UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

FORM 10-KSB

Commission File Number 0-29643

GRANITE CITY FOOD & BREWERY LTD.
(Name of Small Business Issuer in Its Charter)

5831 Cedar Lake Road, Minneapolis, Minnesota 55416
(Address of Principal Executive Offices, including Zip Code)

(952) 525-2070
(Issuer’s Telephone Number, including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

None

Securities registered pursuant to Section 12(g) of the Exchange Act:

Units (each consisting of one share of Common Stock, $0.01 par value, and one redeemable Class A Warrant
to purchase one share of Common Stock), Common Stock ($0.01 par value) and
redeemable Class A Warrants to purchase Common Stock
(Title of Class)

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.   ý

The issuer’s revenues for its most recent fiscal year were $30,755,536.

The aggregate market value of the common equity held by non-affiliates of the issuer as of March 15, 2005 was approximately $34,066,457.

As of March 15, 2005, the issuer had outstanding 11,620,067 shares of common stock and 1,000,000 Class A Warrants.  The number of outstanding shares of common stock includes the shares issuable upon separation of the units, each consisting of one share of common stock and one redeemable Class A Warrant, sold in the issuer’s initial public offering.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Transitional Small Business Disclosure Format:

Yes o   No ý.

TABLE OF CONTENTS

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The following discussion and analysis contains various non-historical forward-looking statements within the meaning of Section 21E of the Exchange Act.  Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.  When used in this report, 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.  These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated.  Potential purchasers of our securities are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by the cautions and risks described herein. Factors that could cause actual results to differ materially from those anticipated, certain of which are beyond our control, are set forth under the caption “Management’s Discussion and Analysis or Plan of Operation — Cautionary Statement.”

Our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking statements.  Accordingly, we cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on us.  We caution you to keep in mind the cautions and risks described in our Cautionary Statement and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of the document in which they appear.

PART I

ITEM 1                   DESCRIPTION OF BUSINESS

Overview

We operate eight casual dining restaurants featuring on-premises breweries under the name Granite City Food & Brewery®.  The location of each restaurant and the month and year of its opening appear in the following chart:

We developed the foregoing restaurants using proceeds from the sale of our securities, building and equipment leases, debt financing and cash flow from operations.

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The last five units were built based upon the prototype we developed in early 2003.  These units were developed under our multi-site development agreement with a commercial developer that provides us with assistance in site selection, construction management and financing for new restaurants.  Under this agreement, we lease each new restaurant from our developer.

In September 2004, we entered into a securities purchase agreement with accredited investors for the sale of approximately $8.5 million of common stock and warrants to purchase common stock.  Using the proceeds from this private placement and equipment loans as needed, we intend to add four additional restaurants in 2005, six additional restaurants in 2006, and eight additional restaurants in 2007.  The restaurants we plan to open in 2005 include sites in Kansas, Minnesota and Missouri.  We anticipate that all of these restaurants will be designed based on our 2003 prototype.

In 2001, we developed a patent-pending brewing process called Fermentus Interruptus™.  We believe that Fermentus Interruptus improves the economics of our microbrewing process as it eliminates the initial stages of brewing and storage at multiple locations, thereby reducing equipment and development costs at new restaurant locations.  Having a common starting point for our initial brewing process creates consistency of taste for our product from unit to unit.  In December 2004 we entered into a lease agreement for a building which will be used as a wort production facility in connection with this brewing process.   The non-alcoholic wort produced at this facility will be transported via truck to the fermentation vessels at each of our restaurants where the brewing process will be completed.  We believe this commissary brewing process will allow us to service approximately 30 locations from one wort production site.  We are evaluating strategies for capitalizing on Fermentus Interruptus, including licensing of our brewing technology.

We maintain a website at www.gcfb.net. We make available on our website, free of charge, our annual, quarterly and current reports, and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

We were incorporated on June 26, 1997, as a Minnesota corporation.  Our executive offices are located at 5831 Cedar Lake Road, Minneapolis, Minnesota 55416, and our telephone number is (952) 525-2070.

Our Granite City Food & Brewery Concept and Business Strategy

Our objective is to develop and operate highly successful restaurants by consistently exceeding our guests’ expectations in product, service and overall dining experience, thereby becoming a leader in the casual dining industry.  We continue to pursue consistent, long-term growth in unit and overall company earnings in order to provide superior returns for our shareholders.  Our Granite City Food & Brewery concept targets a broad guest base by incorporating two popular national dining preferences:  high quality, casual, value-priced food, and fresh, handcrafted, quality beers.  We believe this concept differentiates us from many of our competitors, who feature pre-prepared, smaller portioned food items and mass-produced, pre-packaged beers.  The principal elements of our concept and business strategy are as follows:

•              Offer a Broad Selection of Quality Foods at Reasonable Prices.  Granite City Food & Brewery restaurants feature quality food items prepared from scratch daily, based upon hearty Midwestern fare infused with Southwestern, Cajun and California influences. We place a heavy emphasis on freshness, variety, generous portions and attractive presentation.  We feature many items designed with our handcrafted beers in mind, both as ingredients and to accompany meals.  Our menu is strategically tailored for patrons who tend to have greater price sensitivity toward lunch items than dinner items.  When a guest opens the menu, he or she finds a special section of lunch selections featured at prices which provide a premium meal at a special value for midday diners.

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•              Offer Old World, Classic Beers Made with an Efficient Brewing Process.  We brew ales and lagers in the Old World tradition to the highest standards of brewing, under the direction of our Chairman of the Board and Brewmaster, William E. Burdick.  Our array of craftbrewed beers is distinguishable from other domestically produced beers by its freshness, flavor and brewing styles.  We permanently offer on tap four unique handcrafted beers which are produced from the highest quality ingredients.  Additionally, we produce seasonal and special ales and lagers handcrafted to promote special events.

•              Create a Fun, Energetic Atmosphere and Destination Dining Experience.  We focus on providing the Granite City guest with a fun, warm and energetic atmosphere.  Our restaurant interiors are spacious, open settings designed to create an environment that is upscale, casual and unpretentious.  Guests may watch the brewing process and see food preparation in our open display kitchens, or watch sporting events or other entertainment on the many televisions throughout our dining and bar areas.  We celebrate the art of brewing and cooking by showcasing our breweries and kitchens.

•              Create a Passionate Culture of Service.  We foster a passionate culture of guest service among employees, by emphasizing guest service and comfortable dining experience provided by a knowledgeable, energetic staff.  Our intense employee training and supervision is designed to develop motivated, service-oriented employees who strive to deliver strong customer satisfaction.  Our employees are trained to understand how our foods are flavored and prepared, and to describe our handcrafted beers in order to introduce guests to the Granite City concept.  We have a store-level management presence during all business hours to maintain a high level of service at all times and to support our employees in ensuring guest satisfaction.

•              Achieve Attractive Restaurant and Microbrewery Economics.  We believe that our restaurant-microbrewery concept and the pricing of our products fit well in our existing markets and the markets which we intend to target for expansion.  We also believe that we have the ability to achieve attractive economics through the sale of higher margin menu items such as our handcrafted beers.

•              Pursue Deliberate and Careful Expansion.  We continue to pursue a disciplined expansion strategy in markets where we believe our concept will have broad appeal and attractive restaurant-level economics.  We believe that continued growth in the Midwest will allow us to achieve attractive economics by establishing name recognition and product branding throughout the region.

Existing and Proposed Locations

We currently operate eight Granite City Food & Brewery restaurants as set forth in “Description of Business – Overview.”  Each of our locations consists of an approximately 9,500 square foot facility conveniently located just off one or more interstate highways and is centrally located within the respective area’s retail, lodging and transportation activity.  Our restaurants have open atmospheres with exposed ceilings as well as floor-to-ceiling window systems creating expansive views of outdoor pond and patio areas used for dining during warm weather months.  This window treatment allows activity to be viewed both inside and outside the restaurant and creates a bright, open environment.  We use granite and other rock materials along with natural woods and glass to create a balanced, clean, natural interior feel.  The interiors are accented with vintage photographs of the local area brewing industry, as well as historical photos of the community landscape.  We believe our design creates a fun and energetic atmosphere that promotes a destination dining experience.

