UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED June 30, 2009

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

Commission File Number 000-29643

GRANITE CITY FOOD & BREWERY LTD.

(Exact Name of Registrant as Specified in Its Charter)

Minnesota

(State or Other Jurisdiction

of Incorporation or Organization)

41-1883639

(I.R.S. Employer

Identification No.)

5402 Parkdale Drive, Suite 101

Minneapolis, Minnesota 55416

(952) 215-0660

(Address of Principal Executive Offices and Issuer’s

Telephone Number, including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 10, 2009, the issuer had outstanding 16,197,849 shares of common stock.

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TABLE OF CONTENTS

			Page

PART I		FINANCIAL INFORMATION	1

	ITEM 1	Financial Statements	1

		Condensed Consolidated Balance Sheets as of June 30, 2009 and December 30, 2008	1

		Condensed Consolidated Statements of Operations for the Thirteen and Twenty-six Weeks ended June 30, 2009 and June 24, 2008	2

		Condensed Consolidated Statements of Cash Flows for the Twenty-six Weeks ended June 30, 2009 and June 24, 2008	3

		Notes to Condensed Consolidated Financial Statements	4

	ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

	ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	31

	ITEM 4	Controls and Procedures	32

PART II		OTHER INFORMATION	32

	ITEM 1	Legal Proceedings	32

	ITEM 1A	Risk Factors	32

	ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	33

	ITEM 3	Defaults upon Senior Securities	33

	ITEM 4	Submission of Matters to a Vote of Security Holders	33

	ITEM 5	Other Information	33

	ITEM 6	Exhibits	33

SIGNATURES			34

INDEX TO EXHIBITS			35

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PART I FINANCIAL INFORMATION

ITEM 1 Financial Statements

GRANITE CITY FOOD & BREWERY LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			December 30,
	2009			2008
ASSETS:
Current assets:
Cash and cash equivalents	$	1,934,999		$	2,652,411
Inventory	920,623			773,468
Prepaids and other	755,355			473,343
Total current assets	3,610,977			3,899,222

Prepaid rent, net of current portion	427,741			456,644
Property and equipment, net	75,998,889			76,251,463
Intangible and other assets	1,742,697			1,503,336
Total assets	$	81,780,304		$	82,110,665

LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY:
Current liabilities:
Accounts payable	$	2,680,553		$	2,000,812
Accrued expenses	5,899,730			5,962,487
Accrued exit or disposal activities, current portion	20,453			19,999
Deferred rent, current portion	210,667			203,062
Long-term debt, current portion	603,482			320,697
Capital lease obligations, current portion	3,764,718			3,201,829
Total current liabilities	13,179,603			11,708,886

Accrued exit or disposal activities, net of current portion	1,154,153			822,494
Deferred rent, net of current portion	3,293,711			2,817,593
Long-term debt, net of current portion	1,996,706			1,668,134
Capital lease obligations, net of current portion	64,779,986			62,616,992
Total liabilities	84,404,159			79,634,099

Shareholders’ (deficit) equity:
Common stock, $0.01 par value, 90,000,000 shares authorized; 16,197,849 shares issued and outstanding at June 30, 2009 and December 30, 2008	161,978			161,978
Additional paid-in capital	44,001,654			43,844,373
Accumulated deficit	(46,787,487		)	(41,529,785		)
Total shareholders’ (deficit) equity	(2,623,855		)	2,476,566

Total liabilities and shareholders’ (deficit) equity	$	81,780,304		$	82,110,665

See notes to condensed consolidated financial statements.

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GRANITE CITY FOOD & BREWERY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	June 30,			June 24,			June 30,			June 24,
	2009			2008			2009			2008

Restaurant revenues	$	22,101,365		$	25,098,840		$	43,526,066		$	49,118,323

Cost of sales:
Food, beverage and retail	6,055,751			7,601,147			11,882,004			15,125,213
Labor	7,694,891			9,298,114			15,226,533			18,650,135
Direct restaurant operating	3,164,136			3,537,693			6,357,890			7,095,520
Occupancy	1,571,315			1,618,071			3,143,515			3,164,972
Total cost of sales	18,486,093			22,055,025			36,609,942			44,035,840

Pre-opening	18,333			246,702			211,262			830,074
General and administrative	2,430,751			2,780,374			4,495,067			5,471,343
Depreciation and amortization	1,728,140			1,613,412			3,434,717			3,175,057
Exit or disposal activities	173,460			—			601,540			—
Other	41,307			15,606			50,408			51,371

Operating loss	(776,719		)	(1,612,279		)	(1,876,870		)	(4,445,362		)

Interest:
Income	110			10,038			1,608			25,246
Expense	(1,751,482		)	(1,651,126		)	(3,382,440		)	(3,139,953		)
Net interest expense	(1,751,372		)	(1,641,088		)	(3,380,832		)	(3,114,707		)

Net loss	$	(2,528,091	)	$	(3,253,367	)	$	(5,257,702	)	$	(7,560,069	)

Loss per common share, basic	$	(0.16	)	$	(0.20	)	$	(0.32	)	$	(0.47	)

Weighted average shares outstanding, basic	16,197,849			16,197,849			16,197,849			16,190,066

See notes to condensed consolidated financial statements.

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GRANITE CITY FOOD & BREWERY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Twenty-six Weeks Ended
	June 30,			June 24,
	2009			2008

Cash flows from operating activities:
Net loss	$	(5,257,702	)	$	(7,560,069	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	3,396,279			3,151,514
Other amortization	38,438			23,543
Stock warrant/option expense	157,281			263,912
Loss on disposal of property and equipment	50,408			51,371
Loss on exit or disposal activities	332,113			—
Deferred rent	483,723			281,954
Changes in operating assets and liabilities:
Inventory	(147,155		)	(21,137		)
Prepaids and other	(253,109		)	62,068
Accounts payable	615,198			(69,927		)
Accrued expenses	(62,757		)	50,353
Net cash used in operating activities	(647,283		)	(3,766,418		)

Cash flows from investing activities:
Purchase of:
Property and equipment	(420,702		)	(2,419,971		)
Intangible and other assets	(187,571		)	(229,268		)
Net cash used in investing activities	(608,273		)	(2,649,239		)

Cash flows from financing activities:
Payments on capital lease obligations	(1,073,213		)	(793,469		)
Proceeds from capital leases	1,000,000			4,000,000
Payments on long-term debt	(188,643		)	(135,636		)
Proceeds from long-term debt	800,000			—
Net proceeds from issuance of stock	—			34,486
Net cash provided by financing activities	538,144			3,105,381

Net decrease in cash	(717,412		)	(3,310,276		)
Cash and cash equivalents, beginning	2,652,411			7,076,835
Cash and cash equivalents, ending	$	1,934,999		$	3,766,559

Supplemental disclosure of non-cash investing and financing activities:
Land, buildings and equipment acquired under capital lease agreements	$	2,938,266		$	5,759,548
Property and equipment and intangibles purchased and included in accounts payable	$	64,543		$	1,200,772

See notes to condensed consolidated financial statements.

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GRANITE CITY FOOD & BREWERY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Thirteen and Twenty-six weeks ended June 30, 2009 and June 24, 2009

1. Summary of significant accounting policies

Background

Granite City Food & Brewery Ltd. (the “Company”) develops and operates Modern American casual dining restaurants known as Granite City Food & Brewery®. The restaurant theme is upscale casual dining with a wide variety of menu items that are prepared fresh daily, combined with freshly brewed hand-crafted beers finished on-site. The Company opened its first Granite City restaurant in St. Cloud, Minnesota in July 1999 and has since expanded to other Midwest markets. As of June 30, 2009, the Company operated 26 restaurants. The Company also operates a beer production facility which is used to provide raw material support to its restaurants to create consistent quality and operational efficiencies in the production of its proprietary beer. In 2007, the Company was granted a patent by the United States Patent Office for its brewing process.

Principles of consolidation and basis of presentation

During the first six months of operations in 2009, the Company did not meet its internal budget primarily due to declining revenue. In June 2009, the Company announced the hiring of MorrisAnderson in an effort to restructure its debt and leases. Since that time, the Company has been maintaining sufficient cash for operations by reducing or withholding payments to its landlords during negotiations with the landlords and satisfying such obligations as necessary to avoid disruption of restaurant operations. If the restructuring effort is not successful or sufficient to restore its debt to a level necessary to allow the Company to be cash flow positive at its current level of revenue, the Company will be required to seek further funding for operations during 2009. The Company would be required to raise such funds through the incurrence of indebtedness or public or private sales of equity securities, which may be dilutive to shareholders and may or may not be available to the Company. The amount of any such required funding would depend upon sales trends and the Company’s ability to generate positive cash flow. If the Company is unable to restructure its debt and leases, if cash flow from operations upon a successful restructuring and other sources of liquidity are insufficient to fund expected capital needs, or if the Company’s needs are greater than anticipated, its business and results of operations could be materially and adversely affected.

The Company’s ability to fund its operations in future periods will depend upon its future operating performance, and more broadly, achieving budgeted revenue and on the availability of equity and debt financing, all of which will be affected by prevailing economic conditions in the industry and its financial, business and other factors, which may be beyond the Company’s control. The Company cannot assure you that it will obtain financing on favorable terms or at all. If the Company elects to raise additional capital through the issuance and sale of equity securities, the sales may be at prices below the market price of its stock, and its shareholders may suffer significant dilution. Debt financing, if available, may involve significant cash payment obligations, covenants and financial ratios that restrict the Company’s ability to operate and grow its business, and would cause it to incur additional interest expense and financing costs.

The Company’s condensed consolidated financial statements include the accounts and operations of the Company and its subsidiary corporation under which its Kansas locations are operated. Fifty percent of the stock of the subsidiary corporation is owned by a resident of Kansas. Granite City Restaurant Operations, Inc., a wholly-owned subsidiary of the Company, owns the remaining 50% of the stock of the subsidiary corporation. The resident-owner of the stock of that entity has entered into a buy-sell agreement with the subsidiary corporation providing, among other things, that transfer of the shares is restricted and that the shareholder must sell his shares to the subsidiary corporation upon certain events, or any event that

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disqualifies the resident-owner from owning the shares under applicable laws and regulations of the state. The Company has entered into a master agreement with the subsidiary corporation that permits the operation of the restaurants and leases to the subsidiary corporation the Company’s property and facilities. The subsidiary corporation pays all of its operating expenses and obligations, and the Company retains, as consideration for the operating arrangements and the lease of property and facilities, all the net profits, as defined, if any, from such operations. The Company has determined that the foregoing ownership structure will cause the subsidiary corporation to be treated as a variable interest entity in which the Company has a controlling financial interest for the purpose of Financial Accounting Standards Board (“FASB”) Interpretation 46(R), Consolidation of Variable Interest Entities. As such, the subsidiary corporation is consolidated with the Company’s financial statements and the Company’s financial statements do not reflect a minority ownership in the subsidiary corporation. Also included in the Company’s condensed consolidated financial statements are other wholly-owned subsidiaries. All references to the Company in these notes to condensed consolidated financial statements relate to the consolidated entity, and all intercompany balances have been eliminated.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, which are necessary for a fair statement of its financial position as of June 30, 2009 and the results of operations for the interim periods ended June 30, 2009 and June 24, 2008 have been included.

The balance sheet at December 30, 2008 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. Certain information and note disclosures normally included in the Company’s annual financial statements have been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2008, filed with the Securities and Exchange Commission on March 19, 2009.

The results of operations for the thirteen weeks and twenty-six weeks ended June 30, 2009 are not necessarily indicative of the results to be expected for the entire year.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America and regulations of the Securities and Exchange Commission requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates include estimates related to asset lives, lease accounting and revenue recognition. Actual results could differ from these estimates.

Reclassifications

Certain minor reclassifications have been made to the condensed consolidated financial statements for fiscal year 2008 for them to conform to the presentation of the condensed consolidated financial statements for fiscal year 2009. These reclassifications have no effect on the accumulated deficit or net loss previously reported.

