**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-K**


**(Mark
      One):**





ý
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934**


**For
      the fiscal year ended December 31, 2007**


**OR**


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


**For
      the transition period from** **** **to** ****





**Commission
      File Number 000-53000**





**SPICY
      PICKLE FRANCHISING, INC.**


(Exact
      Name of Registrant as Specified in its Charter)





**Colorado**
            
            **38-3750924**(State
                or other jurisdiction
              of
                incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)





**90
                Madison Street, Suite 700, Denver, Colorado**
            
            **80206**(Address
                of principal executive offices)
            
            (Zip
                Code)





Registrant's
      telephone number, including area code: **(303) 297-1902**





Securities
      registered pursuant to Section 12(b) of the Act: None





Securities
      registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par
      value





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o No ý





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes o No ý





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 ý No o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of the registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-K or
      any amendments of this Form 10-K. ý





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
      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 a 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 ý





State
      the aggregate market value of the voting and non-voting common equity held
      by
      non-affiliates computed by reference to the price at which the common equity
      was
      last sold, or the average bid and asked price of such common equity, as of
      the
      last business day of the registrant’s most recently completed second fiscal
      quarter. As of June 29, 2007 the shares of the registrant were not
      trading.





Indicate
      the number of shares outstanding of each of the registrant’s classes of common
      stock, as of the latest practicable date. As of March 10, 2008, there were
      47,884,053 shares of common stock outstanding.





Table
      of
      Contents





PART
                IItem1.Business
            1Item
                1A.Risk
                Factors
            4Item
                1B.Unresolved
                Staff Comments
            12Item
                2.Properties
            12Item
                3.Legal
                Proceedings
            13Item
                4.Submission
                of Matters to a Vote of Security Holders
            13PART
                IIItem
                5.Market
                for Common Equity, Related Stockholder Matters and Issuer Purchasesof
                Equity Securities
            14Item6.Selected
                Financial Data
            14Item
                7.Management’s
                Discussion and Analysis of Financial Condition and Results ofOperations
            14Item7A.Quantitative
                and Qualitative Disclosures About Market Risk
            22Item
                8Financial
                Statements and Supplementary Data
            23Item
                9.Changes
                in and Disagreements With Accountants on Accounting and FinancialDisclosure
            41Item
                9A(T) Controls and Procedures
            41Item9B.Other
                Information
            41PARTIIIItem10.Directors,
                Executive Officers and Corporate Governance
            42Item
                11.Executive
                Compensation
            45Item
                12.Security
                Ownership of Certain Beneficial Owners and Management and RelatedStockholder
                Matters
            47Item
                13.Certain
                Relationships and Related Transactions, and Director
                Independence
            48Item14.Principal
                Accounting Fees and Services
            49PART
                IVItem
                15.Exhibits,
                Financial Statements Schedules
            50




i


**PART
      I**





**Item
      1. Business**





Our
      sole
      business is the franchise and operation of Spicy Pickle TM restaurants. Spicy Pickle is a fast casual restaurant where made-to-order
      panini, submarine-style sandwiches, pizzetti (Neapolitan thin crust pizza),
      and
      salads created by our founders are served using fresh-baked breads and
      high-quality ingredients.





Our
      goal
      is to deliver a delicious flavor profile, an exceptional customer experience,
      and an enjoyable atmosphere in our locations. We cannot assure you that we
      will
      be successful. We believe our menu items appeal to diners of all ages and
      preferences, and we expect to accommodate all day parts, including breakfast,
      lunch and dinner.





Our
      franchisees must qualify on the basis of considerable experience in other
      management and food service ventures and should have liquid assets of at least
      $150,000. Franchise fees are $35,000 for the first restaurant and $20,000 for
      additional locations. Fees for additional locations are lower because the
      training and grand opening are handled by the experienced franchisee, although
      these services are still available for purchase from us if desired. Area
      development agreements are available to selected franchisees that wish to secure
      a territory for future development ($10,000 per store is pre-paid and the
      balance of $10,000 is paid when the area developer is ready to begin build-out
      for each new site).




Franchisees
      pay Spicy Pickle a 5% royalty on weekly gross sales and an additional 2% to
      support national and regional marketing efforts that produce brand development,
      agency support, point of purchase materials and print and broadcast advertising.
      In addition, we require franchisees to dedicate at least 1% of sales to local
      advertising. The estimated initial cost of a Spicy Pickle franchise is
      approximately $440,000 and varies based on location. Each location has an
      end-cap/in-line of approximately 2,000 square feet and seating for 30-50 guests
      inside with additional outdoor seating as available.




The
      first
      Spicy Pickle restaurant was launched in 1999 by Kevin Morrison and Anthony
      Walker, who remain part of our management team. Spicy Pickle Franchising, LLC
      was formed in January 2003 as a Colorado limited liability company. In January
      2003, we launched the Spicy Pickle brand as a national franchise with Marc
      Geman, former president of the PretzelMaker franchise, as our Chief Executive
      Officer. We sold our first franchise in the spring of 2003 and opened our first
      franchise restaurant in the second half of 2003. On September 8, 2006, we
      converted from a limited liability company to a Colorado corporation named
      Spicy
      Pickle Franchising, Inc. (the “Company”).





Spicy
      Pickle has been recognized nationally and in its local markets as a purveyor
      of
      fast casual food to watch. The December 2006 and 2007 issues of Fast Casual
      Magazine feature Spicy Pickle as numbers 54 and 25, respectively, in its list
      of
“2006 Top 100 Movers and Shakers” and “2007 Top 100 Movers and Shakers,”
respectively. National Restaurant News selected Spicy Pickle as one of its
      2006
      Hot Concepts!





We
      intend
      to expand nationally by growing the chain of restaurants in and near downtown
      settings where daytime population is dense, as well as near tech centers,
      government complexes, universities, and medical centers where large amounts
      of
      administrative and professional people are employed. We have designed systems
      to
      maximize and replicate our success in a variety of settings. Complete programs
      have been developed for real estate, architecture, construction management,
      equipment procurement, food distribution, training, operations and marketing
      to
      promote the success of each franchisee. Owners generally purchase turn-key
      services from us.





**Industry
      Background**





Spicy
      Pickle restaurants are classified as “fast casual” restaurants in the restaurant
      industry. There is no single definition of fast casual, but in concept a fast
      casual restaurant does not offer full table service, but generally offers
      high-quality food and atmosphere with either numbered or personalized delivery
      of meals to the table or a central pick up area. Fast casual fills the space
      between fast-food where no table service is available and food is paid for
      and
      delivered to the customer at the register, and casual dining where full table
      service is available to the customer.










**Growth
      Strategy**





We
      believe that our ability to deliver value, quality, price and convenience will
      help us grow. Our target customer is 21-55 years of age, educated with at least
      some college experience, and the typical location for the Spicy Pickle
      restaurant is near a downtown area of a dense city, or near a tech center,
      government complex, university, or medical center where large numbers of
      administrative and professional employees are found. We also look for big box
      centers anchored by a large tenant and in areas of both white collar workforce
      and high income households.





Our
      menu
      is moderately priced with an average ticket of $8.00 to $9.00. We have expanded
      our menu to include catering and expect to add breakfast. We are committed
      to
      providing sufficient variety to encourage guests to return often and try
      something new.





We
      believe that our growth is the result of the appeal of our food, the clarity
      of
      our vision, the increasing strength of our brand and our commitment to
      constantly improving our customer experience.





As
      part
      of our growth strategy, in addition to our franchised restaurants, we will
      operate company-owned restaurants. In February 2008, we purchased a partial
      interest in one restaurant from a franchisee. In March 2008, we purchased three
      restaurants from another franchisee. We also have two restaurants under
      construction in Colorado. Also in March 2008, we purchased a restaurant located
      in Chicago from another franchisee. We will continue to either build or acquire
      new restaurants in the future. There are no other agreements in place at this
      time.





**Competition**





The
      fast
      casual segment of the restaurant industry is highly competitive and fragmented.
      In addition, fast casual restaurants compete against other segments of the
      restaurant industry, including quick-service restaurants and casual dining
      restaurants. The number, size and strength of competitors vary by region. All
      of
      these restaurants compete based on a number of factors, including taste,
      quickness of service, value, name recognition, restaurant location and customer
      service. Competition within the fast casual restaurant segment, however, focuses
      primarily on the taste, quality and freshness of the menu items and the ambience
      and condition of each restaurant.





The
      industry is often affected by changes in consumer tastes; national, regional
      or
      local economic conditions; currency fluctuations; demographic trends; traffic
      patterns; the type, number and location of competing food retailers and
      products; and disposable purchasing power. Each of the concepts competes with
      international, national and regional restaurant chains as well as locally owned
      restaurants, not only for customers, but also for management and hourly
      personnel, suitable real estate sites and qualified franchisees.





**Our
      Menu**





Our
      menu
      offers customers a choice of seven signature submarine-style sandwiches, eight
      signature panini, six salads, six signature pizzetti and five soups, as well
      as
      a combo meal consisting of a one-half sandwich or panini and a small soup or
      salad. Customers can also build their own sandwich, salad or pizzetti choosing
      from three breads, 12 meats (or vegetables); eight cheeses, an unlimited number
      of our 22 toppings, and an unlimited number of our 14 spreads. Some menu items
      may vary from store to store. We feature high-quality ingredients consisting
      of
      all-natural products with no preservatives or MSG, except for the coloring
      in
      our yellow cheese. This is part of our strategy to attract the growing number
      of
      health-conscious consumers to our restaurants. We believe our restaurants
      deliver value, quality and convenience. Our menu is moderately priced with
      an
      average ticket of $8.00 to $9.00. Menu prices are set by franchisees at the
      store level and vary from location to location, sandwiches typically cost
      between $6.45 and $7.25 with small and large soups and salads ranging from
      $3.45
      to $7.95. An individual size pizzetti ranges from $7.45 to $7.95.





**Our
      Current Locations**





Our
      restaurant locations (including both company-owned and franchisee-owned),
      including those under construction and lease negotiation as of December 31,
      2007, are:




2




Location
            
            Restaurants
              Operating
            
            Under
              Construction
            
            In
                Lease
              NegotiationDenver,
                Colorado
            
            
            5
            
            
            
            
            
            2Boulder,
                Colorado
            
            
            2Ft.
                Collins, Colorado
            
            
            1
            
            
            1Aurora,
                Colorado
            
            
            1Littleton,
                Colorado
            
            
            1Centennial,
                Colorado
            
            
            1Lone
                Tree, Colorado
            
            
            1Greenwood
                Village, Colorado
            
            
            1Federal
                Heights, Colorado
            
            
            1Johnstown,
                Colorado
            
            
            1Colorado
                Springs, Colorado
            
            
            2Louisville,
                Colorado
            
            
            1Englewood,
                Colorado
            
            
            1Ashburn,
                Virginia
            
            
            1Sioux
                Falls, South Dakota
            
            
            1Portland,
                Oregon
            
            
            2Poway,
                California
            
            
            1Sacramento,
                California
            
            
            1Henderson,
                Nevada
            
            
            1Reno,
                Nevada
            
            
            2Chicago,
                Illinois
            
            
            1Cincinnati,
                Ohio
            
            
            1
            
            
            
            
            
            1Austin,
                Texas
            
            
            2
            
            
            
            
            
            1San
                Diego, California
            
            
            
            
            
            1
            
            
            2Indianapolis,
                Indiana
            
            
            2
            
            
            
            
            
            1Chandler,
                Arizona
            
            
            1Brooklyn,
                New York
            
            
            
            
            
            
            
            
            1Hattiesburg,
                Mississippi
            
            
            1Edmond,
                Oklahoma
            
            
            
            
            
            
            
            
            2Pender,
                Virginia
            
            
            
            
            
            
            
            
            1Ocala,
                Florida
            
            
            
            
            
            
            
            
            1Cedar
                Park, Texas
            
            
            
            
            
            136
            
            
            3
            
            
            12




**Franchise
      Site Development and Expansion**




Our
      restaurant locations are critical to our long-term success, and we devote
      significant resources to assessing each prospective site. We have developed
      specific criteria to evaluate each site. We continuously review these criteria
      and adjust them as warranted by changing circumstances in our business or local
      operating conditions.




We
      focus
      our site searches on metropolitan areas where daytime population is dense,
      as
      well as near tech centers, government complexes and medical centers where large
      numbers of administrative and professional people are employed. Preferred
      locations include shopping center end-caps and free standing buildings near
      large intersections, residential areas, offices, retail outlets, universities,
      recreational facilities and hospitals. We also consider traffic patterns, area
      restaurant competition, the likely impact on sales of our nearby restaurants,
      parking, accessibility, potential restaurant size and visibility. In larger
      metropolitan regions, we generally open restaurants in urban storefronts. We
      use
      a combination of our own development staff and outside real estate brokers
      to
      locate, evaluate and negotiate new sites.





The
      cost
      to open a Spicy Pickle restaurant depends on the type of real estate, the
      location of the site and the amount of construction required. We generally
      lease
      the premises and build-out the tenant improvements for our restaurants. We
      sometimes receive landlord development and/or rent allowances for leasehold
      improvements, furniture, fixtures and equipment.




3




**Government
      Regulation**





We
      are
      subject to various federal, state and local laws affecting our business. Each
      of
      our restaurants must comply with licensing and regulation by a number of
      governmental authorities, which include health, sanitation, safety and fire
      agencies in the state or municipality in which the restaurant is located. In
      addition, we must comply with various state laws that regulate the
      franchisor/franchisee relationship.





We
      are
      also subject to federal and state laws governing employment and pay practices,
      overtime, tip credits and working conditions. The bulk of our employees are
      paid
      on an hourly basis at rates related to the federal and state minimum
      wages.





We
      are
      also subject to federal and state child labor laws, which, among other things,
      prohibit the use of certain “hazardous equipment” by employees 18 years of age
      or younger. Under the American with Disabilities Act, we could be required
      to expend funds to modify our restaurants to better provide service to, or
      make
      reasonable accommodation for the employment of, disabled persons. We continue
      to
      monitor our facilities for compliance with the Americans with Disabilities
      Act
      in order to conform to its requirements. We believe future expenditures for
      such
      compliance would not have a material adverse effect on our
      operations.





**Intellectual
      Property**





We
      have
      registered the following marks with the United States Patent and Trademark
      Office: Spicy Pickle (Registration No. 2,905,597), Spicy Pickle Sub Shop
      (Registration No. 2,918,645) and Spicy Pickle Panini♦Salads♦Subs (Registration
      No. 3,182,753). We also have a Canadian registration for the Spicy Pickle name
      and logo.





**Item
      1A. Risk Factors**





Investing
      in our common stock involves a high degree of risk. You should carefully
      consider the risks described below with all of the other information included
      in
      this report before making an investment decision. If any of the possible adverse
      events described below actually occur, our business, results of operations
      or
      financial condition would likely suffer. In such an event, the market price
      of
      our common stock could decline and you could lose all or part of your
      investment. The risks and uncertainties described below are not the only ones
      we
      face.





**RISKS
      RELATING TO OUR BUSINESS**





**We
      have historically incurred losses and may continue to incur losses in the
      future, which may impact our ability to implement our business strategy and
      adversely affect our financial condition.**





We
      expect
      to increase our operating expenses by expanding our marketing activities and
      increasing our level of capital expenditures in order to grow our business
      and
      further develop and maintain our services. Such increases in operating expense
      levels and capital expenditures may adversely affect our operating results
      if we
      are unable to immediately realize benefits from such expenditures. In addition,
      if we are unable to manage a significant increase in operating expenses, our
      liquidity will likely decrease and negatively impact our cash flow and ability
      to sustain operations. In turn, this would have a negative impact on our
      financial condition and share price.




We
      also
      expect that our operating expenses will continue to increase as a result of
      having become a public company in 2007. We cannot assure you that we will be
      profitable or generate sufficient profits from operations in the future. If
      our
      revenue growth does not continue, we may experience a loss in one or more future
      periods. We may not be able to reduce or maintain our expenses in response
      to
      any decrease in our revenue, which may impact our ability to implement our
      business strategy and adversely affect our financial condition. This would
      also
      have a negative impact on our share price.