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Using the proceeds from our 2004 private placement of securities and equipment loans, we intend to continue expansion in markets where we believe our concept will have broad appeal and attractive restaurant-level economics.  We will continue using our prototypical model as we open future restaurants under our multi-site development agreement.  We anticipate that each of these restaurants will require an investment by our developer of approximately $3.5 million to $4.0 million each for land, building and equipment.  We anticipate these costs will vary from one market to another based on real estate values, zoning regulations, labor markets and other variables. Under our development agreement, we will lease each new restaurant from our developer.  We anticipate that pre-opening expenses and the initial purchase of furniture, fixtures and equipment will require an investment by us of approximately $1.0 million to $1.6 million per location.

Development Agreement

In October 2002, we entered into the above-referenced development agreement with Dunham Capital Management L.L.C. (“Dunham”) for the development of restaurants.  Dunham is controlled by Donald A. Dunham, Jr., who is an affiliate of Granite Partners, L.L.C. (“Granite Partners”), a significant beneficial owner of our securities.  For more information regarding this relationship and ownership interest, please review “Security Ownership of Certain Beneficial Owners and Management” and “Certain Relationships and Related Transactions.”  The development agreement gives Dunham the right to develop, construct and lease up to 22 restaurants for us prior to December 31, 2012.  We are not bound to authorize the construction of restaurants during that time period, but generally cannot use another developer to develop or own a restaurant as long as the development agreement is in effect.  We can use another developer if Dunham declines to build a particular restaurant, if the agreement is terminated because of a default by Dunham, or if our company is sold or merged into another company.  In the case of a merger or sale of our company, the development agreement may be terminated at such time as Dunham has completed seven restaurants under the agreement.  As of December 28, 2004, five restaurants have been constructed for us under this development agreement

The development agreement provides for a cooperative process between Dunham and our company for the selection of restaurant sites and the development of restaurants on those sites, scheduling for the development and construction of each restaurant once a location is approved, and controls on the costs of development and construction using bidding and guaranteed maximum cost concepts.  The development agreement provides that restaurants are leased to us on the basis of a triple net lease.  The rental rate of each lease is calculated using a variable formula which is based on approved and specified costs of development and construction and an indexed interest rate.  The term of each lease is 20 years with five five-year options to renew.

The selection of our Granite City locations has been and will continue to be based upon criteria which we have determined are important for restaurant development.  Such criteria include minimum “trade area” populations, proximity to regional retail, entertainment, financial and educational hubs, as well as excellent accessibility and visibility.  Our developer has purchased a site for us in Wichita, Kansas and is negotiating to purchase sites in Kansas, Missouri, Wisconsin and Minnesota.

Menu

At the core of our concept is our 85-item menu complemented by fresh, handcrafted beers.  Our menu is committed to full flavored ingredients and is based on the preparation of distinctive items not generally featured on restaurant chain menus.  We create new menu items and weekly specials on a regular basis.  All menu items are staff and guest tested then refined before menu implementation.

Our menu is strategically tailored for patrons who tend to have greater price sensitivity toward lunch items than dinner items.  When our menu is opened, our guests find a special section of lunch selections featured at prices ranging from $4.99 to $7.99, providing a premium meal at a special value for midday diners.  We also offer signature selections, meals which are among our chefs’ personal favorites.  These selections provide our guests with an opportunity to treat themselves to the highest quality Granite City Food & Brewery has to offer.  Our overall menu prices range from $3.99 for appetizers to $19.99 for our BBQ Pork Ribs.  Most of our 85 menu items range from $8.00 to $13.99.

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Some of our more popular items include our Granite City Ale and Cheddar Soup, Chicken Caesar Chalupa, Grilled Chicken and Bruschetta Salad, Chinese Pasta Salad, Grilled London Broil with Bourbon Onion Sauce, Southern Fried Chicken Breast Sandwich (marinated in buttermilk and Cajun spices), Honey Rosemary Filet Mignon and Granite City Walleye.  We currently offer up to five special menu items weekly, ranging from appetizers to salads and entrees.  This approach allows us to be innovative, keeping our menu fresh and interesting.  Approximately 11% of food sales are generated through weekly specials.  We also solicit input from guests regarding our menu offerings.

To ensure that we are serving food of consistently high quality, we have developed quality control practices, including (a) the participation by each member of our kitchen staff in a thorough training program, (b) the development of strict specifications that ensure that only high quality ingredients are used in our food and (c) the requirement that each shift of cooking personnel consistently prepare each menu item.  We believe that we are able to consistently provide a superior value-oriented dining experience for our guests by serving generous portions of well-presented foods.

Brewing Operations – Fermentus Interruptus

Our flagship brews consist of four styles available every day.  In addition, we also produce specialty or seasonal beers which are designed to attract beer enthusiasts.  Seasonal ales are often tied to particular events including Oktoberfest, St. Patrick’s Day, Christmas and Easter.  Further, some seasonal beers may be tied to other promotions or particular events including college events and major sales promotions.  It is this ability to craft beers to our events that builds customer appeal and provides customers with a different feel or experience each time they visit, which we believe promotes strong repeat business.

We have created a brewing process that we believe improves the quality, consistency and efficiency of serving handcrafted brews at multiple locations.  This process, Fermentus Interruptus, enables us to keep our high quality product intact while enhancing overall profitability.  We believe that Fermentus Interruptus provides us with a distinct competitive advantage because it fits our development strategy of clustering our locations within geographic regions to maximize operational efficiencies.

The brewing process begins at a single location where wort is produced.  This non-alcoholic liquid is then transported via truck to the fermentation vessels at each of our restaurant locations.  It is then fermented by adding yeast to complete the brewing process.  We use the freshest and finest malted barleys, wheats and rye as well as various hops, which we purchase from a variety of sources in Europe and North America.  Our Chairman of the Board and Brewmaster, William E. Burdick, developed Fermentus Interruptus in order to maintain the quality and consistency of our beer products.  We believe this process will allow us to service approximately 30 locations from one wort production site.

We believe that Fermentus Interruptus improves the economics of our microbrewing process by eliminating the initial stages of brewing and storage at multiple locations, thereby reducing equipment and development costs at new restaurant locations.  Having a common starting point for our initial brewing process creates consistency of taste for our product from unit to unit.  Because the initial stages of brewing are under the direction of a single brewing team and have a single water source, consistency of product is further maintained.  We believe that Fermentus Interruptus gives us the ability to maintain attractive unit level economics while maintaining the consistency of our Old World, classic beers.

We supplement our microbrewed products with national and international brands of beer served in bottles at each of our locations.  This allows us to cater to a larger variety of beer enthusiasts.

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Dedicated Guest Service

We are committed to guest satisfaction.  From the moment a guest walks through the door, he or she is treated and served in a professional, attentive manner.  We understand the critical importance of our attention to detail and seek to create and maintain an exceptional service-oriented environment.  We conduct daily pre-shift meetings, track service audits and assign manageable table stations in order to create a system of effective service and assure guest satisfaction.  Our service is based on a team concept.  Guests are made to feel that any employee can help them, and that they are never left unattended.

Management and Employees

Our ability to effectively manage restaurants in multiple geographic areas will be critical to our success.  Our existing locations are accessible by major highways which will allow management to provide assistance in development, restaurant opening and on-going support and supervision to create strong and responsive employee teams at each location.  Store-level management teams consist of a general manager, a kitchen manager and assistant managers.  This management team receives incentive bonuses based upon financial and qualitative performance criteria, including the results of mystery shoppers who anonymously evaluate individual restaurants.  Each member of our restaurant management team is cross-trained in all operational areas.  As we grow and expand geographically, we expect to add additional employees to ensure proper management, support and controls.

Each Granite City restaurant employs approximately 125 hourly employees, approximately 80% of whom are part time.  All employees are trained and follow tenured employees for a period of time before they are scheduled to work independently.

We actively recruit and select individuals who share our passion for a high level of guest service.  Multiple interviews are used to aid in the selection of new employees at all levels.  We have developed a competitive compensation package for our restaurant management teams.  This package includes a base salary, competitive benefits and participation in a management incentive plan that rewards the management teams for achieving performance objectives.  It is our policy to promote from within, but at our current stage of growth, we supplement this policy with employees from outside our organization as we open restaurants in new markets.