Revenue recognition

Revenue is derived from the sale of prepared food and beverage and select retail items. Revenue is recognized at the time of sale and is reported on the Company’s condensed consolidated statements of operations net of sales taxes collected. Revenue derived from gift card sales is recognized at the time the gift card is redeemed. Until the redemption of gift cards occurs, the outstanding balances on such cards are included in accrued expenses in the accompanying condensed consolidated balance sheets. The Company periodically recognizes gift card breakage which represents the portion of its gift card obligation for which management believes the likelihood of redemption by the customer is remote, based upon historical redemption patterns. Such amounts are included as a reduction to general and administrative expense.

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Cash equivalents

The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.

Stock-based compensation

The Company accounts for stock-based compensation in accordance with the provisions of SFAS No. 123 (revised 2004) (“SFAS 123(R)”), Share-Based Payment, and SEC Staff Accounting Bulletin No. 107 (“SAB 107”), Share-Based Payment, requiring the measurement and recognition of all share-based compensation under the fair value method.

The fair value of options at date of grant was estimated using the Black-Scholes option-pricing model with the following assumptions for the second quarter and first half of 2009 and 2008:

	Twenty-six Weeks Ended
	June 30, 2009	June 24, 2008
Weighted average risk-free interest rate	2.25% - 3.71%	3.88% - 4.25%
Expected life of options	10 years	10 years
Expected stock volatility	66.30% - 94.69%	40.53% - 44.27%
Expected dividend yield	None	None

Net loss per share

Basic net loss per share is computed based on the weighted average number of shares of common stock outstanding during the fiscal year. Diluted net loss per share is not presented since the effect would be anti-dilutive due to the losses. Calculations of the Company’s net loss per common share for the thirteen and twenty-six weeks ended June 30, 2009 and June 24, 2008 are set forth in the following table:

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	June 30, 2009			June 24, 2008			June 30, 2009			June 24, 2008
Net loss	$	(2,528,091	)	$	(3,253,367	)	$	(5,257,702	)	$	(7,560,069	)
Loss per common share, basic	$	(0.16	)	$	(0.20	)	$	(0.32	)	$	(0.47	)
Weighted average shares outstanding, basic	16,197,849			16,197,849			16,197,849			16,190,066

Recent accounting pronouncements

In June 2009, the FASB approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (“SEC”), will be superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. The Codification does not change GAAP, but instead introduces a new structure that will combine all authoritative standards into a comprehensive, topically organized online database. The Codification will be effective for interim or annual periods ending after September 15, 2009, and will impact the Company’s financial statement disclosures beginning with the quarter ending September 29, 2009 as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There will be no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued (“subsequent events”). SFAS 165 requires disclosure of the date through which the entity has evaluated subsequent events and the basis for that date. For public

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entities, this is the date the financial statements are issued. SFAS 165 does not apply to subsequent events or transactions that are within the scope of other GAAP and will not result in significant changes in the subsequent events reported by the Company. SFAS 165 is effective for interim or annual periods ending after June 15, 2009. The Company implemented SFAS 165 during the quarter ended June 30, 2009. The Company evaluated for subsequent events through August 14, 2009, the issuance date of the Company’s financial statements. No subsequent events were noted other than those disclosed in Note 13.

In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”), which amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about the fair value of financial instruments for interim reporting periods, as well as annual reporting periods. FSP FAS 107-1 and APB 28-1 are effective for all interim and annual reporting periods ending after June 15, 2009 and did not impact the Company’s consolidated financial statements.

In June 2008, the FASB issued Emerging Issues Task Force No. 08-03, Accounting for Leases for Maintenance Deposits (“EITF No, 08-03”). EITF No. 08-03 addresses how a lessee should account for a nonrefundable maintenance deposit under an arrangement accounted for as a lease. The guidance in EITF No. 08-03 is effective for fiscal years beginning after December 15, 2008, including interim periods within those fiscal years. Implementation of this staff position in the first quarter of fiscal 2009 did not impact the Company’s consolidated financial statements.

In June 2008, the FASB issued EITF No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 provides guidance in assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock for purposes of determining whether the appropriate accounting treatment falls under the scope of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and/or EITF 00-19, “Accounting For Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” EITF 07-5 is effective for fiscal years beginning after December 15, 2008 and did not impact the Company’s financial statements.

In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). This change is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under Statement No. 141R (revised 2007), “ Business Combinations “ (“SFAS 141R”) and other GAAP. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FSP 142-3 did not impact the Company’s consolidated financial statements.

In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of Statement No. 157, “Fair Value Measurements” (“SFAS 157”), for most nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The implementation of SFAS 157 for nonfinancial assets and nonfinancial liabilities did not impact the Company’s consolidated financial statements.

In December 2007, the Financial Accounting Standards Board (FASB) issued FASB Statement (“SFAS”) No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting for business combinations and certain other transactions. SFAS 141R will apply prospectively to business combinations and certain other transactions for which the acquisition date is on or after the start of the first annual reporting period beginning on or after December 15, 2008. The Company currently does not contemplate any business combinations or other transactions that will be subject to SFAS 141R.

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In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Since the Company does not currently have and does not contemplate acquiring any interests in subsidiaries or variable interest entities with noncontrolling interests, management expects that SFAS 160 will not have an impact on the Company’s future financial position, results of operations and operating cash flows.

2. Fair value of financial instruments

At June 30, 2009 and December 30, 2008, the fair value of cash and accounts payable approximate their carrying value due to the short-term nature of the instruments. The fair value of the capital lease obligations and long-term debt is estimated at its carrying value based upon current rates available to the Company.

3. Exit or disposal activities

Rogers, Arkansas

In August 2008, the Company ceased operations at its Rogers, Arkansas restaurant. Since opening in October 2007, the restaurant failed to generate positive cash flow and had approximately $1.4 million of net loss. Management believes the closure of this restaurant will allow the Company to focus its capital and personnel resources on its other restaurants in order to increase future operating efficiencies and cash flow. The Company is working to find a replacement tenant for the location, for which it is bound by a 20-year net lease. Costs incurred in connection with this closure include one-time benefits to employees who were involuntarily terminated of $57,681, costs incurred for early contract termination of $4,578 and costs to close and maintain the facility of $500,925. Until the Company is able to find a replacement tenant, it will incur ongoing costs such as utilities, landscape and maintenance and general liability insurance. In accordance with the requirements of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, the Company recorded a non-cash lease termination liability of $852,146 based on management’s estimate of the fair value of these obligations. This required management to estimate the present value of the future minimum lease obligations offset by the estimated sublease rentals that could be reasonably obtained for the property. During the third quarter of 2008, the Company recorded a non-cash impairment charge of $135,057 related to the write-off of the carrying value of the restaurant equipment at the Rogers location. The amount of this write-off is equal to the difference between the net book value of the equipment and the expected future cash flows generated by leasing the equipment to a replacement tenant. As of June 30, 2009, the annual lease payments for the Roger’s site were $405,000 and the ongoing costs to maintain the property were approximately $10,500 per month. As of June 30, 2009, the Company’s future undiscounted cash payments under the terms of this 20-year lease were approximately $7.5 million.

Troy, Michigan

In May 2008, the Company entered into a 20-year net lease agreement relating to the restaurant it had planned to open in Troy, Michigan. However, in February 2009, the Company decided not to build on that site, and as part of an agreement with Dunham Capital Management, L.L.C. (“Dunham”), DHW Leasing, L.L.C. (“DHW”) and Dunham Equity Management, L.L.C. (collectively, the “Dunham Entities”), the Company will reimburse Dunham for any out-of-pocket expenses incurred, including the carrying cost of the related land, less net proceeds from the sale of the real estate or lease income associated with the site (Note 9). As of June 30, 2009, the carrying cost of the land approximated $15,500 per month. Such expenses will be amortized and payable to Dunham over a 60-month period commencing January 2011, at a 6% annual interest rate. The Company’s management has concluded that as of June 30, 2009, it is probable that the Company will need to reimburse Dunham approximately $342,000 of such costs. Pursuant to SFAS No. 5, Accounting for Contingencies, the Company has included $342,000 in “exit or disposal activities” on its condensed consolidated statements of operations and “accrued exit or disposal activities” on its balance sheet.

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The costs related to the closing of the Rogers restaurant and the decision not to build the Troy restaurant aggregated approximately $601,540 in the first half of 2009 and are reflected on the Company’s consolidated statements of operations as “exit or disposal activities”. The following is a reconciliation of the beginning and ending balances of exit or disposal activities:

Accrued exit or disposal costs at December 30, 2008	$	842,493
Costs incurred and charged to expense	611,427
Payments	(269,427		)
Amortization of sublease liability	(9,887		)
Accrued exit or disposal costs at June 30, 2009	$	1,174,606

4. Non-current assets

Property and equipment

Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets. Leasehold improvements are depreciated over the term of the related lease or the estimated useful life, whichever is shorter. Depreciation and amortization of assets held under capital leases and leasehold improvements are computed on the straight-line method for financial reporting purposes. The following is a summary of the Company’s property and equipment at June 30, 2009 and December, 2008:

	June 30, 2009			December 30, 2008
Land	$	18,000		$	18,000
Buildings	57,127,818			54,991,656
Leasehold improvements	9,251,476			9,117,667
Equipment and furniture	33,311,717			31,877,053
Construction in progress*	—			642,579
	99,709,011			96,646,955
Less accumulated depreciation	(23,710,122		)	(20,395,492		)
	$	75,998,889		$	76,251,463

*Construction in progress includes the following approximate amounts for items yet to be placed in service:

	June 30, 2009		December 30, 2008
Leasehold improvements for future locations	$	—	$	187,400
Building and equipment at future locations	$	—	$	255,200
Equipment at current locations	$	—	$	199,900

Intangible and other assets

Intangible and other assets consisted of the following:

	June 30, 2009			December 30, 2008
Intangible assets:
Liquor licenses	$	760,865		$	760,865
Trademarks	140,141			140,141
Other:
Deferred loan costs	414,418			243,421
Security deposits	645,989			539,187
	1,961,413			1,683,614
Less accumulated amortization	(218,716		)	(180,278		)
	$	1,742,697		$	1,503,336

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5. Accrued expenses

Accrued expenses consisted of the following:

	June 30, 2009		December 30,2008
Payroll and related	$	1,803,117	$	1,770,802
Deferred revenue from gift card sales	1,331,026		1,971,477
Sales taxes payable	485,688		619,377
Interest	998,780		568,777
Real estate taxes	709,248		536,290
Other	571,871		495,764
	$	5,899,730	$	5,962,487

6. Deferred rent payable

Under the terms of the lease agreement the Company entered into regarding its Lincoln property, the Company received a lease incentive of $450,000, net. This lease incentive was recorded as a deferred rent payable and is being amortized to reduce rent expense over the initial term of the lease using the straight-line method.

Also included in deferred rent payable is the difference between minimum rent payments and straight-line rent over the initial lease term including the “build out” or “rent-holiday” period. Additionally, certain of the Company’s landlords have agreed to defer a portion of the payments due them until future years. Contingent rent expense, which is based on a percentage of revenue, is also recorded to the extent it exceeds minimum base rent per the lease agreement. Deferred rent payable consisted of:

	June 30, 2009		December 30, 2008
Difference between minimum rent and straight-line rent	$	2,909,474	$	2,633,912
Deferred rent payments	216,267		—
Contingent rent expected to exceed minimum rent	64,748		57,854
Tenant improvement allowance	313,889		328,889
	$	3,504,378	$	3,020,655

7. Long-term debt

As of June 30, 2009, the Company had three long-term loans outstanding with an independent financial institution, the proceeds of which it used to purchase assets at its Fargo, North Dakota; Des Moines and Davenport, Iowa restaurants. These loans are secured by the tangible personal property and fixtures at the respective locations and are guaranteed by Steven J. Wagenheim, the Company’s president, chief executive officer and one of its directors.

