|
| Loan balance          |       | $426,042            |       | $458,025        |       | $1,320,824      |       |
| Annual interest  rate |       | 10.25%              |       | 10.25%          |       | 8.75%           |       |
| Maturity date         |       | August 27, 2010     |       | January 6, 2011 |       | August 20, 2011 |       |

 

**7.****             ****Common stock**

On March 8, 2007, the Company entered into a stock purchase agreementwith accredited investors under which it sold 2,617,334 shares of common stockat a price of $5.35 per share.  TheCompany obtained gross proceeds of $14,002,737, paid its placement agents cashcommission aggregating $1,050,205 and paid expenses aggregating $167,252.  Pursuant to the conditions of the stockpurchase agreement, the Company used approximately $6.0 million of the$12,785,280 net proceeds to retire the entire balance of equipment lease debtobtained from DHW pursuant to the master lease agreement entered into inSeptember 2006.  The members of DHW areDonald A. Dunham, Charles J. Hey and Steven J. Wagenheim.  Mr. Wagenheim is the Company’s president,chief executive officer and one of its directors.  Mr. Wagenheim owns a 20% membership interestin DHW and personally guaranteed 20% of DHW’s indebtedness to its lenders. Theremaining net proceeds from this placement are being used to fund expansion ofthe Company’s restaurant operations.

**8.****             ****Stock plans**

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 March 27, 2007 was 400,000, of which 35,500shares remained 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 88,500 remained available for issuance at March 27,2007.  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 and thereafteron each successive anniversary of the grant of the first option for thepurchase of 15,000 shares.  Each optionvests one year after the option is granted and is exercisable for five yearsfrom the date of grant. Options are granted at fair market value.

9

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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 March 27, 2007 was 1,826,244, of which549,244 shares remained available for future issuance.  Although vesting schedules may vary, optiongrants under this plan generally vest evenly over a three or four-year periodand options are exercisable for no more than ten years from the date of grant.

Under all plans, the Company has reserved 2,816,244 shares of commonstock.  A summary of the status of theCompany’s stock options as of March 27, 2007 is presented below:
|                                                                    | ** ** | ** ** | ** ** | **Weighted**            | ** ** | **Average**               | ** ** | **Aggregate** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|---------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | **Average**             | ** ** | **Remaining**             | ** ** | **Intrinsic** | ** ** |
| **Fixed Options**                                             | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** | **Contractual Life** | ** ** | **Value**     | ** ** |
| Outstanding at  December 26, 2006                                  |       | 1,595,000  |       | $                       | 3.70       |                      | 6.1 years  |          |       |   |
| Granted                                                            |       | 305,000    |       | 5.17                    |       | 4.8 years                 |       |          |       |
| Exercised                                                          |       | —     |       | —                  |       | —                    |       |          |       |
| Forfeited                                                          |       | —     |       | —                  |       | —                    |       |          |       |
| Outstanding at  March 27, 2007                                     |       | 1,900,000  |       | $                       | 3.94       |                      | 5.7 years  |          | $          | 3,973,322 |   |
|                                                               |       |       |       |                    |       |                      |       |          |       |
| Options  exercisable at December 26, 2006                          |       | 1,076,502  |       | $                       | 3.46       |                      | 5.2 years  |          |       |   |
| Options  exercisable at March 27, 2007                             |       | 1,290,002  |       | $                       | 3.60       |                      | 5.5 years  |          | $          | 3,139,983 |   |
|                                                               |       |       |       |                    |       |                      |       |          |       |
| Weighted-average fair  value of options granted during the quarter |       | $          | 2.83       |                    |       |                      |       |          |       |   |
|                                                                    |            |            |            |                         |            |                           |            |               |            |  |  |  |

 

The fair value of options at date of grant was estimated using theBlack-Scholes option pricing model with the following assumptions:  (a) no dividend yield, (b) 58.13% to60.78% expected volatility, (c) expected life of options of five to ten yearsand (d) a risk-free interest rate of 4.46% to 4.78%.

The aggregate intrinsic value in the table above represents the totalpretax intrinsic value (the difference between the closing price of theCompany’s stock on March 27, 2007 and the exercise price, multiplied by thenumber of in-the-money options) that would have been received by the optionholders had all option holders exercised their options on March 27, 2007.  As of March 27, 2007, there was approximately$1,103,320 of total unrecognized compensation cost related to unvestedshare-based compensation arrangements, of which $543,745 is expected to berecognized during the remainder of fiscal year 2007, $302,935 in fiscal year2008, $242,446 in fiscal year 2009 and $14,194 in fiscal year 2010.

 

If all options outstanding at March 27, 2007 were exercised for cash,proceeds to the Company would be approximately $7.5 million.

 

The following table summarizes information about stock optionsoutstanding at March 27, 2007:
|                          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **Number of**           | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | **Number of** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Options**                  | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | **Options** | ** ** | **Weighted** | ** ** |
| **Range of**        | ** ** | **Outstanding**              | ** ** | **Remaining**                | ** ** | **Average** | ** ** | **Exercisable** | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** ** | **3/27/2007**                | ** ** | **Contractual Life**    | ** ** | **Exercise Price** | ** ** | **3/27/2007** | ** ** | **Exercise Price** | ** ** |
|                     |       |                         |       |                         |       |   |   |   |   |   |   |
| $1.00 - $2.00            |       | 158,000                      |       | 4.0 years                    |       | $ | 1.61 |   | 158,000 |   | $ | 1.61 |   |
| $2.01 - $3.00            |       | 180,000                      |       | 5.1 years                    |       | $ | 2.41 |   | 180,000 |   | $ | 2.41 |   |
| $3.01 - $4.00            |       | 698,000                      |       | 5.7 years                    |       | $ | 3.89 |   | 510,000 |   | $ | 3.88 |   |
| $4.01 - $5.00            |       | 493,000                      |       | 7.0 years                    |       | $ | 4.40 |   | 412,002 |   | $ | 4.42 |   |
| $5.01 - $6.00            |       | 371,000                      |       | 4.7 years                    |       | $ | 5.16 |   | 30,000 |   | $ | 5.02 |   |
| Total                    |       | 1,900,000                    |       | 5.7 years                    |       | $ | 3.94 |   | 1,290,002 |   | $ | 3.60 |   |