Operational Controls

Our restaurants use personal computer systems that are integrated with management reporting systems which enable us to monitor restaurant sales and product and labor costs on a daily basis.  Financial controls are maintained through a centralized accounting system.  Our monthly financial statements are generated within a relatively short period of time so that management may review and respond to requirements in a timely fashion.  We continuously monitor sales, product costs, labor costs, operating expenses and advertising and promotional expenses.  We believe that our system of operational controls is adequate for our planned expansion.

Hours of Operation

Our restaurants are open seven days a week, from 11:00 a.m. to 1:00 a.m., Monday through Saturday, and from 10:00 a.m. to midnight on Sunday.  On Sundays, beginning at 10:00 a.m., we offer a buffet style brunch, featuring both breakfast and lunch items, which follows our high quality standards and price/value relationship.  We are open on selected holidays.

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Purchasing

We strive to obtain consistent, high-quality ingredients for our food products and brewing operations at competitive prices from reliable sources.  To attain operating efficiencies and to provide fresh ingredients for our food and beverage products while obtaining the lowest possible prices for the required quality, we control such purchasing by buying from a variety of national, regional and local suppliers at negotiated prices.  Most food products are shipped from a central distributor directly to our existing restaurants four or more times per week.  Produce is delivered four or more times per week from local distributors to ensure product freshness.  We do not maintain a central food product warehouse.  As is typical in our industry, we do not have any long-term contracts with our food or brewing ingredient suppliers.  We purchase ingredients for our brewing operations from a variety of foreign and domestic suppliers at negotiated prices.  We have not experienced significant delays in receiving food products, brewing ingredients, restaurant supplies or equipment.  As the number of our restaurants increases, we expect to gain greater leverage in the purchasing of food and brewing products.

Government Regulation

Our restaurants are subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, building, zoning, safety, fire and other departments relating to the development and operation of restaurants.  These regulations include matters relating to environmental, building, construction and zoning requirements and the preparation and sale of food and alcoholic beverages.  Our facilities are licensed and subject to regulation under state and local fire, health and safety codes.

Each of our restaurants is required by a state authority and, in certain locations, county and/or municipal authorities, to obtain a license to brew beer and a license to sell beer, wine and liquor on the premises.  Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time.  Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, and storage and dispensing of alcoholic beverages.  We have not encountered any material difficulties in obtaining or retaining alcoholic beverage licenses to date.  Our failure to receive or retain a license in a particular location could adversely affect that restaurant and our ability to obtain such a license elsewhere.

We are subject to “dram-shop” statutes in the states in which our restaurants are located.  These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated individual.  We carry liquor liability coverage as part of our existing comprehensive general liability insurance, which we believe is consistent with coverage carried by other entities in the restaurant industry.

Our operations are also subject to federal and state laws governing such matters as wages, working conditions, citizenship requirements and overtime.  Some states have set minimum wage requirements higher than the federal level.  Significant numbers of hourly personnel at our restaurants are paid at rates related to the federal minimum wage and, accordingly, increases in the minimum wage will increase labor costs.

Beer and Liquor Regulation

Licensing Requirements

We must comply with federal licensing requirements imposed by the United States Department of Treasury, Alcohol and Tobacco Tax and Trade Bureau, as well as the licensing requirements of states and municipalities where our restaurants are located.  Failure to comply with federal, state or local regulations could cause our licenses to be revoked and force us to cease the brewing and/or sale of our beer.  Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time.  Management believes that our company is operating in substantial compliance with applicable laws and regulations governing our operations.

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Excise Taxes

The federal government currently imposes an excise tax of $18 on each barrel of beer produced for domestic consumption in the United States.  However, each brewer with production of not more than 2,000,000 barrels per year is taxed only $7 per barrel on the first 60,000 barrels produced annually.  If company-wide production increases to amounts over 60,000 barrels per year or if the small brewer’s credit is reduced or eliminated, there will be an increase in our average federal excise tax rate.

Each of the states in which we currently do business imposes an excise tax based on the amount of beer sold.  The amounts of such taxes vary by state and range from $2.48 to $8.50 per barrel.  We anticipate similar excise taxes will be imposed by states in which we build future restaurants.

Limits on Production

Most states regulate microbreweries and maintain limits on beer production.  Additionally, certain states include restrictions on beer sales and beer purchases.  While regulations vary from state to state, in the states in which we do business, the production limits range from 3,500 to 10,000 barrels per year.  We believe we can operate our existing Granite City locations without violating such restrictions.  Although states into which we enter may also limit the amount of beer production to a specific number of barrels per year, we believe that we will be able to expand pursuant to our plan described in “Description of Business – Overview” without violating such production limits.

Competition

The restaurant industry is intensely competitive.  We positioned the Granite City concept in the high-quality casual dining segment.  In our current and proposed markets, we compete with established local restaurants, established national chains such as TGI Friday’s, Applebee’s, Outback Steak House, Biaggi’s, Bennigan’s, Champps Americana, Timberlodge Steak House, Chilis, Olive Garden, Red Lobster, as well as Rock Bottom and Hop’s, which also have on-premises brewing.  Throughout the United States, including markets which we intend to target for expansion, there are micro-breweries of various sizes and qualities, some of which feature food.  Competition in our industry segment is based primarily upon food and beverage quality, price, restaurant ambience, service and location.  We believe we compare favorably with respect to each of these factors and intend to emphasize our quality food and specialty handcrafted beers.  We compete with a number of well-established national, regional and local restaurants which have substantially greater financial, marketing, personnel and other resources than we do.  We also compete with many other retail establishments for site locations.

Employees

As of March 15, 2005, we had approximately 1,260 employees, representing approximately 380 full time employees and approximately 880 part time employees.

Trademarks, Service Marks and Patents

We have a federal registration of the trademark “Granite City Food & Brewery.”  We have applications pending for federal registration of the trademark “Fermentus Interruptus.”  We have registered in Minnesota the trademarks “Granite City Food & Brewery,” “Brother Benedict’s Mai Bock,” “Victory Lager,” “Pride of Pilsen,” “Northern Light” and “Duke of Wellington.”  Federal and state trademark registrations continue indefinitely, so long as the trademarks are in use and periodic renewals and other required filings are made.

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We have filed a U.S. patent application to protect a method and apparatus for maintaining a centralized facility for the production of unfermented, undiluted and unprocessed hopped wort, which is then transported to our restaurant sites for fermentation into beer.  We have developed this process to provide our guests with the aesthetic enjoyment of our beers fermented on the premises and to provide a consistent quality from one restaurant location to the next where our beers are produced.  Using a centralized facility for the production of our wort is intended to enable us to reduce our capital outlay per restaurant as we increase the scale of our operations.  We refer to this process as Fermentus Interruptus.

ITEM 2                   DESCRIPTION OF PROPERTY

Our corporate headquarters is located in Minneapolis, Minnesota.  We occupy this facility under a two-year lease which expires in December 2005.  This office space is rented to us at a rate of $3,350 per month.

As of December 28, 2004, we operated eight restaurants.  We lease the land and building for seven of these sites and we own the building, subject to a mortgage, and lease the land at one site.  The majority of our existing leases are for 20 years with options to extend.  We typically lease our restaurant facilities under “triple net” leases that require us to pay minimum rent, real estate taxes, maintenance costs and insurance premiums and, in four instances, percentage rent based on sales in excess of specified amounts.

The following table sets forth data regarding our restaurant locations as of December 28, 2004:

On February 1, 2005, we commenced leasing a 5,400 square foot facility in Ellsworth, Iowa to be used as a wort production facility in connection with our Fermentus Interruptus brewing process.  The lease is for a base term of 10 years with options to extend and the base rent is $7,200 per month for the entire life of the lease.  We have the option to purchase the facility at any time during the lease term for one dollar plus the unamortized construction costs.  Because the construction costs will be fully amortized through payment of rent during the base term, if the option is exercised at or after the end of the initial ten-year period, the option price will be one dollar.

We plan to lease our future restaurant sites (land and buildings) from our developer under the terms set forth in the development agreement described in “Description of Business – Development Agreement.”

For further information on property leases entered into in fiscal year 2004, refer to “Management’s Discussion and Analysis or Plan of Operation – Liquidity and Capital Resources.”