4




**Our
      operating results are closely tied to the success of our
      franchisees.**





Our
      operating results are dependent upon our selling additional franchises and
      our
      receipt of royalties from our existing franchisees. Franchisees may lack access
      to the financial or management resources that they need to open or continue
      operating their restaurants. New franchisees may not be able to find suitable
      sites on which to develop restaurants, negotiate acceptable lease or purchase
      terms for the sites, obtain the necessary permits and government approvals
      or
      meet construction schedules. Our franchisees generally depend upon financing
      from banks and other financial institutions to finance the cost of opening
      a new
      restaurant. If franchisees cannot obtain financing and restaurants do not open,
      our royalties from those restaurants will not exist. Any decrease or delay
      in
      our planned revenues could slow our planned growth.





**Food
      safety and food-borne illness concerns may have an adverse effect on our
      business.**





We
      dedicate substantial resources to ensuring that our customers enjoy safe,
      quality food products. However, food-borne illnesses (such as E. coli, hepatitis
      A, trichinosis or salmonella) and food safety issues are an ongoing issue in
      the
      restaurant industry. If a food-borne illness or other food safety issues occur,
      whether at our restaurants or those of our competitors, it is likely that
      negative publicity would adversely affect our sales and profitability. If our
      customers become ill from food-borne illnesses, we might need to temporarily
      close some restaurants. Separately, the occurrence of food-borne illnesses
      or
      food safety issues could adversely affect the price and availability of affected
      ingredients.





**Changes
      in commodity and other operating costs or supply chain and business disruptions
      could adversely affect our results of operations.**





Changes
      in food and supply costs are a part of our business; any increase in the prices
      of our key ingredients, such as beef, chicken, cheese and produce could
      adversely affect our operating results. We remain susceptible to increases
      in
      food costs as a result of factors beyond our control, such as general economic
      conditions, seasonal fluctuations, weather conditions, demand, food safety
      concerns, product recalls, labor disputes and government regulations. In
      addition to food, we purchase electricity, oil and natural gas needed to operate
      our restaurants, and suppliers purchase gasoline needed to transport food and
      supplies to us. Any significant increase in energy costs could adversely affect
      our business through higher rates and the imposition of fuel surcharges by
      our
      suppliers. Because we provide moderately priced food, we may choose not to,
      or
      be unable to, pass along commodity price increases to our customers.
      Additionally, significant increases in gasoline prices could result in a
      decrease in customer traffic at our restaurants. We rely on third-party
      distribution companies to deliver food and supplies to our stores. Interruption
      of distribution services due to financial distress or other issues could impact
      our operations. Our operating costs also include premiums that we pay for our
      insurance (including workers’ compensation, general liability, property and
      health), which may increase over time, thereby further increasing our costs.
      Finally, our industry is susceptible to natural disasters, which could result
      in
      restaurant closures and business disruptions.





**We
      could be party to litigation that could adversely affect us by increasing our
      expenses or subjecting us to material money damages and other
      remedies.**





We
      are
      susceptible to claims filed by customers alleging that we are responsible for
      an
      illness or injury they suffered at or after a visit to our restaurants.
      Regardless of whether any claims against us are valid, or whether we
      are ultimately held liable, such litigation may be expensive to defend and may
      divert time and money away from our operations and hurt our performance. A
      judgment for significant monetary damages in excess of any insurance coverage
      could adversely affect our financial condition or results of operations. Any
      adverse publicity resulting from these allegations may also adversely affect
      our
      reputation, which in turn could adversely affect our results.




In
      addition, the restaurant industry has been subject to claims that relate to
      the
      nutritional content of food products, as well as claims that the menus and
      practices of restaurant chains have led to the obesity of some guests. We also
      may be subject to this type of claim in the future and, even if we are not,
      publicity about these matters (particularly directed at the quick-service and
      fast casual segments of the industry) may harm our reputation and adversely
      affect our results.





5




**Compliance
      with governmental regulations may adversely affect our business
      operations.**





We
      and
      our franchisees are subject to various federal, state and local regulations.
      Each of our restaurants is subject to state and local licensing and regulation
      by health, sanitation, food and workplace safety and other agencies.
      Requirements of local authorities with respect to zoning, land use, licensing,
      permitting and environmental factors could delay or prevent development of
      new
      restaurants in particular locations.




We
      are
      subject to the U.S. Americans with Disabilities Act and similar state laws
      that
      give civil rights protections to individuals with disabilities in the context
      of
      employment, public accommodations and other areas. The expenses associated
      with
      any facilities modifications required by these laws could be material. Our
      operations are also subject to the U.S. Fair Labor Standards Act, which governs
      such matters as minimum wages, overtime and other working conditions, family
      leave mandates and a variety of similar state laws that govern these and other
      employment law matters. The compliance costs associated with these laws and
      evolving regulations could be substantial.





The
      operation of our franchise system is also subject to franchise laws and
      regulations enacted by a number of states and rules promulgated by the U.S.
      Federal Trade Commission. Any future legislation regulating our franchise
      relationships may negatively affect our operations, particularly our
      relationships with our franchisees. Failure to comply with new or existing
      franchise laws and regulations in any jurisdiction or to obtain required
      government approvals could result in a ban or temporary suspension on future
      franchise sales.





**We
      may not attain our target development goals.**





We
      are
      pursuing a disciplined growth strategy, which will depend in large part on
      our
      ability and the ability of our franchisees to increase sales volumes in existing
      restaurants, open new restaurants, and operate these restaurants profitably.
      We
      cannot guarantee that we, or our franchisees, will be able to achieve our
      expansion goals or that new or converted restaurants will be operated
      profitably. Further, there is no assurance that any restaurant we open or
      convert will obtain operating results similar to those of our existing
      restaurants. The success of our planned expansion, including our branding
      initiatives, will depend upon numerous factors, many of which are beyond our
      control.





**The
      fast casual segment of the restaurant industry is highly
      competitive.**





The
      fast
      casual segment of the restaurant industry is highly competitive and fragmented.
      In addition, fast casual restaurants compete against other segments of the
      restaurant industry, including quick-service restaurants and casual dining
      restaurants. The number, size and strength of competitors vary by region. All
      of
      these restaurants compete based on a number of factors, including taste,
      quickness of service, value, name recognition, restaurant location and customer
      service. Competition within the fast casual restaurant segment, however, focuses
      primarily on the taste, quality and freshness of the menu items and the ambience
      and condition of each restaurant.





We
      focus
      on price and quality of food products, new product development, advertising
      levels and promotional initiatives, customer service, reputation, restaurant
      location, and attractiveness and maintenance of properties. If our company-owned
      restaurants and franchised restaurants are unable to compete successfully with
      other restaurants in new and existing markets, our business could be adversely
      affected. In the restaurant industry, labor is a primary operating cost
      component. Competition for qualified employees also could require us to pay
      higher wages to attract a sufficient number of employees. In addition, our
      success depends to a significant extent on numerous factors affecting
      discretionary consumer spending, including economic conditions, disposable
      consumer income and consumer confidence. Adverse changes in these factors could
      reduce guest traffic or impose practical limits on pricing, either of which
      could harm our results of operations.





**We
      may not persuade customers of the benefits of paying our prices for
      higher-quality food.**




Our
      success as a fast casual restaurant depends in large part on our ability to
      persuade customers that food made with higher-quality ingredients is worth
      the
      prices they will pay at our restaurants relative to prices offered by some
      of
      our competitors, particularly those in the quick-service segment. We may not
      be
      able to successfully educate customers about the quality of our food or food
      quality may not matter to them even if they do understand we must charge more
      for higher-quality food. If that were to happen, we might need to change our
      pricing, advertising or promotional strategies, which could materially and
      adversely affect our results or the brand identity that we have tried to
      create.





6




**Health
      concerns arising from outbreaks of Avian flu may have an adverse effect on
      our
      business.**





In
      2004
      and 2005, Asian and European countries experienced outbreaks of Avian flu,
      and
      some commentators have hypothesized that further outbreaks could occur and
      reach
      pandemic levels. While fully cooked chicken has been determined to be safe
      for
      consumption, and while we have taken and continue to take measures to anticipate
      and minimize the effect of these outbreaks on our business, any further
      outbreaks could adversely affect the price and availability of poultry and
      cause
      customers to shift their preferences. In addition, outbreaks on a widespread
      basis could also affect our ability to attract and retain
      employees.





**We
      are dependent on key personnel, the loss of whom could significantly harm our
      business, results of operations and financial
      condition.**





Our
      success depends to a significant extent upon the efforts and abilities of our
      key personnel, including Marc Geman, Chairman and Chief Executive Officer,
      Anthony Walker, Chief Operating Officer and co-founder, and Kevin Morrison,
      Chief Culinary Officer and co-founder, as well as other key creative and
      strategic marketing and operational personnel. Competition for highly qualified
      personnel is intense. The loss of any executive officer, manager or other key
      employee could have a material adverse effect upon our business, operating
      results and financial condition. If we are not able to efficiently replace
      our
      key personnel with qualified individuals, our business and operational
      activities could suffer. In turn, if our operational activities decline, our
      financial performance and overall financial condition will also suffer. We
      cannot assure you that a replacement for these key employees could be located
      if
      their services were no longer available. At present, we do not have key man
      insurance for Mr. Geman, Mr. Walker, or Mr. Morrison.





**We
      are a high-risk early stage company.**





We
      are a
      high-risk early stage company with limited operating history in a competitive
      industry. Our limited operating history provides a limited basis on which to
      base an evaluation of our business and prospects. In addition, our revenue
      model
      relies substantially on the assumption that we will be able to successfully
      expand our sales and distribution channels in key markets. Our prospects must
      be
      considered in light of the risks, uncertainties, expenses and difficulties
      frequently encountered by companies in the earliest stages of development.
      To be
      successful, we must, among other things:





·
            continue
                to expand the number of franchise and corporate
                locations;


·
            attract
                and maintain customer loyalty;


·
            continue
                to establish and increase brand
                awareness;


·
            provide
                products to customers at attractive
                prices;


·
            establish
                and maintain relationships with strategic partners and
                affiliates;


·
            rapidly
                respond to competitive
                developments;


·
            build
                an operations and customer service structure to support our business;
                and


·
            attract,
                retain and motivate qualified
                personnel.





We
      cannot
      guarantee that we will be able to achieve these goals, and our failure to do
      so
      could have a material adverse effect on our business. If our business suffers
      as
      a result of failing to meet any one or all of these goals, our performance
      and
      financial condition will suffer.





**We
      may need additional financing to support business growth, and this capital
      might
      not be available on acceptable terms, or at all, which could adversely affect
      our financial condition.**





We
      may
      need additional funds to develop and expand our franchises, company restaurants
      and product lines. Lack of funds may cause us to delay, reduce or abandon
      aspects of our expansion or product development programs. Moreover, we cannot
      assure you that our financial resources will be sufficient to finance our
      operations on an ongoing basis, or that we will be able to obtain additional
      funding when our current financial resources are exhausted. We expect
      that our
      revenues and operating results will fluctuate significantly in the future.
      We
      could require additional financing to support existing and new franchises,
      and
      to finance the development, production and distribution of new
      products.





7




**Our
      operating results may fluctuate in future periods and, as a result, we may
      fail
      to meet investor expectations, which could cause the price of our common stock
      to decline.**





As
      a
      result of our history of incurring net losses, the relatively short time frame
      of the operations of several of our franchises and the highly competitive nature
      of the industry, we may not be able to accurately predict our operating results
      on a quarterly basis, if at all. We expect to experience significant
      fluctuations in our future quarterly operating results due to a variety of
      factors, many of which are outside of our control, including:





·
            our
                ability to establish and strengthen brand
                awareness;


·
            our
                success, and the success of our strategic partners, in promoting
                our
                products;


·
            the
                overall market demand for food products of the type offered by us
                and in
                general;


·
            pricing
                changes for food products as a result of competition or other
                factors;


·
            the
                amount and timing of the costs relating to our marketing efforts
                or other
                initiatives;


·
            the
                timing of contracts with strategic partners and other
                parties;


·
            our
                ability to compete in a highly competitive market, and the introduction
                of
                new products by us; and


·
            economic
                conditions specific to the food industry and general economic
                conditions.





We
      believe period-to-period comparisons of our operating results are not
      necessarily meaningful, and you should not rely upon them as indicators of
      future performance. It is also possible that, in the future, our operating
      results will be below the expectations of public market analysts and investors
      due to quarterly fluctuations rather than our overall performance. In that
      event, the trading price of our common stock may decline.





**We
      could have difficulty in the management of potential growth, which could
      adversely affect our business, results of operations and financial
      condition.**





We
      anticipate that a period of significant expansion will be required to capitalize
      on the potential growth in our customer base, market opportunities and
      personnel. This expansion will place a significant strain on our management,
      operational and financial resources, and we will be required to implement new
      operational and financial systems, procedures and controls, and to expand,
      train
      and manage our and our franchisees’ growing employee base. We also will be
      required to expand our finance, administrative and operations
      staff.





Further,
      we anticipate entering into relationships with various strategic partners and
      third parties necessary to our business. We cannot assure you that our current
      and planned personnel, systems, procedures and controls will be adequate to
      support our future operations, that management will be able to hire, train,
      retain, motivate and manage required personnel for planned operations, or that
      our management will be able to identify, manage and exploit existing and
      potential strategic relationship and market opportunities. Our failure to manage
      growth effectively could have a material adverse effect on our business because
      we might be unable to meet the operational and training demands of our
      franchisees or maintain a level of inventory sufficient to support demand.
      This
      could cause us to lose customers, which would have an adverse effect on our
      results of operations and financial condition.




**We
      may not be able to successfully integrate and oversee the growth of new
      franchises, which could adversely affect our business, results of operations
      and
      financial condition.**





In
      addition to organic growth to expand our operations and market presence, we
      intend to pursue a growth strategy driven by selling franchises and territories
      in key locations as well as opening additional company-owned and operated
      stores. Any such transactions would be accompanied by the risks commonly
      encountered in such transactions, including, among others, the difficulty of
      assimilating operations, technology and personnel of the combined franchises,
      the potential disruption of our ongoing business, the inability to retain key
      technical and managerial personnel, the inability of management to maximize
      our
      financial and strategic position through the successful integration of the
      new
      franchises, additional expenses associated with amortization of acquired
      intangible assets, the maintenance of uniform standards, controls and policies
      and the impairment of relationships with existing employees and customers.
      We
      may not be successful in overcoming these risks or any other potential problems.
      Any additional franchises may have a material adverse effect on our business
      if
      any of the risks stated above materialize, and each of the risks stated above
      could bring about adverse operating results which, in turn, would negatively
      impact our financial condition.





8




**We
      will incur increased costs as a result of being a public company and this may
      adversely affect our operating results.**





As
      a
      public company, we will incur significant legal, accounting and other expenses
      that we did not incur as a private company. We also anticipate that we will
      incur costs associated with recently adopted corporate governance requirements,
      including requirements under the Sarbanes-Oxley Act of 2002, as well as new
      rules implemented by the Securities and Exchange Commission (the “SEC”) and the
      OTC Bulletin Board (the “OTCBB”). We expect these rules and regulations to
      increase our legal and financial compliance costs and make some activities
      more
      time-consuming and costly. We are currently evaluating and monitoring
      developments with respect to these new rules, and we cannot predict or estimate
      the amount of additional costs we may incur or the timing of such
      costs.





**New
      rules, including those contained in and issued under the Sarbanes-Oxley Act
      of
      2002, may make it difficult for us to retain or attract qualified officers
      and
      directors, which could adversely affect the management of our business and
      our
      ability to retain the trading status of our common stock on the
      OTCBB.**





The
      enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of
      a
      series of new rules and regulations and the strengthening of existing rules
      and
      regulations by the SEC. We may be unable to attract and retain qualified
      officers, directors and members of board committees required for our effective
      management as a result of the recent and currently proposed changes in the
      rules
      and regulations that govern publicly held companies. The perceived increased
      personal risk associated with these recent changes may deter qualified
      individuals from accepting these roles.




**If
      we fail to comply with federal and state statutes, regulations and rules
      governing our offer and sale of franchises and our relationship with our
      franchisees, we may be subject to franchisee-initiated litigation and
      governmental or judicial fines or sanctions.**





We
      are
      subject to the Federal Trade Commission and to various state laws that govern
      the offer and sale of franchises. Additionally, many state laws regulate various
      aspects of the franchise relationship, including the following:





·
            the
                nature, timing and sufficiency of disclosures to franchisees upon
                the
                initiation of the franchisor-potential franchisee
                relationship;


·
            our
                conduct during the franchisor-franchisee relationship;
                and


·
            renewals
                and terminations of franchises.




