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 10, 2008, 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 September 30, 2008, we operated 25 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

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 unit to unit. 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 managers are trained under the instruction of dedicated trainers and veteran managers. Our seven to fourteen-week training program consists of both "hands on" as well as classroom training for all aspects of management. All salaries of our managers in training and our dedicated trainers as well as all related costs incurred during the training process are recorded as a component of our general and administrative costs.

We utilize a new store opening team which consists of experienced restaurant managers who are dedicated to the opening of our new restaurants. This team generally arrives at a new restaurant site two to three months in advance of the restaurant opening date and coordinates all staffing and training matters for that new restaurant. We believe that a dedicated team delivers a more disciplined opening process and ensures adherence to our company's exacting standards and culture. In the third quarter of 2008, we initiated a greater involvement of our district operators in our store openings to enhance the opening process and provide more consistency of training. Additionally, we are committed to balance store opening schedules in the future to avoid clustering of store openings in a short period of time.

We have developed our restaurants using proceeds from the sale of our securities, building and equipment financing and cash flow from operations. We built units 4-9, 11-14 and 16-25 based upon the prototype we developed in early 2003. In 2004 and 2005, we retrofitted units 1-3 to conform to this prototype model. In 2005 and 2006, we developed units 10 and 15, respectively, which were conversions of existing restaurants. With the exception of units 1-3 and 15, we developed all of our units under our multi-site development agreement with Dunham Capital Management, L.L.C. ("Dunham"), a commercial developer that provides us with construction management and financing for new restaurants. Under the development agreement, we lease the land and building of each restaurant developed by Dunham.

In April 2008, we entered into a development agreement with United Properties Investment LLC ("United Properties") for the development of up to 22 restaurants to be built between 2009 and 2012. As our new developer, 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. We will lease each restaurant developed under this agreement from United Properties.

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

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

We utilize a 52/53-week fiscal year ending the last Tuesday in December for financial reporting purposes. Fiscal year 2007 had 52 weeks while fiscal year 2008 will have 53 weeks. The additional week was included in the third quarter of 2008. As such, the quarter ended September 30, 2008 included 14 weeks while the quarter ended September 25, 2007 included 13 weeks.

The fourteen and forty weeks ended September 30, 2008 included 353 and 988 operating weeks, respectively, which is the sum of the actual number of weeks each restaurant operated. The thirteen and thirty-nine weeks ended September 25, 2007 included 246 and 714 operating weeks, respectively. Because we continue to expand our operations and open new restaurants at various times throughout the year, we provide this statistical measure to enhance the comparison of revenues from period to period as changes occur in the number of units we are operating.

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.

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 fourteen and forty weeks ended September 30, 2008 and the thirteen and thirty-nine weeks ended September 25, 2007.

                                    Fourteen         Thirteen           Forty         Thirty-nine
                                   Weeks Ended      Weeks Ended      Weeks Ended      Weeks Ended
                                  September 30,    September 25,    September 30,    September 25,
                                      2008             2007             2008             2007

Restaurant revenues                       100.0 %          100.0 %          100.0 %          100.0 %

Cost of sales:
Food, beverage and retail                  29.7             30.5             30.4             30.0
Labor                                      35.8             36.0             37.2             35.9
Direct restaurant operating                15.0             14.5             14.6             13.7
Occupancy                                   5.8              6.2              6.2              6.2
Total cost of sales                        86.3             87.1             88.5             85.9

Pre-opening                                 2.0              3.7              1.8              2.2
General and administrative                 10.7             10.5             11.0             10.1
Depreciation and amortization               6.4              5.9              6.5              6.1
Exit or disposal activities                 4.4                -              1.5                -
Other                                       0.2              0.1              0.1              0.1

Operating loss                            (10.0 )           (7.3 )           (9.4 )           (4.4 )

Interest:
Income                                      0.0              0.4              0.0              0.3
Expense                                    (6.7 )           (4.6 )           (6.5 )           (5.0 )

Net interest expense                       (6.7 )           (4.2 )           (6.5 )           (4.7 )

Net loss                                  (16.7 )%         (11.5 )%         (15.8 )%          (9.1 )%

Certain percentage amounts do not sum due to rounding.