In the opinion of our management, each of our existing locations is adequately covered by insurance.

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ITEM 3                   LEGAL PROCEEDINGS

We were not a party to any material litigation as of March 15, 2005.

ITEM 4                   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The 2004 annual meeting of shareholders was held November 4, 2004.  Six proposals were submitted for shareholder approval, all of which passed with voting results as follows:

(1)       To approve the issuance and sale of 2,022,253 shares of common stock and warrants to purchase 910,012 shares of common stock.

(2)       To amend our bylaws to permit the board of directors to annually fix the number of directors to be elected by the shareholders.

(3)       Election of Directors:

(4)       To amend the 1997 Director Stock Option Plan to increase the total number of shares for which options may be granted to non-employee directors from 360,000 to 590,000 shares.

(5)       To amend the 2002 Equity Incentive Plan to increase the total number of shares for which awards may be granted from 762,287 to 1,062,287 shares.

(6)       To ratify the appointment of Schechter, Dokken, Kanter, Andrews & Selcer Ltd. as our independent auditors for the fiscal year ended December 28, 2004.

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Executive Officers of the Registrant

The following table provides information with respect to our executive officers as of March 15, 2005.  Each executive officer has been appointed to serve until his or her successor is duly appointed by the board or his or her earlier removal or resignation from office.  There are no familial relationships between any director or executive officer.

Steven J. Wagenheim, President, Chief Executive Officer and director, is also one of our founders.  Mr. Wagenheim has over 25 years of hospitality industry experience as corporate executive, owner/operator, manager and consultant for hotels, resorts, and individual and multi-unit restaurant operations.  Mr. Wagenheim is the Chief Executive Officer and principal shareholder of New Brighton Ventures, Inc., which operates a Champps Americana restaurant in New Brighton, Minnesota.  Since 1989, Mr. Wagenheim has been involved in the expansion and operations of Champps restaurants, holding positions with Champps Entertainment, Inc., Champps Development Group, Inc. and Americana Dining Corporation.

  Monica A. Underwood became our Interim Chief Financial Officer in February 2003.  Ms. Underwood has also served as our Corporate Controller since April 2001.  Prior to joining our company in 2001, she was the Corporate Controller for iNTELEFILM Corporation, an entity engaged in television commercial production, from May 1990 to April 2001.

Timothy R. Cary became our Chief Operating Officer-Restaurant Operations in December 2003.  Mr. Cary has been involved in the restaurant industry for 20 years.  From October 1999 until December 2003, Mr. Cary served as our Vice President of Operations.  From 1991 until 1999, he held a variety of management positions with the Champps Americana chain of restaurants.

James J. Hughes became our Senior Vice President of Operations in December 2003.  Mr. Hughes has over 25 years of experience in the restaurant industry.  From 2002 to 2003, Mr. Hughes was Vice President of Operations of Krispy Kreme for South Florida and New York.  From 1979 to 2001, he held various positions with Carlson Restaurants Worldwide (TGI Friday’s), most recently that of Vice President of Operations for the Northeast and Mid Atlantic Divisions.

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PART II

ITEM 5                   MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

Our units have been listed on the Nasdaq SmallCap Market under the symbol “GCFBU” since the completion of our initial public offering in June 2000.  Since the separability date of our units in August 2001, our common stock and our Class A Warrants have been listed on The Nasdaq SmallCap Market under the symbols “GCFB” and “GCFBW,”respectively.  The following table sets forth the approximate high and low sales prices for our common stock for the periods indicated as reported by The Nasdaq SmallCap Market.  Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

As of March 15, 2005, we had 301 shareholders of record.

We have never declared or paid cash dividends to holders of our common stock.  We currently do not intend to pay cash dividends on our common stock as we intend to retain future earnings for the operation and expansion of our business.  Any future payment of cash dividends on our common stock will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements and contractual restrictions, if any, and other factors deemed relevant by our board.

During the fourth quarter of 2002, we completed a private placement to accredited investors of Series A Convertible Preferred Stock and warrants to purchase common stock.  The convertible preferred stock paid an 8% cumulative dividend in cash or in shares of common stock.  As of November 4, 2004, all convertible preferred stock had been converted to common stock.  During fiscal year 2003, we paid dividends to holders of our preferred stock aggregating $168,421 in cash and 210,310 in shares of common stock.  During fiscal year 2004, we paid dividends to holder of our preferred stock aggregating $217,456 in cash and 69,414 in shares of common stock.

See Item 12 for information regarding securities authorized for issuance under our Equity Compensation Plans.

Sales of Unregistered Securities during the Fourth Quarter of 2004

A description of unregistered sales of equity securities during the fourth quarter of 2004 was previously included in our Current Report on Form 8-K, dated November 4, 2004.

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ITEM 6                   MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Overview

We operate eight casual dining restaurants featuring on-premises breweries under the name Granite City Food & Brewery®.  We intend to add four additional restaurants in 2005, six additional restaurants in 2006, and eight additional restaurants in 2007.  Our developer has purchased a site for us in Wichita, Kansas and is negotiating to purchase additional sites in Kansas, Missouri, Wisconsin and Minnesota.

We believe that our operating results will fluctuate significantly because of several factors, including the timing of new restaurant openings and related expenses, profitability of new restaurants, changes in food and labor costs, increases or decreases in comparable restaurant sales, general economic conditions, consumer confidence in the economy, changes in consumer preferences, competitive factors and weather conditions.

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

We use a 52/53-week fiscal year ending on the last Tuesday of December to account for our operations.  All references to “2003” and “2004” within the following discussion represent fiscal years ended December 28, 2003 and December 28, 2004, respectively.  Our fiscal year ended December 28, 2003 included 179 restaurant weeks, which is the sum of the actual number of weeks each restaurant operated. Our fiscal year ended December 28, 2004 included 369 restaurant weeks.  Weeks of operations at each of our restaurants for fiscal year 2003 and 2004 are shown in the following chart:

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

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Our restaurant revenues are comprised almost entirely of the sales of food and beverages.  The sale of retail items, such as cigarettes and promotional items, typically represent approximately 0.3% to 1.4% of total revenue.  Product costs include the costs of food, beverages and retail items.  Labor costs include direct hourly and management wages, taxes and benefits for restaurant employees.  Direct and occupancy costs include restaurant supplies, marketing costs, rent, utilities, real estate taxes, repairs and maintenance and other related costs.  Pre-opening costs consist of direct costs related to hiring and training the initial restaurant workforce and certain other direct costs associated with opening new restaurants.  General and administrative expenses are comprised of expenses associated with all corporate and administrative functions that support existing operations, management and staff salaries, employee benefits, travel, information systems and training and market research.  Depreciation and amortization includes depreciation on capital expenditures.  Other income and expense represents the cost of interest expense on debt and capital leases, interest income on invested assets and loss on disposal of assets.

Results of Operations

The table below sets forth results of our operations for the years ended December 28, 2003 and December 28, 2004. 

Certain percentage amounts do not sum due to rounding.

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Critical Accounting Policies

This discussion and analysis is based upon our consolidated financial statements, which were prepared in conformity with generally accepted accounting principles.  These principles require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  We believe our estimates and assumptions are reasonable; however, actual results and the timing of the recognition of such amounts could differ from those estimates.  We have identified the following critical accounting policies and estimates utilized by management in the preparation of our financial statements:

Property and equipment

The cost of property and equipment is depreciated over the estimated useful lives of the related assets ranging from three to 20 years.  The cost of leasehold improvements is depreciated over the initial term of the related lease.  Depreciation is computed on the straight-line method for financial reporting purposes and accelerated methods for income tax purposes.  Amortization of assets acquired under capital lease is included in depreciation expense.  We review property and equipment, including leasehold improvements, for impairment when events or circumstances indicate these assets might be impaired pursuant to Statement of Financial Accounting Standard (SFAS) No. 144.  We base this assessment upon the carrying value versus the fair market value of the asset and whether or not that difference is recoverable.  Such assessment is performed on a restaurant-by-restaurant basis and includes other relevant facts and circumstances including the physical condition of the asset.