Any
      past
      or future failures by us to comply with these laws and regulations in any
      jurisdiction or to obtain required government approvals could result in
      franchisee-initiated lawsuits, a ban or temporary suspension on future franchise
      sales, or civil and administrative penalties or other fines, or require us
      to
      make offers of rescission, disgorgement or restitution, any of which could
      adversely affect our business and operating results. We could also face lawsuits
      by our franchisees based upon alleged violations of these laws. In the case
      of
      willful violations, criminal sanctions could be brought against us.





**Our
      franchisees could take actions that could be harmful to our
      business** ***.***





Our
      franchisees are contractually obligated to operate their restaurants in
      accordance with our standards and all applicable laws. Although we attempt
      to
      properly train and support franchisees, franchisees are independent third
      parties that we do not control, and the franchisees own, operate and oversee
      the
      daily operations of their restaurants. As a result, the ultimate success and
      quality of any franchised restaurant rests with the franchisee. If franchisees
      do not successfully operate restaurants in a manner consistent with our
      standards, the Spicy Pickle image and reputation could be harmed, which in
      turn
      could adversely affect our business and operating results. Further, a
      franchisee’s inability to remain financially viable could result in its failure
      to pay various franchise-related fees owed to us. Finally, regardless of the
      actual validity of such a claim, we may be named as a party in an action
      relating to, and/or be held liable for, the conduct of our franchisees if it
      is
      shown that we exercise a sufficient level of control over a particular
      franchisee’s operation.





9




**RISKS
      RELATING TO OWNERSHIP OF OUR COMMON STOCK**





**Our
      common stock price has been volatile, which could result in substantial losses
      for investors purchasing shares of our common stock.**





The
      market price of our common stock has fluctuated significantly in the past.
      Our
      common stock started trading on the OTCBB under the symbol “SPKL” on August 20,
      2007. Since
      it
      started trading, the high and low prices of a share of our common stock have
      been $2.02 and $0.48, respectively. On March 5, 2008, the last reported sale
      price of a share of our common stock was $1.00.
      The market price of our common stock may continue to fluctuate in response
      to
      the following factors, in addition to others, many of which are beyond our
      control:





·
            conversion
                of our Series A Variable Rate Convertible Preferred Stock (“Series A
                Preferred Stock”) and exercise of our warrants and the sale of their
                underlying common stock;


·
            changes
                in market valuations of similar companies and stock market price
                and
                volume fluctuations generally;


·
            economic
                conditions specific to the industries within which we
                operate;


·
            announcements
                by us or our competitors of new franchises, food products or marketing
                partnerships;


·
            actual
                or anticipated fluctuations in our operating
                results;


·
            changes
                in the number of our franchises;
                and


·
            loss
                of key employees.





In
      addition, the stock market in general, and the OTCBB specifically, have
      experienced extreme price and volume fluctuations that have often been unrelated
      or disproportionate to the operating performance of the listed companies. These
      broad market and industry factors may seriously harm the market price of our
      common stock, regardless of our operating performance. In the past, following
      periods of volatility in the market, securities class action litigation has
      often been instituted against public companies. Litigation against us, whether
      or not a judgment is entered against us, could result in substantial costs,
      and,
      potentially, economic loss and a diversion of our management's attention and
      resources.




The
      market price of our common stock is likely to be highly volatile, which could
      cause investment losses for our shareholders and result in shareholder
      litigation with substantial costs, economic loss and diversion of our
      resources.





**The
      conversion of our Series A Preferred Stock and the exercise of outstanding
      options and warrants to purchase our common stock could substantially dilute
      your investment, impede our ability to obtain additional financing, and cause
      us
      to incur additional expenses.**





Under
      the
      terms of our Series A Preferred Stock and existing warrants to purchase our
      common stock, and outstanding options to acquire our common stock issued to
      employees and others, the holders are given an opportunity to profit from a
      rise
      in the market price of our common stock that, upon the conversion of our Series
      A Preferred Stock and the exercise of the warrants and/or options, could result
      in dilution in the interests of our other shareholders. The terms on which
      we
      may obtain additional financing may be adversely affected by the existence
      and
      potentially dilutive impact of our Series A Preferred Stock, options and
      warrants. In addition, holders of the Series A Preferred Stock and warrants
      have
      registration rights with respect to the common stock underlying such Series
      A
      Preferred Stock and warrants, the registration of which has caused, and may
      continue to cause, us to incur substantial expenses.





**The
      voting power and value of your investment could decline if our Series A
      Preferred Stock and warrants are converted or exercised at a reduced price
      due
      to our issuance of lower-priced shares that trigger rights of the holders of
      our
      Series A Preferred Stock and warrants to receive additional shares of our
      stock.**





As
      part
      of our recent issuance of Series A Preferred Stock, we issued a significant
      number of warrants to the purchasers of the Series A Preferred Stock, the
      conversion or exercise of which could have a substantial negative impact on
      the
      price of our common stock and could result in a dramatic decrease in the value
      of your investment. The initial conversion price of our Series A Preferred
      Stock
      and the initial exercise price of the warrants will be subject to downward
      anti-dilution adjustments in most cases, from time to time, where we issue
      securities at a purchase, exercise or conversion price that is less than the
      then-applicable conversion price of our Series A Preferred Stock or exercise
      price of the warrants. Consequently, the voting power and value of your
      investment in each such event would decline if our Series A Preferred Stock
      or
      the warrants are converted or exercised for shares of our common stock at the
      new lower price as a result of sales of our securities made below the
      then-applicable conversion price of the Series A Preferred Stock and/or the
      exercise price of the warrants.





10




**We
      may continue to pay for consulting and professional services fees with our
      stock, and this would be dilutive to investors.**





In
      the
      past, we have issued shares to consultants and professional services providers
      as a means of paying certain professional service fees and consulting
      agreements. We may continue to use our stock in the future as a means of paying
      for these kinds of services and believe that doing so will enable us to retain
      a
      greater percentage of our operating capital to pay for operations, product
      development and marketing.





Price
      and
      volume fluctuations in our stock might negatively impact our ability to
      effectively use our stock to pay for services, or it could cause us to offer
      stock as compensation for services on terms that are not favorable to us and
      our
      shareholders. If we did resort to granting stock in lieu of cash for consulting
      and professional services fees under unfavorable circumstances, it would result
      in increased dilution to investors.




**Our
      executive officers and directors own a significant amount of our common stock,
      which probably will allow them to control the outcome of matters submitted
      to
      our shareholders for vote.**





As
      of
      March 10, 2008, management owns a near-majority of our issued and outstanding
      shares of common stock. Management owns approximately 49.11% of our issued
      and
      outstanding common stock, and other remaining shareholders own approximately
      50.89% of our issued and outstanding common stock. Because management owns
      a
      significant block of the common stock, management probably will have the ability
      to elect a majority of the Board of Directors and thereby control our
      management. Although they are under no obligation to do so, if our executive
      officers and directors (and their affiliates) were to vote together, they
      probably also would have the ability to control the outcome of corporate actions
      requiring shareholder approval, including mergers and other changes of corporate
      control, going private transactions, and other extraordinary transactions.
      This
      concentration of ownership may have the effect of delaying or preventing a
      change of control, even if a change of control would benefit
      shareholders.




**We
      have not paid cash dividends to our common stockholders, and it is unlikely
      that
      we will pay cash dividends to our common stockholders in the foreseeable
      future.**





To
      the
      extent that we have earnings, we plan to use earnings to fund our operations.
      We
      do not plan to pay any cash dividends on our common stock in the foreseeable
      future. We cannot guarantee that we will generate, at any time, sufficient
      surplus cash that would be available for distribution as a dividend to the
      holders of our common stock. You should not expect to receive cash dividends
      on
      our common stock.





**Our
      common stock is considered to be a “penny stock” as defined by Section 3(a)(51)
      and Rule 3a51-1 under the Securities Exchange Act of 1934, as amended (the
      “Exchange Act”), and, therefore, is subject to penny stock regulations. These
      regulations could make it more difficult for you to sell shares you
      acquire.**





Our
      common stock is subject to regulations of the SEC relating to the market for
      penny stocks. These regulations generally require broker-dealers who sell penny
      stocks to persons other than established customers and accredited investors
      to
      deliver a disclosure schedule explaining the penny stock market and the risks
      associated with that market. These regulations also impose various sales
      practice requirements on broker-dealers. The regulations that apply to penny
      stocks may severely affect the market liquidity for our securities, and that
      could limit your ability to sell your securities in the secondary
      market.





11




**NOTE
      REGARDING FORWARD-LOOKING STATEMENTS**





This
      report, including the sections entitled “Business,” “Risk Factors” and
“Management's Discussion and Analysis of Financial Condition and Results of
      Operations,” contains forward-looking statements.





These
      statements relate to future events or our future financial performance and
      involve known and unknown risks, uncertainties and other factors that may cause
      our actual results, levels of activity, performance or achievements to be
      materially different from any future results, levels of activity, performance
      or
      achievements expressed or implied by these forward-looking statements. These
      risks and other factors include those listed under “Risk Factors” and elsewhere
      in this report. In some cases, you can identify forward-looking statements
      by
      terminology such as “may,” “expects,” “intends,” “plans,” “anticipates,”
“believes,” “potential,” “continue” or the negative of these terms or other
      comparable terminology. Although we believe that the expectations reflected
      in
      the forward-looking statements are reasonable, we cannot guarantee future
      results, levels of activity, performance or achievements. We do not intend
      to
      update any of the forward-looking statements after the date of this report
      or to
      conform these statements to actual results.





You
      should rely only on the information contained in this report. We have not
      authorized any other person to provide you with information that is different
      from that contained in this report. If anyone provides you with different or
      inconsistent information, you should not rely on it. The information presented
      on, or that can be accessed through, our website is not a part of this report.
      You should assume the information appearing in this report is accurate only
      as
      of the date on which this report was filed. Our business, financial condition,
      results of operations and prospects may have changed since that
      date.





**Item
      1B. Unresolved Staff Comments**





Not
      required.





**Item
      2. Properties**





We
      do not
      own any real property. We lease all of the real properties we use in our
      business. The table below sets forth information regarding each of those
      properties as of March 10, 2008. We believe that each of our leased facilities
      is suitable for the operations we conduct in it.





Use
            
            Location
            
            Current
              Monthly
              Rent
            
            Square
              Footage
            
            Remaining
              Term
                (in
              years)
              Including
              Expected
              Renewal
              Period
            
            CommentsCorporate
                headquarters
            
            
            90
                Madison St.
              Denver,
                CO
            
            $
            7,964
            
            
            10,159
            
            
            4.58
            
            
            Rent
                increases in 2008 and 2009.Restaurant
                and bakery
            
            
            1298
                S. Broadway
              Denver,
                CO
            
            $
            4,081
            
            
            3,481
            
            
            9.17
            
            
            Rent
                increases in 2012.Restaurant
            
            
            10320
                Federal Heights Blvd.
              #200
              Federal
                Heights, CO
            
            $
            3,958
            
            
            1,453
            
            
            11.67
            
            
            Rent
                increases each year. Includes 2 five-year renewals.Restaurant
            
            
            8923
                E. Union Ave.
              Greenwood
                Village, CO
            
            $
            1,909
            
            
            1,516
            
            
            12.75
            
            
            Rent
                increases each year. Includes 2 five-year renewals.Restaurant
            
            
            2043
                S. University Blvd.
              Denver,
                CO
            
            $
            3,740
            
            
            2,200
            
            
            8.42
            
            
            Rent
                increases each year. Includes 2 five-year renewals.Restaurant
            
            
            123
                N. College Ave.
              Ft.
                Collins, CO
            
            $
            3,635
            
            
            1,848
            
            
            18.83
            
            
            Includes
                3 five-year options.Restaurant
            
            
            2312
                N. Lincoln Ave.
              Chicago,
                IL
            
            $
            4,096
            
            
            1,200
            
            
            4.08
            
            
            Rent
                increases each year.Restaurant
              (under
                construction)
            
            
            2120
                E. Harmony Rd.
              #101
              Ft.
                Collins, CO
            
            $
            4,650
            
            
            1,800
            
            
            10.83
            
            
            Includes
                1 five-year option.Restaurant
              (under
                construction)
            
            
            2300
                Parker Rd.
              Aurora,
                CO
            
            $
            5,250
            
            
            1,800
            
            
            10.00
            
            
            Rent
                increases each year.




12




**Item
      3. Legal Proceedings.**





We
      are
      not involved in any material legal proceedings. None of our officers, directors
      or affiliates, nor any owner of record or beneficially of more than five percent
      of any class of our voting securities, nor any associate of any such director,
      officer, affiliate of the Company, or security holder is a party adverse to
      us
      or any of our subsidiaries or has a material interest adverse to us or any
      of
      our subsidiaries.





**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders.**





No
      matters were submitted to a vote of security holders during the fourth quarter
      of the fiscal year ended December 31, 2007.




13




**PART
      II**





**Item
      5.**  **Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities.**





**Market
      Information**





Our
      common stock is quoted on the OTCBB under the symbol “SPKL.” Trading of our
      stock on the OTCBB began on August 20, 2007. The following table sets forth,
      for
      the periods indicated, the reported high and low closing bid quotations for
      our
      common stock as reported by NASDAQ in the Info Quotes section of its website
      located at www.nasdaq.com. The bid prices reflect inter-dealer quotations,
      do
      not include retail markups, markdowns or commissions and may not represent
      actual transactions.





Quarter
                Ended
            
            High
                Bid
            
            Low
                BidDecember
                31, 2007
            
            $
            2.02
            
            $
            0.92September
                30, 2007
            
            $
            1.24
            
            $
            0.48





**Shareholders**





We
      have
      approximately 92 record holders of our common stock as of March 10,
      2008.





**Dividends**





We
      have
      not paid any cash dividends on our common stock, and we currently intend to
      retain any future earnings to fund the development and growth of our business.
      Any future determination to pay dividends on our common stock will depend upon
      our results of operations, financial condition and capital requirements,
      applicable restrictions under any credit facilities or other contractual
      arrangements or related to the Series A Preferred Stock and such other factors
      deemed relevant by our Board of Directors.





**Equity
      Compensation Plan Information**





Information
      relating to compensation plans under which our equity securities are authorized
      for issuance is set forth in Item 12 of this report under “Security Ownership of
      Certain Beneficial Owners and Management and Related Stockholder
      Matters.”





**Use
      of Proceeds**


On
      January 24, 2007, the SEC declared effective a registration statement we filed
      on Form SB-2 (File number 333-138228), registering for sale by us up to
      10,000,000 shares of our common stock and for resale by existing selling
      shareholders up to 8,240,000 shares of our common stock. We sold 4,352,780
      of
      the shares offered by us at a price of $.40 per share for gross proceeds of
      $1,741,112, less offering expenses of $118,434, for net proceeds of
      $1,622,678.We terminated the offering on November 15, 2007 prior to the sale
      of
      all of the registered securities.




**Item
      6. Selected Financial Data**





Not
      required




**Item
      7. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations**





The
      following discussion and analysis of financial condition and results of
      operations should be read in conjunction with our financial statements and
      related notes included elsewhere in this report. This discussion contains
      forward-looking statements that involve risks, uncertainties and assumptions.
      Our actual results could differ materially from those anticipated in the
      forward-looking statements as a result of certain factors discussed in "Risk
      Factors" and elsewhere in this report.


14


**Overview**





Our
      sole
      business is the franchise and operation of Spicy Pickle restaurants. Spicy
      Pickle is a fast casual restaurant where made-to-order panini, submarine-style
      sandwiches, pizzetti (Neapolitan thin crust pizza), and salads created by our
      founders are served using fresh-baked breads and high-quality ingredients.
      Although prices are set by franchisees at the store level and vary from location
      to location, sandwiches typically cost between $6.45 and $7.25 with small and
      large soups and salads ranging from $3.45 to $7.95. An individual size pizzetti
      ranges from $7.45 to $7.95. Our goal
      is to deliver a delicious flavor profile, an exceptional customer experience,
      and an enjoyable atmosphere in our locations; we cannot assure you that we
      will
      succeed. We believe our menu items appeal to diners of all ages and preferences,
      and we expect to accommodate all
      day
      parts, including breakfast, lunch and dinner.