In August 2008, the Company issued a promissory note to an Indiana general partnership in the amount of $250,000. The note was issued to secure the liquor license for the Company’s restaurant located in South Bend, Indiana.

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On March 30, 2009, the Company entered into a bridge loan agreement with a group of accredited investors to provide $1.0 million of partially convertible debt financing. The bridge loan is evidenced by notes bearing interest at 9.0% per annum, payable in six equal monthly installments commencing on May 1, 2010 and due in full on October 1, 2010. The bridge loan was funded to the extent of $800,000 on March 30, 2009, with the balance of the bridge loan to be funded by the end of May 2009 pursuant to an amendment to the agreement dated April 30, 2009. The Company and Harmony have entered into amendments to extend the date for the balance of the funding to September 30, 2009 (see Note 13). The lead investors in the transaction were Harmony Equity Income Fund, L.L.C. and Harmony Equity Income Fund II, L.L.C. (collectively, “Harmony”). The Company’s Chairman, Eugene E. McGowan, is a member of, and has a beneficial interest in, both of the Harmony funds. The transaction was approved by the Company’s Audit Committee as a transaction with a related person. The notes are secured by a mortgage against the lease, and security agreements against personal property and intangibles relating to the Company’s Sioux Falls, South Dakota restaurant, including a grant of the rights to use patents, trademarks and other intangibles associated with that restaurant. The Company’s Board of Directors has authorized it to borrow up to an aggregate of $3.0 million under the terms of the bridge loan agreement, which provides that the investors may, but are not obligated to, make additional loans on substantially the same terms and conditions, including a similar pledge of collateral related to either its St. Cloud, Minnesota, or Fargo, North Dakota restaurants. The notes may be prepaid upon 30 days prior notice without premium or penalty. The notes must also be paid if the Company receives $4.0 million or more of proceeds from the sale of equity securities or securities convertible into equity securities. The notes must also be repaid in the event the Company defaults under the terms and conditions of the bridge loan, including the financial covenants set forth therein. Such covenants include maintaining minimum operating income before interest, taxes, depreciation and amortization from the Sioux Falls, South Dakota restaurant operations, and minimum consolidated revenue of the Company, as provided in the bridge loan agreement. Up to 20% of each bridge note may be converted into common stock at a conversion price equal to $0.50 per share. At June 30, 2009, the Company had not met the minimum consolidated revenue required. Harmony has agreed to waive the consolidated revenue covenant requirement and agreed to defer the July 2009 interest payment until the maturity date of the loans.

In addition, the Company agreed to issue to Harmony warrants for the purchase of an aggregate of 400,000 shares of common stock exercisable six months after date of issuance at a price of $0.25267 per share, or 110% of the closing price of the Company’s stock on March 30, 2009. As of June 30, 2009, warrants to purchase an aggregate of 320,000 shares of common stock had been issued to such investors. The notes and the warrants provide customary anti-dilution rights to the holders, including weighted average anti-dilution provisions for sales at less than the exercise or conversion prices thereof. The Company has also agreed that if it proposes to issue new securities in excess of 1.0% of its outstanding shares prior to May 1, 2010, subject to the exceptions noted below, it will give the investors the right to purchase up to that portion of the new securities which equals the proportion of the number of securities purchasable upon conversion of notes and exercise of the warrants relative to the Company’s outstanding stock as of March 30, 2009. The participation right is not applicable to certain categories of issuances, such as shares issuable pursuant to public offerings, mergers and acquisitions and options, warrants and other rights to purchase securities. The Company has also granted the investors certain rights to require the Company to register common stock acquired by them upon conversion of the notes or exercise of the warrants under the Securities Act of 1933, as amended (the “Act”) on Form S-3, or include such shares in certain company registrations under the Act, at the expense of the Company.

The Company determined the fair value of the warrants issued in the first quarter of 2009 to be $43,299 using the Black Scholes pricing model assuming: (i) a weighted average risk-free interest rate of 1.72%, (ii) an expected warrant life of five years, (iii) expected stock volatility of 73.86% and (iv) no expected dividend yield. Pursuant to Accounting Principles Board Opinion (“APB”) 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, the Company allocated the fair value of the warrants to paid-in capital and the remainder of the proceeds to long-term debt. The value of these warrants is being expensed as additional interest over the term of the related loan.

As of June 30, 2009 and December 30, 2008, the balances, interest rates and maturity dates of our long-term debt were as follows:

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	June 30, 2009		December 30, 2008
Des Moines
Balance	$	162,824	$	226,802
Annual interest rate	10.25%		10.25%
Maturity date	27-Aug-10		27-Aug-10

Davenport
Balance	$	212,015	$	272,081
Annual interest rate	10.25%		10.25%
Maturity date	6-Jan-11		6-Jan-11

Fargo
Balance	$	1,214,080	$	1,239,948
Annual interest rate	8.75%		8.75%
Maturity date	15-Aug-11		15-Aug-11

South Bend
Balance	$	247,350	$	250,000
Annual interest rate	8.00%		8.00%
Maturity date	30-Sep-23		30-Sep-23

Harmony
Balance	$	763,919	$	0
Annual interest rate	9.00%		N/A
Maturity date	1-Oct-10		N/A

Future maturities of long-term debt, exclusive of interest, are as follows:

Year ending:
2009	$	160,520
2010	1,059,358
2011	1,142,241
2012	4,263
2013	4,617
Thereafter	229,189
	$	2,600,188

8. Capital leases

As of June 30, 2009, the Company operated 24 restaurants under capital lease agreements. Of these leases, one expires in 2020, two in 2023, four in 2024, three in 2025, four in 2026, seven in 2027, two in 2028 and one in 2029, all with renewable options for additional periods. Twenty-two of these lease agreements originated with Dunham. Under certain of the leases, the Company may be required to pay additional contingent rent based upon restaurant sales. At the inception of each of these leases, the Company evaluated the fair value of the land and building separately pursuant to the guidance in SFAS No. 13, Accounting for Leases. The land portion of these leases is classified as an operating lease while the building portion of these leases is classified as a capital lease

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because its present value was greater than 90% of the estimated fair value at the beginning of the lease and/or the lease term represents 75% or more of the expected life of the property.

The Company also has a land and building lease agreement for its beer production facility. This ten-year lease allows the Company to purchase the facility at any time for $1.00 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 $1.00. As such, the lease, including land, is classified as a capital lease.

In May 2008, the Company entered into a 20-year net lease agreement relating to the restaurant it had planned to open in Troy, Michigan. However, in February 2009, the Company decided not to build on that site, and as part of an agreement with the Dunham Entities, the Company will reimburse Dunham for any out-of-pocket expenses incurred less net proceeds from the sale of the real estate or lease income associated with the site (see Notes 3 and 9).

In August 2008, the Company ceased operations at its restaurant in Rogers, Arkansas (see Note 3). However, the Company is currently bound by the terms of this 20-year net lease agreement entered into under the terms specified in the development agreement with Dunham. Pursuant to an agreement with the Dunham Entities described in Note 9, the Company will reimburse Dunham for any out-of-pocket expenses incurred less net proceeds from the sale of the real estate or lease income associated with this site. The building portion of this lease is classified as a capital lease while the land portion is classified as an operating lease.

As of June 30, 2009, the Company had 20 capital lease agreements that it used to finance the equipment at its restaurants. During the first quarter of 2009, the Company financed the equipment at two of those restaurants, aggregating approximately $2.0 million, under the terms and conditions of the equipment lease commitment the Company entered into with DHW in December 2007. Of such financing, $1.0 million was the result of a sale-leaseback transaction with DHW for which the Company received cash proceeds. This sale-leaseback transaction met one or more criteria for treatment as a capital lease pursuant to SFAS No. 13, Accounting for Leases. Because the Company retained substantially all the benefits and risks incident to the ownership of the property sold, the Company considered this sale-leaseback transaction merely a financing pursuant to SFAS No. 28, Accounting for Sales with Leasebacks. As such, the Company did not recognize any gain or loss on the transaction and included it as a financing activity on its condensed consolidated statement of cash flows.

In February 2009, the Company entered into amendments to the three lease schedules of its master lease agreement with Carlton Financial Corporation (“Carlton”) reducing the monthly payments and extending the terms by one year on two of the lease schedules. Pursuant to the amendments, the Company may purchase Carlton’s interest in all, but not less than all, of the equipment for a purchase price equal to 15% of the original cost of the equipment. Steven J. Wagenheim, the Company’s president, chief executive officer and one of its directors, was required to personally guarantee payments to be made to Carlton under the lease financing and the Company’s board of directors agreed to compensate him for such guarantee.

Included in property and equipment are the following assets held under capital leases:

	June 30, 2009			December 30, 2008
Land	$	18,000		$	18,000
Building	57,113,974			54,991,656
Equipment and leasehold improvements	19,601,567			17,588,649
	76,733,541			72,598,305
Less accumulated depreciation	(14,285,324		)	(9,600,913		)
	$	62,448,217		$	62,997,392

Minimum future lease payments under all capital leases are as follows:

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Year ending:	Capital Leases
2009	$	5,376,766
2010	10,010,918
2011	10,410,403
2012	12,357,649
2013	9,907,804
Thereafter	87,369,274
Total minimum lease payments	135,432,814
Less amount representing interest	(68,094,375		)
Present value of net minimum lease payments	67,338,439
Less current portion	(3,547,010		)
Long-term portion of obligations	$	63,791,429

The foregoing table includes changes to lease commitments commencing after June 30, 2009 (see Note 13). Amortization expense related to the assets held under capital leases is included with depreciation expense on the Company’s statements of operations.

9. Commitments and contingencies

Rent Reductions

In February 2009, the Company entered into a master agreement with the Dunham Entities to provide rent or other cash flow reductions to the Company in the amount of $2.5 million for calendar year 2009 and $1.5 million for calendar year 2010 (the “Master Agreement”). The Master Agreement provides that the Dunham Entities will amend and restate applicable leases and subleases with the Company to reflect negotiated rent reductions. As a part of the Master Agreement, Dunham has agreed to amend its building leases with the Company that are currently treated as capital leases for accounting purposes by reducing their terms to periods which will thereafter qualify the leases to be treated as operating leases in accordance with generally accepted accounting principles. Each amended lease will be modified for a term of not less than 10 years and will provide that the tenant will have three consecutive options to extend the leases for five years per extension. As of June 30, 2009, Dunham and the Company had not reached agreements as to the amendment of any leases due primarily to the level of concessions to be assigned to each property, as well as the determination of the value of each property in a fluctuating real estate environment. As such, the Company has made no changes to the classification or accounting for these leases. Additionally, the Company agreed to reimburse Dunham for any out-of-pocket costs that Dunham incurs due to the closing of the Rogers, Arkansas location and the decision not to build on the Troy, Michigan site, reduced by net sales proceeds from the sale of any real estate or lease income associated with such sites. Reimbursement of costs related to these sites will be amortized and payable to Dunham over a 60-month period commencing January 2011, at a 6% annual interest rate. Such reimbursement includes the carrying cost of the related land until its disposal.

In consideration of the agreements Dunham provided in the Master Agreement, the Company agreed to issue to the Dunham Entities a warrant to purchase 1,000,000 shares of common stock of the Company at an exercise price of $0.264 per share, representing 110% of the closing price of the Company’s common stock on the trading date prior to the date of signing the Master Agreement. The value of these warrants of $136,495 is being amortized over a ten-year period which is the anticipated term of the underlying lease agreements once they are revised.