Our accounting policies regarding property and equipment include certain management judgments regarding the estimated useful lives of such assets and the determination as to what constitutes enhancing the value of or increasing the life of existing assets.  These judgments and estimates may produce materially different amounts of depreciation and amortization expense than would be reported if different assumptions were used.

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

Results of Operations for the Fiscal Years Ended December 28, 2003 and December 28, 2004

Revenue

We generated $14,153,005 and $30,755,536 of revenues during fiscal years 2003 and 2004, respectively, with average weekly sales increasing from $79,067 to $83,348 per week.  This overall sales increase of 117.3% was due to the successful openings of five new restaurants, all of which were based on our prototype, since September 2, 2003.  Comparable restaurant sales, which include restaurants in operation over 18 months, decreased 3.8%, due primarily to disruption during the remodeling of two of the three units to mirror our prototype restaurant design.

We anticipate that restaurant revenues will vary from quarter to quarter.  We anticipate seasonal fluctuations in restaurant revenues due in part to increased outdoor seating and generally favorable weather conditions at all locations during the summer months.  A restaurant typically experiences a temporary period of high revenues immediately following its opening due to increased demand fostered by the publicity surrounding the opening (the “honeymoon effect”).  We experienced this effect throughout 2004 due to our expansion in late 2003 to mid-2004.  Due to the honeymoon effect, we expect the timing of new restaurant openings to cause fluctuations in restaurant revenues.  Additionally, consumer confidence in the economy and changes in consumer preferences may affect our future revenues.

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Restaurant Costs

Food and Beverage

Our food and beverage costs increased by 0.7% as a percentage of revenues during 2004 compared to 2003.  The increases we experienced were due primarily to new staff members becoming familiar with our operations as we opened three new restaurants in late 2004, as well as product price increase in some areas, particularly chicken, beef and dairy.

We expect that our food and beverage costs will vary going forward due to numerous variables, including seasonal changes in food costs and guest preferences.  We periodically create new menu offerings and introduce new craftbrewed beers based upon guest preferences.  Although such menu modifications may temporarily result in increased food and beverage cost, we believe we are able to offset such increases with our weekly specials which provide variety to our guests at a great price value.  Our varieties of craftbrewed beer, which we can produce at lower cost than beers we purchase for resale, also enable us to keep our food and beverage costs low while fulfilling guest requests and building customer loyalty.  As we have opened additional units, we have experienced increased purchasing power and believe we will continue to do so with additional expansion, thereby mitigating product price increases and maintaining or reducing our food and beverage costs as a percentage of revenues.  Additionally, as we add new units, we believe our brewing process, Fermentus Interruptus, will allow us to keep our high quality product intact while reducing the production cost, thereby enhancing overall profitability.

Labor

Our labor costs decreased by 1.0% as a percentage of revenues during 2004 from that experienced in 2003.  Although we have experienced increases in health and workers compensation insurance rates of approximately 15%, our increased revenue base in the first three quarters of 2004, due primarily to the honeymoon effect, enabled us to obtain an overall decrease in labor as a percentage of revenue from 35.1% to 34.1%.

We expect that labor costs will vary as we add new locations.  Minimum wage laws, local labor laws and practices, as well as unemployment rates vary from state to state and will affect our labor costs, as will hiring and training expense at our new locations.  Our management believes that retaining good employees and more experienced staff ensures high quality guest service and reduces hiring and training costs.

Direct and Occupancy

Our direct and occupancy expenses decreased 2.0% as a percentage of revenues during 2004 from that experienced in 2003.  Operating supplies, rent and occupancy costs, repairs and maintenance and advertising expense represent the majority of our direct and occupancy expenses, a substantial portion of which is fixed or indirectly variable.  As such, our higher unit volumes reduced the fixed and indirectly variable costs as a percentage of revenue from 19.0% to 17.0%.

Pre-Opening Costs

We experienced pre-opening costs during the first half of 2004 related to our Davenport, Lincoln and Minneapolis restaurants.  During that time, we incurred pre-opening costs of $197,769 in Davenport, $292,676 in Lincoln and $237,578 in Minneapolis.  The Lincoln pre-opening expenses were unusually high due to the distance between Lincoln and the restaurants at which the new managers trained, causing us to incur significantly more travel, lodging and meal expenses.  Additionally, we encountered some unexpected personnel turnover and related costs during the training process there.  Based upon general increases in the costs of labor, travel and lodging as well as our plan to train managers for an additional week prior to each opening, we expect future pre-opening expenses to average between $275,000 and $300,000 per unit.  Such costs are primarily incurred in the month of, and two months prior to, the restaurant opening.

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General and Administrative

General and administrative expenses include salaries and benefits associated with our corporate staff that is responsible for overall restaurant quality, future expansion into new locations and financial controls and reporting.  Other general and administrative expenses include advertising, professional fees, office administration, centralized accounting system costs, and travel by our corporate management to the restaurant locations.  General and administrative expenses increased $771,704 during 2004 compared to 2003.  As a percent of revenue, general and administrative expenses decreased 4.5%, indicating that revenues generated from our new locations more than offset the related increase in general and administrative expenses.  In order to retain and recruit core management and further build our infrastructure to facilitate growth, we incurred increased expenses primarily related to payroll and employee benefits, as well as increased expenses related to rent and office upkeep.  During the first quarter of 2003, our president and chief executive officer did not receive any monetary compensation from our company as we believe the options issued to him represented reasonable compensation for his service through March 30, 2003.  Additionally, our travel related expenses increased with the opening of new restaurants and the development of new sites for expansion, and our professional fees, including investor relations, legal and accounting increased in fiscal year 2004 over 2003.

We expect that general and administrative costs will continue to fluctuate as a percentage of restaurant revenues in the near term as we build our infrastructure to adequately sustain operations across multiple locations.  The anticipated additional restaurant revenues associated with further expansion are expected to result in greater economies of scale for our corporate expenses in the long term.

Depreciation and Amortization

Depreciation and amortization expense increased $832,994 in 2004 compared to 2003 due to the additional depreciation related to the newly opened restaurants.  As a percentage of revenues, depreciation expense decreased 0.4% from 2003 to 2004 due to the higher unit volumes.

Other Income and Expense

Interest expense net of interest income increased $669,432 in 2004 compared to 2003.  The increase was due to the increase of debt and capital leases and the reduction of invested cash as we opened new units throughout the year.  Management expects interest expense will increase with future expansion.  As we remodeled our older restaurants to mirror the prototype units, we recorded a $92,505 loss on assets which had not been fully depreciated.

Liquidity and Capital Resources

We have funded our capital requirements since inception through sales of securities, building and equipment leases, debt financing and cash flow from operations.  During fiscal year 2004, to obtain working capital to fund additional expansion, we entered into a securities purchase agreement with accredited investors for the sale of approximately $8.5 million of common stock and warrants to purchase common stock.  The agreement provided for securities to be sold at an offering price of $3.25 per share of common stock, with one warrant for every 2.5 shares of common stock sold.  The warrants have a term of five years and are exercisable at $5.00 per share, subject to certain anti-dilution adjustments.  The Company completed this private placement, generating gross proceeds of $8,497,489 with the sale of 2,614,609 shares of common stock and issuance of warrants to purchase 1,045,844 shares of common stock.  In connection with this private placement, the Company issued its placement agents warrants for the purchase of 130,730 shares of common stock at an exercise price of $5.00 per share, paid its agents cash commission of $424,764 and paid expenses related to the transaction of $196,929.

As of December 28, 2004, we had net working capital of $6,216,713 compared to a net working capital deficit of $475,912 at December 28, 2003.

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During the year ended December 28, 2004, operating activities provided us $2,297,946 of net cash, the sale of common stock described above provided us $7,875,796 of net cash, issuance of common stock pursuant to the exercise of options and warrants provided us $640,535 in net cash and proceeds from long-term debt provided us $750,000 of cash.  We used $2,843,059 of cash to purchase equipment and other assets primarily for our Davenport, Lincoln and Minneapolis locations and our Wort House, made payments on our debt and capital lease obligations aggregating $646,475, and paid cash dividends aggregating $217,456 to holders of our convertible preferred stock.