We
      market
      our menu primarily through targeted local store marketing efforts, mail drops,
      and print campaigns, as well as through other grass roots efforts. The "Spicy
      Pickle" brand name has existed for eight years. We are headquartered in Denver,
      Colorado.





The
      first
      Spicy Pickle restaurant was launched in 1999 by founders Kevin Morrison and
      Anthony Walker under the name Spicy Pickle, LLC. In late 2001, there were three
      restaurants, two in Denver and one in Lakewood, a Denver suburb. By January
      2003, we organized Spicy Pickle Franchising, LLC and launched the Spicy Pickle
      brand as a national franchise and recruited Marc Geman, former president of
      the
      PretzelMaker franchise, as our Chief Executive Officer.





As
      of
      December 31, 2007, we had 35 franchised restaurants and one company-owned
      restaurant opened. The company-owned restaurant is a replacement for a
      company-owned restaurant that closed in November 2006. Co-located with this
      restaurant is a bakery.





Our
      prior
      company restaurant, which we used as a training restaurant, operated at a loss.
      This loss is primarily due to higher labor costs at a restaurant that is used
      for training purposes. The number of employees per shift is higher than a normal
      restaurant, and the employees are less productive during the training period.
      We
      anticipate that our new company restaurant will also operate at a loss for
      its
      first year of operations.





Our
      franchise agreements include build-out schedules for franchisee restaurants.
      Based on current franchise agreements and construction schedules, we believe
      there will be approximately 60 to 65 Spicy Pickle, franchisee-owned and operated
      restaurants and at least 5 company-operated restaurants open by the end of
      2008.





As
      of
      December 31, 2007, we have sold 102 franchises. Of the franchises sold, 35
      franchise restaurants are opened and operating, 3 franchise restaurants are
      under construction, 10 franchise sites are under lease negotiation (we have
      either received an actual lease that is being reviewed or a letter of intent),
      1
      franchise restaurant closed and 53 franchise sites are subject to area
      development agreements. An area development agreement is entered into when
      a
      franchisee has purchased the rights to a geographic area with a set number
      of
      stores in that area.





We
      completed a bakery co-located with our new Denver company restaurant that will
      supply the Spicy Pickle restaurants in the Denver, Boulder, Colorado Springs,
      and Ft. Collins areas with daily fresh-baked bread. This bakery will replace
      the
      current supplier of our artisan breads and is expected to result in a food
      cost
      savings for the franchisees in that market. Spicy Pickle restaurants outside
      this market are equipped for bread baking at the store location.





Our
      locations and marketing efforts are directed principally to white collar
      administrative, managerial, professional, and sales personnel, who are generally
      found in and near downtown districts, technological centers, universities,
      hospitals and government complexes.





We
      currently derive our revenue from the sale of franchises, from royalties paid
      by
      franchisees and from the sale of food and beverages at the company store we
      opened in December 2007. Our business is headquartered in Colorado, and we
      have
      a high concentration of restaurants in the Rocky Mountain region. Additionally,
      we have franchises opened and planned in a number of other regions in the United
      States. Our restaurant locations (including both company-owned and
      franchisee-owned), including those under construction and lease negotiation
      as
      of December 31, 2007, are:


15





Location
            
            Restaurants
                Operating
            
            Under
              Construction
            
            In
                Lease
              NegotiationDenver,
                Colorado
            
            
            5
            
            
            
            
            
            2Boulder,
                Colorado
            
            
            2Ft.
                Collins, Colorado
            
            
            1
            
            
            1Aurora,
                Colorado
            
            
            1Littleton,
                Colorado
            
            
            1Centennial,
                Colorado
            
            
            1Lone
                Tree, Colorado
            
            
            1Greenwood
                Village, Colorado
            
            
            1Federal
                Heights, Colorado
            
            
            1Johnstown,
                Colorado
            
            
            1Colorado
                Springs, Colorado
            
            
            2Louisville,
                Colorado
            
            
            1Englewood,
                Colorado
            
            
            1Ashburn,
                Virginia
            
            
            1Sioux
                Falls, South Dakota
            
            
            1Portland,
                Oregon
            
            
            2Poway,
                California
            
            
            1Sacramento,
                California
            
            
            1Henderson,
                Nevada
            
            
            1Reno,
                Nevada
            
            
            2Chicago,
                Illinois
            
            
            1Cincinnati,
                Ohio
            
            
            1
            
            
            
            
            
            1Austin,
                Texas
            
            
            2
            
            
            
            
            
            1San
                Diego, California
            
            
            
            
            
            1
            
            
            2Indianapolis,
                Indiana
            
            
            2
            
            
            
            
            
            1Chandler,
                Arizona
            
            
            1Brooklyn,
                New York
            
            
            
            
            
            
            
            
            1Hattiesburg,
                Mississippi
            
            
            1Oklahoma
                City, Oklahoma
            
            
            
            
            
            
            
            
            2Pender,
                Virginia
            
            
            
            
            
            
            
            
            1Ocala,
                Florida
            
            
            
            
            
            
            
            
            1Cedar
                Park, Texas
            
            
            
            
            
            1
            
            
            036
            
            
            3
            
            
            12





We
      intend
      to increase our revenues by adding new company-owned stores, selling new
      franchises and expanding consumption of our food products at all stores. General
      economic and industry conditions may affect our ability to do so and our revenue
      performance.





**Critical
      Accounting Policies and Estimates**





The
      preparation of our financial statements in conformity with accounting principles
      generally accepted in the United States of America requires us to make estimates
      and assumptions that affect the reported amounts of assets and liabilities,
      the
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported revenues and expenses during the reporting periods.
      Actual results could differ from those estimates. A summary of accounting
      policies that have been applied to the historical financial statements presented
      in this report can be found in the footnotes thereto. We consider certain of
      these accounting policies to be critical as they are important to the portrayal
      of our financial condition and results of operations and may require judgments
      on the part of management about matters that are uncertain. We have identified
      the following accounting policies that are important to the presentation of
      financial information in this report.





*Revenue
      Recognition*





Initial
      Franchise Fees – We enter into franchise agreements that grant franchisees
      the exclusive right to develop and operate businesses at certain locations.
      Initial franchise fees are recognized as revenue when all material services
      and
      conditions required to be performed by us have been substantially completed,
      which is generally when the restaurant opens. Initial franchise fees were
      $497,500 and $170,000 for the years ended December 31, 2007 and 2006,
      respectively.


16




Royalty
      Fees – Pursuant to the franchise agreements, franchisees are required to pay
      royalties to us at the rate of 5% of weekly gross sales as reported to us
      through the franchisees’ point of sale systems. Royalties are recognized as
      revenue in the period corresponding to the reported period. Royalty fees were
      $577,334 and $294,481 for the years ended December 31, 2007 and
      2006.





With
      regard to royalty fees, our franchisees grant us the right to extract data
      from
      their point of sale systems in each restaurant they operate. We receive weekly
      reports on sales at each franchise location and calculate our revenue directly
      from those reports. This allows for extremely accurate accounting of our revenue
      stream from royalty fees. We do not anticipate any future change in the method
      of reporting.





Rebates
–
      We receive rebates from purveyors that supply products to our franchisees.
      Rebates related to franchisees are included in Franchise Fees and Royalties.
      The
      rebates are recorded when earned. Rebates that relate to the company-owned
      restaurant are offset against restaurant cost of sales. Rebates related to
      franchisees were $151,020 and $79,638 for the years ended December 31, 2007
      and
      2006, respectively.





Product
      Sales – Prior to the fourth quarter of 2007, we sold logo products to our
      franchisees. Sales were recognized when products were shipped to the franchisee.
      These types of sales are now handled by a third-party supplier who sells
      directly to our franchisees.





Restaurant
      and Bakery Sales – We record revenue from company-owned restaurant sales upon
      delivery of the related food and other products to customers. Our restaurant
      sales are either cash or credit card (which are pre-approved) sales and,
      therefore, no estimate for collectibility is necessary. We
      record
      revenue from bakery sales when sold to the bakery customers, which are our
      franchisees.





*Advertising
      Costs*





Franchisees
      must contribute to an advertising fund established by us at a rate of up to
      2%
      of total franchisee gross sales. In our discretion, we may spend more or less
      than our actual advertising receipts from the franchisees. Advertising fees
      collected were $291,881 and $200,455 for the years ended December 31, 2007
      and
      2006, respectively. These fees are offset against actual advertising expenses,
      which are recognized when incurred. We incurred advertising expenses of $443,566
      and $242,906 for the years ended December 31, 2007 and 2006, respectively.
      We
      paid those expenses from the advertising fund and from our own funds. The net
      amounts reflected as advertising costs in the financial statements are $151,685
      and $42,451 for the years ended December 31, 2007 and 2006,
      respectively.





*Rent
      Expense*





We
      recognize rent expense on a straight-line basis over the reasonably assured
      lease term as defined in the Financial Accounting Standards Board ("FASB")
      Statement of Financial Accounting Standards ("SFAS") No. 98, "Accounting for
      Leases.'' In addition, certain of our lease agreements provide for scheduled
      rent increases during the lease term or for rental payments commencing on a
      date
      other than the date of initial occupancy. We include any rent escalations and
      construction period and other rent holidays in our determination of
      straight-line rent expense. Therefore, rent expense for new locations is charged
      to expense beginning with the start of the construction period.





*Equity-Based
      Compensation*





On
      January 1, 2006, we adopted FASB SFAS No. 123 (revised 2004), “Share-Based
      Payment” (“SFAS 123(R)”), which requires the measurement and recognition of
      compensation expense for all share-based payment awards made to employees and
      directors including employee stock options based on estimated fair values.
      SFAS
      123(R) supersedes our previous accounting under Accounting Principles Board
      Opinion No. 25, “Accounting for Stock Issued to Employees.” In March 2005, the
      SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS
      123(R). We have applied the provisions of SAB 107 in our adoption of SFAS
      123(R).


17




SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service periods in our statement of operations.
      Prior
      to the adoption of SFAS 123(R), we had no stock-based compensation awarded
      to
      employees and directors.





*Recent
      Pronouncements*





We
      have
      reviewed all recently issued, but not yet effective, accounting pronouncements
      and do not believe the future adoption of any such pronouncements may be
      expected to cause a material impact on our financial condition or the results
      of
      our operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS
      157”). SFAS 157 is effective for financial statements issued for fiscal years
      beginning after November 15, 2007. SFAS 157 defines fair value, establishes
      a
      framework for measuring fair value in generally accepted accounting principles
      (“GAAP”), and expands disclosure about fair value measurements. Management does
      not expect adoption of SFAS 157 to have a material impact on the Company's
      financial statements.





On
      February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value
      Option for Financial Assets and Financial Liabilities — Including an Amendment
      of FASB Statement No. 115” (“SFAS 159”). This standard permits an entity to
      measure many financial instruments and certain other items at estimated fair
      value. Most of the provisions of SFAS 159 are elective; however, the
      amendment to FASB Statement No. 115, “Accounting for Certain Investments in
      Debt and Equity Securities,” applies to all entities that own trading and
      available-for-sale securities. The fair value option created by SFAS 159 permits
      an entity to measure eligible items at fair value as of specified election
      dates. The fair value option (a) generally may be applied instrument by
      instrument, (b) is irrevocable unless a new election date occurs, and
      (c) must be applied to the entire instrument and not to only a portion of
      the instrument. SFAS 159 is effective as of the beginning of the first fiscal
      year that begins after November 15, 2007. Early adoption is permitted as of
      the beginning of the previous fiscal year provided that the entity
      (i) makes that choice in the first 120 days of that year,
      (ii) has not yet issued financial statements for any interim period of such
      year, and (iii) elects to apply the provisions of FASB Statement No. 157.
      Management is currently evaluating the impact of SFAS 159, if any, on our
      financial statements.





In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
      Combinations” (“SFAS No. 141R”). SFAS No. 141R will change the accounting for
      business combinations. Under SFAS No. 141R, an acquiring entity will be required
      to recognize all the assets acquired and liabilities assumed in a transaction
      at
      the acquisition-date fair value with limited exceptions. SFAS No. 141R will
      change the accounting treatment and disclosure for certain specific items in
      a
      business combination. SFAS No. 141R applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008.
      Accordingly, any business combinations we engage in will be recorded and
      disclosed following existing GAAP until January 1, 2009. The Company expects
      SFAS No. 141R will have an impact on accounting for business combinations once
      adopted, but the effect is dependent upon acquisitions at that time. The Company
      is still assessing the impact of this pronouncement.





In
      December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
      Consolidated Financial Statements-An Amendment of ARB No. 51" (“SFAS No. 160").
      SFAS No. 160 establishes new accounting and reporting standards for the
      non-controlling interest in a subsidiary and for the deconsolidation of a
      subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
      December 15, 2008. The Company believes that SFAS 160 should not have a material
      impact on our financial position or results of operations.





We
      believe that any estimates or assumptions we have made in the past have been
      accurate. We do not anticipate that any estimate or assumption is likely to
      change in the future. We also believe that, due to the nature of our business,
      there should not be any change to our accounting policies in the
      future.


18


**Results
      of Operations**





Operating
      Statistics


The
      following analysis shows operating statistics for the years ended December
      31,
      2007 and 2006:





2007
            
            2006Amount
            
            As
                a
              Percentage
              of
                Total
              Revenue
            
            Amount
            
            As
                a
              Percentage
              of
                Total
              RevenueRevenues:Restaurant
                and bakery sales
            
            $
            30,730
            
            
            2.41
            %
            $
            409,018
            
            
            45.85
            %Franchise
                fees and royalties
            
            
            1,243,263
            
            
            97.59
            %
            
            482,991
            
            
            54.15
            %Total
                revenue
            
            $
            1,273,993
            
            
            100.00
            %
            $
            892,009
            
            
            100.00
            %Operating
                costs and expenses:As
                a   Percentage
              of
              RestaurantSales
            
            
            
            
            
            As
                a
              Percentage
              of
              Restaurant
              SalesRestaurant:Cost
                of sales
            
            $
            30,383
            
            
            98.87
            %
            $
            160,728
            
            
            39.30
            %Labor
            
            
            33,137
            
            
            107.83
            %
            
            154,619
            
            
            37.80
            %Occupancy
            
            
            44,423
            
            
            144.56
            %
            
            67,951
            
            
            16.61
            %Other
                operating cost
            
            
            42,551
            
            
            138.47
            %
            
            50,582
            
            
            12.37
            %Total
                restaurant operating expenses
            
            $
            150,494
            
            
            489.73
            %
            $
            433,880
            
            
            106.08
            %As
                a
              Percentage
              ofFranchise
              Fees
                and
              Royalties
            
            
            
            
            
            As
                a
              Percentage
              of
                Franchise
              Fees
                and
              RoyaltiesFranchise
                and general:Cost
                of sales
            
            $
            -
            
            
            -
            
            $
            18,510
            
            
            3.83
            %General
                and administrative
            
            
            4,735,854
            
            
            380.92
            %
            
            1,834,571
            
            
            379.84
            %Depreciation
            
            
            22,744
            
            
            1.83
            %
            
            18,575
            
            
            3.85
            %Total
                franchise and general expenses
            
            $
            4,758,598
            
            
            382.75
            %
            $
            1,871,656
            
            
            387.52
            %As
                a
              Percentage
              of
                Total
              Revenue
            
            
            
            
            
            As
                a
              Percentage
              of
                Total
              RevenueTotal
                operating costs and expenses
            
            $
            4,909,092
            
            
            385.33
            %
            $
            2,305,536
            
            
            258.47
            %(Loss)
                from operations
            
            
            (3,635,099
            )
            
            (285.33
            )%
            
            (1,413,527
            )
            
            (158.47
            )%Other
                income and (expense):Interest
                income
            
            
            51,252
            
            
            4.02
            %
            
            29,556
            
            
            3.31
            %Other
                income (expense)
            
            
            (18,037
            )
            
            (1.42
            )%
            
            986
            
            
            0.11
            %Total
                other income and (expense)
            
            
            33,215
            
            
            2.60
            %
            
            30,542
            
            
            3.42
            %Net
                (loss)
            
            $
            (3,601,884
            )
            
            (282.72
            )%
            $
            (1,382,985
            )
            
            (155.04
            )%




19


For
      the
      twelve months ended December 31, 2007, total revenue increased $381,984 (43%)
      from $892,009 in 2006 to $1,273,993 in 2007. For the twelve months ended
      December 31, 2007, restaurant and bakery sales decreased by $378,288 over the
      same period in 2006. This decrease is the result of the restaurant operating
      for
      less than 1 month in 2007 and 10 months in 2006. The lease on this restaurant
      that was operating during 2006 expired in November of that year, and we elected
      not to renew it. We constructed a new restaurant and co-located a bakery in
      the
      same building. The restaurant opened in mid-December 2007, and the bakery opened
      right after the beginning of 2008. For the year ended December 31, 2007,
      franchise fees and royalties increased $760,272 (157%) over the same period
      in
      2006. The increase relates directly to the number of franchised restaurants
      sold
      and opened. For the year ended December 31, 2007, we recognized franchise fees
      of $497,500. This represented 19 locations opened during this period. During
      the
      period ended December 31, 2006, we recognized franchise fees of $170,000. This
      represented 6 locations opened in 2006. Deferred franchise revenue (not included
      in the statement of operations) increased $85,000 from $685,000 at December
      31,
      2006 to $770,000 at December 31, 2007. At December 31, 2007, there were deferred
      fees for 67 new locations. Royalty fees increased approximately $282,853 as
      a
      result of more operating locations in 2007 than in 2006. At December 31, 2007,
      there were 35 operating franchised locations compared to 16 operating franchised
      locations at December 31, 2006.