The Company subsequently entered into agreements with certain other of its landlords for rent reductions. Such rent reductions are deemed to be part of the above-referenced $4.0 million of rent reductions. In consideration of such rent reductions, the Company has issued five-year warrants to purchase the Company’s common stock to such landlords. Each warrant is exercisable at 110% of the closing price of the Company’s common stock on the trading date prior to the date on which the Company received the executed rent relief agreement, and is issued only to accredited investors. As of June 30, 2009, the aggregate number of shares underlying such warrants was 196,070 shares and the weighted average exercise price was $0.27 per share. The value of these warrants of $27,376 is being amortized over the underlying lease terms.

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The Company measured and recognized the value of these warrants issued to Dunham and certain of its other landlords referenced above under the fair value method. The fair value of the warrants at date of grant was estimated using the Black-Scholes option-pricing model with the following assumptions: (i) a weighted average risk-free interest rate of 1.79% - 1.99%, (ii) an expected warrant life of five years, (iii) expected stock volatility of 70.24% - 73.90% and (iv) no expected dividend yield.

Litigation

From time to time, lawsuits are threatened or filed against the Company in the ordinary course of business. Such lawsuits typically involve claims from customers, former or current employees, and others related to issues common to the restaurant industry. A number of such claims may exist at any given time. Although there can be no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operation, liquidity or financial condition of the Company.

10. Stock plans

In July 1997, the Company adopted the 1997 Stock Option Plan for employees and non-employees, including consultants to the Company, to purchase the Company’s common stock at an exercise price that equals or exceeds the fair market value on the date of grant. As of June 30, 2009, options to purchase 32,500 shares of common stock were outstanding under the plan, which expired July 28, 2007. All options outstanding under this plan are fully vested and are exercisable for ten years from the date of grant.

As of June 30, 2009, options to purchase 225,000 shares of common stock were outstanding under the 1997 Director Stock Option Plan (“DSOP”), which expired July 29, 2007. All such options are fully vested and exercisable for five years from the date of grant. On May 2, 2007, the Company’s board of directors agreed that until the adoption of any future equity plan for non-employee directors, awards of stock options for the purchase of 15,000 shares of common stock per year, exercisable for a period of ten years, should be made to each non-employee director on the anniversary of his election to the board under the 2002 Equity Incentive Plan.

In August 2002, the Company adopted the 2002 Equity Incentive Plan, now known as the Amended and Restated Equity Incentive Plan, for employees, prospective employees, officers and members of the Company’s board of directors, as well as consultants and advisors to the Company, to purchase shares of the Company’s common stock at an exercise price that equals or exceeds the fair market value on the date of grant. The number of shares authorized for issuance as of June 30, 2009 was 2,729,743, of which 474,409 shares remained available for future issuance and options to purchase 2,179,634 shares were outstanding. Although vesting schedules vary, option grants under this plan generally vest over a three or four-year period and options are exercisable for no more than ten years from the date of grant.

A summary of the status of the Company’s stock options as of June 30, 2009 is presented below:

Fixed Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at December 25, 2007	2,272,800			$	4.10	6.7 years

Granted	615,000			$	1.92	8.4 years
Exercised	(15,000		)	2.27
Forfeited	(684,666		)	3.76
Outstanding at December 30, 2008	2,188,134			$	3.60	6.2 years

Granted	686,500			0.21		9.7 years
Exercised	—			—
Forfeited	(392,500		)	3.14
Outstanding at June 30, 2009	2,482,134			$	2.74	6.9 years	$	81,799

Options exercisable at December 30, 2008	1,266,141			$	3.93	4.9 years
Options exercisable at June 30, 2009	1,126,554			$	4.00	5.0 years	$	—

Weighted-average fair value of options granted during 2009	$	0.14

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The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the closing price of the Company’s stock on June 30, 2009 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2009. As of June 30, 2009, there was approximately $232,763 of total unrecognized compensation cost related to unvested share-based compensation arrangements, of which $106,057 is expected to be recognized during the remainder of fiscal year 2009, $79,829 in fiscal year 2010, $36,525 in fiscal year 2011, $10,081 in fiscal year 2012 and $271 in fiscal year 2013.

The following table summarizes information about stock options outstanding at June 30, 2009:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options Outstanding 6/30/2009	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number of Options Exercisable 6/30/2009	Weighted Average Exercise Price

$0.00 - $1.00	746,500	9.6 years	$	0.27	—	$	—
$1.01 - $2.00	157,500	7.9 years	$	1.69	48,750	$	1.78
$2.01 - $3.00	337,500	7.0 years	$	2.31	145,833	$	2.44
$3.01 - $4.00	378,000	5.6 years	$	3.67	328,000	$	3.69
$4.01 - $5.00	517,300	5.5 years	$	4.37	442,300	$	4.39
$5.01 - $6.00	245,334	2.6 years	$	5.21	95,004	$	5.27
$6.01 - $7.00	100,000	7.8 years	$	6.20	66,667	$	6.20
Total	2,482,134	6.9 years	$	2.74	1,126,554	$	4.00

11. Common stock warrants

In September 2004, the Company entered into a securities purchase agreement with certain accredited investors for the sale of approximately $8.5 million of common stock and warrants. Under this agreement, the Company issued five-year warrants for the purchase of 1,045,844 shares of common stock at an exercise price of $5.00 per share. The Company may call for the mandatory exercise of such warrants if certain conditions are met. As part of this private placement, the Company sold to its placement agents, for $100, five-year warrants to purchase an aggregate of 130,730 shares of common stock at an exercise price of $5.00 per share. Such agreements with the investors and placement agents for this transaction contain certain anti-dilution provisions. Pursuant to these provisions, the number of shares purchasable upon exercise of these warrants and the related purchase price both required adjustment upon the issuance of warrants, at an exercise price less than the thresholds set forth in the security purchase agreement, to certain of the Company’s landlords and Harmony (see Notes 7 and 9). The exercise price of each existing warrant was multiplied by a fraction, the numerator of which was the sum of the number of shares of common stock outstanding immediately prior to the issuance of warrants to the landlords and Harmony, plus the number of shares of common stock which the offering price for such shares of common stock would purchase at the closing price of our common stock on the initial closing date of this securities purchase

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agreement, and the denominator of which was the sum of the number of shares of common stock outstanding immediately prior to such issuance plus the number of such new securities so issued. As a result of these adjustments, the number of shares purchasable under these warrants at June 30, 2009 was 1,215,469 and the exercise price was $4.84 per share. As of June 30, 2009, none of such warrants had been exercised.

In October 2005, the Company entered into a securities purchase agreement with certain accredited investors for the sale of approximately $5.34 million of common stock and warrants. Under this agreement, the Company issued five-year warrants for the purchase of 221,762 shares of common stock at an exercise price of $6.50 per share to such investors and five-year warrants for the purchase of 55,436 shares of common stock at an exercise price of $6.50 to the Company’s placement agent. Such agreements with the investors and placement agents for this transaction contain certain anti-dilution provisions. Pursuant to these provisions, the number of shares purchasable upon exercise of these warrants and the related purchase price both required adjustment upon the issuance of warrants, at an exercise price less than the thresholds set forth in the security purchase agreement, to certain of the Company’s landlords and Harmony (see Notes 7 and 9). The exercise price of each existing warrant was multiplied by a fraction, the numerator of which was the sum of the number of shares of common stock outstanding immediately prior to the issuance of warrants to the landlords and Harmony, plus the number of shares of common stock which the offering price for such shares of common stock would purchase at the closing price of our common stock on the closing date of this securities purchase agreement, and the denominator of which was the sum of the number of shares of common stock outstanding immediately prior to such issuance plus the number of such new securities so issued. As a result of these adjustments, the number of shares purchasable under these warrants at June 30, 2009 was 289,211 and the exercise price was $6.23 per share. As of June 30, 2009, none of such warrants had been exercised.

In consideration of rent reduction agreements entered into with certain of its landlords, the Company issued five-year warrants to purchase the Company’s common stock to such landlords. The aggregate number of shares underlying such warrants was 1,196,070 shares and the weighted average exercise price was $0.2648 per share. Pursuant to the provisions of such agreements, the number of shares purchasable upon exercise of these warrants and the related purchase price both required adjustment upon the issuance of warrants, at an exercise price less than the thresholds set forth in the security purchase agreement, to Harmony (see Note 7). The exercise price of each existing warrant was multiplied by a fraction, the numerator of which was the sum of the number of shares of common stock outstanding immediately prior to the issuance of warrants to Harmony, plus the number of shares of common stock which the offering price for such shares of common stock would purchase at the warrant exercise price in effect immediately prior to such issuance, and the denominator of which was the sum of the number of shares of common stock outstanding immediately prior to such issuance plus the number of such new securities so issued. As a result of these adjustments, the number of shares purchasable under these warrants at June 30, 2009 was 1,197,040 and the weighted average exercise price was $0.2646 per share. As of June 30, 2009, none of such warrants had been exercised.

Pursuant to the bridge loan agreement entered into in March 2009 with a group of accredited investors, the Company issued to the investors warrants for the purchase of an aggregate of 320,000 shares of common stock at a price of $0.25267 per share. Such warrants become exercisable September 30, 2009.

As of June 30, 2009, warrants for the purchase of an aggregate of 3,021,802 shares of common stock were outstanding and warrants to purchase an aggregate of 2,701,802 shares were exercisable. The weighted average exercise price of such warrants was $2.67 per share.

12. Retirement plan

The Company sponsors a defined contribution plan under the provisions of section 401(k) of the Internal Revenue Code. The Plan is voluntary and is provided to all employees who meet the eligibility requirements. A participant can elect to contribute up to 100% of his/her compensation subject to IRS limits. Beginning in fiscal year 2009, the Company elected to match 10% of such contributions up to 6% of the participant’s compensation. As of June 30, 2009, the Company had contributed $6,864 in aggregate under the plan. The Company expects to contribute an additional $8,200 under the plan in fiscal year 2009.

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13. Subsequent events

In August 2009, the Company entered into amended lease agreements with certain of its landlords. While the payment terms of the lease were changed in each amendment, in no case did the classification or accounting treatment of the lease change. The resulting change to future minimum lease payments are reflected in Note 9.

In August 2009, the Company entered into an agreement to terminate the lease for the facility it used as a test kitchen. The operating lease, which was to expire in October 2011, will terminate effective August 20, 2009. Pursuant to the termination agreement, the Company is required to pay rent through August 2009 plus an additional $11,064, which is equivalent to three months of lease payments.

On August 10, 2009, the Company entered into an amendment to the bridge loan agreement dated March 30, 2009 with Harmony to extend the time period for the closing of the $200,000 balance on the loan to September 30, 2009. The bridge loan provided for $1,000,000 of partially convertible debt financing to the Company. The Company has closed on $800,000 of the debt. The time period for the second closing was previously extended to the end of July 2009, as reported on the Company’s Current Report on Form 8-K filed June 4, 2009.

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

This 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 the following discussion, the words “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates” and similar expressions, as they relate to us or our management, are intended to identify such forward-looking statements. You are cautioned not to attribute undue certainty to such forward-looking statements, which are qualified in their entirety by the cautions and risks described herein. Please refer to the “Risk Factors” section of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 19, 2009, and the “Risk Factors” section of this document, for additional factors known to us that may cause actual results to vary.