Critical Accounting Policies

Our critical accounting policies are those that require significant judgment. In addition to those previously reported in our 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2008, the following critical accounting policy and related estimates were utilized in the preparation of our financial statements:

Estimated Liability for Closing Restaurants

We continually evaluate the performance of each of our restaurants. If a restaurant consistently performs poorly, we consider many factors including the demographics of the location and the likelihood of being able to improve the performance of the restaurant. If we determine that the restaurant will not, within a reasonable period of time, perform to our expectations, we may close the restaurant.

In the event we close a restaurant, we record the liability to cover future lease termination costs using the fair value of these liabilities as estimated in accordance with the requirements of Statement of Financial Accounting Standard ("SFAS") No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This estimate is generally based on the term of the lease and the lease termination fee we expect to pay. The amount of the estimated liability established is generally the present value of these estimated net future payments upon exiting the property.

A significant assumption we use in determining the amount of the estimated liability for closing a restaurant is the amount of the estimated liability for future lease payments on vacant restaurants, determined based on the likelihood of successfully negotiating an early termination of the lease agreement with our landlord or subleasing the property. If it takes longer than anticipated to terminate or sublease the lease, we may need to record additional estimated liability. If the lease on the vacant restaurant is not terminated or subleased on the terms we used to estimate the liability, we may be required to record losses in future periods. Conversely, if the lease on the vacant restaurant is terminated or subleased on more favorable terms than we used to estimate the liability, we would reverse previously established estimated liability, resulting in an increase in operating income.

Results of operations for the fourteen and forty weeks ended September 30, 2008 and the thirteen and thirty-nine weeks ended September 25, 2007

Revenue

We generated $25,483,423 and $19,584,040 of revenue during the third quarters of 2008 and 2007, respectively. This 30.1% increase was primarily the result of 107 additional operating weeks, which is the sum of the actual number of weeks each restaurant operated. Such additional operating weeks were generated due to the additional fiscal week in the third quarter of fiscal 2008 and the five restaurants that opened in late 2007 and early 2008. Comparable restaurant revenue, which included restaurants in operation over 18 months, increased 3.8% from the third quarter of 2007 to the third quarter of 2008, primarily due to the additional fiscal week in 2008 and a price increase of approximately 4%, partially offset by a decrease in guest traffic, which we believe was caused primarily by the macroeconomic factors affecting the restaurant industry in general. Average weekly revenue per

comparable restaurant decreased $2,826 from $78,431 in the third quarter of 2007 to $75,605 in the third quarter of 2008.

During the first three quarters of fiscal years 2008 and 2007, we generated revenue of $74,601,745 and $56,220,186, respectively. The 32.7% increase in first three quarters revenue was primarily the result of the additional fiscal week in 2008 and the additional restaurants opened during the second half of 2007 and first three quarters of 2008. The first three quarters of 2008 included 988 operating weeks, while the first three quarters of 2007 included 714 operating weeks. Comparable restaurant revenue increased 2.1% in the first three quarters of 2008 over the first three quarters of 2007. The increase in comparable restaurant revenue was due primarily to the additional fiscal week and the 4.0% price increase, partially offset by a decrease in guest traffic, which we believe was caused primarily by the macroeconomic factors affecting the restaurant industry in general. Average weekly revenue per comparable restaurant decreased $660 from $78,836 in the first three quarters of 2007 to $78,176 in the first three quarters of 2008.

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 decreased consumer confidence negatively impacted the restaurant industry as a whole during the first three quarters of fiscal year 2008.

Restaurant costs

Food and beverage

Our food and beverage costs, as a percentage of revenue, decreased 0.8% to 29.7% in the third quarter of 2008 from 30.5% in the third quarter of 2007. Such costs increased 0.4% as a percentage of revenue to 30.4% in the first three quarters of 2008 from 30.0% in the first three quarters of 2007. While the cost of dairy, chicken, beef, bread, general groceries, soft drinks and beer have increased throughout the year, we believe the price increase of approximately 4.0% which became effective in March 2008 has continued to help address these commodity price increases. The decrease in food and beverage costs as a percentage of revenue in the third quarter was in part a result of our increased oversight of inventory and kitchen management, as well as the menu price increase. We will continue to monitor our prices in an effort to address future commodity price increases.