During fiscal year 2003, the issuance of our convertible preferred stock and our issuance of common stock upon the exercise of options and warrants provided us $1,408,986 of net cash and proceeds from long-term debt provided us $750,000 of net cash.  We used $143,089 of cash in operating activities, $3,582,066 to purchase equipment and other assets primarily for our West Des Moines, Cedar Rapids and Davenport locations, paid cash dividends to holders of our convertible preferred stock of $168,421, and made payments on our debt and capital lease obligations aggregating $347,292.

Using the proceeds from our 2004 private placement, we continue to expand into markets where we believe our concept will have broad appeal and attractive restaurant-level economics.  We plan to develop four additional restaurants in 2005, six additional restaurants in 2006 and eight additional restaurants in 2007.  We are utilizing the multi-site development agreement we entered into in October 2002 with Dunham to facilitate this expansion plan.  Dunham is controlled by Donald A. Dunham, Jr., who is an affiliate of Granite Partners, a significant beneficial owner of our securities.  Under this agreement, our developer provides us assistance in site selection, construction management and restaurant financing for new restaurants.

As part of our expansion strategy, we will continue utilizing the prototype model we developed and used for our five most recent locations.  We anticipate that each of these prototypical restaurants will require an investment by our developer of approximately $3.5 million to $4.0 million each for land, building and equipment.    We anticipate these costs will vary from one market to another based on real estate values, zoning regulations, labor markets and other variables. Under our development agreement, we will lease each new restaurant from our developer.  We anticipate that pre-opening expenses and the initial purchase of furniture, fixtures and equipment will require an investment by us of approximately $1.0 million to $1.6 million per location.

Between January and June 2004, we commenced the following lease agreements relating to our new restaurants:

•        In January 2004, we opened our restaurant in Davenport.   We are leasing this property from our developer under a 20-year lease agreement.   Our annual lease payments are $341,250 with $194,250 classified as a capital lease and the remaining $147,000 classified as an operating lease. This lease may be extended at our option for up to five additional five-year periods.

•        In May 2004, we opened our restaurant in Lincoln.   We are leasing this property from our developer under a 20-year lease agreement for the building and a 15-year lease agreement for the land.   Our annual capital lease payments on the building lease are $168,000 and our annual operating lease payments for the land average $151,165 per year over the initial term of the lease. The lease agreement for the land included a deferred rent incentive of $450,000, net.  This incentive is amortized and reduces rent expense over the initial term of the lease on a straight-line basis.  These leases may be extended at our option for up to five additional five-year periods.

•        In June 2004, we opened our restaurant in Minneapolis.  We are leasing this property from an independent third party under a 20-year lease agreement.  Our annual lease payments are $367,500 with $235,200 classified as a capital lease and the remaining $132,300 classified as an operating lease. This lease may be extended at our option for up to five additional five-year periods.

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In December 2004, we entered into a lease agreement with an unrelated third party for a building in Ellsworth, Iowa, to be constructed in accordance with our specifications, and used as a wort production facility in connection with our Fermentus Interruptus™ brewing process.  Such lease commenced February 1, 2005.  We have the option to purchase the facility at any time during the lease term for one dollar plus the unamortized construction costs.  Because the construction costs will be fully amortized through payment of rent during the base term, if the option is exercised at or after the end of the initial ten-year period, the option price will be one dollar.  As such, the lease is classified as a capital lease.  To commence operations at the wort production facility, we anticipate we will incur approximately $430,000 in equipment and related costs, of which approximately $286,000 was included on our balance sheet at December 28, 2004.

2004 Financing Activity

In January 2004, we entered into a $750,000 loan agreement with an independent financial institution.  The proceeds of this loan financed the purchase of equipment for the Davenport location.  The loan is secured by substantially all of the personal property of our company and is guaranteed by one of our directors.  The interest rate on the loan is 6.125% per annum and the loan matures in January 2011.

In April 2004, we entered into a revolving line of credit agreement with maximum availability of $750,000 with an independent financial institution.  We paid annual interest at a rate of 6.75% on amounts we borrowed.  This line of credit expired September 1, 2004, at which time we renewed the line at an annual interest rate of 7.00%.  This line of credit is secured by substantially all our personal property, is guaranteed by one of our directors and expires September 15, 2005.  During fiscal year 2004, we incurred $7,519 in interest expense related to line of credit financing and as of December 28, 2004, we had no balance outstanding on this line.

With cash generated from operations and proceeds from our private placement, management believes that we will have sufficient funds to pursue our business strategy over the next three years.  We continue to explore new restaurant sites and we expect to continue our strategy of obtaining equipment financing as needed for additional units.

Commitments and Contingent Liabilities

Operating and Capital Leases:

As of December 28, 2004, we had seven land and building lease agreements.  One of these leases expires in 2019, one in 2020, two in 2023, and the remaining three expire in 2024, all with renewable options for additional periods.  The building portions of these leases are classified as capital leases because their present value was greater than 90% of the estimated fair value at the beginning of the lease.  The land portions of these leases are classified as operating leases because the fair value of the land was more than 25% of the leased property at the inception of each lease.  Under three of the leases, we are required to pay additional percentage rent based upon restaurant sales.  As of December 28, 2004, future obligations relating to the land portion of these seven leases aggregated $15,392,483 plus percentage rent.  The scheduled rent increases for the land during the life of each lease are recognized on a straight-line basis.  Future obligations relating to the building portion of these seven leases aggregated $23,434,708 at December 28, 2004.

In 2001, we entered into a 20-year operating lease for land upon which we built our Fargo restaurant.  As of December 28, 2004, future obligations under the terms of this lease aggregated $1,215,800 plus percentage rent.

As of December 28, 2004, we have additional capital lease obligations outstanding aggregating $720,610 for equipment leases expiring in 2008, and operating lease obligations outstanding aggregating $38,072 for leases expiring in 2005 for office space and various office equipment items.

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Personal Guaranties:

Certain of our directors have personally guaranteed certain of our leases and loan agreements.  In connection with the $1.5 million loan we obtained in July 2001 to finance our Fargo restaurant, we entered into an agreement concerning guaranty which provides, among other things, that such guarantors will be indemnified from any liabilities they may incur by reason of their guaranties of our indebtedness. The agreement contains various covenants, one of which requires us to use our best efforts to obtain a release of one individual’s guarantee obligation by January 1, 2006.  If we have not accomplished this, we are obligated to pay him a monthly guarantee fee in the amount of $1,000 until such release is obtained.  Additionally, at a meeting held in March 2004, our board of directors agreed to compensate our President and Chief Executive Officer for his personal guaranties of equipment loans entered into in August 2003 and January 2004.  The amount of such compensation is calculated based on 3% of the weighted average daily balances of such loans at the end of each monthly accounting period.  As of December 28, 2004, we had paid $21,660 and accrued $14,894 of such fees.

Employment Agreement:

We have entered into an employment agreement with our President and Chief Executive Officer.  In lieu of a salary, we issued stock options to him in 1999, 2001 and 2003 as compensation for his services through March 30, 2003.  Effective April 1, 2003, we began paying an annual salary to such officer.  Among other provisions, the employment agreement includes change in control provisions that would entitle him to receive severance pay equal to 18 months of salary if there is a change in control of our company and his employment terminates.  On March 15, 2005, the Compensation Committee of our board of directors authorized a new three-year employment and compensation arrangement with him.  The arrangement provides for a minimum base salary of $225,000, commencing January 1, 2005, cash incentive compensation for 2005 ranging from $0 to $125,550 based on performance, and a stock option for the purchase of 150,000 shares of common stock.  For more information on this arrangement, refer to “Executive Compensation – Employment Contracts and Termination of Employment, and Change-in-Control Arrangements.”

Development Agreement:

We have entered into a development agreement with Dunham for the development of our restaurants.  Dunham is controlled by Donald A. Dunham, Jr., who is an affiliate of Granite Partners, a significant beneficial owner of our securities.  The agreement gives Dunham the right to develop, construct and lease up to 22 restaurants for us prior to December 31, 2012.  We are not bound to authorize the construction of restaurants during that time period, but generally cannot use another developer to develop or own a restaurant as long as the development agreement is in effect.  We can use another developer if Dunham declines to build a particular restaurant, if the agreement is terminated because of a default by Dunham, or if our company is sold or merged into another company.  In the case of a merger or sale of our company, the development agreement may be terminated at such time as Dunham has completed seven restaurants under the agreement.  As of December 28, 2004, five restaurants had been constructed for us under this development agreement.