Overview

We are a Modern American upscale casual restaurant chain. As of June 30, 2009, we operated 26 restaurants in 11 Midwestern states featuring on-premises breweries, substantially all of which operate under the name of Granite City Food & Brewery®. We believe our menu features high quality yet affordable family favorite menu items prepared from made-from-scratch recipes and served in generous portions. We believe that the sophisticated yet unpretentious restaurants, proprietary food and beverage products, attractive price points and high service standards combine for a great dining experience. The location of each restaurant in operation and the month and year of its opening appear in the following chart:

Unit	Location	Opened
1	St. Cloud, Minnesota	Jun-99
2	Sioux Falls, South Dakota	Dec-00
3	Fargo, North Dakota	Nov-01
4	Des Moines, Iowa	Sep-03
5	Cedar Rapids, Iowa	Nov-03
6	Davenport, Iowa	Jan-04
7	Lincoln, Nebraska	May-04
8	Maple Grove, Minnesota	Jun-04
9	East Wichita, Kansas	Jul-05
10	Eagan, Minnesota	Sep-05
11	Kansas City, Missouri	Nov-05
12	Kansas City, Kansas	Jan-06
13	Olathe, Kansas	Mar-06
14	West Wichita, Kansas	Jul-06
15	St. Louis Park, Minnesota	Sep-06
16	Omaha, Nebraska	Oct-06
17	Roseville, Minnesota	Nov-06
18	Madison, Wisconsin	Dec-06
19	Rockford, Illinois	Jul-07
20	East Peoria, Illinois	Oct-07
21	Orland Park, Illinois	Dec-07
22	St. Louis, Missouri	Jan-08
23	Ft. Wayne, Indiana	Jan-08
24	Toledo, Ohio	Feb-08
25	South Bend, Indiana	Jul-08
26	Indianapolis, Indiana	Feb-09

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In August 2008, we ceased operations at our restaurant in Rogers, Arkansas. However, we are currently bound by the terms of the 20-year net lease agreement which commenced in October 2007 under the terms specified in the development agreement with Dunham Capital Management, L.L.C. (“Dunham”).

We operate a centrally-located beer production facility in Ellsworth, Iowa which facilitates the initial stage of our patented brewing process. We believe that this brewing process improves the economics of microbrewing as it eliminates the initial stages of brewing and storage at multiple locations, thereby reducing equipment and development costs at new restaurant locations. Additionally, having a common starting point, the beer production creates consistency of taste for our product from restaurant to restaurant. The initial product produced at our beer production facility is transported by truck to the fermentation vessels at each of our restaurants where the brewing process is completed. In 2007, we were granted a patent by the United States Patent Office for this brewing process. We believe that our current beer production facility, which opened in June 2005, has the capacity to service up to 35 restaurant locations.

Our industry can be significantly affected by changes in economic conditions, discretionary spending patterns, consumer tastes, and cost fluctuations. Beginning in 2007, consumers have been under increased economic pressures and as a result, many have changed their discretionary spending patterns. Many consumers are dining out less frequently than in the past and/or have decreased the amount they spend on meals while dining out. As guest traffic decreases, lower sales result in decreased leverage that leads to declines in operating margins. To offset the negative impact of decreased leverage in a declining sales environment while protecting our guests’ dining experience, we have undertaken a series of initiatives to renegotiate the pricing of all aspects of our business, effectively reducing our cost of food, insurance, payroll processing, shipping, supplies and most recently, our property and equipment rent. We have also begun implementing marketing initiatives designed to increase brand awareness and help drive guest traffic.

In February 2009, we entered into a master agreement with Dunham, DHW Leasing, L.L.C. (“DHW”) and Dunham Equity Management, L.L.C. (collectively, the “Dunham Entities”) to provide rent or other cash flow reductions to us in the amount of $2.5 million for the calendar year 2009 and $1.5 million for calendar year 2010 (the “Master Agreement”). The Master Agreement provides that the Dunham Entities will amend and restate applicable leases and subleases to reflect negotiated rent reductions. We commenced paying reduced rent in January 2009 in anticipation of finalizing the Master Agreement, which reductions are deemed to be part of the negotiated rent reductions. As a part of the Master Agreement, Dunham has agreed to amend its leases with us that are currently treated as capital leases for accounting purposes by reducing their terms to periods which will thereafter qualify the leases to be treated as operating leases in accordance with generally accepted accounting principles. Each lease will be modified for a term of not less than 10 years and will provide that the tenant will have three consecutive options to extend the leases for five years per extension. As of June 30, 2009, we had not reached agreements with Dunham as to the amendments of any leases due primarily to the level of concessions to be assigned to each property, as well as the determination of the value of each property in a fluctuating real estate environment. As such, we have made no changes to the classification or accounting for these leases. In consideration of the agreements of Dunham provided in the Master Agreement, we issued to the Dunham Entities a warrant to purchase 1,000,000 shares of our common stock at an exercise price of $0.264 per share, representing 110% of the closing price of our common stock on the trading date prior to the date of signing the Master Agreement.

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which we received the executed rent relief agreement, and are issued only to accredited investors. As of June 30, 2009, the aggregate number of shares underlying such warrants was 196,070 shares and the weighted average exercise price was $0.27 per share.

In March 2009, we entered into a bridge loan agreement with a group of accredited investors to provide $1.0 million of partially convertible debt financing. The bridge loan is evidenced by notes bearing interest at 9.0% per annum, payable in six equal monthly installments commencing on May 1, 2010 and due in full on October 1, 2010. The notes are secured by a mortgage against the lease, and security agreements against personal property and intangibles relating to the Company’s Sioux Falls, South Dakota restaurant, including a grant of the rights to use patents, trademarks and other intangibles associated with that restaurant. The bridge loan was funded to the extent of $800,000 on March 30, 2009, with the balance of the bridge loan to be funded by the end of May 2009, pursuant to an amendment to the agreement dated April 30, 2009. We have entered into amendments with Harmony to extend the date for the balance of the funding to September 30, 2009. Up to 20% of each bridge note may be converted into common stock at a conversion price equal to $0.50 per share. At June 30, 2009, we had not met the minimum consolidated revenue required. Harmony has agreed to waive the consolidated revenue covenant requirement and agreed to defer the July 2009 interest payment until the maturity date of the loans. In addition, the Company agreed to issue to the investors warrants for the purchase of an aggregate of 400,000 shares of common stock exercisable six months after date of issuance at a price of $0.25267 per share, or 110% of the closing price of the Company’s stock on March 30, 2009. As of June 30, 2009, warrants to purchase an aggregate of 320,000 shares of common stock had been issued to such investors.

The lead investors in the transaction were Harmony Equity Income Fund, L.L.C. and Harmony Equity Income Fund II, L.L.C. (collectively, “Harmony”). The Company’s Chairman, Eugene E. McGowan, is a member of, and has a beneficial interest in, both of the Harmony funds. The Company’s Board of Directors has authorized it to borrow up to an aggregate of $3.0 million under the terms of the bridge loan agreement, which provides that the investors may, but are not obligated to, make additional loans on substantially the same terms and conditions, including a similar pledge of collateral related to either its St. Cloud, Minnesota, or Fargo, North Dakota restaurants.

We utilize a 52/53-week fiscal year ending the last Tuesday in December for financial reporting purposes. Fiscal year 2008 had 53 weeks while fiscal year 2009 will have 52 weeks. The additional week was included in the third quarter of 2008.

The thirteen weeks ended June 30, 2009 and June 24, 2008 included 338 and 325 operating weeks, respectively, which is the sum of the actual number of weeks each restaurant operated. The twenty-six weeks ended June 30, 2009 and June 24, 2008 included 670 and 635 operating weeks, respectively. Because we have opened new restaurants at various times throughout the years, 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.

Our restaurant revenue is comprised almost entirely of the sales of food and beverages. The sale of retail items typically represents less than one percent 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, the salaries and related costs of our dedicated new store opening team, rent expense incurred during the construction period and 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, which include management and staff salaries, employee benefits, travel, information systems, training, market research, professional fees, supplies and corporate rent. Depreciation and amortization includes depreciation on capital expenditures at the restaurant and corporate levels and amortization of intangibles that do not have indefinite lives. Interest expense represents the cost of interest expense on debt and capital leases net of interest income on invested assets.

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Results of operations as a percentage of sales

The following table sets forth results of our operations expressed as a percentage of sales for the thirteen and twenty-six weeks ended June 30, 2009 and June 24, 2008.

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	June 30,		June 24,		June 30,		June 24,
	2009		2008		2009		2008

Restaurant revenues	100.0	%	100.0	%	100.0	%	100.0	%

Cost of sales:
Food, beverage and retail	27.4		30.3		27.3		30.8
Labor	34.8		37.0		35.0		38.0
Direct restaurant operating	14.3		14.1		14.6		14.4
Occupancy	7.1		6.4		7.2		6.4
Total cost of sales	83.6		87.9		84.1		89.7

Pre-opening	0.1		1.0		0.5		1.7
General and administrative	11.0		11.1		10.3		11.1
Depreciation and amortization	7.8		6.4		7.9		6.5
Exit or disposal activities	0.8		—		1.4		—
Other	0.2		0.1		0.1		0.1

Operating loss	(3.5	)	(6.4	)	(4.3	)	(9.1	)

Interest:
Income	0.0		0.0		0.0		0.1
Expense	(7.9	)	(6.6	)	(7.8	)	(6.4	)
Net interest expense	(7.9	)	(6.5	)	(7.8	)	(6.3	)

Net loss	(11.4	)%	(13.0	)%	(12.1	)%	(15.4	)%

Certain percentage amounts do not sum due to rounding.

Critical Accounting Policies

Our critical accounting policies are those that require significant judgment. There have been no material changes to the critical accounting policies previously reported in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2009.

Results of operations for the thirteen weeks ended June 30, 2009 and June 24, 2008

Revenue

We generated $22,101,365 and $25,098,840 of revenue during the second quarter of 2009 and 2008, respectively. The decrease in revenue of 11.9% for the second quarter of 2009 compared to 2008 was primarily the result of a decrease in guest traffic of approximately 7.5%. The second quarter of 2009 included 338 restaurant operating weeks while the same period in 2008 included 325 operating weeks. Comparable restaurant revenue, which included restaurants in operation over 18 months, decreased 13.2% from the second quarter of 2008 to the second quarter of 2009 partially due to a decrease in guest traffic of approximately 8.6%, which we believe was caused primarily by the macroeconomic factors affecting the restaurant industry in general. Average

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weekly revenue per comparable restaurant decreased $10,500 from $79,730 in the second quarter of 2008 to $69,230 in the second quarter of 2009.

During the first half of fiscal years 2009 and 2008, we generated revenue of $43,526,066 and $49,118,323, respectively. The 11.4% decrease in first half revenue was primarily the result of a decrease in guest traffic of approximately 9.3%. The first half of 2009 included 670 restaurant operating weeks while the same period in 2008 included 635 operating weeks. Comparable restaurant revenue, which included restaurants in operation over 18 months, decreased 12.7% from the first half of 2008 to the first half of 2009 primarily due to a decrease in guest traffic of approximately 9.3%. Average weekly revenue per comparable restaurant decreased $10,006 from $78,704 in the first half of 2008 to $68,698 in the first half of 2009.

We expect that restaurant revenue will vary from quarter to quarter. We anticipate continued seasonal fluctuations in restaurant revenue due in part to increased outdoor seating and generally favorable weather conditions at many of our locations during the summer months. Due to the honeymoon effect that periodically occurs with the opening of a restaurant, we expect the timing of new restaurant openings to cause fluctuations in restaurant revenue. Additionally, other factors outside of our control, such as inclement weather, timing of holidays, consumer confidence in the economy and changes in consumer preferences may affect our future revenue. We believe that the decreased consumer confidence that has negatively impacted the restaurant industry as a whole beginning in 2007 has continued through at least the second quarter of 2009. Overall industry trends have been slightly worse in the second quarter of 2009 compared to 2008.

Restaurant costs

Food and beverage

Our food and beverage costs, as a percentage of revenue, decreased 2.9% to 27.4% in the second quarter of 2009 from 30.3% in the second quarter of 2008. Such costs decreased 3.5% as a percentage of revenue to 27.3% in the first half of 2009 from 30.8% in the first half of 2008. Pricing negotiations with our suppliers, a menu price increase of approximately 4.0% in March 2008 and improved oversight of inventory and kitchen management contributed to this decrease.