 

10

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In November 2002, the Company completed a private placement of Series AConvertible Preferred Stock and warrants to purchase common stock.  As part of the agreement between the Companyand its private placement agents, the agents received five-year warrants topurchase an aggregate of 288,604 shares of common stock at an exercise price of$1.58 per share. As of March 27, 2007, 241,602 of the agent warrants remainedexercisable.

In May 2003, the Company entered into a two-year financial advisoryservices agreement. As part of the agreement between the Company and thefinancial consultant, the consultant received five-year warrants to purchase anaggregate of 35,000 shares of common stock at exercise prices ranging from$2.85 to $5.40 per share.  As of March27, 2007, none of such warrants had been exercised.

 

In September 2004, the Company entered into a securities purchaseagreement with certain accredited investors, whereby the Company issued1,045,844 five-year warrants exercisable at $5.00 per share.  The Company may call for the mandatoryexercise of such warrants if certain conditions are met.  As part of this private placement, theCompany sold to its placement agents, for $100, five-year warrants to purchasean aggregate of 130,730 shares of common stock at an exercise price of $5.00per share.  As of March 27, 2007, none ofsuch warrants had been exercised.

 

In October 2005, the Company entered into a securities purchaseagreement with certain accredited investors for the sale of approximately $5.34million of common stock and warrants. Under this agreement, the Company issued five-year warrants for thepurchase of 221,762 shares of common stock at an exercise price of $6.50 pershare to such investors and five-year warrants for the purchase of 55,436shares of common stock at an exercise price of $6.50 to the Company’s placementagent. As of March 27, 2007, none of such warrants had been exercised.

 

During the first quarter of fiscal year 2007, no warrants were issuedor exercised, and no warrants expired. As of March 27, 2007, 1,730,374 warrants were outstanding andexercisable.  The weighted averageexercise price of such warrants was $4.74 per share.

 

If all warrants outstanding at March 27, 2007 were exercised for cash,proceeds to the Company would be approximately $8.2 million.

 

**ITEM 2****                 Management’sDiscussion and Analysis of Financial 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 to attribute unduecertainty to such forward-looking statements, which are qualified in theirentirety by the cautions and risks described herein.  Please refer to the “Risk Factors” section ofour Annual Report on Form 10-K for the fiscal year ended December 26, 2006,filed with the Securities and Exchange Commission on February 21, 2007, foradditional factors known to us that may cause actual results to vary.*

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**Overview**

We are a Modern American upscale casual restaurant chain.  As of May 1, 2007, we operated 18 restaurantsin eight Midwestern states featuring on-premises breweries under the name ofGranite City Food & Brewery®.  Webelieve our menu features affordable yet high quality family favorite menuitems prepared from made-from-scratch recipes and served in generous portions.We believe that the sophisticated yet unpretentious restaurants, proprietaryfood and beverage products, attractive price points and high service standardscombine for a great dining experience. The location of each restaurant and the month and year of its openingappear in the following 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     |
| 15   |       | St. Louis Park,  Minnesota |       | Sep-06     |
| 16   |       | Omaha, Nebraska            |       | Oct-06     |
| 17   |       | Roseville,  Minnesota      |       | Nov-06     |
| 18   |       | Madison,  Wisconsin        |       | Dec-06     |

 

We developed the foregoingrestaurants using proceeds from the sale of our securities, building andequipment financing and cash flow from operations.  We built units 4-9, 11-14 and 16-18 basedupon the prototype we developed in early 2003. In 2004 and 2005, we retrofitted units 1-3 to conform to this prototypemodel.  In 2005 and 2006, we developedunits 10 and 15, respectively, which were conversions of existing restaurants.  With the exception of units 1-3 and 15, wedeveloped all of our units under our multi-site development agreement with acommercial 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 March 2007, we enteredinto a stock purchase agreement with accredited investors under which we sold2,617,334 shares of common stock at a price of $5.35 per share.  We obtained gross proceeds of $14,002,737,paid our placement agents cash commission aggregating $1,050,205 and paidexpenses aggregating $167,252.  Pursuantto the conditions of the stock purchase agreement, we used approximately $6.0million of the $12,785,280 net proceeds to retire the entire balance ofequipment lease debt we had obtained from DHW pursuant to the master leaseagreement we entered into in September 2006. The members of DHW are Donald A. Dunham, Charles J. Hey and Steven J. Wagenheim.  Mr. Wagenheim is our company’s president,chief executive officer and one of its directors.  Mr. Wagenheim owns a 20% membership interestin DHW and personally guaranteed 20% of DHW’s indebtedness to its lenders.  The remaining net proceeds from thisplacement are being used to fund the expansion of our restaurant operations.

12

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We operate a beer production facility whichfacilitates the initial stage of our brewing process using our patented brewingprocess.  We believe that this brewingprocess and the use of a centrally located beer production facility improve theeconomics of microbrewing as it eliminates the initial stages of brewing andstorage at multiple locations, thereby reducing equipment and development costsat new restaurant locations. Additionally, having a common starting point the beer production createsconsistency of taste for our product from unit to unit.  The initial product produced at our beerproduction facility is transported by truck to the fermentation vessels at eachof our restaurants where the brewing process is completed.  We believe that our current beer productionfacility, which was opened in June 2005, has the capacity to service 30 to 35restaurant locations.