The development agreement provides for a cooperative process between Dunham and our company for the selection of restaurant sites and the development of restaurants on those sites, scheduling for the development and construction of each restaurant once a location is approved, and controls on the costs of development and construction using bidding and guaranteed maximum cost concepts.  The development agreement provides that restaurants will be leased to us on the basis of a triple net lease.  The rental rate of each lease will be calculated using a variable formula which is based on approved and specified costs of development and construction and an indexed interest rate.  The term of each lease is 20 years with five five-year options to renew.

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Summary of Contractual Obligations:

The following table summarizes our obligations under contractual agreements as of December 28, 2004 and the time frame within which payments on such obligations are due.  This table does not include amounts related to percentage rent as such amounts have not yet been determined.  In addition, whether or not we would incur any additional expense on our employment agreement with Mr. Wagenheim depends upon the existence of a change in control of the company.  Therefore, no percentage rent or severance expense have been included in the following table.

Based on our working capital position at December 28, 2004, we believe we have sufficient working capital to meet our current obligations.

Qualitative and Quantitative Disclosures about Market Risk

Our company is exposed to market risk from changes in interest rates on debt and changes in commodity prices.

Changes in Interest Rate:

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

Changes in Commodity Prices:

Many of the food products we purchase are affected by commodity pricing and are, therefore, subject to unpredictable price volatility.   These commodities are generally purchased based upon market prices established with vendors.  Extreme fluctuations in commodity prices and/or long-term changes could have an adverse affect on us.  Although SYSCO Corporation is our primary supplier of food, substantially all of the food and supplies we purchase are available from several sources, which helps to control commodity price risks.  Additionally, we have the ability to increase menu prices, or vary the menu items offered, in response to a food product price increases.  If, however, competitive circumstances limit our menu price flexibility, margins could be negatively impacted.

Our company does not enter into derivative contracts either to hedge existing risks or for speculative purposes.

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Seasonality

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

Inflation

The primary inflationary factors affecting our operations are food, supplies and labor costs.  A large number of our restaurant personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage directly affect our labor costs.  In the past, we have been able to minimize the effect of these increases through menu price increases and other strategies.  To date, inflation has not had a material impact on our operating results.

Cautionary Statement

Granite City Food & Brewery Ltd., or persons acting on our behalf, or outside reviewers retained by us making statements on our behalf, or underwriters of our securities, from time to time, may make, in writing or orally, “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995.  This Cautionary Statement, when used in conjunction with an identified forward-looking statement, is for the purpose of qualifying for the “safe harbor” provisions of the Litigation Reform Act and is intended to be a readily available written document that contains factors which could cause results to differ materially from such forward-looking statements.  These factors are in addition to any other cautionary statements, written or oral, which may be made, or referred to, in connection with any such forward-looking statement.

The following matters, among others, may have a material adverse effect on our business, financial condition, liquidity, results of operations or prospects, financial or otherwise.  Reference to this Cautionary Statement in the context of a forward-looking statement or statements shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those in such forward-looking statement or statements.

Risks Related to our Business

We cannot predict whether we will be able to achieve or sustain revenue growth, profitability or positive cash flow.  Our operating experience has not been long enough for us to know whether we can achieve and sustain profitable operations and positive cash flow.  Our operating results can be affected by changes in guest tastes, the popularity of handcrafted beers, economic conditions in our markets, and the level of competition in our markets.

We may not be able to achieve and manage planned expansion.  We face many business risks associated with our proposed growth, including the risk that our existing management, information systems and financial controls will be inadequate to support our planned expansion.  We cannot predict whether we will be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and these systems and controls.  If we fail to continue to improve management, information systems and financial controls, or if we encounter unexpected difficulties during expansion, our business, financial condition, operating results and cash flows could be materially adversely affected.

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We may be unable to recruit, motivate and retain qualified employees.  Our success depends, in part, upon our ability to attract, motivate and retain a sufficient number of qualified employees, including trained brewing personnel, restaurant managers, kitchen staff and wait staff, to keep pace with our expansion schedule.  Qualified individuals needed to fill these positions could be in short supply in one or more of our markets.  Our inability to recruit, motivate and retain such individuals may delay the planned openings of new restaurants or result in high employee turnover in existing restaurants, either of which could have a material adverse effect on our business, financial condition, operating results and cash flows.  Additionally, competition for qualified employees could require us to pay higher wages and provide additional benefits to attract sufficient employees, which could result in higher labor costs.

We may be unable to successfully compete with other restaurants in our markets.  The restaurant industry is intensely competitive.  There are many well-established competitors with greater financial, marketing, personnel and other resources than ours, and many of such competitors are well established in the markets where we have restaurants, or in which we intend to establish restaurants.  Additionally, other companies may develop restaurants with similar concepts in our markets.  Any inability to successfully compete with restaurants in our markets could prevent us from increasing or sustaining our revenues and result in a material adverse effect on our business, financial condition, results of operations or cash flows.  We may also need to make changes to our established concept in order to compete with new and developing restaurant concepts that become popular within our markets.  We cannot assure you that we will be successful in implementing such changes or that these changes will not reduce our profitability.

Changes in consumer preferences or discretionary consumer spending could negatively impact our results.  Our operating results may be affected by changes in guest tastes, the popularity of handcrafted beers, general economic and political conditions and the level of competition in our markets.  Our continued success depends, in part, upon the popularity of micro-brewed beers and casual, broad menu restaurants.  Shifts in consumer preferences away from these beers and this dining style could materially adversely affect our future profitability.  Also, our success depends to a significant extent on numerous factors affecting discretionary consumer spending, including general economic conditions, disposable consumer income and consumer confidence.  In a weak economy, our customers may reduce their level of discretionary spending which could impact the frequency with which our customers choose to dine out or the amount they spend when they do dine out, thereby reducing our revenues.  Adverse economic conditions and changes in consumer preferences could reduce guest traffic or impose practical limits on pricing, either of which could materially adversely affect our business, financial condition, operating results and cash flows.

Our business could be materially adversely affected if we are unable to expand in a timely and profitable manner.  To continue to grow, we must open new restaurants on a timely and profitable basis.  We may experience delays in restaurant openings which could materially adversely affect our business, financial condition, operating results and cash flows.  Our ability to expand successfully depends upon a number of factors, some of which are beyond our control, including:

•              identification and availability of suitable restaurant sites

•              competition for restaurant sites

•              management of construction and development costs of new restaurants

•              availability of financing for the purchase or lease of restaurant and brewing equipment and leasehold improvements

•              securing required governmental approvals, licenses and permits

•              recruitment of qualified operating personnel, particularly general managers and kitchen managers

•              competition in new markets

In addition, we contemplate entering geographic markets in which we have no operating experience.  These new markets may have demographic characteristics, competitive conditions, consumer tastes and discretionary spending patterns different than those present in our existing markets, which may cause our new restaurants to be less successful than our existing restaurants.

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Unanticipated costs or delays in the development or construction of our restaurants could prevent our timely and cost-effective opening of new restaurants.  Our developer depends upon contractors for the construction of our restaurants.  After construction, we invest heavily in leasehold improvements for completion of our restaurants.  Many factors could adversely affect the cost and time associated with our development of restaurants, including:

•                                          labor disputes

•                                          shortages of materials and skilled labor

•                                          adverse weather

•                                          unforeseen construction problems

•                                          environmental problems

•                                          zoning problems

•                                          federal, state and local government regulations

•                                          modifications in design

•                                          other unanticipated increases in costs

Any of these factors could give rise to delays or cost overruns which may prevent us from developing additional restaurants within anticipated budgets and expected development schedules.  Any such failure could have a material adverse effect on our business, financial condition, operating results and cash flows.