Due to the number of restaurants we now operate throughout the Midwest, we were able to contract for many of the food commodities we use in our restaurants for periods up to one year. Based on several new contracts entered into in the later part of 2008, we believe we will be able to maintain or further reduce our food and beverage costs as a percentage of revenue for 2009 by reducing our exposure to commodity price increases. We do, however, expect that our food and beverage costs will continue to vary going forward due to numerous variables, including seasonal changes in food and beverage costs for which we do not have contracted pricing and guest preferences. We periodically create new menu offerings and introduce new craft brewed 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 and value to our guests. Our varieties of craft brewed beer, which we believe 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. We expect food and beverage costs at our newer restaurants to be higher initially due to inefficiencies that are part of the start-up process of a new restaurant. Additionally, with future expansion, we believe our brewing process will allow us to keep our high quality beer products intact while leveraging our fixed production costs, thereby enhancing overall profitability.

Labor

Labor expense consists of restaurant management salaries, hourly staff payroll costs, other payroll-related items including management bonuses, and non-cash stock-based compensation expense. Our experience to date has been that staff labor costs associated with a newly opened restaurant, for approximately its first four to six months of operation, are greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenue.

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Our labor costs, as a percentage of revenue, decreased 2.2% to 34.8% in the second quarter of 2009 from 37.0% in the second quarter of 2008. Such costs decreased 3.0% as a percentage of revenue to 35.0% in the first half of 2009 to 38.0% in the first half of 2008. As our new restaurants began to stabilize and we trained new managers on a number of operational metrics and initiatives focused on manager accountability and internal development of restaurant-level staff, we were able to reduce labor costs as a percentage of revenue.

We expect that labor costs will vary as minimum wage laws, local labor laws and practices, as well as unemployment rates vary from state to state, as will hiring and training expenses. We believe that retaining good employees and more experienced staff ensures high quality guest service and may reduce hiring and training costs.

Direct restaurant operating

Operating supplies, repairs and maintenance, utilities, promotions and restaurant-level administrative expense represent the majority of our direct restaurant operating expense, a substantial portion of which is fixed or indirectly variable. Our direct restaurant operating expense as a percentage of revenue increased 0.2% to 14.3% in the second quarter of 2009 from 14.1% in the second quarter of 2008. Such costs increased 0.2% as a percentage of revenue to 14.6% in the first half of 2009 from 14.4% in the first half of 2008. While such increases as a percentage of revenue were due in part to a smaller revenue base, increases in repair and maintenance, credit card fees and marketing were offset, in part, by the decrease in utilities and the reduced cost of certain supplies.

We continue to seek ways to reduce our direct operating costs going forward by continuing to renegotiate pricing on all aspects of these costs. While we started seeing the effects of previously renegotiated operating items in late 2008, we believe we will see the full benefit of the resulting cost reductions throughout 2009.

Occupancy

Our occupancy costs, which include both fixed and variable portions of rent, common area maintenance charges, property insurance and property taxes, increased 0.7% as a percentage of revenue to 7.1% in the second quarter of 2009 from 6.4% in the second quarter of 2008. Such costs increased 0.8% as a percentage of revenue to 7.2% in the first half of 2009 from 6.4% in the first half of 2008, due primarily to a smaller revenue base. While property and casualty insurance decreased slightly, it was offset by an increase in common area maintenance expense and property tax. Included in our rent expense is the difference between our current rent payments and straight-line rent expense over the initial lease term. As such, occupancy costs included non-cash rent expense of $294,241 and $128,513 in the first half of 2009 and 2008, respectively. The $165,728 increase in non-cash rent expense was due primarily to the rent reductions provided by Dunham and certain of our other landlords. While our occupancy cost is expected to continue to change as a result of the Master Agreement entered into with the Dunham Entities in 2009, the overall effect of these changes is still evolving as the parties are assessing restaurant-by-restaurant lease reductions as well as changes in the terms of the leases.

Pre-opening

Pre-opening costs, which are expensed as incurred, consist of expenses related to hiring and training the initial restaurant workforce, wages and expenses of our dedicated new restaurant opening teams, rental costs incurred during the construction period and certain other direct costs associated with opening new restaurants. Pre-opening costs, excluding construction-period rent, are primarily incurred in the month of, and two months prior to, restaurant opening.

Pre-opening costs decreased $618,812 to $211,262 in the first half of 2009 from $830,074 in the first half of 2008. Included in such expense in the first half of 2009 were expenses related to the opening of our restaurant in Indianapolis, Indiana. Pre-opening expenses incurred in the first half of 2008 were related primarily to the restaurants we opened in St. Louis, Missouri; Ft. Wayne, Indiana; and Toledo, Ohio.

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General and administrative

General and administrative expense includes all salaries and benefits, including non-cash stock-based compensation, associated with our corporate staff that is responsible for overall restaurant quality, future expansion into new locations, financial controls and reporting, restaurant management recruiting, management training, excess capacity costs related to our beer production facility, and salaries and expenses of our new restaurant opening team when it is not dedicated to a particular restaurant opening. Other general and administrative expense includes advertising, professional fees, investor relations, office administration, centralized accounting system costs and travel by our corporate management.

General and administrative expense decreased $349,623 to $2,430,751 in the second quarter of 2009 from $2,780,374 in the second quarter of 2008. Such expenses decreased $976,276 to $4,495,067 in the first half of 2009 from $5,471,343 in the first half of 2008. As a percentage of revenue, general and administrative expenses decreased 0.1% in the second quarter of 2009 and 0.8% in the first half of 2009 over the respective periods in 2008. The primary sources of such decreases were expenses related to recruiting, relocation, training and consulting costs, compensation and travel expense. Such decreases were offset in part by increased consulting and professional fees as well as marketing expense. Non-cash stock based compensation included in general and administrative expense was $81,343 and $222,256 in the first half of 2009 and 2008, respectively. We incurred approximately $479,000 and $501,000 in restructuring costs and legal costs related to restructuring during the second quarter and first half of 2009, respectively. If we successfully restructure and obtain adequate cash from operations and/or financing, we believe we can avoid curtailing or reducing the scale of our operations.

We continue to seek ways to reduce our general and administrative expenses by continuing to renegotiate pricing with our vendors. While we started seeing the effects of previously renegotiated general and administrative costs, we will closely monitor and attempt to further reduce these expenses while seeking to preserve an infrastructure that remains suitable for our current operations and future expansion. Although we may need to recruit additional personnel to provide continued oversight of operations, we expect our turnover ratios for 2009 to return to levels more consistent with the industry, allowing us to reduce our costs. To the extent our turnover increases above our expectations, additional costs above our budgeted figures could be incurred in our recruiting and training expenses. We believe our general and administrative expense and our general and administrative expense as a percentage of revenue will decrease throughout 2009.

Depreciation and amortization

Depreciation and amortization expense increased $114,728 to $1,728,140 in the second quarter of 2009 from $1,613,412 in the second quarter of 2008. Such expense increased $259,660 to $3,434,717 in the first half of 2009 from $3,175,057 in the first half of 2008, due principally to the additional depreciation related to new restaurants. As a percentage of revenue, depreciation expense increased 1.4% to 7.9% in the first half of 2009 from 6.5% in the first half of 2008, due in part to a smaller revenue base.

Exit or disposal activities

In August 2008, we closed our Rogers, Arkansas restaurant. Since opening in October 2007, the restaurant failed to generate positive cash flow and had approximately $1.4 million of net loss. We believe the closure of this restaurant will allow management to focus its capital and personnel resources on our other restaurants in order to increase future operating efficiencies and cash flow. We are working to find a replacement tenant for the location, for which we are bound by a 20-year net lease. Costs incurred in the second quarter and first half of 2009 in connection with this closure include costs to maintain the facility of approximately $136,431 and $269,427, respectively. We will incur ongoing costs such as utilities, landscape and maintenance and general liability insurance until we are able to find a replacement tenant. In accordance with the requirements of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, we recorded a non-cash lease termination liability of $852,146 based on management’s estimate of the fair value of these obligations. This required management to estimate the present value of the future minimum lease obligations offset by the estimated sublease rentals that could be reasonably obtained for the property. During the first half of 2009, amortization of this sublease liability offset exit or disposal activities expense by $9,887. All costs related to the

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closing of the Rogers restaurant, including lease payments, are reflected in our statements of operations as “exit or disposal activities”. As of June 30, 2009, our annual lease payments for the Roger’s site were $405,000 and our ongoing costs to maintain the property were approximately $10,500 per month. As of June 30, 2009, our undiscounted cash payments under the terms of this 20-year lease were approximately $7.5 million.

As part of the Master Agreement we entered into with the Dunham Entities in February 2009, we agreed to reimburse Dunham for any out-of-pocket expenses incurred, reduced by net proceeds from the sale of the real estate or lease income associated with the Rogers, Arkansas site and the site at Troy, Michigan upon which we decided not build a restaurant. We have concluded that as of June 30, 2009, it is probable we will need to reimburse Dunham approximately $342,000 of such costs related to the Troy, Michigan site and have included such costs in “exit or disposal activities” on our statement of operations for the first quarter of 2009 pursuant to SFAS No. 5, Accounting for Contingencies. As of June 30, 2009, the carrying cost of the land approximated $15,500 per month. Reimbursement of costs related to these sites, including the carrying cost of the related land, will be amortized and payable to Dunham over a 60-month period commencing January 2011, at a 6% annual interest rate. The actual amount due Dunham could fluctuate due to changes in the economy.

Interest

Net interest expense consists of interest expense on capital leases and long-term debt, net of interest earned from cash on hand. Interest expense increased $100,356 to $1,751,482 in the second quarter of 2009 from $1,651,126 in the second quarter of 2008. Such expense increased $242,487 to $3,382,440 in the first half of 2009 from $3,139,953 in the first half of 2008 due to additional capital leases as a result of new restaurants. Interest income decreased $9,928 in the second quarter of 2009 and $23,638 in the first half of 2009 over the respective periods in 2008 due to the reduction of cash on hand.

Liquidity and capital resources

As of June 30, 2009, we had $1,934,999 of cash and a working capital deficit of $9,568,626 compared to $2,652,411 of cash and a working capital deficit of $7,809,664 at December 30, 2008. In June 2009, we announced the hiring of MorrisAnderson in an effort to restructure our debt and leases. Since that time, we have been maintaining sufficient cash for operations by reducing or withholding payments to our landlords during our negotiations with the landlords and satisfying such obligations as necessary to avoid disruption of restaurant operations. If the restructuring effort is not successful or sufficient to restore our debt to a level necessary to allow us to be cash flow positive at our current level of revenue, we will be required to seek further funding for operations during 2009.

During the twenty-six weeks ended June 30, 2009, we obtained proceeds of $1,800,000 pursuant to a sales-leaseback capital lease agreement and a loan agreement and made payments aggregating $1,261,856 on our debt and capital lease obligations. We used $647,283 of net cash in operating activities and $608,273 of net cash to purchase equipment and other assets.

During the twenty-six weeks ended June 24, 2008, we used $3,766,418 of net cash in operating activities and $2,649,239 of net cash to purchase equipment and other assets primarily related to the restaurants we opened in the first quarter of 2008 and our restaurant in South Bend, Indiana. We made payments aggregating $929,105 on our debt and capital lease obligations, received $4.0 million in proceeds from capital lease obligations and received $34,486 of net cash through the exercise of stock options. During the first and second quarters of 2008, our cash used in operations was $2,722,787 and $1,043,631, respectively. The decrease in cash used in operations was primarily the result of the reduction of costs of sales as a percentage of revenue to 87.9% in the second quarter of 2008 compared to 91.6% in the first quarter of 2008.