We operate Granite City University where thetraining of each of our managers takes place under the instruction offull-time, dedicated trainers.  Oureight-week training program consists of both “hands on” as well as classroomtraining for all aspects of management. All salaries of our managers in training and our trainers as well as allrelated costs incurred at Granite City University are recorded as a componentof corporate general and administrative costs.

We utilize a new store opening team whichconsists of experienced restaurant managers who are dedicated to the opening ofour new restaurants.  Generally, thisteam arrives at a new restaurant site two to three months in advance of therestaurant opening date and coordinates all staffing and training matters forthat new restaurant.  We believe that adedicated team delivers a more disciplined opening process and ensuresadherence to our company’s exacting standards and culture.

We believe that our operating results will fluctuate significantlybecause of several factors, including the timing of new restaurant openings andrelated expenses, profitability of new restaurants, changes in food and laborcosts, increases or decreases in comparable restaurant sales, general economicconditions, consumer confidence in the economy, changes in consumer preferences,competitive factors, the skill and experience of our restaurant-levelmanagement teams and weather conditions.

We expect the timing of new restaurant openings to have a significantimpact on restaurant revenues and costs. We believe we will incur the most significant portion of pre-openingcosts associated with a new restaurant within the two months immediatelypreceding, and the month of, the opening of such restaurant.

Thethirteen weeks ended March 27, 2007 included 234 restaurant weeks, which is thesum of the actual number of weeks each restaurant operated. The thirteen weeksended March 28, 2006 included 151 restaurant weeks.  The source of the additional 83 restaurantweeks in the first quarter of fiscal year 2007 is shown in the following chart:
|                                   | ** ** | **Thirteen Weeks Ended** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|
| **Location**                      | ** ** | **March 27, 2007**       | ** ** |
| Kansas City, Kansas               |       | 5                                  |       |
| Olathe, Kansas                    |       | 13                                 |       |
| West Wichita                      |       | 13                                 |       |
| St. Louis Park,  Minnesota        |       | 13                                 |       |
| Omaha, Nebraska                   |       | 13                                 |       |
| Roseville, Minnesota              |       | 13                                 |       |
| Madison, Wisconsin                |       | 13                                 |       |
| Total Additional Restaurant Weeks |       | 83                                 |       |

 

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.

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Ourrestaurant revenues are comprised almost entirely of the sales of food andbeverages.  The sale of retail items,such as cigarettes and promotional items, typically represent less than onepercent of total revenue.  Product costsinclude the costs of food, beverages and retail items.  Labor costs include direct hourly andmanagement wages, taxes and benefits for restaurant employees.  Direct and occupancy costs include restaurantsupplies, marketing costs, rent, utilities, real estate taxes, repairs andmaintenance and other related costs. Pre-opening costs consist of direct costs related to hiring and trainingthe initial restaurant workforce, the salaries and related costs of ourdedicated new store opening team, rent expense incurred during the constructionperiod and other direct costs associated with opening new restaurants.  General and administrative expenses arecomprised of expenses associated with all corporate and administrativefunctions that support existing operations which include management and staffsalaries, employee benefits, travel, information systems, training, marketresearch, professional fees, supplies and corporate rent.  Depreciation and amortization includesdepreciation on capital expenditures at the restaurant and corporate levels andamortization of intangibles that do not have indefinite lives.  Interest expense represents the cost ofinterest expense on debt and capital leases net of interest income on investedassets.

**Resultsof operations as a percentage of sales**

The following table compares operating resultsexpressed as a percentage of total revenue for the thirteen weeks ended March27, 2007 and March 28, 2006.
|                                | ** ** | **Thirteen Weeks Ended** | ** ** |
|--------------------------------|------------|------------------------------------|------------|
| ** **                     | ** ** | **March 27,**                 | ** ** | **March 28,** | ** ** |
| ** **                     | ** ** | **2007**                           | ** ** | **2006** | ** ** |
|                           |       |                               |       |   |   |
| Restaurant revenues            |       | 100.0                              | %          | 100.0 | % |
|                           |       |                               |       |   |   |
| Cost of sales:                 |       |                               |       |   |   |
| Food, beverage  and retail     |       | 29.7                               |       | 29.6 |   |
| Labor                          |       | 36.3                               |       | 35.9 |   |
| Direct  restaurant operating   |       | 13.4                               |       | 13.4 |   |
| Occupancy                      |       | 6.4                                |       | 5.7 |   |
| Total cost of sales            |       | 85.9                               |       | 84.6 |   |
|                           |       |                               |       |   |   |
| Pre-opening                    |       | 0.5                                |       | 6.8 |   |
| General and administrative     |       | 9.5                                |       | 12.2 |   |
| Depreciation and  amortization |       | 6.2                                |       | 6.3 |   |
|                           |       |                               |       |   |   |
| Operating loss                 |       | (2.1                               | )          | (9.9 | ) |
|                           |       |                               |       |   |   |
| Interest:                      |       |                               |       |   |   |
| Income                         |       | 0.2                                |       | 0.3 |   |
| Expense                        |       | (5.8                               | )          | (4.2 | ) |
| Net interest expense           |       | (5.6                               | )          | (3.9 | ) |
|                           |       |                               |       |   |   |
| Net loss                       |       | (7.7                               | )%         | (13.8 | )% |
|                                |            |                                    |            |  |  |  |

 

Certain percentage amounts do not sum due to rounding.