Operating
      expenses for the year ended December 31, 2007 increased $2,603,556 (113%) from
      $2,305,536 in 2006 to $4,909,092 in 2007





Cost
      of
      restaurant and bakery operations decreased $283,386 (65%) from $433,880 in
      2006
      to $150,494 in 2007 as a result of the difference in the number of months of
      operations. As a percentage of sales, cost of restaurant operations were
      significantly higher in 2007 than in 2006. The difference is due primarily
      to
      store opening expenses in 2007, which included rent during the construction
      period, employee training and promotional give-aways during the grand
      opening.





The
      following table sets forth details of the costs that make up franchise and
      general expenses and the differences for the year ended December 31, 2007 as
      compared to December 31, 2006.





2007
            
            2006
            
            DifferencePersonnel
                cost
            
            $
            1,935,067
            
            $
            800,722
            
            $
            1,134,345Investor
                relations
            
            
            731,343
            
            
            -
            
            
            731,343Travel
                and entertainment
            
            
            440,982
            
            
            211,039
            
            
            229,943Stock
                options
            
            
            403,368
            
            
            7,595
            
            
            395,773Professional
                fees
            
            
            348,931
            
            
            444,512
            
            
            (95,581
            )Marketing,
                advertising, promotion
            
            
            151,685
            
            
            107,532
            
            
            44,153Rent
            
            
            138,865
            
            
            60,349
            
            
            78,516MIS
            
            
            113,015
            
            
            32,812
            
            
            80,203Communication
            
            
            112,200
            
            
            38,919
            
            
            73,281Office
                supplies and expenses
            
            
            109,972
            
            
            44,194
            
            
            65,778Other
                general and administrative expenses
            
            
            250,426
            
            
            105,407
            
            
            145,019Total
                general and administrative expenses
            
            $
            4,735,854
            
            $
            1,853,081
            
            $
            2,882,773





Franchise
      and general expenses increased $2,882,773 (156%) from $1,853,081 for the year
      ended December 31, 2006 to $4,735,854 for the year ended December 31, 2007.
      The
      increase related to the increased number of franchises and our increased
      activity in seeking new franchisees. In order to service our increased number
      of
      operating locations and to continue to increase the number of franchises, we
      hired more employees. The number of employees, not including restaurant
      employees, increased from 18 at December 31, 2006 to 22 at December 31, 2007.
      The number of employees as well as increased wages and benefits resulted in
      an
      increase in personnel cost of $1,134,345 (142%) from $800,722 in 2006 to
      $1,935,067 in 2007. We became a public company in 2007. Our stock began trading
      on the OTCBB in August 2007. We engaged a number of investor relations firms
      to
      assist in attracting new shareholders in the Company. We expensed $731,343
      for
      these investor relations expenses in 2007. Of that amount $76,300 was paid
      in
      cash and $655,043 was paid in our common stock. We will continue to incur
      investor relations expenses in the future. Travel and entertainment increased
      as
      a result in the increased activity in our business. Stock option expense
      represents the fair value of options granted to employees. The stock option
      plan
      was established in October 2006 and accordingly more grants were made in 2007
      than in 2006. Although professional fees decreased by $95,581 in 2007 as
      compared to 2006 we expect higher legal and accounting fees as a result of
      being
      a public company. Our franchisees pay an advertising fee equal to 2% of the
      gross revenue of the franchised restaurants they operate. Our accounting policy
      is to offset the amounts collected from the franchisees against actual
      advertising expenses. The amount collected for the year ended December 31,
      2007
      was $291,881 as compared to $200,455 for the year ended December 31, 2006.
      Actual expenses for the year ended December 31, 2007 were $443,566 as compared
      to $242,906 for the year ended December 31, 2006. This increase was primarily
      due to an increase in advertising resulting from a greater number of markets.
      The net amount charged to expense was $151,685 for the year ended December
      31,
      2007 and $42,451 for the year ended December 31, 2006. Other general and
      administrative expenses increased across the board as our business grew and
      were
      anticipated.


20




The
      net
      loss for the year ended December 31, 2007 was $3,601,884 compared to a loss
      of
      $1,382,985 for the same period in 2006 for an increased loss of $2,218,899
      (160%). The loss from operations was $3,635,099 in the year ended December
      31,
      2007 compared to $1,413,527 for the year ended December 31, 2006. The increase
      in the loss from operations of $2,221,572 (157%) was primarily due to increased
      payroll expenses, investor relations, stock options and increases in other
      operating expenses.





**Liquidity
      and Capital Resources**





At
      December 31, 2007, we had working capital of $4,398,216, as compared to working
      capital of $433,756 at December 31, 2006. The increase in working capital is
      primarily due to increased operating activities and losses as offset by
      increased fund raising activities. During 2007, we completed two separate
      financings. The first was the public sale of 4,352,780 shares of our common
      stock for gross proceeds of $1,741,112 offset by offering expenses of $118,434
      for net proceeds of $1,622,678. The second was a
      private
      equity financing of $5,992,500. The net proceeds from the offering were
      $5,623,996. The Company issued 705 shares of its Series A Preferred Stock,
      par
      value $0.001 per share and stated value of $8,500 per share. Each share of
      the
      Series A Preferred Stock is immediately convertible into 1,000 shares of the
      Company’s $.001 par value common stock.





During
      the year ended December 31, 2007, we used cash in operating activities of
      $2,425,198 as compared to cash used in operations of $590,640 for the same
      period in 2006. We also used cash for the acquisition of assets in the amount
      of
      $584,389 in 2007 as compared to $119,811 in 2006. We receive payments from
      franchisees when they sign a franchise agreement. We do not include those
      payments in revenue until such time as the franchisee opens the restaurant.
      The
      amount recorded as deferred revenue at December 31, 2007 was $770,000, an
      increase of $85,000 compared to December 31, 2006. Although not recorded as
      revenue, these payments provide working capital.





At
      December 31, 2007, we had contractual obligations for operating leases of
      approximately $1,412,470, of which $239,594 was due in less than one year.





As
      of
      December 31, 2007, our aggregate minimum requirements under non-cancelable
      leases are as follows:





2008
            
            $
            239,5942009
            
            
            221,5732010
            
            
            159,5492011
            
            
            160,9902012
            
            
            166,990Later
                years
            
            
            463,775$
            1,412,470




*Summary –
      December 31, 2007*





As
      a
      result of our recent fund raising activity we have significant cash,
      approximately $5,400,000, with which to implement our business
      strategy.


21




Our
      need
      to raise additional equity or debt financing and our ability to generate cash
      flow from operations will depend on our future performance and our ability
      to
      successfully implement our stated business and growth strategies. Our results
      of
      operations will also be affected by prevailing economic conditions. Many of
      these factors are beyond our control. If our working capital is insufficient
      to
      fund the implementation of our business plan (due to a change in our plans
      or a
      material inaccuracy in our assumptions, or as a result of unanticipated
      expenses, or other unanticipated problems), we will be required to seek
      additional financing sooner than currently anticipated in order to proceed
      with
      such implementation. In the event that we need additional capital and are unable
      to obtain it, we could be left without sufficient liquidity.





In
      the
      past we have issued common stock to our consultants and professional services
      providers in lieu of cash payments for these services. We may continue this
      practice to conserve our cash to pay for operations, product development and
      inventory.





**Off-Balance
      Sheet Arrangements**





At
      December 31, 2007, we had no obligations that would qualify to be disclosed
      as
      off-balance sheet arrangements




**Item
      7A. Quantitative and Qualitative Disclosures About Market
      Risk**





Not
      required.




22


**Item
      8. Financial Statements and Supplementary Data**





PageIndex
                to Consolidated Financial StatementsReport
                of Independent Registered Public Accounting Firm
            24Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            25Consolidated
                Statements of Operations for the Years Ended December 31, 2007 and
                2006
            26Consolidated
                Statements of Stockholders' Equity for the Years Ended December 31,
                2007
                and 2006
            27Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2007 and
                2006
            28Notes
                to Consolidated Financial Statements
            29




23




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders of


Spicy
      Pickle Franchising, Inc.


Denver,
      Colorado




We
      have
      audited the accompanying consolidated balance sheets of Spicy Pickle
      Franchising, Inc as of December 31, 2007 and 2006, and the related consolidated
      statements of operations, stockholders’ equity, and cash flows for each of the
      years ended 2007 and 2006. Spicy Pickle Franchising Inc.’s management is
      responsible for these financial statements. Our responsibility is to express
      an
      opinion on these financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The company is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audit included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Spicy Pickle Franchising Inc.
      as of
      December 31, 2007 and 2006, and the results of its operations and its cash
      flows
      for each of the years ended 2007 and 2006 in conformity with accounting
      principles generally accepted in the United States of America .




***Gordon,
                Hughes & Banks,
                LLP***





Greenwood
      Village, Colorado


March
      17,
      2008


24




Spicy
      Pickle Franchising, Inc.


Consolidated
      Balance Sheets


December
      31, 2007 and 2006





2007
            
            2006AssetsCurrent
                assets:Cash
                and cash equivalents
            
            $
            5,405,069
            
            $
            1,198,982Current
                portion of notes receivable
            
            
            40,000
            
            
            -Accounts
                receivable, trade, net
            
            
            60,489
            
            
            63,597Inventory
            
            
            11,383
            
            
            31,969Prepaid
                expenses and other current assets
            
            
            184,498
            
            
            29,171Total
                current assets
            
            
            5,701,439
            
            
            1,323,719Property
                and equipment, net of accumulated depreciation
            
            
            685,751
            
            
            127,982Other
                assets:Notes
                receivable, less current portion
            
            
            40,000
            
            
            -Deposits
                and other assets
            
            
            12,869
            
            
            30,107Total
                other assets
            
            
            52,869
            
            
            30,107Total
                assets
            
            $
            6,440,059
            
            $
            1,481,808Liabilities
                and stockholders' equityCurrent
                liabilities:Current
                portion of notes payable to related parties
            
            $
            -
            
            $
            30,000Accounts
                payable
            
            
            441,096
            
            
            55,440Accrued
                expenses and compensation
            
            
            89,827
            
            
            63,298Accounts
                payable related parties
            
            
            -
            
            
            53,925Deferred
                franchise revenue
            
            
            770,000
            
            
            685,000Other
            
            
            2,300
            
            
            2,300Total
                current liabilities
            
            
            1,303,223
            
            
            889,963Commitments
                and contingenciesStockholders'
                equity:Preferred
                stock, $.001 par value, 20,000,000 shares authorized, 705 shares
                of Series
                A Variable Rate Convertible Preferred Stock, stated value $8,500
                per
                share, issued and outstanding in 2007 and none issued or outstanding
                in
                2006
            
            
            4,801,124
            
            
            -Common
                stock, $.001 par value, 200,000,000 shares authorized, 47,634,053
                and
                40,996,455 shares issued and outstanding in 2007 and 2006,
                respectively
            
            
            47,634
            
            
            40,996Additional
                paid in capital
            
            
            5,546,692
            
            
            1,161,516Fair
                value of common stock warrants
            
            
            873,825
            
            
            -Accumulated
                (deficit)
            
            
            (5,562,772
            )
            
            (610,667
            )Deferred
                compensation
            
            
            (569,667
            )
            
            -Total
                stockholders' equity
            
            
            5,136,836
            
            
            591,845Total
                liabilities and stockholders’ equity
            
            $
            6,440,059
            
            $
            1,481,808





See
      the
      accompanying notes to the consolidated financial statements


25





Spicy
      Pickle Franchising, Inc.


Consolidated
      Statements of Operations


Years
      Ended December 31, 2007 and 2006




Year
                Ended2007
            
            2006Revenue:Restaurant
                and bakery sales
            
            $
            30,730
            
            $
            409,018Franchise
                fees and royalties
            
            
            1,243,263
            
            
            482,991Total
                revenues
            
            
            1,273,993
            
            
            892,009Operating
                costs and expenses:Restaurant
                and bakery:Cost
                of sales
            
            
            30,383
            
            
            160,728Labor
            
            
            33,137
            
            
            154,619Occupancy
            
            
            44,423
            
            
            67,951Other
                operating costs
            
            
            42,551
            
            
            50,582Total
                restaurant and bakery operating costs
            
            
            150,494
            
            
            433,880Franchise
                and general:General
                and administrative
            
            
            4,735,854
            
            
            1,853,081Depreciation
            
            
            22,744
            
            
            18,575Total
                franchise and general
            
            
            4,758,598
            
            
            1,871,656Total
                operating costs and expenses
            
            
            4,909,092
            
            
            2,305,536(Loss)
                from operations
            
            
            (3,635,099
            )
            
            (1,413,527
            )Other
                income (expense):Interest
                income
            
            
            51,252
            
            
            29,556Other
                income (expense)
            
            
            (18,037
            )
            
            986Total
                other income (expense):
            
            
            33,215
            
            
            30,542Net
                (loss)
            
            $
            (3,601,884
            )
            $
            (1,382,985
            )Per
                share information - basic and fully diluted:Weighted
                average shares outstanding
            
            
            44,315,486
            
            
            36,514,512Net
                (loss) per share
            
            $
            (0.08
            )
            $
            (0.04
            )




See
      the
      accompanying notes to the consolidated financial statements




26





Spicy
      Pickle Franchising, Inc.