In February 2009, we entered into a Master Agreement with the Dunham Entities to provide rent or other cash flow reductions to us in the amount of $2.5 million for the calendar year 2009 and $1.5 million for calendar year 2010. The Master Agreement provides that the Dunham Entities will amend and restate applicable leases and subleases to reflect negotiated rent reductions. As a part of the Master Agreement, Dunham has agreed to amend its leases with us that are currently treated as capital leases for accounting purposes by reducing their terms

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to periods which will thereafter qualify the leases to be treated as operating leases in accordance with generally accepted accounting principles. Each lease will be modified for a term of not less than 10 years and will provide that the tenant will have three consecutive options to extend the leases for five years per extension. As of June 30, 2009, we had not reached agreements with Dunham as to the amendments of any leases due primarily to the level of concessions to be assigned to each property, as well as the determination of the value of each property in a fluctuating real estate environment. As such, we have not made changes to the classification or accounting for these leases. In consideration of the agreements of Dunham provided in the Master Agreement, we agreed to issue to the Dunham Entities a warrant to purchase 1,000,000 shares of our common stock at an exercise price of $0.264 per share, representing 110% of the closing price of our common stock on the trading date prior to the date of signing the Master Agreement.

Subsequently, we entered into agreements with certain of our other landlords for rent reductions. Such rent reductions are deemed to be part of the above-referenced $4.0 million in rent reductions. In consideration of such rent reductions, we have issued five-year warrants to purchase our common stock to such landlords. Each warrant is exercisable at 110% of the closing price of our common stock on the trading date prior to the date on which we received the executed rent relief agreement, and are issued only to accredited investors. As of June 30, 2009, the aggregate number of shares underlying such warrants was 196,070 shares and the weighted average exercise price was $0.27 per share.

During the first quarter of 2009, we financed the equipment at two of our restaurants, aggregating approximately $2.0 million, under the terms and conditions of the equipment lease commitment we entered into with DHW in December 2007. Of such financing, $1.0 million was the result of a sale-leaseback transaction with DHW for which we received cash proceeds

In March 2009, we entered into a bridge loan agreement with a group of accredited investors to provide $1.0 million of partially convertible debt financing. The bridge loan is evidenced by notes bearing interest at 9.0% per annum, payable in six equal monthly installments commencing on May 1, 2010 and due in full on October 1, 2010. The notes are secured by a mortgage against the lease, and security agreements against personal property and intangibles relating to our Sioux Falls, South Dakota restaurant, including a grant of the rights to use patents, trademarks and other intangibles associated with that restaurant. The bridge loan was funded to the extent of $800,000 on March 30, 2009, with the balance of the bridge loan to be funded by the end of May 2009, pursuant to an amendment to the agreement dated April 30, 2009. We have entered into amendments with Harmony to extend the date for the balance of the funding to September 30, 2009. Up to 20% of each bridge note may be converted into common stock at a conversion price equal to $0.50 per share. At June 30, 2009, we had not met the minimum consolidated revenue required. Harmony has agreed to waive the consolidated revenue covenant requirement and agreed to defer the July 2009 interest payment until the maturity date of the loans. In addition, we agreed to issue to the investors warrants for the purchase of an aggregate of 400,000 shares of common stock exercisable six months after date of issuance at a price of $0.25267 per share, or 110% of the closing price of our stock on March 30, 2009. As of June 30, 2009, warrants to purchase an aggregate of 320,000 shares of common stock had been issued to such investors.

The lead investors in the transaction were Harmony Equity Income Fund, L.L.C. and Harmony Equity Income Fund II, L.L.C. Our Chairman, Eugene E. McGowan, is a member of, and has a beneficial interest in, both of the Harmony funds. Our Board of Directors has authorized us to borrow up to an aggregate of $3.0 million under the terms of the bridge loan agreement, which provides that the investors may, but are not obligated to, make additional loans on substantially the same terms and conditions, including a similar pledge of collateral related to either our St. Cloud, Minnesota, or Fargo, North Dakota restaurants.

During the first six months of operations in 2009, we did not meet our internal budget primarily due to declining revenue. In June 2009, we announced the hiring of MorrisAnderson in an effort to restructure our debt and leases. If this effort is not successful or sufficient to restore our debt to a level necessary to allow us to be cash flow positive at our current level of revenue, we will be required to seek further funding for operations during 2009. We would be required to raise such funds through the incurrence of indebtedness or public or private sales of equity securities, which may be dilutive to shareholders. The amount of any such required

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funding would depend upon sales trends and our ability to generate positive cash flow. We anticipate that we will need to raise additional funds for future expansion depending upon the level of expansion determined to be appropriate in later years as compared to our the cash flow. If we are unable to restructure our debt and leases, if cash flow from operations upon a successful restructuring and other sources of liquidity are insufficient to fund expected capital needs, or if our needs are greater than anticipated, our business and results of operations could be materially and adversely affected.

Our ability to fund our operations in future periods will depend upon our future operating performance, and more broadly, achieving budgeted revenue and on the availability of equity and debt financing, all of which will be affected by prevailing economic conditions in our industry and financial, business and other factors, which may be beyond our control. We cannot assure you that we will obtain financing on favorable terms or at all. If we elect to raise additional capital through the issuance and sale of equity securities, the sales may be at prices below the market price of our stock, and our shareholders may suffer significant dilution. Debt financing, if available, may involve significant cash payment obligations, covenants and financial ratios that restrict our ability to operate and grow our business, and would cause us to incur additional interest expense and financing costs.

Commitments

Capital Lease:

As of June 30, 2009, we had 24 capital lease agreements related to our restaurant properties. Of these leases, one expires in 2020, two in 2023, four in 2024, three in 2025, four in 2026, seven in 2027, two in 2028 and one in 2029, all with renewable options for additional periods. Twenty-two of these lease agreements originated with Dunham. Under certain of the leases, we may be required to pay additional contingent rent based upon restaurant sales. At the inception of each of these leases, we evaluated the fair value of the land and building separately pursuant to the guidance in SFAS No. 13, Accounting for Leases. The land portion of these leases is classified as an operating lease while the building portion of these leases is classified as a capital lease because its present value was greater than 90% of the estimated fair value at the beginning of the lease and/or the lease term represents 75% or more of the expected life of the property. In August 2009, we entered into amended lease agreements with certain of our landlords. While the payment terms of the lease were changed in each amendment, in no case did the classification or accounting treatment of the lease change. The resulting changes to future minimum lease payments are reflected in our summary of contractual obligations below.

In December 2004, we entered into a land and building lease agreement for our beer production facility. This ten-year lease, which commenced February 1, 2005, allows us to purchase the facility at any time for $1.00 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 $1.00. As such, the lease is classified as a capital lease.

In August 2006, we entered into a master lease agreement with Carlton Financial Corporation (“Carlton”) pursuant to which we could “finance lease” up to $3.0 million of equipment purchases for three restaurant locations. As of March 31, 2009, we had entered into three lease schedules and amendments to this master lease, pursuant to which we began leasing equipment for an initial lease term ranging from 36 to 39 months. The value of the equipment financed at each of the three locations is approximately $1.0 million and the annual interest rate on each ranges from 12.9% to 19.6% annually. We have provided Carlton with refundable security deposits aggregating $251,165 as well as a security interest in certain other equipment. In February 2009, these lease schedules were amended to extend the terms by one year and reduce the monthly payments related to two of the lease schedules. At the end of each initial lease term, we may, under the amended lease schedules, purchase Carlton’s interest in all, but not less than all, of the equipment for a purchase price equal to 15% of the original cost of the equipment. Steven J. Wagenheim, our president, chief executive officer and one of our directors, was required to personally guarantee payments to be made to Carlton under the lease financing and our board of directors agreed to compensate him for such guarantee. The amount of annual compensation is 3% of the balance of such leases and is calculated and accrued based on the weighted average daily balance of the leases at the end of each monthly accounting period.

As of June 30, 2009, DHW had purchased and leased to us equipment costing $16.0 million under the Equipment Lease we entered into with DHW, relating to the lease of furniture, fixtures and equipment for our

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restaurants. Under the terms of the Equipment Lease Commitment, each five-year lease with DHW is for equipment costing approximately $1.0 million per restaurant and the annual interest rate on each lease ranges from 10.3% to 12.3%. Payments due DHW have an annual interest rate equal to the DHW bank base rate plus 4.8%. Principal payments on the amounts borrowed depend upon the repayment schedule specified by the banks that have provided the financing commitments to DHW. We have the option to purchase the leased equipment for $1.00 upon payment in full of all rent payments due under each lease. While Mr. Wagenheim owns a 20% membership interest in DHW and has agreed to personally guarantee 20% of DHW’s indebtedness to its lenders, he will not receive a guarantee fee or other payment in connection with this DHW financing.

In June 2007, we entered into a lease for an energy optimization system at our Maple Grove, Minnesota restaurant for approximately $30,000. This five-year lease commenced June 28, 2007, carries an annual interest rate of approximately 11.9% and contains a bargain purchase option.

Operating Lease:

The land portions of the 24 property leases referenced above, 22 lease agreements of which originated with Dunham, are classified as operating leases because the fair value of the land was 25% or more of the leased property at the inception of each lease. All scheduled rent increases for the land during the initial term of each lease are recognized on a straight-line basis. In addition to such property leases, we have obligations under the following operating leases:

In January 2001, we entered into a 20-year operating lease for the land upon which we built our Fargo, North Dakota restaurant. Under the lease terms, we are obligated to annual rent of $72,000 plus contingent rent based upon restaurant sales.

In August 2005, we entered into a 38-month lease agreement for office space for our corporate offices. The lease commenced October 1, 2005. In November 2007, we entered into an amendment to such lease to include additional space commencing December 1, 2007. Pursuant to the amended lease, which expires in November 2011, annual rent is $96,613 with scheduled annual increases throughout the term of the lease. Such scheduled rent increases are recognized on a straight-line basis over the term of the lease.

In March 2006, we entered into a lease agreement for the land and building for our St. Louis Park, Minnesota restaurant. Rental payments for this lease are $148,625 annually. This operating lease expires in 2016 with renewal options for additional periods.

In August 2008, we ceased operations at our restaurant in Rogers, Arkansas. However, we are currently bound by the terms of the 20-year net lease agreement entered into in 2007 under the terms specified in the development agreement with Dunham. Pursuant to the Master Agreement with the Dunham Entities described above, we will reimburse Dunham for any out-of-pocket expenses incurred less net proceeds from the sale of the real estate or lease income associated with this site. The building portion of this lease is classified as a capital lease, while the land portion is classified as an operating lease (see Notes 3 and 9 to our condensed consolidated financial statements).

In August 2009, we entered into an agreement to terminate the lease for a facility in Minneapolis, Minnesota which we used as a test kitchen. This operating lease, which was to expire in October 2011, will terminate effective August 20, 2009. Pursuant to the termination agreement, we are required to pay rent through August 2009 plus an additional $11,064, which is equivalent to three months of lease payments.

Personal Guaranties and Guarantee Fees:

One of our directors and one former director have personally guaranteed certain of our leases and loan agreements. Our board of directors has agreed to compensate Steven J. Wagenheim, our president, chief executive officer and one of our directors, for his personal guaranties of equipment loans entered into in August 2003, January 2004 and August 2006. The amount of annual compensation for each of these guarantees is 3% of the balance of the obligation and is calculated and accrued based on the weighted average daily balance of the

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obligation at the end of each monthly accounting period. During the first half of 2009 and 2008, we recorded $33,576 and $49,731 of such compensation in general and administrative expense, respectively. We paid no such compensation in the first half of 2009 and paid $30,000 of such compensation in the first half of 2008.

In December 2007, we entered into an Equipment Lease Commitment and Master Equipment Lease with DHW, relating to the lease of furniture, fixtures and equipment for current and future restaurants. While Mr. Wagenheim owns a 20% membership interest in DHW and has agreed to personally guarantee 20% of DHW’s indebtedness to its lenders, his participation in the income and profits of DHW may not exceed 3% of the average principal balance of the amount guarantied for the term of the guarantied debt. Furthermore, Mr. Wagenheim will not receive a guarantee fee or other payment from our company in connection with the equipment lease financing from DHW.