14

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**Resultsof operations for the weeks ended March 27, 2007 and March 28, 2006**

**Revenue**

We generated $18,182,192 and $11,892,319 of revenues during the firstquarter of fiscal years 2007 and 2006, respectively.  The increase in revenues of 52.9% wasprimarily the result of the additional restaurant operating weeks related tothe six restaurants that opened subsequent to the first quarter of 2006.  The first quarter of 2007 included 234restaurant operating weeks, which is the sum of the actual number of weeks eachrestaurant operated, while the first quarter of 2006 included 151 operatingweeks.  Comparable restaurant revenues,which include restaurants in operation over 18 months, increased 2.6% for thefirst quarter of 2007 over the same period of 2006.  The increase in comparable restaurantrevenues was primarily driven by a 2.1% price increase that took effect at theend of November 2006.

Average weekly revenues decreased $1,055 from $78,757 per week in thefirst quarter of 2006 to $77,702 per week in the first quarter of 2007 for allthe restaurants in operation during the quarter due primarily to an increase ofrestaurant days affected by snow and ice storms in the first quarter of 2007.  Average weekly revenues for comparablerestaurants increased $2,089 from $78,863 in the first quarter of 2006 to$80,952 in the first quarter of 2007.

We anticipate thatrestaurant revenues will vary from quarter to quarter.  We anticipate seasonal fluctuations inrestaurant revenues due in part to increased outdoor seating and generallyfavorable weather conditions at our locations during the summer months.   Due to the honeymoon effect thatperiodically occurs with the opening of a restaurant, 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.

**Restaurantcosts**

***Foodand beverage***

Our food and beverage costs, as a percentage of revenues remainedconsistent at 29.7% and 29.6% in the first quarters of 2007 and 2006,respectively.  While such food andbeverage costs decreased as a percentage of revenues at our comparablerestaurants, such costs at our newer restaurants increased as staff members were not as experienced inour disciplined preparation and production methods, thereby generating more waste.

We expect that our food and beverage costs will vary going forward dueto numerous variables, including seasonal changes in food and beverage costs,and guest preferences.  We periodicallycreate new menu offerings and introduce new craft brewed beers based upon guestpreferences.  Although such menu modificationsmay temporarily result in increased food and beverage cost, we believe we areable to offset such increases with our weekly specials which provide varietyand value to our guests.  Our varietiesof craft brewed beer, which we believe we can produce at lower cost than beerswe purchase for resale, also enable us to keep our food and beverage costs lowwhile fulfilling guest requests and building customer loyalty.  As we open additional units, we believe wewill 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 units, we believe our brewing process, Fermentus Interruptus,will allow us to keep our high quality beer products intact while leveragingour fixed production costs, thereby enhancing overall profitability.

***Labor***

Labor expenses consist of restaurant management salaries, hourly staffpayroll costs, other payroll-related items including partner and managementbonuses, and non-cash stock-based compensation expense.  Our experience to date has been that stafflabor costs associated with a newly opened restaurant, for approximately itsfirst four to six months of operation, are greater than what can be expectedafter that time, both in aggregate dollars and as a percentage of revenues.

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Our labor costs, as a percentage of revenues, increased 0.4% to 36.3%in the first quarter of 2007 from 35.9% in the first quarter of 2006.  This increase was due in part to a 0.3%increase attributable to non-cash stock-based compensation expense and tohigher labor costs at our newer restaurants as a result of inexperience.  These increases were partially offset by afavorable trend in our workers’ compensation insurance costs.

We expect that labor costs will vary as we add new restaurants.  Minimum wage laws, local labor laws andpractices, as well as unemployment rates vary from state to state and willaffect our labor costs, as will hiring and training expenses at our newunits.  We believe that retaining goodemployees and more experienced staff ensures high quality guest service andreduces hiring and training costs.

***Direct restaurant operating***

Operatingsupplies, repairs and maintenance, utilities, promotions and restaurant-leveladministrative expense represent the majority of our direct restaurantoperating expenses, a substantial portion of which is fixed or indirectlyvariable.  Our direct restaurantoperating expenses as a percentage of revenue remained at 13.4% in the firstquarter of 2007 and 2006.  While werealized a decrease in utilities and expenses related to credit cardacceptance, we saw an increase in promotions and loss on disposal of assets aswe made some upgrades primarily at our mature properties.

***Occupancy***

Our occupancy costs whichinclude both fixed and variable portions of rent, common area maintenancecharges, property insurance and property taxes, increased 0.7% as a percentageof revenues from 5.7% in the first quarter of 2006 to 6.4% in the first quarterof 2007.

**Pre-o**pening

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 first quarter of2007 are made up primarily of costs incurred during construction periods ofthree of the restaurants we plan to open in Illinois later this year.  Pre-opening costs in the first quarter of 2006related primarily to our Kansas City and Olathe, Kansas restaurants which weopened in the first and second quarter of 2006, respectively.  Pre-opening costs, excludingconstruction-period rent, are primarily incurred in the month of, and twomonths prior to, the restaurant opening.

**Generaland administrative**

General and administrative expenses include all salaries and benefits,including non-cash stock-based compensation, associated with our corporatestaff that is responsible for overall restaurant quality, future expansion intonew locations, financial controls and reporting, restaurant managementrecruiting, training at Granite City University, excess capacity costs relatedto our beer production facility, and salaries and expenses of our new store openingteam when it is not dedicated to a particular restaurant opening.  Other general and administrative expensesalso include advertising, professional fees, investor relations, officeadministration, centralized accounting system costs, and travel by ourcorporate management.

General and administrative expenses increased$284,492 from $1,449,560 in the first quarter of 2006 to $1,734,052 in thefirst quarter of 2007.  The primarysources of such increase were payroll expense, expenses related to expansionand recruiting, insurance costs and cost related to the retirement of certaincapital lease obligations using the proceeds from the sale of our common stockin March 2007.  These increases werepartially offset by decreases in professional fees and marketing costs.