Consolidated
      Statements of Stockholders' Equity


Years
      Ended December 31, 2007 and 2006


Members' Equity
                
                
                
                
                
                Additional
                
                CommonContributed Capital
                
                Accumulated
                
                Preferred Stock
                
                Common Stock
                
                Paid in
                
                Stock
                
                Deferred
                
                AccumulatedUnits
                
                Amount
                
                Deficit
                
                Shares
                
                Amount
                
                Shares
                
                Amount
                
                Capital
                
                Warrants
                
                Compensation
                
                (Deficit)
                
                TotalBalances
                    at January 1, 2006
                
                
                154,974
                
                $
                781,209
                
                $
                (988,525
                )
                
                -
                
                $
                -
                
                
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                (207,316
                )Membership
                    units issued for cash
                
                
                38,920
                
                
                1,889,551
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,889,551Membership
                    units issued for services
                
                
                5,546
                
                
                285,000
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                285,000Net
                    loss for the periodJanuary
                    1, 2006 to September 8, 2006
                
                
                
                
                
                
                
                
                (772,318
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (772,318
                )Conversion
                    of membership unitsto
                    common shares
                
                
                (199,440
                )
                
                (2,955,760
                )
                
                1,760,843
                
                
                -
                
                
                -
                
                
                40,996,455
                
                
                40,996
                
                
                1,153,921
                
                
                -
                
                
                -
                
                
                -
                
                
                -Fair
                    value of options granted
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                7,595
                
                
                -
                
                
                -
                
                
                -
                
                
                7,595Net
                    (loss) for the period September 9, 2006 to December 31,
                    2006
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (610,667
                )
                
                (610,667
                )Balances
                    at December 31, 2006
                
                
                -
                
                $
                -
                
                $
                -
                
                
                -
                
                
                -
                
                
                40,996,455
                
                
                40,996
                
                
                1,161,516
                
                
                -
                
                
                -
                
                
                (610,667
                )
                
                591,845Common
                    shares issued for cash
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,352,780
                
                
                4,353
                
                
                1,574,398
                
                
                -
                
                
                -
                
                
                -
                
                
                1,578,751Common
                    shares issued for services
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,284,818
                
                
                2,285
                
                
                1,109,142
                
                
                -
                
                
                (871,292
                )
                
                -
                
                
                240,135Preferred
                    shares issued for cash
                
                
                
                
                
                
                
                
                
                
                
                705
                
                
                5,622,996
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                5,622,996Allocation
                    of fair value common stock warrants
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                (821,872
                )
                
                -
                
                
                -
                
                
                -
                
                
                821,872
                
                
                -
                
                
                -
                
                
                -Fair
                    value of placement consultant warrants
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (51,953
                )
                
                51,953
                
                
                -
                
                
                -
                
                
                -Beneficial
                    conversion dividend on preferred shares
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,350,221
                
                
                -
                
                
                -
                
                
                (1,350,221
                )
                
                -Fair
                    value of stock options granted
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                403,368
                
                
                -
                
                
                -
                
                
                -
                
                
                403,368Amortization
                    of deferred compensation
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                301,625
                
                
                -
                
                
                301,625Net
                    (loss) for the year
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,601,884
                )
                
                (3,601,884
                )Balances
                    at December 31, 2007
                
                
                
                
                
                
                
                
                
                
                
                705
                
                $
                4,801,124
                
                
                47,634,053
                
                $
                47,634
                
                $
                5,546,692
                
                $
                873,825
                
                $
                (569,667
                )
                $
                (5,562,772
                )
                $
                5,136,836




See
      the
      accompanying notes to the consolidated financial statements


27




Spicy
      Pickle Franchising, Inc.


Consolidated
      Statements of Cash Flows


Years
      Ended December 31, 2007 and 2006




2007
            
            2006Cash
                flows from operating activities:Net
                (loss)
            
            $
            (3,601,884
            )
            $
            (1,382,985
            )Adjustments
                to reconcile net (loss) to net cash (used in) operating
                activities:Depreciation
            
            
            26,620
            
            
            24,622Fair
                value of membership units issued for services
            
            
            -
            
            
            285,000Stock
                based compensation expense
            
            
            901,201
            
            
            7,595Changes
                in operating assets and liabilities:Restricted
                cash
            
            
            -
            
            
            6,245Accounts
                receivable, trade
            
            
            3,108
            
            
            (32,604
            )Accounts
                receivable, related party
            
            
            -
            
            
            1,750Notes
                receivable
            
            
            (80,000
            )
            
            -Prepaid
                expenses and other
            
            
            (155,327
            )
            
            (23,377
            )Inventories
            
            
            20,586
            
            
            (643
            )Deposits
            
            
            17,238
            
            
            (21,402
            )Accounts
                payable, trade
            
            
            385,656
            
            
            10,057Accounts
                payable, related parties
            
            
            -
            
            
            53,925Accrued
                expenses and compensation
            
            
            26,529
            
            
            49,821Deferred
                franchise revenue
            
            
            85,000
            
            
            435,000Other
                liabilities
            
            
            (53,925
            )
            
            (3,644
            )Net
                cash (used in) operating activities
            
            
            (2,425,198
            )
            
            (590,640
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (584,389
            )
            
            (121,911
            )Proceeds
                from sale of equipment
            
            
            -
            
            
            2,100Net
                cash (used in) investing activities
            
            
            (584,389
            )
            
            (119,811
            )Cash
                flows from financing activities:Repayment
                of note payable to related party
            
            
            (30,000
            )
            
            (10,000
            )Proceeds
                from issuance of membership units
            
            
            -
            
            
            1,889,551Proceeds
                from sale of common stock
            
            
            1,622,678
            
            
            -Proceeds
                from sale of preferred stock and warrants
            
            
            5,622,996
            
            
            -Net
                cash provided by financing activities
            
            
            7,215,674
            
            
            1,879,551Net
                increase in cash and cash equivalents
            
            
            4,206,087
            
            
            1,169,100Cash
                and cash equivalents, beginning of period
            
            
            1,198,982
            
            
            29,882Cash
                and cash equivalents, end of period
            
            $
            5,405,069
            
            $
            1,198,982Supplemental
                cash flow information:Cash
                paid for income taxes
            
            $
            -
            
            $
            -Cash
                paid for interest
            
            $
            -
            
            $
            -





See
      the
      accompanying notes to the consolidated financial statements


28




Spicy
      Pickle Franchising, Inc.


Notes
      to
      Consolidated Financial Statements





**1.
      Nature of Business**





Spicy
      Pickle Franchising, Inc. ("Spicy Pickle" or the "Company”) was organized in the
      State of Colorado on January 14, 2003 as a limited liability company and on
      September 8, 2006 converted to a corporation. The Company is engaged in the
      business of marketing and franchising Spicy Pickle restaurants, which specialize
      in fast casual food featuring fresh, made-to-order, premium submarine-style,
      deli and panini sandwiches, salads, soups and soft drinks. Through December
      31,
      2007, the Company has signed agreements with franchisees to open 100
      restaurants. Thirty five of the franchisee-owned restaurants and one
      Company-owned restaurant were open as of December 31, 2007. The restaurants
      are
      located in 12 states. The Company continues to interview prospective franchisees
      and relies on the cash deposits from the franchise sales as well as royalty
      fees
      from the existing stores to support the expenses of the business.





Effective
      October 30, 2006, the Company created wholly owned subsidiaries, SP Broadway,
      LLC, and SP Chicago, LLC for the purpose of operating a Spicy Pickle company
      restaurant in Denver, CO and operating a franchisee’s restaurant in Chicago, IL.
      Additionally, in October 2007, the Company created a wholly owned subsidiary,
      Crumb Rustic Bakery, LLC, for the purpose of operating a bakery that will supply
      breads and other bakery products for Company and franchisee-owned locations
      in
      Colorado. The Company began the operations of the Denver restaurant and the
      bakery during December 2007. However, bakery sales did not commence until
      January 2008.





**2.
      Summary of Significant Accounting Policies**





*Principles
      of Consolidation*


The
      accompanying consolidated financial statements include the accounts of the
      Company and our wholly owned subsidiaries, SP Broadway, LLC., SP Chicago, LLC.,
      and Crumb Rustic Bakery, LLC. All material inter-company transactions and
      balances have been eliminated in consolidation.





*Cash
      and Cash Equivalents*


The
      Company considers all highly liquid investments with an original maturity of
      three months or less, at the time of purchase, to be cash
      equivalents.





*Accounts
      Receivable*


Accounts
      receivable consists primarily of amounts billed to franchisees for logo items
      and expenses advanced on behalf of the franchisees and expected rebates from
      vendors. The Company makes its best estimate of the amounts of probable credit
      losses in the Company’s existing accounts receivable and provides for such loss
      as an allowance for doubtful accounts. At December 31, 2006, the Company
      determined that no allowance for doubtful accounts was necessary. At December
      31, 2007, the Company estimated an allowance for doubtful accounts of $70,595.
      Account balances are charged off against the allowance after all means of
      collection have been exhausted and the potential for recovery is considered
      remote. The Company does not have any off-balance-sheet credit exposure related
      to its customers.





*Inventories*


Inventories
      are stated at the lower of cost or market, with cost being determined on the
      first-in, first-out method. Inventories include food, beverage and supply items
      at Company-owned or operated locations.


29


Spicy
      Pickle Franchising, Inc.


Notes
      to
      Consolidated Financial Statements


(Continued)





*Property
      and equipment*


Property
      and equipment are stated at cost. Depreciation is computed using the
      straight-line method over the estimated useful lives of the assets. Leasehold
      improvements are amortized using the straight-line method over the shorter
      of
      their estimated useful lives or the related reasonably assured lease term.
      The
      estimated useful lives used for financial statement purposes are:





Computer
      software and equipment 3 years


Furniture
      and fixtures 5 to 7 years


Kitchen
      equipment 5 years


Office
      equipment 5 years


Leasehold
      improvements 5 years





Maintenance
      and repairs of property and equipment are charged to operations. Major
      improvements are capitalized. Upon retirement, sale or other disposition of
      property and equipment, the cost and accumulated depreciation are eliminated
      from the accounts and any gain or loss is included in operations.




*Long-Lived
      Assets*


In
      accordance with the Financial Accounting Standards Board ("FASB") Statement
      of
      Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment
      or Disposal of Long-Lived Assets” (“SFAS 144”), long-lived assets are reviewed
      for impairment whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable. Recoverability of assets
      to
      be held and used is measured by a comparison of the carrying amount of an asset
      to the estimated undiscounted future cash flows expected to be generated by
      the
      asset. If the carrying amount of an asset exceeds its estimated future cash
      flows, an impairment charge is recognized as the amount by which the carrying
      amount of the asset exceeds the fair value of the asset. Based on the Company’s
      analysis, no impairment charges were recognized for the years ended December
      31,
      2007 and 2006.





*Use
      of Estimates*


The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, the disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported revenues and expenses during the
      reporting periods. Actual results could differ from those
      estimates.





*Concentration
      of Credit Risks*


Financial
      instruments, which potentially subject the Company to concentrations of credit
      risk, consist primarily of cash and trade accounts receivable. The Company’s
      receivables are primarily from its franchisees. To the extent our franchisees
      face similar economic conditions, the Company is exposed to a concentration
      of
      credit risk.





The
      Company’s cash is primarily in demand deposit accounts placed with federally
      insured financial institutions. Such deposit accounts at times may exceed
      federally insured limits. However, the Company believes the risk of loss to
      be
      minimal.





*Fair
      Value of Financial Instruments*


The
      carrying value of the Company’s financial assets and liabilities, because of
      their short-term nature, approximate their fair value.





*Revenue
      Recognition*


Initial
      Franchise Fees - The Company enters into franchise agreements, which grant
      franchisees the exclusive right to develop and operate businesses at certain
      locations. Initial franchise fees are recognized as revenue when all material
      services and conditions required to be performed by the Company have been
      substantially completed, which is generally when the business commences
      operations. Initial franchise fees were established at $35,000 and $30,000
      for
      the years ended December 31, 2007 and 2006, respectively. Franchise fees
      recognized were $497,500 and $170,000 for the years ended December 31, 2007
      and
      2006 respectively.


30


Spicy
      Pickle Franchising, Inc.


Notes
      to
      Consolidated Financial Statements


(Continued)





Royalty
      Fees - Pursuant to the franchise agreements, franchisees are required to pay
      royalties to the Company based on 5% of weekly gross sales as reported to the
      Company through the franchisees’ point of sales systems. The royalties are
      recognized as revenue in the period corresponding to the sales reporting period.
      Royalty fees were $577,334 and $294,481 for the years ended December 31, 2007
      and 2006, respectively.





Product
      Sales - The Company sells logo products to its franchisees. Sales are recognized
      when products are shipped to the franchisee. Product sales were $17,411 and
      $18,510 for the years ended December 31, 2007 and 2006, respectively. As of
      December 31, 2007 the Company is using a third party to provide logo products
      to
      its franchisees.





Rebates
      -
      Rebates received from purveyors that supply products to the Company's
      franchisees are included in Franchise Fees and Royalties. The rebates are
      recorded when earned. Rebates that relate to the company-owned restaurant are
      offset against restaurant cost of sales. Rebates related to franchisees were
      $151,020, and $79,638 for the years ended December 31, 2007 and 2006,
      respectively.





Restaurant
      and Bakery Sales - The Company records revenue from restaurant and bakery sales
      upon delivery of the related food and other products to customers, which, in
      the
      case of the bakery, are our franchisees. There were no bakery sales in
      2007.




*Advertising
      Costs*


Franchisees
      contribute to an advertising fund established by the Company a fee of up to
      2%
      of the total amount of the franchisees’ gross sales. The Company, at its
      discretion, may spend more or less than actual advertising receipts from the
      franchises. Advertising fees collected were $291,881 and $200,455 for the years
      ended December 31, 2007 and 2006, respectively. These fees are offset against
      advertising expenses, which are recognized when incurred. The Company incurred
      advertising expense of $443,566 and $242,906 in 2007 and 2006, respectively,
      including those from the advertising fund and the Company’s own advertising
      expenses. The net amounts reflected in the financial statements are $151,685
      and
      $42,451 in 2007 and 2006, respectively.





*Income
      Taxes*


Through
      September 8, 2006, the Company was a limited liability company; accordingly,
      no
      provision for income taxes has been made in the accompanying consolidated
      financial statements for the periods then ended as taxable income or losses
      are
      reportable on the tax returns of the members of the Company.





Subsequent
      to September 8, 2006, the provision for income taxes is determined in accordance
      with the provisions of SFAS No. 109, “Accounting for Income Taxes.” Under this
      method, deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      basis. Deferred tax assets and liabilities are measured using enacted income
      tax
      rates expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. Any effect on deferred
      tax
      assets and liabilities of a change in tax rates is recognized in income in
      the
      period that includes the enactment date.





In
      June 2006, the Financial Accounting Standards Board (“FASB”) issued
      Interpretation No. 48, “Accounting for Uncertainties in Income Taxes, an
      interpretation of SFAS No. 109, Accounting for Income Taxes” (“FIN 48”).
      FIN 48 prescribes a comprehensive model for how companies should recognize,
      measure, present, and disclose in their financial statements uncertain tax
      positions taken or expected to be taken on a tax return. Under FIN 48, tax
      positions must initially be recognized in the financial statements when it
      is
      more likely than not the position will be sustained upon examination by the
      tax
      authorities. Such tax positions must initially and subsequently be measured
      as
      the largest amount of tax benefit that has a greater than 50% likelihood of
      being realized upon ultimate settlement with the tax authority assuming full
      knowledge of the position and relevant facts. FIN 48 is effective for fiscal
      years beginning after December 15, 2006.


31


Spicy
      Pickle Franchising, Inc.


Notes
      to
      Consolidated Financial Statements


(Continued)





FIN
      48
      became effective for the Company on January 1, 2007. The cumulative effect
      of
      adopting FIN 48 on January 1, 2007 has been recorded net in deferred tax
      assets, which resulted in no FIN 48 liability on the balance sheet. The total
      amount of unrecognized tax benefits as of the date of adoption was zero. There
      are open statutes of limitations for taxing authorities in federal and state
      jurisdictions to audit the Company’s tax returns from 2006 through the current
      period. The Company’s policy is to account for income tax related interest and
      penalties in income tax expense in the statement of operations. There have
      been
      no income tax related interest or penalties assessed or recorded. Because the
      Company has provided a full valuation allowance on all of its deferred tax
      assets, the adoption of FIN 48 had no impact on the Company’s effective tax
      rate.





*Rent
      Expense*


The
      Company recognizes rent expense on a straight-line basis over the reasonably
      assured lease term as defined in SFAS No. 98, "Accounting for Leases.'' In
      addition, certain of the Company's lease agreements provide for scheduled rent
      increases during the lease terms or for rental payments commencing at a date
      other than the date of initial occupancy. Beginning January 1, 2006, the Company
      adopted FASB Staff Position No. FAS 13-1, "Accounting for Rental Costs Incurred
      During a Construction Period'' ("FSP 13-1''). FSP 13-1 states that rental costs
      associated with operating leases must be recognized as rental expense allocated
      on a straight-line basis over the lease term, which includes the construction
      period.





The
      Company includes any rent escalations and construction period and other rent
      holidays in its determination of straight-line rent expense. Therefore, rent
      expense for new locations is charged to expense beginning with the start of
      the
      construction period.





*Equity-Based
      Compensation*


On
      January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
      Payment” (“SFAS 123(R)”), which requires the measurement and recognition of
      compensation expense for all share-based payment awards made to employees and
      directors including employee stock options based on estimated fair values.
      SFAS
      123(R) supersedes our previous accounting under Accounting Principles Board
      Opinion No. 25, “Accounting for Stock Issued to Employees.”. In March 2005, the
      Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
      (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of
      SAB 107 in our adoption of SFAS 123(R).