Employment Agreements:

In June 2005, we entered into a three-year employment agreement with Steven J. Wagenheim, our president and chief executive officer, who also is one of our directors. In April 2007, we amended the compensatory arrangements under the agreement to provide for an annual base salary of $300,000, commencing April 1, 2007. Mr. Wagenheim’s annual non-equity incentive compensation ranges from $0 to $197,400 based on performance. In addition to annual compensation terms and other provisions, the agreement includes change in control provisions that would entitle Mr. Wagenheim to receive severance pay equal to 18 months of salary if there is a change in control of our company and his employment terminates. Mr. Wagenheim has agreed to certain nondisclosure provisions during the term of his employment and any time thereafter, and certain noncompetition and nonrecruitment provisions during the term of his employment and for a period of one year thereafter. Our company and Mr. Wagenheim have agreed to continue operating under the terms of this agreement, which was amended in December 2008 to comply with the requirements of Section 409A of the Internal Revenue Code, until such time as a new agreement becomes effective.

In November 2007, we entered into an employment agreement with James G. Gilbertson providing for his employment as our chief financial officer on an at-will basis at an annual base salary of $225,000. He is entitled to participate in performance-based cash bonus or equity award plans for senior executives based upon goals established by our board or compensation committee after reasonable consultation with Mr. Gilbertson. He may be eligible to receive a bonus of up to 50% of his base salary. We also granted to Mr. Gilbertson a stock option for the purchase of 175,000 shares of common stock, vesting over a two-year period, upon the commencement of his employment. The employment agreement provides for provisions for termination with and without cause by us and for good reason by Mr. Gilbertson and for the payment of a severance payment equal to 12 months of base salary upon termination of employment resulting from a change of control of our company, or if Mr. Gilbertson is terminated without cause. The employment agreement contains other customary terms and conditions. Mr. Gilbertson’s employment agreement also was amended in December 2008 to comply with the requirements of Section 409A of the Internal Revenue Code.

In December 2008, we entered into an employment and severance agreement with Darius H. Gilanfar providing for his continued employment as Chief Operating Officer on an at-will basis at an annual base salary of $202,860. He also is entitled to participate in employee benefit plans, policies, programs, perquisites and arrangements that are provided generally to similarly situated executive employees of our company. The employment agreement provides for provisions for termination with and without cause by us and for good reason by Mr. Gilanfar and for the payment of a severance payment equal to 12 months of base salary upon termination of employment resulting from a change of control of our company, or if Mr. Gilanfar is terminated without cause. In addition to the severance payment, we would pay Mr. Gilanfar a pro-rated bonus due him pursuant to any bonus plan or arrangement in which he participates at the time of the termination of his employment. Such bonus would be reduced by the amount of cash severance benefits to which Mr. Gilanfar may be entitled pursuant to any other cash severance plan, agreement, policy or program. In addition, Mr. Gilanfar has agreed to certain nondisclosure provisions during the term of his employment and any time thereafter, and certain non-competition and non-recruitment provisions during the term of his employment and for a period of 12 months thereafter.

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Development Agreement:

In April 2008, we entered into a development agreement with United Properties for the development of up to 22 restaurants to be built between 2009 and 2012. United Properties will be responsible for all costs related to the land and building of each restaurant. The development agreement provides for a cooperative process between United Properties and our management for the selection of restaurant sites and the development of restaurants on those sites and scheduling for the development and construction of each restaurant once a location is approved. The annual lease rate for fee-simple land and building developments will be 9.5% and we will have the right of first offer to purchase these restaurants. Additionally, in the event United Properties sells one of the buildings that it develops for us at an amount in excess of the threshold agreed to by the parties in the agreement, then we will share in the profits of that sale. We assume no liability in the event United Properties sells a building at a loss. 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, however, use another developer if United Properties declines to build a particular restaurant. In addition, we have also agreed to refrain from developing any new restaurants in the remainder of 2009 without the consent of the Dunham Entities (which will not be unreasonably delayed or withheld).

Off- balance sheet arrangements:

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

Summary of contractual obligations:

The following table summarizes our obligations under contractual agreements and the time frame within which payments on such obligations are due. This table includes changes to lease commitments commencing after June 30, 2009 (see Note 13). This table does not include amounts related to contingent rent as such future amounts are not determinable. In addition, whether we would incur any additional expense on our employment agreements depends upon the existence of a change in control of the company or other unforeseeable events. Therefore, neither contingent rent nor severance expense has been included in the following table.

	Payments due by period
Contractual Obligations	Total		Fiscal Year 2009		Fiscal Years 2010-2011		Fiscal Years 2012-2013		Fiscal Years Thereafter
Long-term debt, principal	$	2,600,186	$	160,520	$	2,201,600	$	8,880	$	229,186
Interest on long-term debt	644,259		137,017		314,895		37,429		154,919
Capital lease obligations, including interest	135,432,814		5,376,766		20,421,321		22,265,453		87,369,274
Operating lease obligations, including interest	63,979,836		1,469,228		6,856,801		7,397,313		48,256,494
Loan guarantee	162,713		124,726		31,301		6,686		—
Total obligations	$	202,819,808	$	7,268,257	$	29,825,917	$	29,715,761	$	136,009,873

Certain amounts do not sum due to rounding.

During the first six months of operations in 2009, we did not meet our internal budget primarily due to declining revenue. If our effort to restructure our debt is not successful or sufficient to restore our debt to a level necessary to allow us to be cash flow positive at our current level of revenue, we will require further funding for operations during 2009.

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Recent accounting pronouncements:

See the “Recent accounting pronouncements” section of Note 1 to our condensed consolidated financial statements for a summary of recent accounting standards.

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 markets.

Inflation

The primary inflationary factors affecting our operations are food, supplies and labor costs. A large percentage of our restaurant personnel is 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.

ITEM 3 Quantitative and Qualitative 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 rates:

Pursuant to the terms of our capital leases and long-term debt, we will have balloon payments due over five years beginning in 2010. If it becomes necessary to refinance such balloon balances, 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 and other commodities we use in our operations are subject to price volatility due to market supply and demand factors outside of our control. Fluctuations in commodity prices and/or long-term changes could have an adverse effect on us. These commodities are generally purchased based upon market prices established with vendors. To manage this risk in part, we have entered into fixed price purchase commitments, with terms typically up to one year, for many of our commodity requirements. We have entered into contracts through 2013 with certain suppliers of raw materials (primarily hops) for minimum purchases both in terms of quantity and in pricing. As of June 30, 2009, our future obligations under such contracts aggregated approximately $1.3 million.

Although a large national distributor is our primary supplier of food, substantially all of our food and supplies 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 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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ITEM 4 Controls and Procedures

Evaluation of disclosure controls and procedures

We maintain a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of June 30, 2009, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1 Legal Proceedings

None.

ITEM 1A Risk Factors

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2008, filed with the Securities and Exchange Commission on March 19, 2009, with the exception of the following:

Our strategy of negotiating with our lessors to reduce or restructure rents under current leases may adversely affect our relationships with these lessors, could result in the cancellation of leases, and subject us to damages, which could materially adversely affect our business. Since January 2009, we have engaged in discussions with our lessors in an effort to negotiate reduced rents and restructure leases to address the effects of the current economic conditions, which have resulted in lower revenues for our company and in the casual dining industry nationwide. We have paid reduced rents in many cases as we continue to discuss new, reduced rent structures. While payment of reduced rents is a short-term strategy that has produced some positive discussions and some agreements with lessors, we risk potential loss of restaurant locations, many of which are profitable to us on an operating unit level, if we are served with default notices and do not cure the related default(s). We risk losing profitable locations if our cash flow does not permit us to cure defaults and we could be subject to damages in favor of lessors who may prevail in lawsuits following lease cancellations. The amount of damages, if any, to which we could be exposed is uncertain and would depend upon provisions of leases and whether lessors are able to lease any former restaurant locations. The loss of profitable locations and the incurrence of any related damages could materially adversely affect our business.

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ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3 Defaults upon Senior Securities

None.

ITEM 4 Submission of Matters to a Vote of Security Holders

Our 2009 annual meeting of shareholders was held on June 23, 2009. Two proposals were submitted for shareholder approval, which passed with voting results as follows:

(1) Election of Directors:

	FOR	WITHHOLD
Steven J. Wagenheim	10,842,901	1,740,400
Arthur E. Pew III	10,773,432	1,809,869
James G. Gilbertson	10,809,296	1,774,005
Bruce H. Senske	10,862,997	1,720,304
Eugene E. McGowan	10,862,590	1,720,711

(2) To ratify the appointment of Schechter, Dokken, Kanter, Andrews & Selcer Ltd. as our independent registered public accounting firm for the fiscal year ending December 29, 2009.

FOR		AGAINST		ABSTAIN		BROKER NON-VOTE
11,766,062		806,948		10,291		0

ITEM 5 Other Information

Item 1.01. Entry into a Material Definitive Agreement

On August 10, 2009, Granite City Food & Brewery Ltd. (the “Company”) entered into an amendment to the bridge loan agreement dated March 30, 2009 with the investors therein (the “Amendment No. 4”) to extend the time period for the closing of the $200,000 balance on the loan to September 30, 2009. The bridge loan provided for $1,000,000 of partially convertible debt financing to the Company, and was described in the Company’s Current Report on Form 8-K filed April 3, 2009, which is incorporated herein by reference. The Company has closed on $800,000 of the debt. The time period for the second closing was previously extended to the end of July 2009, as reported on the Company’s Current Report on Form 8-K filed June 4, 2009.

The amendment to the bridge loan agreement, which appears as Exhibit 10.4 to this report, is incorporated by reference herein.

ITEM 6 Exhibits

See “Index to Exhibits.”

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	GRANITE CITY FOOD & BREWERY LTD.


Date: August 14, 2009		By:	/s/ James G. Gilbertson
		James G. Gilbertson
		Chief Financial Officer
		(As Principal Financial Officer and Duly Authorized Officer of Granite City Food & Brewery Ltd.)

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INDEX TO EXHIBITS

Exhibit
Number		Description

3.1		Articles of Incorporation of the Company, as amended (incorporated by reference to our Quarterly Report on Form 10-QSB, filed on November 13, 2002 (File No. 000-29643)).

3.2		Amended and Restated Bylaws of the Company, dated May 2, 2007 (incorporated by reference to our Current Report on Form 8-K, filed on May 4, 2007 (File No. 000-29643)).

4.1		Reference is made to Exhibits 3.1 and 3.2.

4.2		Specimen common stock certificate (incorporated by reference to our Current Report on Form 8-K, filed on September 20, 2002 (File No. 000-29643)).

10.1		Amendment No. 1 to Bridge Loan Agreement by and between the Company, Granite City Restaurant Operations, Inc. and Harmony Equity Income Fund, L.L.C., including the Amended Forms of Note and Warrant, dated April 22, 2009 (incorporated by reference to our Current Report on Form 8-K, filed on May 6, 2009 (File No. 000-29643)).

10.2		Amendment No. 2 to Bridge Loan Agreement by and between the Company, Granite City Restaurant Operations, Inc. and Harmony Equity Income Fund, L.L.C., dated April 30, 2009 (incorporated by reference to our Current Report on Form 8-K, filed on May 6, 2009 (File No. 000-29643)).

10.3		Amendment No. 3 to Bridge Loan Agreement by and between the Company, Granite City Restaurant Operations, Inc. and Harmony Equity Income Fund, L.L.C., dated May 29, 2009 (incorporated by reference to our Current Report on Form 8-K, filed on June 4, 2009 (File No. 000-29643)).

10.4		Amendment No. 4 to Bridge Loan Agreement by and between the Company, Granite City Restaurant Operations, Inc. and Harmony Equity Income Fund, L.L.C., dated August 10, 2009.

31.1		Certification by Steven J. Wagenheim, President and Chief Executive Officer of the Company, pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by James G. Gilbertson, Chief Financial Officer of the Company, pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification by Steven J. Wagenheim, President and Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by James G. Gilbertson, Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.