We may be unable to fund our significant future capital needs in the long term and we may need additional funds sooner than anticipated.  To finance our expansion plans, we require funds for capital expenditures, pre-opening costs and to offset negative cash flow related to new restaurant openings.  We may not be able to obtain the future financing we need for expansion on acceptable terms.  If we do not generate sufficient cash flow from current operations or if financing is not available to us, we will have to curtail projected growth, which could materially adversely affect our business, financial condition, operating results and cash flows.  We may raise future capital through the issuance of our securities.  Depending upon the price at which we issue securities to fund expansion, your holdings may be diluted.  Specifically, our future expansion may be delayed or curtailed:

•                                          if future cash flows from operations fail to meet our expectations

•                                           if costs and capital expenditures for new restaurant development exceed anticipated amounts

•                                          if we incur unanticipated expenditures related to our operations

•                                          if we are unable to obtain acceptable equipment financing of restaurants

•                                          if we are required to reduce prices to respond to competitive pressures

Our operations depend upon governmental licenses or permits and we may face liability under dram shop statutes.  Our business depends upon obtaining and maintaining required food service, liquor and brewing licenses for each of our restaurants.  If we fail to hold all necessary licenses, we may be forced to delay or cancel new restaurant openings and close or reduce operations at existing locations.  We must comply with federal licensing requirements imposed by the United States Department of Treasury, Alcohol and Tobacco Tax and Trade Bureau, as well as licensing requirements of states and municipalities where we operate restaurants.  Failure to comply with federal, state or local regulations could cause our licenses to be revoked or force us to cease brewing and selling our beer.  Typically, licenses must be renewed annually and may be revoked and suspended for cause at any time.  State liquor and brewing laws may prevent or impede our expansion into certain markets.  Although we have not experienced, and do not anticipate, any significant problems in obtaining required licenses, permits or approvals, any delays or failures to obtain required licenses, permits or approvals could delay or prevent our expansion in a particular area. In addition, our sale of alcoholic beverages subjects us to “dram shop” statutes in some states.  These statutes allow an injured person to recover damages from an establishment that served alcoholic beverages to an intoxicated person.  If we receive a judgment substantially in excess of our insurance coverage, or if we fail to maintain our insurance coverage, our business, financial condition, operating results and cash flows could be materially and adversely affected.

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Compliance with changing regulation of corporate governance, public disclosure and financial accounting standards may result in additional expenses and affect our reported results of operations.  Keeping informed of, and in compliance with, changing laws, regulations and standards relating to corporate governance, public disclosure and accounting standards, including the Sarbanes-Oxley Act of 2002, as well as new and proposed SEC regulations, Nasdaq Stock Market rules and accounting standards, has required an increased amount of management attention and external resources.  Compliance with such requirements may result in increased general and administrative expenses and an increased allocation of management time and attention to compliance activities.  Additionally, changes to existing rules or current practices may adversely affect our reported financial results.

Because the value of our business depends primarily upon intangible assets, such as our business concept and development strategy, the value of your investment could decrease significantly in the event of liquidation.  Because we do not own the real estate at any of our existing locations, we do not own the buildings at six of our seven existing locations, we lease much of the equipment we use, and we do not plan to own the real estate or buildings in which our future restaurants will be located, our tangible assets mainly consist of inventory.  Until we establish a history of earnings, the value of our business that could be realized upon liquidation is comprised of intangible assets, including our business concept, development strategy, intellectual property, trademarks, goodwill and employee know-how.  If our business is not successful, the value of our intangible assets could decrease significantly.  The value of your investment could decrease as a result.

Risks Related to our Securities

Fluctuations in our operating results may decrease the price of our securities.  Our operating results may fluctuate significantly because of several factors, including the timing of new restaurant openings and related expenses, profitability of new restaurants, increases or decreases in comparable restaurant sales, general economic conditions, consumer confidence in the economy, changes in consumer preferences, competitive factors and weather conditions.  Consequently, our operating results may fall below the expectations of public market analysts and investors for any given reporting period.  In that event, the price of our securities would likely decrease.

Our existing shareholders have significant control which could reduce your ability to receive a premium for your shares through a change in control.  As of March 15, 2005, our directors and executive officers, as a group, beneficially owned approximately 7,155,709 shares or 56.2% of our common stock.  As a result, they are able to control our company and direct our affairs, including the election of directors and approval of significant corporate transactions.  This concentration of ownership may also delay, defer or prevent a change in control of our company, and make some transactions more difficult or impossible without their support.  These transactions might include proxy contests, tender offers, open market purchase programs or other share purchases that could give our shareholders the opportunity to realize a premium over the then prevailing market price of our common stock.  As a result, this concentration of ownership could depress our stock price.

If we do not maintain our Nasdaq listing, you may have difficulty reselling your units, common stock or Class A Warrants.  We will need to maintain certain financial and corporate governance qualifications to keep our units, common stock and Class A Warrants listed on Nasdaq.  We cannot assure you that we will at all times meet the criteria for continued listing on The Nasdaq SmallCap Market.  If we fail to maintain such qualifications, including a minimum bid price for our common stock of $1.00, our securities may be delisted.  In the event of delisting, trading, if any, would be conducted in the over-the-counter market in the so-called “pink sheets” or on the OTC Bulletin Board.  In addition, our securities could become subject to the SEC’s “penny stock rules.”  The penny stock rules would impose additional requirements on broker-dealers who effect trades in our securities, other than trades with their established customers and accredited investors.  Consequently, the delisting of our securities and the applicability of the penny stock rules may adversely affect the ability of broker-dealers to sell our securities, which may adversely affect your ability to resell our securities.  If any of these events take place, you may not be able to sell as many securities as you desire, you may experience delays in the execution of your transactions and our securities may trade at a lower market price than they otherwise would.

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If we do not maintain the effectiveness of our initial public offering prospectus holders of our Class A Warrants will be unable to exercise such warrants.  Holders of our Class A Warrants will be able to exercise the Class A Warrants only if a current prospectus relating to the shares underlying the Class A Warrants is then in effect and only if such securities are qualified for sale or exempt from qualification under the applicable securities laws of the state in which such holder resides.  We will use our best efforts to (a) maintain the effectiveness of a current prospectus covering the shares underlying the Class A Warrants and (b) maintain the registration of such shares under the securities laws of the states in which we initially qualified the units for sale in our initial public offering.  We cannot assure you that we will actually be able to do so.  We cannot issue shares upon the exercise of Class A Warrants if the prospectus covering the shares is not kept effective or if the exercise of the Class A Warrants is not qualified or exempt from qualification in the state where the exercising holder resides.

We may redeem the Class A Warrants at a price less than market value.  We may redeem the Class A Warrants at $0.01 per share if the closing bid price of our common stock exceeds $5.83 per share, subject to adjustment, for 45 consecutive trading days.  As a result of the anti-dilution adjustments applicable to the Class A Warrants, the foregoing redemption threshold adjusted from $6.25 to $5.83.  We must give 20 days written notice of such redemption.  If we redeem the Class A Warrants holders will lose their right to exercise the Class A Warrants except during the 20 day redemption period.  Redemption of the Class A Warrants could force holders to exercise the Class A Warrants at a time when it may be disadvantageous for them to do so or to sell the Class A Warrants at the then current market price or accept the redemption price, which could be substantially less than the market value of the Class A Warrants at the time of redemption.

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ITEM 7                                                                                                        FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Granite City Food & Brewery Ltd.

St. Louis Park, Minnesota

We have audited the accompanying balance sheets of Granite City Food & Brewery Ltd. as of December 28, 2003 and December 28, 2004, and the related statements of operations, shareholders’ equity, and cash flows for each of the two years in the period ended December 28, 2004.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 2003 and 2004 financial statements referred to above present fairly, in all material respects, the financial position of Granite City Food & Brewery Ltd. as of December 28, 2003 and December 28, 2004, and the results of its operations and its cash flows for each of the two years in the period ended December 28, 2004, in conformity with U.S. generally accepted accounting principles.

Minneapolis, Minnesota

February 14, 2005

F-2

GRANITE CITY FOOD & BREWERY LTD.

BALANCE SHEETS

See notes to financial statements.

F-3

GRANITE CITY FOOD & BREWERY LTD.

STATEMENTS OF OPERATIONS

See notes to financial statements.

F-4

GRANITE CITY FOOD & BREWERY LTD.

STATEMENTS OF SHAREHOLDERS’ EQUITY

See notes to financial statements.

F-5

GRANITE CITY FOOD & BREWERY LTD.

STATEMENTS OF CASH FLOWS