The
      Company has adopted SFAS 123(R) using the modified prospective transition
      method, which requires the application of the accounting standard as of January
      1, 2006, the first day of our fiscal year 2006. Our financial statements as
      of
      and for the year ended December 31, 2007 reflect the impact of SFAS 123(R).
      In
      accordance with the modified prospective transition method, the Company’s
      financial statements for prior periods have not been restated to reflect, and
      do
      not include, the impact of SFAS 123(R). Stock-based compensation expense
      recognized under SFAS 123(R) for the years ended December 31, 2007 and 2006
      was
      $403,368 and $7,995, which consisted of stock-based compensation expense related
      to employee stock options.





SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service periods in our statement of operations.
      Prior
      to the adoption of SFAS 123(R), the Company had no stock-based compensation
      awarded to employees and directors.





Upon
      adoption of SFAS 123(R), the Company used the Black-Scholes option-pricing
      model
      (“Black-Scholes model”) to determine fair value. The determination of fair value
      of share-based payment awards on the date of grant using an option-pricing
      model
      is affected by the Company’s stock price as well as assumptions regarding a
      number of highly complex and subjective variables. These variables include,
      but
      are not limited to, our expected stock price volatility over the term of the
      awards, and actual and projected employee stock option exercise behaviors.
      Although the fair value of employee stock options is determined in accordance
      with SFAS 123(R) and SAB 107 using an option-pricing model, that value may
      not
      be indicative of the fair value observed in a willing buyer/willing seller
      market transaction.





The
      weighted average fair value of options granted during 2007 of $.222 was
      estimated on the grant date using the Black-Scholes option-pricing model with
      the following weighted average assumptions: expected volatility of 41.66%,
      expected term of 2.5 years, risk-free interest rate of 5.9%, and no expected
      dividend yield.


32


Spicy
      Pickle Franchising, Inc.


Notes
      to
      Consolidated Financial Statements


(Continued)




The
      weighted average fair value of options granted during 2006 of $.076 was
      estimated on the grant date using the Black-Scholes option-pricing model with
      the following assumptions: expected volatility of 40.48%, expected term of
      2.5
      years, risk-free interest rate of 5.5%, and expected dividend yield of
      0%.





*Recent
      Pronouncements*





The
      Company has reviewed all recently issued, but not yet effective, accounting
      pronouncements and does not believe the future adoption of any such
      pronouncements may be expected to cause a material impact on its financial
      condition or the results of its operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS
      157”). SFAS 157 is effective for financial statements issued for fiscal years
      beginning after November 15, 2007. SFAS 157 defines fair value, establishes
      a
      framework for measuring fair value in generally accepted accounting principles
      (“GAAP”), and expands disclosure about fair value measurements. Management does
      not expect adoption of SFAS 157 to have a material impact on the Company's
      financial statements.





On
      February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value
      Option for Financial Assets and Financial Liabilities — Including an Amendment
      of FASB Statement No. 115” (“SFAS 159”). This standard permits an entity to
      measure financial instruments and certain other items at estimated fair value.
      Most of the provisions of SFAS No. 159 are elective; however, the amendment
      to FASB No. 115, “Accounting for Certain Investments in Debt and Equity
      Securities,” applies to all entities that own trading and available-for-sale
      securities. The fair value option created by SFAS 159 permits an entity to
      measure eligible items at fair value as of specified election dates. The fair
      value option (a) may generally be applied instrument by instrument,
      (b) is irrevocable unless a new election date occurs, and (c) must be
      applied to the entire instrument and not to only a portion of the instrument.
      SFAS 159 is effective as of the beginning of the first fiscal year that begins
      after November 15, 2007. Early adoption is permitted as of the beginning of
      the previous fiscal year provided that the entity (i) makes that choice in
      the first 120 days of that year, (ii) has not yet issued financial
      statements for any interim period of such year, and (iii) elects to apply
      the provisions of FASB 157. Management is currently evaluating the impact of
      SFAS 159, if any, on the Company’s financial statements.





In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
      Combinations” (“SFAS No. 141R”). SFAS No. 141R will change the accounting for
      business combinations. Under SFAS No. 141R, an acquiring entity will be required
      to recognize all the assets acquired and liabilities assumed in a transaction
      at
      the acquisition-date fair value with limited exceptions. SFAS No. 141R will
      change the accounting treatment and disclosure for certain specific items in
      a
      business combination. SFAS No. 141R applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008.
      Accordingly, any business combinations we engage in will be recorded and
      disclosed following existing GAAP until January 1, 2009. The Company expects
      SFAS No. 141R will have an impact on accounting for business combinations once
      adopted, but the effect is dependent upon acquisitions at that time. The Company
      is still assessing the impact of this pronouncement.





In
      December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
      Consolidated Financial Statements-An Amendment of ARB No. 51" (“SFAS No. 160").
      SFAS No. 160 establishes new accounting and reporting standards for the
      non-controlling interest in a subsidiary and for the deconsolidation of a
      subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
      December 15, 2008. The Company believes that SFAS 160 should not have a material
      impact on our financial position or results of operations.


33


Spicy
      Pickle Franchising, Inc.


Notes
      to
      Consolidated Financial Statements


(Continued)





**3.
      Property and Equipment**





Major
      classes of property and equipment consist of the following:





2007
            
            2006Computer
                software and equipment
            
            $
            86,643
            
            $
            66,995Furniture
                and fixtures
            
            
            47,753
            
            
            22,379Office
                equipment
            
            
            26,344
            
            
            23,022Leasehold
                improvements
            
            
            392,994
            
            
            -Kitchen
                equipment
            
            
            147,548
            
            
            3,796Vehicles
            
            
            17,340
            
            
            -Construction
                in progress
            
            
            35,303
            
            
            53,345753,926
            
            
            169,537Less:
                accumulated depreciation
            
            
            (68,175
            )
            
            (41,555
            )$
            685,751
            
            $
            127,982





The
      Company recorded depreciation expense related to these assets of $26,620 and
      $24,622 in 2007 and 2006, respectively.





**4.
      Commitments and Contingencies**





The
      Company leases office space, as well as restaurant locations, under
      non-cancelable operating leases, which expire through 2016.





The
      aggregate minimum requirements under non-cancelable leases as of December 31,
      2007 are as follows:




2008
            
            $
            239,5942009
            
            
            221,5732010
            
            
            159,5492011
            
            
            160,9902012
            
            
            166,990Later
                years
            
            
            463,775$
            1,412,470





Rent
      expense for the years ended December 31, 2007 and 2006 was $146,039 and
      $106,826, respectively.





**5.
      Shareholders’ and Members’ Equity**





Pursuant
      to a private placement, the Company raised $2,000,000 less offering expenses
      of
      $110,449 for a net amount of $1,889,551 through the issuance of 38,920 member
      units during the year ended December 31, 2006. In addition, the Company issued
      5,546 member units to non-employees for services rendered. The Company recorded
      expenses in the amount of $225,000 for consulting services and $60,000 of
      offering costs attributed to and included in the offering expenses mentioned
      above.





Effective
      September 8, 2006, the Company converted from a Colorado limited liability
      company to a Colorado corporation. At that date, there were 199,400 membership
      units issued and outstanding. The membership units converted to 40,996,455
      shares of common stock. The total amount of members’ equity, including
      contributed capital and retained deficit, at that date was $1,194,917. As a
      result of the conversion, the Company recorded $40,996 in common stock and
      $1,153,921 in additional paid in capital.


34


Spicy
      Pickle Franchising, Inc.


Notes
      to
      Consolidated Financial Statements


(Continued)





The
      Company is authorized to issue two hundred million (200,000,000) shares of
      common stock, par value $0.001. At December 31, 2007, the Company has reserved
      7,500,000 shares of common stock for issuance upon exercise of awards granted
      under the Company’s 2006 Stock Option Plan (Note 9).





The
      Company also is authorized to issue twenty million (20,000,000) shares of
      preferred stock, $0.001 par value. The Board of Directors of the Company is
      authorized to provide for the issuance of shares of preferred stock in one
      or
      more classes or series and to fix the designation, powers, preferences and
      rights of shares to be included in each such class or series. Each such class
      or
      series of preferred stock shall have such voting power as shall be authorized
      by
      the Board of Directors.





The
      Company filed a registration statement with the United States Securities and
      Exchange Commission (“SEC”) that became effective during January 2007. The
      registration statement covered 8,240,000 common shares of the Company held
      by
      shareholders. The Company has not received and will not receive any proceeds
      from the sales of these shares by the selling shareholders. In addition, the
      Company registered 10,000,000 common shares to be sold by the Company, and
      the
      Company received the proceeds from such sales. As of December 31, 2007, the
      Company had sold 4,352,780 of such shares at a price of $.40 per share for
      gross
      proceeds of $1,741,112, less offering expenses of $118,434, for net proceeds
      of
      $1,622,678. The offering was terminated November 15, 2007.





The
      Company completed a private equity financing of $5,992,500 on December 14,
      2007,
      with 14 accredited investors. Net proceeds from the offering were approximately
      $5,623,000. The Company issued 705 shares of its Series A Variable Rate
      Convertible Preferred Stock, par value $0.001 per share and stated value of
      $8,500 per share (the “Series A Preferred Stock”). Each share of the Series A
      Preferred Stock is immediately convertible into 1,000 shares of the Company’s
      $.001 par value common stock. This conversion rate implies a discount to the
      fair value of the common stock of $.26 per share ($1,833,000), which amount
      will
      be recorded by the Company $1,350,221 as a current dividend on the Series A
      Preferred Stock with an additional dividend of $482,779 recorded ratably over
      a
      forty-five-day period immediately subsequent to December 31, 2007. Additionally,
      the Company shall pay each holder of Series A Preferred Stock cumulative
      dividends at a rate per share of 5% per annum until the second anniversary
      of
      the original issue date, 7.5% per annum from the second anniversary of the
      original issue date until the third anniversary of the original issue date,
      and
      14% per annum thereafter, payable semi-annually on January 1 and July 1,
      beginning on July 1, 2008, and upon conversion or redemption of the Series
      A
      Preferred Stock. Such dividends are payable in cash or, at the Company’s option,
      in shares of common stock or a combination thereof.





The
      terms
      of the Series A Preferred Stock include certain “Non-Cash Redemption Triggering
      Events” that may be considered to be outside of the control of the Company that
      would, if occurring and elected by the investor, require the Company to (a)
      redeem all of the Series A Preferred Stock then held by the investors for a
      redemption price, in shares of common stock, equal to a number of shares of
      common stock equal to the stated redemption amount divided by 75% of the average
      of the 10 daily volume weighted average price calculations (“VWAPs”) immediately
      prior to the date of redemption election or (b) increase the dividend rate
      on
      all of the outstanding Series A Preferred Stock held by the investor to 18%
      per
      annum thereafter.





Additionally,
      the investors received warrants to purchase an aggregate of 5,287,500 shares
      of
      the Company’s $.001 par value common stock at an exercise price of $1.60 per
      share. Should the warrants be exercised in full, the Company would receive
      additional proceeds from the offering of $8,460,000.





The
      warrants that each investor received as a result of the Series A Preferred
      Stock
      financing are exercisable immediately at an exercise price of $1.60 per share.
      The Company was obligated to register the common shares underlying the warrants
      within 180 days of the closing date in order to avoid cash penalties which
      could
      amount to an aggregate of $719,100. The Company completed the registration
      of
      the shares during February 2008.


35


Spicy
      Pickle Franchising, Inc.


Notes
      to
      Consolidated Financial Statements


(Continued)





The
      Company has determined the fair value of the warrants as of the issuance date.
      The Company used the Black-Scholes option-pricing model with the following
      assumptions: an expected life equal to 1⁄2 of the contractual term of the
      warrants, no dividends, a risk free rate of 5.5%, and volatility of 39%. Under
      the assumptions, the Black-Scholes option pricing model yielded an aggregate
      fair value of approximately $952,500. A portion of this amount ($821,872) has
      been allocated to Common Stock Warrants in the accompanying balance sheet based
      upon the percentage relationship of the warrant fair value to the total fair
      value of the offering multiplied by the gross proceeds of the offering.





In
      connection with this financing, the Company paid cash compensation to a
      placement consultant in the amount of $369,500 and issued it 288,400 placement
      consultant warrants (fair value $51,953), exercisable at $1.60 per share for
      a
      period of five years from the date of issue. Also, the placement consultant
      may
      be entitled to 216,300 additional warrants based on subsequent exercise of
      warrants by certain investors. The fees were recorded as a cost of
      capital.





The
      net
      proceeds from the financing are to be used for capital expenditures necessary
      to
      expand our Company-owned and franchising operations.





In
      addition, during 2007, the Company issued 2,284,818 shares of common stock
      to
      non-employees for services rendered. The Company recorded the shares at their
      fair value at the issue dates with fair value determined to be equivalent to
      the
      then-current market price. The fair value of the shares amounted to an aggregate
      of $1,067,500 of which $196,208 has been recorded as current expenses for
      consulting services with the remaining balance of $871,292 recorded as deferred
      compensation costs that will be amortized to expense during the 2008 fiscal
      year.





**6.
      Earnings Per Share Data**





Earnings
      per share is based on the weighted average number of shares outstanding during
      the period after consideration of the dilutive effect, if any, for common stock
      equivalents, including stock options, restricted stock, and other stock-based
      compensation. Earnings per common share are computed in accordance with SFAS
      No.
      128 "Earnings Per Share,'' which requires companies to present basic earnings
      per share and diluted earnings per share. Basic earnings per share are computed
      by dividing net income by the weighted average number of shares of common stock
      outstanding during the year. Diluted earnings per common share are computed
      by
      dividing net income by the weighted average number of shares of common stock
      outstanding and dilutive securities outstanding during the year. At December
      31,
      2007 and 2006, any equivalents would be anti-dilutive as the Company had losses
      for the years then ended.





**7.
      Income Taxes**





The
      Company accounts for income taxes under SFAS 109, which requires the use of
      the
      liability method. SFAS 109 provides that deferred tax assets and liabilities
      are
      recorded based on the differences between the tax bases of assets and
      liabilities and their carrying amounts for financial reporting purposes,
      referred to as temporary differences. Deferred tax assets and liabilities at
      the
      end of each period are determined using the currently enacted tax rates applied
      to taxable income in the periods in which the deferred tax assets and
      liabilities are expected to be settled or realized.


36


Spicy
      Pickle Franchising, Inc.


Notes
      to
      Consolidated Financial Statements


(Continued)





Income
      tax provision (benefit) for the year ended December 31, 2007 and 2006 is
      summarized below:





2007
            
            2006Current:Federal
            
            $
            -
            
            $
            -State
            
            
            -
            
            
            -Total
                current
            
            
            -
            
            
            -Deferred:Federal
            
            
            (1,053,000
            )
            
            (198,000
            )State
            
            
            (163,000
            )
            
            (28,300
            )Total
                deferred
            
            
            (1,216,000
            )
            
            (226,300
            )Increase
                in valuation allowance
            
            
            1,216,000
            
            
            226,300Total
                provision
            
            $
            -
            
            $
            -





The
      provision for income taxes differs from the amount computed by applying the
      statutory federal income tax rate to income before provision for income taxes.
      The sources and tax effects of the differences are as follows:





2007
            
            2006Income
                tax provision at the federal statutory rate
            
            
            34.0
            %
            
            34.0
            %Amount
                of 2006 income attributed to members prior to conversion from a limited
                liability company to a corporation ($772,318)
            
            
            0.0
            %
            
            (19.0
            )%State
                income taxes, net of federal benefit
            
            
            (3.3
            )%
            
            (4.6
            )%Effect
                of net operating loss ($610,667 attributed to the corporation in
                2006)
            
            
            (30.7
            )%
            
            (10.4
            )%0.0
            %
            
            0.0
            %





Components
      of the net deferred income tax assets at December 31, 2007 and 2006 were as
      follows:


Deferred
                  tax assets:
              
              
              2007
              
              
              2006Net
                  operating loss carryovers
              
              $
              1,313,000
              
              $
              226,300Taxable
                  deferred franchise fees
              
              
              130,000
              
              
              -Valuation
                  allowance
              
              
              (1,443,000
              )
              
              (226,300
              )$
              -
              
              $
              -





SFAS
      109
      requires a valuation allowance to reduce the deferred tax assets reported if,
      based on the weight of the evidence, it is more likely than not that some
      portion or all of the deferred tax assets will not be realized. After
      consideration of all the evidence, both positive and negative, management has
      determined that a $1,443,000 allowance at December 31, 2007 is necessary to
      reduce the deferred tax assets to the


amount
      that will more likely than not be realized. The change in the valuation
      allowance for the current year is $1,216,000.