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

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administrativeexpenses to decrease 2.7% as a percentage of revenue from 12.2% in the firstquarter of 2006 to 9.5% in the first quarter of 2007.

As we continue to expand our restaurant chain, weexpect general and administrative expenses will decrease as a percentage ofrevenues in the long term.

**Depreciation and amortization**

Depreciation andamortization expense increased $367,867 during the first quarter of 2007compared to the same period in 2006, due principally to the additionaldepreciation related to restaurants opened in 2006.  As a percentage of revenues, depreciationexpense decreased 0.1% from the first quarter of 2006 to the first quarter of2007.

**Interest**

Net interestexpense consists of interest expense on capital leases and long-term debt, netof interest earned from cash on hand. Interest expense increased $547,536 to $1,045,565 in the first quarterof 2007 from $498,029 in the first quarter of 2006, due to an increase incapital leases as a result of additional restaurants, while interest incomeremained constant at approximately $32,000.

**Liquidity and capitalresources**

As of March 27, 2007, we had $12,385,804 of cash andworking capital of $6,215,007 compared to $7,671,750 of cash and a workingcapital deficit of $1,106,720 at December 26, 2006.

During the thirteen weeks ended March 27, 2007, weused $1,415,062 of net cash in operating activities, $374,234 in net cash topurchase equipment and other assets, and made payments aggregating $6,349,328on our debt and capital lease obligations. Additionally, during the first quarter of 2007, we received net cash of$12,852,678 from the issuance of our common stock.

During the quarter ended March 28, 2006, we used$818,665 of net cash in operating activities, $2,428,608 in net cash topurchase equipment and other assets primarily for our new restaurants and thoseunder construction, and made payments aggregating $272,130 on our debt andcapital lease obligations.  Additionally,during the first quarter of 2006, we paid expenses related to the issuance ofour common stock of $4,181.

In March 2007, we entered into a stock purchase agreement withaccredited investors under which we sold 2,617,334 shares of common stock at aprice of $5.35 per share.  We obtainedgross proceeds of $14,002,737, paid our placement agents cash commission aggregating$1,050,205 and paid expenses aggregating $167,252.  Pursuant to the conditions of the stockpurchase agreement, we used approximately $6.0 million of the $12,785,280 netproceeds to retire the entire balance of equipment lease debt we had obtained fromDHW pursuant to the master lease agreement we entered into in September2006.  The members of DHW are Donald A.Dunham, Charles J. Hey and Steven J. Wagenheim. Mr. Wagenheim is our company’s president, chief executive officer andone of its directors.  Mr. Wagenheim ownsa 20% membership interest in DHW and personally guaranteed 20% of DHW’sindebtedness to its lenders.  Theremaining net proceeds from this placement are being used to fund the expansionof our restaurant operations.

We intend to continue expansion in markets where we believe our conceptwill have broad appeal and attractive restaurant-level economics.  We plan to continue using our model as weopen future restaurants; however, where appropriate, we will convert existingrestaurants to our Granite City concept. Additionally, we intend to explore alternative restaurant designs toreduce the cost of our initial capital investment and we may alter our model tomeet various state and local regulatory requirements, including, but notlimited to, pollution control requirements, liquor license ordinances andsmoking regulations.  We intend to openeight new restaurants in 2007 and have entered into agreements or are innegotiation for locations in Illinois, Arkansas, Missouri and Minnesota.

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Based upon our existing prototype, we anticipate that pre-opening costsand the initial purchase of furniture, fixtures and equipment will require aninvestment by us of approximately $1.0 million to $1.3 million for each newrestaurant.  We anticipate that our newrestaurants will require an investment by our developer of approximately $1.8million to $2.3 million for the building and approximately $1.2 million for thepurchase of the land.  We expect thesecosts will vary from one market to another based on real estate values, zoningregulations, labor markets and other variables.

We will need to expend significant capital in connection with ourexpansion plans. With our existing capital resources, cash generated fromoperations, and the proceeds received from our sale of common stock, we believethat we will have sufficient funds to complete our planned eight restaurantopenings in 2007, maintain sufficient working capital for our operations andcontinue our future expansion.  We arecontinually evaluating our development plans and we are exploring optionsrelative to the pace of our growth.  Ifour available sources of liquidity are insufficient to fund our expectedcapital needs beyond 2007, or our needs are greater than anticipated, we willbe required to raise additional funds in the future through public or privatesales of equity securities or the incurrence of indebtedness.  If we do not generate sufficient cash flowfrom current operations or if financing is not available to us, we will have tocurtail projected growth, which could materially adversely affect our business,financial condition, operating results and cash flows.

**Commitments and contingent liabilities**

*Capital Leases:*

As of March 27, 2007, we had 16 capital lease agreements related to ourrestaurants.  Of these leases, oneexpires in 2020, two in 2023, four in 2024, three in 2025, four in 2026 and theremaining two in 2027, all with renewable options for additional periods.Fourteen of these lease agreements are with our developer. Under six of theleases, we are required to pay additional percentage rent based upon restaurantsales. The land portion of these leases is classified as an operating leasewhile the building portion of these leases is classified as capital leasebecause its present value was greater that 90% of the estimated fair value atthe beginning of the lease.

In December 2004, we entered into a land and building lease agreementfor our beer production facility.  Thisten-year lease commenced February 1, 2005, and contains a bargain purchaseoption.

We entered into a sale-leaseback agreement for the equipment andleasehold improvements at St. Cloud and Sioux Falls in June 2001 and a leasefor equipment under agreements expiring in 2008.  A director and former director of our companyhave personally guaranteed these leases.