Due to the number of restaurants we now operate throughout the Midwest, we are able to contract for many of the food commodities we use in our restaurants for periods up to one year. This enables us to eliminate some of the price fluctuations due to market conditions outside of our control, thereby enabling us to maintain or reduce our food and beverage costs as a percentage of revenue. 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, as we add new restaurants, 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 partner and 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.

Our labor costs, as a percentage of revenue, decreased 0.2% to 35.8% in the third quarter of 2008 from 36.0% in the third quarter of 2007, primarily due to improved oversight at the management level. Such costs increased 1.3% as a percentage of revenue to 37.2% in the first three quarters of 2008 from 35.9% in the first three quarters of 2007. The increase in the first three quarters of 2008 was due primarily to new store openings and minimum wage increases, turnover and the addition of a new position at each restaurant to oversee inventory and kitchen management in an effort to address the increases in commodity costs. Although the immediate effect of these personnel additions was to increase labor costs, we are beginning to see an overall decrease in costs of goods which we believe will continue in the long term. We believe such decrease will over time offset this labor cost increase.

We expect that labor costs will vary as we add new restaurants. Minimum wage laws, local labor laws and practices, and as unemployment rates vary from state to state and will affect our labor costs, as will hiring and training expenses at our new restaurants. 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 0.5% to 15.0% in the third quarter of 2008 from 14.5% in the third quarter of 2007. Such costs increased 0.9% as a percentage of revenue to 14.6% in the first three quarters of 2008, from 13.7% in the first three quarters of 2007. These increases were due to operating inefficiencies during the first few months at newly opened restaurants, as well as increased cost of paper products, utilities and expenses related to repair and maintenance at our mature properties, offset in part by a decrease in marketing expense.

Occupancy

Our occupancy costs, which include both fixed and variable portions of rent, common area maintenance charges, property insurance and property taxes, decreased 0.4% as a percentage of revenue to 5.8% in the third quarter of 2008 from 6.2% in the third quarter of 2007. Such costs were 6.2% as a percentage of revenue in both the first three quarters of 2008 and 2007. While rent expense and property tax costs increased slightly year over year, they were offset by a decrease in property and casualty insurance.

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 store 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 $233,935 to $498,744 in the third quarter of 2008 from $732,679 in the third quarter of 2007. Such costs increased $83,951 to $1,328,812 in the first three quarters of 2008 from $1,244,861 in the first three quarters of 2007. Included in such expense was $322,085 and $505,149 of non-cash rental costs incurred during construction periods in the first three quarters of 2008 and 2007, respectively.

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 store 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 increased $680,089 to $2,735,500 in the third quarter of 2008 from $2,055,411 in the third quarter of 2007. Such expense increased $2,507,494 to $8,206,848 in the first three quarters of 2008 from $5,699,354 in the first three quarters of 2007. As a percentage of revenue, general and administrative expenses increased 0.2% to 10.7% in the third quarter of 2008 and increased 0.9% to 11.0% in the first three quarters of 2008 over the respective periods in 2007. The primary sources of such increases were expenses related to recruiting, relocation, training and consulting costs, as well as accounting services and marketing expense. We undertook an ambitious recruiting plan to upgrade our overall restaurant management teams, particularly in our Kansas/Missouri markets. These increases were partially offset by decreases in insurance, non-cash stock-based compensation and an adjustment of $285,790 for the portion of our gift card obligation for which we believe the likelihood of redemption is remote. Non-cash stock based compensation included in general and administrative expense was $115,110 and $286,345 in the third quarters of 2008 and 2007, respectively, and was $337,367 and $670,736 in the first three quarters of 2008 and 2007, respectively.

As we continue to expand our restaurant chain, we will closely monitor our general and administrative expense while seeking to preserve an infrastructure that remains suitable for our current operations and potential growth. We may need to recruit additional personnel to provide continued oversight of operations depending on our turnover ratios. To the extent our turnover increases above our expectations, additional costs could be incurred in our recruiting and training expenses. We believe our general and administrative expense as percentage of revenue will level off as many of our new recruits complete their training, and decrease in the long term due to economies of scale.

Depreciation and amortization

Depreciation and amortization expense increased $480,457 to $1,640,343 in the third quarter of 2008 from $1,159,886 in the third quarter of 2007. Such . . .