In August 2006, we entered into a master lease agreement with CarltonFinancial Corporation (“Carlton”) pursuant to which we may “finance lease” upto $3,000,000 of equipment purchases for three future restaurant locations. OnSeptember 28, 2006, we entered into a lease schedule and amendment to thismaster lease, pursuant to which we are leasing equipment for our restaurant inSt. Louis Park for an initial lease term of 39 months. Our president and chiefexecutive officer was required to personally guarantee payments to be made toCarlton under the lease financing and our board of directors agreed to pay himfor such guarantee.  Details regardingsuch guarantee fees appear below under the caption “Person Guaranties.”

*Operating Leases:*

The land portions of the 16 property leases referenced above, 14 ofwhich are lease agreements with our developer, are classified as operatingleases because the fair value of the land was 25% or more of the leasedproperty at the inception of each lease. All scheduled rent increases for theland during the initial term of each lease are recognized on a straight-linebasis. In addition to such property leases, we have obligations under thefollowing operating leases:

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In January 2001, we entered into a 20-year operating lease for the landupon which we built our Fargo restaurant. Under these terms, we are obligated to pay annual rent of $72,000 pluspercentage rent based upon restaurant sales.

In August 2005, we entered into a 38-month lease agreement for theoffice space for our corporate offices. The lease commenced October 1, 2005. Annual rent is $41,520 with scheduled annual increases throughout the termof the lease.  Such scheduled rentincreases are recognized on a straight-line basis over the term of the lease.

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 leaseagreement began November 1, 2005.  Theagreement calls for annual rent of $42,000 and has an option for a three-yearrenewal.

In March 2006, we entered into a lease agreement for the land and thebuilding for our St. Louis Park restaurant. This opening lease expires in 2016 with renewal options for additional periods.

In January 2007 and February 2007, we entered into 20-year net leaseagreements relating to restaurants we anticipate opening in 2007 in Rockford,East Peoria and Orland Park, Illinois, under the terms specified in thedevelopment agreement with the Dunham. Each restaurant will be constructed for us on a build-to-suitbasis.  The annual rent of each will beequal to 10.5% of the construction cost including land cost and will escalate10% at the end of each five-year period. The term of each lease will commence when operations begin and may beextended at our option for up to five additional five-year periods on the sameterms and conditions, except the rent may increase based on a formula using theConsumer Price Index during any such extension. Rental costs associated with the operating leases that are incurredduring the construction period will be recognized as pre-opening costs, andescalated rent will be recognized as expense on a straight-line basis over theterm of the leases.

*Personal Guaranties:*

Two of our directors and one former director have personally guaranteedcertain of our leases and loan agreements. At a meeting held in March 2004, our board of directors agreed to payour president and chief executive officer for his personal guaranties ofequipment loans entered into in August 2003 and January 2004.  The amount of the annual guarantee fee is 3%of the balance of such loans.  Thisamount is calculated and accrued based on the weighted average daily balancesof such loans at the end of each monthly accounting period.  During the first quarters of 2007 and 2006,we accrued $6,717 and $8,242 of such fees, respectively, and paid $0 and$15,000 of such fees, respectively.

In August 2006, we entered into a lease agreement with Carlton pursuantto which we may finance lease up to $3.0 million of equipment.  Mr. Wagenheim was required to personallyguarantee payment to be made to Carlton under this lease financing agreementand our board of directors agreed to pay him for such guarantee.  The amount of the annual guarantee fee is 3%of the balance of such lease and is calculated and accrued based on theweighted average daily balance of the lease at the end of each monthlyaccounting period.  Although we did notpay any of such fees during the first quarter of 2007, $5,462 of such expensewas recorded in general and administrative expense.

*Employment Agreements:*

In June 2005, we entered into a three-year employment agreementwith Steven J. Wagenheim, our president and chief executive officer, who isalso a director of our company.  The agreement provided for a minimum basesalary of $225,000, commencing January 1, 2005, cash incentivecompensation ranging from $0 to $125,550 based on performance, and a stockoption for the purchase of 150,000 shares of common stock.  InFebruary 2006, we amended the compensatory arrangements under theagreement to provide for an annual base salary of $275,000, commencingJanuary 1, 2006, cash incentive compensation ranging from $0 to $167,400 basedon performance, and a stock option for the purchase of 100,000 shares of commonstock.  In April 2007, we amended the compensatory arrangements under theagreement to provide for an annual base salary of $300,000,

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commencing April 1, 2007, cash incentivecompensation for 2007 ranging from $0 to $197,400 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 that wouldentitle him to receive severance pay equal to 18 months of salary if there is achange in control of our company and his employment terminates.

In August 2006, we entered into an at-will employment agreement withPeter P. Hausback that provides for Mr. Hausback to serve as our chieffinancial officer and principal accounting officer. The agreement provides fora minimum annual base salary of $215,000 and the eligibility to participate inany performance-based cash bonus or equity award plans for senior executivesbased upon goals established by the board or compensation committee.  Mr. Hausback’s possible cash incentivecompensation for end of the years 2006 and 2007 is up to $75,000 based uponperformance.  The employment agreementprovides that a severance payment equal to 12 months of base salary will bemade if Mr. Hausback’s employment is terminated in connection with a change ofcontrol, by our company without cause, or by the officer for good reason.

*Development Agreement:*

We have entered into a development agreement with Dunham for thedevelopment of our restaurants.  Dunhamis controlled by Donald A. Dunham, Jr., who is a member of DHW Leasing, L.L.C.and an affiliate of Granite Partners LLC, a beneficial owner of less than 2% ofour securities.  The agreement givesDunham the right to develop, construct and lease up to 22 restaurants for usprior to December 31, 2012.  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 terminated becauseof a default by Dunham, or if our company is sold or merged into anothercompany.  In the case of a merger or saleof our company, the development agreement may be terminated.  As of May 1, 2007, 14 restaurants had beenconstructed for us under this development agreement.

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 lease willbe calculated using a variable formula which is based on approved and specifiedcosts of development and construction and an indexed interest rate.  The term of each lease is 20 years with fivefive-year options to renew.

In September 2006, we entered into an amendment of this developmentagreement.  Under the terms of theamendment, in lieu of future adjustments to restaurant leases, lease rateswould be increased by 10% commencing on the fifth anniversary of each lease andon each five-year anniversary thereafter. The lease rate increases apply to our Omaha, Roseville and Madisonleases as well as all future leases under the development agreement.

Dunham also has the right to sell the underlying land and building tothird parties or assign our leases. As of May 1, 2007, Dunham had sold three ofour restaurants sites to third parties. The assignment or sale of a lease byDunham has no material impact on our agreement.

*Off- balance sheet arrangements:*

It is not our business practice to enterinto off-balance sheet arrangements.

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*Summary of contractual obligations:*

The following table summarizes our obligations under contractualagreements as of March 27, 2007 and the time frame within which payments onsuch obligations are due.  This tabledoes not include amounts related to percentage rent as such future amounts arenot determinable.  In addition, whetherwe would 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  2007**                | ** ** | **Fiscal Years  2008-2009** | ** ** | **Fiscal Years  2010-2011** | ** ** | **Fiscal Years  Thereafter** | ** ** |
| Long-term debt,  principal                       |       | $          | 2,204,891   |                                      | $          | 196,375 |   | $ | 574,272 |   | $ | 1,434,244 |   | $ | — |   |
| Interest on  long-term debt                      |       | 576,933    |        | 122,119                                   |       | 277,743 |   | 177,071 |   | — |   |
| Capital lease  obligations, including interest   |       | 71,244,763 |        | 3,120,764                                 |       | 8,084,718 |   | 7,576,955 |   | 52,462,327 |   |
| Operating lease  obligations, including interest |       | 39,568,302 |        | 1,748,047                                 |       | 4,586,249 |   | 4,554,911 |   | 28,679,095 |   |
| Loan guarantee                                   |       | 144,505    |        | 92,272                                    |       | 48,903 |   | 3,330 |   | — |   |
| Total obligations                                |       | $          | 113,739,396 |                                      | $          | 5,279,577 |   | $ | 13,571,885 |   | $ | 13,746,512 |   | $ | 81,141,422 |   |

 

Certain amounts do not sum due to rounding.

 

Based on our cash and working capitalposition at March 27, 2007, we believe we have sufficient capital to meet ourcurrent obligations.

**Critical accounting policies**

This discussion and analysis is based upon our consolidated financialstatements, which were prepared in conformity with generally acceptedaccounting principles.  These principlesrequire management to make estimates and assumptions that affect the amountsreported in the consolidated financial statements and accompanying notes.  We believe our estimates and assumptions arereasonable; however, actual results and the timing of the recognition of suchamounts could differ from those estimates. We have identified the following critical accounting policies andestimates utilized by management in the preparation of our financialstatements:

*Property and equipment*

The cost of property and equipment is depreciated over the estimateduseful lives of the related assets ranging from three to 20 years.  The cost of leasehold improvements isdepreciated over the initial term of the related lease, which is generally 20years.  Depreciation is computed on thestraight-line method for financial reporting purposes and accelerated methodsfor income tax purposes.  Amortization ofassets acquired under capital lease is included in depreciation 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 accounting policies regarding property and equipment includecertain management judgments regarding the estimated useful lives of suchassets and the determination as to what constitutes enhancing the value of orincreasing the life of existing assets. These judgments and estimates may produce materially different amountsof depreciation and amortization expense than would be reported if differentassumptions were used.

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We continually reassess our assumptions and judgments and makeadjustments when significant facts and circumstances dictate.  Historically, actual results have not beenmaterially different than the estimates we have made.

*Leasing activities*

We have entered into various leases for our buildings, equipment andfor ground leases.  At the inception of alease, we evaluate it to determine whether the lease will be accounted for asan operating or capital lease pursuant to SFAS No. 13.

Our lease term used for straight-line rent expense is calculated fromthe date we take possession of the leased premises through the terminationdate.  There is potential for variabilityin our “rent holiday” period which begins on the possession date and ends on thestore open date, during which no cash rent payments are typically due.  Factors that may affect the length of therent holiday period generally relate to construction related delays.  Extension of the rent holiday period due todelays in store opening will result in greater pre-opening rent expenserecognized during the rent holiday period.

Certain leases contain provisions that require additional rent paymentsbased upon restaurants sales volume (“contingent rentals”).  Contingent rentals are accrued each period asthe liabilities are incurred.

Management makes judgments regarding the probable term for eachrestaurant property lease which can impact the classification and account for alease as capital or operating.  Thesejudgments may produce materially different amounts of depreciation, rentexpense and interest expense than would be reported if different assumptionswere made.

*Stock-based compensation*

We have granted stock options to certain employees and non-employeedirectors.  We account for stock-basedcompensation in accordance with the fair value recognition provisions of SFASNo. 123(R).  Under such provisions,stock-based compensation is measured at the grant date based on the value ofthe award and is recognized as an expense over the vesting period.  Under the Black-Scholes option-pricing model,we determine the fair value of stock-based compensation at the grant date.  This requires judgment, including but notlimited to the expected volatility of our stock.  If actual results differ significantly fromthese estimates, stock-based compensation expense and our results of operationscould be materially impacted.

*Revenue recognition*

Revenue is derived from the sale of prepared food and beverage andselect retail items and is recognized at the time of sale.  Revenue derived from gift card sales isrecognized at the time the gift card is redeemed.  Until the redemption of gift cards occurs,the outstanding balances on such cards are included in accrued expenses in theaccompanying consolidated balance sheets. We recognize gift card breakage amounts based upon historical redemptionpatterns, which represent the balance of gift cards for which we believe thelikelihood of redemption by the customer is remote.  We arrive at this amount using certain managementjudgments and estimates.  Such judgmentsand estimates may produce different amounts of breakage than would be reportedif different assumptions were used.

**Seasonality**

We expect that our sales andearnings will fluctuate based on seasonal patterns.  We anticipate that our highest sales andearnings will occur in the second and third quarters due to the milder climateand availability of outdoor seating during those quarters in our existing andproposed markets.

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**Inflation**

The primary inflationary factors affecting ouroperations are food, supplies and labor costs. A large number of our restaurant personnel are paid at rates based onthe applicable minimum wage, and increases in the minimum wage directly affectour labor costs.  In the past, we have beenable to minimize the effect of these increases through menu price increases andother strategies.  To date, inflation hasnot had a material impact on our operating results.

**ITEM 3   Quantitativeand Qualitative Disclosures about Market Risk**

 

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

*Changesin interest rate:*

Pursuant to the terms of the loan we entered into in January 2004 forequipment at our Davenport location, the interest rate increased from 6.125% to10.25% effective January 1, 2007.  As ofMarch 27, 2007, the unpaid balance on this loan was $458,025.  The 412.5 basis point change in this rate,assuming consistent levels of floating rate debt, will have an impact ofapproximately $16,000 on annual interest expense in fiscal year 2007.

*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 isavailable from several sources, which helps to control commodity pricerisks.  Additionally, we have the abilityto increase menu 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   Controlsand Procedures**

 

*Evaluationof disclosure controls and procedures*

We maintain a system of disclosure controlsand procedures that is designed to ensure that information required to bedisclosed in our Exchange Act report is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, andthat such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding disclosures.

Under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, we conducted an evaluation of our disclosure controlsand procedures (as defined in Exchange Act Rules 13a-15(e)).  Based on this evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of March 27, 2007, ourdisclosure controls and procedures were effective.

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*Changes in internal control over financial reporting*

There were no changes in our internal controlover financial reporting that occurred during the quarter ended March 27, 2007,that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

**PART II OTHER INFORMATION**

 
| **ITEM 1**  | ** ** | **Legal Proceedings**                                                                                                                                                                                         |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                    |
|        |       | Not applicable.                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                          |
| **ITEM 1A** | ** ** | **Risk Factors**                                                                                                                                                                                              |
| ** **  | ** ** | ** **                                                                                                                                                                                                    |
|        |       | Please refer to the “Risk Factors” section of our  Annual Report on Form 10-K for the fiscal year ended December 26, 2006, filed  with the Securities and Exchange Commission on February 21, 2007. |
|        |       |                                                                                                                                                                                                          |
| **ITEM 2**  | ** ** | **Unregistered Sales of Equity  Securities and Use of Proceeds**                                                                                                                                              |
| ** **  | ** ** | ** **                                                                                                                                                                                                    |
|        |       | A description of unregistered sales of equity  securities during the first quarter of 2007 was previously included in our  Current Report on Form 8-K, filed on March 8, 2007.                                |
|        |       |                                                                                                                                                                                                          |
| **ITEM 3**  | ** ** | **Defaults upon Senior Securities**                                                                                                                                                                           |
| ** **  | ** ** | ** **                                                                                                                                                                                                    |
|        |       | Not applicable.                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                          |
| **ITEM 4**  | ** ** | **Submission of Matters to a Vote  of Security Holders**                                                                                                                                                      |
| ** **  | ** ** | ** **                                                                                                                                                                                                    |
|        |       | Not applicable.                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                          |
| **ITEM 5**  | ** ** | **Other Information**                                                                                                                                                                                         |
| ** **  | ** ** | ** **                                                                                                                                                                                                    |
|        |       | Not applicable.                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                          |
| **ITEM 6**  | ** ** | **Exhibits**                                                                                                                                                                                                  |
| ** **  | ** ** | ** **                                                                                                                                                                                                    |
|        |       | See “Index to Exhibits.”                                                                                                                                                                            |

** **

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|              |   | GRANITE  CITY FOOD & BREWERY LTD. |
|-------------------|--------|---------------------------------------|
|              |   |                                  |
|              |   |                                  |
| Date: May 4, 2007 |   | By:                                   |  /s/ Peter P. Hausback |
|              |   | Peter P.  Hausback                    |
|              |   | Chief Financial  Officer              |

 

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**INDEX TO EXHIBITS**
| Exhibit Number | ** ** | **Description**                                                                                                                                                                                                                 |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                                                                            |
| 3.1            |       | Articles of Incorporation of the Registrant, as  amended (incorporated by reference to our Quarterly Report on Form 10-QSB,  filed on November 13, 2002 (File No. 000-29643)).                                                  |
|           |       |                                                                                                                                                                                                                            |
| 3.2            |       | Amended and Restated Bylaws of the Registrant, dated  April 13, 2007 (incorporated by reference to our Current Report on Form 8-K,  filed on April 19, 2007 (File No. 000-29643)).                                              |
|           |       |                                                                                                                                                                                                                            |
| 10.1           |       | Granite City Food & Brewery Ltd. 2002 Equity  Incentive Plan, as amended effective April 13, 2007.                                                                                                                          |
|           |       |                                                                                                                                                                                                                            |
| 10.2           |       | Stock Purchase Agreement between the Registrant and  the Investors named as signatories thereto, dated March 8, 2007 (incorporated  by reference to our Current Report on Form 8-K, filed March 8, 2007 (File No.  000-29643)). |
|           |       |                                                                                                                                                                                                                            |
| 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 Peter P. Hausback, 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 Peter P. Hausback, 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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