As
      of
      December 31, 2007, the Company has a net operating loss carry forward of
      approximately $3,482,000. This loss will be available to offset future taxable
      income. If not used, this carry forward will expire in 2027.


37


Spicy
      Pickle Franchising, Inc.


Notes
      to
      Consolidated Financial Statements


(Continued)





**8.
      Related Party Transactions**





Two
      of
      the Company’s members are also the founders and sole members of Spicy Pickle,
      LLC, a Colorado limited liability company formed on January 14, 1999. Spicy
      Pickle, LLC created the Spicy Pickle restaurant concept, and its primary
      business was the operation of the three original Spicy Pickle
      restaurants.





Prior
      to
      2006, two of these three original restaurants were sold to unrelated parties,
      who then entered into franchise agreements with the Company. No initial
      franchise fees were charged to the new owners.





On
      January 1, 2005, the Company acquired the remaining Spicy Pickle restaurant
      from
      Spicy Pickle, LLC for $40,000. The purchase consideration consisted of a $40,000
      promissory note that bore interest at 7%, was secured by substantially all
      of
      the restaurant assets, and was due in installments of $10,000 in January 2006
      and $30,000 in January 2007. Due to the commonality of ownership of the Company
      and Spicy Pickle, LLC, the acquisition of the restaurant was recorded at the
      historical basis of the assets acquired of $12,667, with the excess purchase
      price of $27,333 reflected as a reduction of members’ equity.





The
      Company rents a suite at a local events center from a partnership in which
      an
      officer and member of the Company is a partner. The partnership passed through
      the rent at the same rate it paid to the event center owner. The booth is used
      primarily for marketing entertainment. The amounts charged to expense were
      $75,197 and $73,860 for the years ended December 31, 2007 and 2006,
      respectively.





The
      accounts payable due to related parties at December 31, 2006 relates to accrued
      expenses and compensation.





**9.
      Stock-Based Compensation**





In
      October 2006, the Company’s Board of Directors adopted the 2006 Stock Option
      Plan (“2006 Plan”), which was approved by the Company’s shareholders the same
      month. The 2006 Plan provides for the grant of up to 7,500,000 shares of the
      Company’s common stock (subject to certain adjustments in the event of stock
      splits or other similar events) as incentive stock options. The Company’s Board
      of Directors has delegated authority to grant awards under the 2006 Plan to
      the
      Company’s Compensation Committee.





A
      summary
      of stock option activity under the Company’s stock-based compensation plan is
      set forth below:





Weighted AverageWeighted
            
            RemainingAverage
            
            Contractual Term
            
            AggregateOptions
            
            Exercise Price
            
            (in
                years)
            
            Intrinsic ValueOutstanding
                January 1, 2006
            
            
            -Granted
            
            
            100,000Exercised
            
            
            -Cancelled
            
            
            -Outstanding
                December 31, 2006
            
            
            100,000
            
            $
            0.25
            
            
            4.80
            
            $
            7,595Granted
            
            
            3,960,000
            
            $
            0.78
            
            
            4.68
            
            $
            879,049Exercised
            
            
            -Cancelled
            
            
            -Outstanding
                December 31, 2007
            
            
            4,060,000
            
            $
            0.76
            
            
            4.66
            
            $
            886,644Exercisable
                December 31, 2007
            
            
            1,940,000
            
            $
            0.56
            
            
            4.60
            
            $
            304,521





Of
      the
      options outstanding at December 31, 2007, 1,940,000 were vested and exercisable
      with a weighted average exercise price of $.56 per share.


38


Spicy
      Pickle Franchising, Inc.


Notes
      to
      Consolidated Financial Statements


(Continued)





The
      following table summarizes information concerning outstanding and exercisable
      options at December 31, 2007:


Options Outstanding
              
              
              
              Options ExercisableRange of
                  Exercise Price
              
              
              Number
                Outstanding
              
              
              Weighted
                  Average Remaining
                Contractual
                  Life
              
              
              Weighted
                  Average Exercise Price
              
              
              Number
                Exercisable
              
              
              Weighted
                Average
                  Exercise
                Price$.25
                  - $1.26
              
              
              4,060,000
              
              
              4.66
              
              $
              .76
              
              
              1,940,000
              
              $
              .56





**10.
      Business Segment information**





The
      Company operates two business segments. The Company Restaurant Operations
      segment is comprised of the operating activities of the restaurant owned by
      the
      Company. The company-owned restaurant conducts business under the Spicy Pickle
      name. This restaurant specializes in fast casual food featuring fresh,
      made-to-order, premium submarine-style, deli and panini sandwiches, salads,
      soups and soft drinks.





The
      Franchise Operations segment is comprised of the operating activities of the
      franchise business unit, which licenses qualified operators to conduct business
      under the Spicy Pickle name, and also of the costs to monitor the operations
      of
      these restaurants. Under the terms of the agreements, the licensed operators
      pay
      royalties and fees to the Company in return for the use of the Spicy Pickle
      name.





The
      following table sets forth certain restaurant data relating to company-owned
      and
      franchise-operated restaurants:




2007
            
            2006Number
                of restaurants:Company-owned:Beginning
                of period
            
            
            -
            
            
            1Restaurants
                closed
            
            
            -
            
            
            1Restaurants
                opened
            
            
            1
            
            
            -End
                of period
            
            
            1
            
            
            -Franchise-operated:Beginning
                of period
            
            
            16
            
            
            10Restaurants
                opened
            
            
            19
            
            
            6End
                of period
            
            
            35
            
            
            16System-wide:Beginning
                of period
            
            
            16
            
            
            11Restaurants
                opened
            
            
            20
            
            
            6Restaurants
                closed
            
            
            -
            
            
            (1
            )End
                of period
            
            
            36
            
            
            16





The
      accounting policies of the segments are the same as those described in the
      summary of significant accounting policies (see Note 2). The Company had no
      inter-segment sales for the years ended December 31, 2007 and 2006. Management
      has determined that the Company’s reportable segments are strategic business
      units that offer different products and services.


39


Spicy
      Pickle Franchising, Inc.


Notes
      to
      Consolidated Financial Statements


(Continued)





Segment
      information related to the Company's two business segments follows:





Revenues:
            
            
            2007
            
            
            2006Company
                restaurant and bakery operations
            
            $
            30,730
            
            $
            409,018Franchise
                operations
            
            
            1,243,263
            
            
            482,991Total
                Revenues
            
            $
            1,273,993
            
            $
            892,009Segment
                profit (loss):Company
                restaurant and bakery operations
            
            $
            (119,764
            )
            $
            (33,174
            )Franchise
                operations
            
            
            (3,515,335
            )
            
            (1,380,353
            )Total
                segment profit (loss)
            
            $
            (3,635,099
            )
            $
            (1,413,527
            )Segment
                assets:Company
                restaurant and bakery operations
            
            $
            625,874
            
            $
            -Franchise
                operations
            
            
            5,814,185
            
            
            1,481,808Total
                segment assets
            
            $
            6,440,059
            
            $
            1,481,808Segment
                liabilitiesCompany
                restaurant and bakery operations
            
            $
            102,615
            
            $
            -Franchise
                operations
            
            
            1,200,608
            
            
            889,963Total
                segment liabilities
            
            $
            1,303,223
            
            $
            889,963Depreciation
                and amortization (included in segment profit (loss):Company
                restaurant and bakery operations
            
            $
            3,876
            
            $
            6,047Franchise
                operations
            
            
            22,744
            
            
            18,575Total
                depreciation and amortization
            
            $
            26,620
            
            $
            24,622Capital
                expenditures:Company
                restaurant and bakery operations
            
            $
            561,761
            
            $
            44,639Corporate
                administration
            
            
            22,628
            
            
            77,272Total
                capital expenditures
            
            $
            584,389
            
            $
            121,911





**11.
      Subsequent Events**





Subsequent
      to December 31, 2007, the Company purchased 100% of four restaurants from
      franchisees and a 60% interest in a fifth. The total investment was $1,121,257,
      of which $621,256 was paid in cash and $500,000 was paid in notes. The notes
      bear interest at a rate of 10% and are payable over 4 years. There was no prior
      obligation to purchase these restaurants from the franchisees.





Subsequent
      to December 31, 2007, the Company had two restaurants under
      construction.


40


**Item
      9. Changes in and Disagreements With Accountants on Accounting and Financial
      Disclosure**





None   .





**Item
      9A(T). Controls and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**





We
      have
      established disclosure controls and procedures to ensure that material
      information relating to the Company, including its consolidated subsidiaries,
      is
      made known to the officers who certify our financial reports and to other
      members of management and the Board of Directors. Based on their evaluation
      as
      of December 31, 2007, our Chief Executive Officer (the “CEO”) and Chief
      Financial Officer (the “CFO”) have concluded that our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act) are effective in ensuring that the information required to be disclosed
      by
      us in the reports that we file or submit under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in SEC
      rules and forms and that such information is accumulated and communicated to
      our
      management, including our CEO and our CFO, as appropriate to allow timely
      decisions regarding required disclosure.





**Internal
      Control over Financial Reporting**





**(a)** ***Management’s
      annual report on internal control over financial
      reporting.***




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Our internal control over financial reporting
      is a process designed under the supervision of our CEO and CFO to provide
      reasonable assurance regarding the reliability of financial reporting and
      preparation of our financial statements for external purposes in accordance
      with
      generally accepted accounting principles.





As
      of
      December 31, 2007, management assessed the effectiveness of our internal
      control over financial reporting based on the criteria for effective internal
      control over financial reporting established in *Internal
      Control — Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission. Based
      on
      that assessment, management determined that we maintained effective internal
      control over financial reporting as of December 31, 2007, based on those
      criteria.





Because
      of its inherent limitations, our internal control over financial reporting
      may
      not prevent or detect misstatements. Therefore, even those systems determined
      to
      be effective can provide only reasonable assurance with respect to financial
      statement preparation and presentation. Projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions or that the degree of compliance
      with the policies or procedures may deteriorate.





This
      annual report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting.
      Management's report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the SEC that permit us to provide
      only management's report in this annual report.





***(b)
      Changes in internal control over financial reporting.***





There
      were no changes in our internal control over financial reporting that occurred
      during the most recent fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





**Item
      9B. Other Information**





None.


41


**PART
      III**





**Item
      10. Directors, Executive Officers and Corporate Governance**





Our
      executive officers and directors are as follows:




Name
            
            Age
            
            PositionMarc
                N. Geman
            
            62
            
            Chairman
                and Chief Executive OfficerAnthony
                S. Walker
            
            36
            
            Director
                and Chief Operating OfficerKevin
                Morrison
            
            42
            
            Chief
                Culinary OfficerArnold
                Tinter
            
            62
            
            Chief
                Financial OfficerRaymond
                BonAnno
            
            67
            
            DirectorPresley
                Reed
            
            61
            
            DirectorL.
                Kelly Jones
            
            54
            
            Director





**Background
      of Officers and Directors**





**Marc
      N. Geman -** Mr.
      Geman is our Chief Executive Officer and Chairman of the Board of Directors
      of
      our Company. Mr. Geman has held these positions since our formation in January
      2003. From 1994 to 1998, he was president of Pretzelmaker Holdings, Inc., a
      national franchisor of soft pretzels. From May 2001 to May 2003, Mr. Geman
      was
      the Chief Executive Officer and a director of Bayview Technology Group, LLC
      (“Bayview”), a company that manufactured and developed energy-efficient
      products. From May 2003 until October 2003, Mr. Geman was the Chairman of
      Bayview. From July 2003 until December 2004, he was a consultant to the
      purchaser of Bayview. Mr. Geman was a founder and Chief Executive Officer of
      Portfolio Management Consultants, Inc., an investment advisory firm managing
      assets for high net worth individuals from 1990 to 1995. Mr. Geman has been
      a
      licensed attorney since 1973.





**Anthony
      S. Walker -** Mr.
      Walker is our Chief Operating Officer and has been a director since our
      inception in January 2003. Together with Mr. Morrison, he is a co-founder of
      the
      concept that in August 1999 started operating Spicy Pickle Restaurants in
      Denver, Colorado. From 1996 until 1999, Mr. Walker was a chef at the Barolo
      Grill, a fine dining restaurant in Denver, Colorado. Mr. Walker has been
      recognized in magazines such as The New York Times, Cucina Italiana and Nations
      Restaurant News.




**Kevin
      Morrison** - Mr.
      Morrison is our Chief Culinary Officer; he has held a senior management position
      since our inception in January 2003. In 1999, Mr. Morrison co-founded the Spicy
      Pickle concept with Mr. Walker and opened the first Spicy Pickle restaurant
      in
      1999, in Denver, Colorado. From 1995 through 2000, Mr. Morrison also owned
      and
      operated a wholesale food distribution business, Red Tomato Specialty Produce.
      Mr. Morrison also has served as chef di cuisine of Vinci Restaurant in Chicago
      and sous chef at the Barolo Grill in Denver.




**Arnold
      Tinter -** Mr.
      Tinter has been our Chief Financial Officer since September 1, 2006. From 1990
      to the present, he has been the president of Corporate Finance Group, a company
      involved in financial consulting in the areas of strategic planning, mergers
      and
      acquisitions and capital formation. From May 2001 to May 2003, he served as
      Chief Financial Officer of Bayview Technology Group, LLC, a privately held
      company that manufactured and distributed energy-efficient products. From May
      2003 to October 2004, he served as that company’s Chief Executive Officer. Mr.
      Tinter is a Certified Public Accountant.




**Raymond
      BonAnno**- Mr.
      BonAnno has served as a member of our Board of Directors since April 2006.
      He
      has spent more than 30 years in the automotive carrier truck industry. Mr.
      BonAnno was Director of Operations, Baker Driveaway Co., Inc. (1973-1975) and
      at
      E & L Transport, Inc. (1975-1977). In 1977, he was recruited by Ryder
      Systems, Inc. to be General Manager - Cadillac Division (1977-1982). With Ryder,
      he held assignments of increasing responsibility for 23 years until his
      departure in 1990. Mr. BonAnno has a BBA degree in finance from the University
      of Notre Dame (1963) and an MBA, Advanced Management Program from Michigan
      State
      University (1983). In 1990, Mr. BonAnno purchased an interest in Fleet Car
      Carriers and now he and his family own that company. Mr. BonAnno currently
      serves on the University of Notre Dame Advisory Council for the College of
      Arts
      and Letters, the Board of Advisors for the University of Detroit Jesuit High
      School and Academy and the Advisory Board for the Alliance Real Estate
      Investment Fund. Mr. BonAnno also serves as a member of the Board of Directors
      of the Colorado Capital Bank, Cherry Creek Branch, and the Agents Title
      Insurance Company.


42


**Presley
      Reed** - Dr.
      Presley Reed has served as a member of our Board of Directors since April 2006
      and is founder and Chairman of Reed Group with offices in Colorado and New
      York;
      Dr. Reed has held such position for many years. Dr. Reed is the Editor-in-Chief
      of *The
      Medical Disability Advisor: Workplace Guidelines for Disability
      Duration* .
      Dr.
      Reed is an expert in disability management, workplace absence and productivity,
      workers' compensation, and occupational health. He is Board Certified by the
      American Board of Psychiatry and Neurology. He is a Fellow of the American
      College of Occupational and Environmental Medicine and is a former chair of
      its
      Committee on Occupational Mental Health. He is a Fellow of the American Academy
      of Disability Evaluating Physicians. He served as Founding Chairman of the
      American Board of Independent Medical Examiners and is a Certified Independent
      Medical Examiner. Dr. Reed received his BS in Medical Arts from the University
      of Kentucky and his medical degree from the University of Tennessee. He
      completed his residency in psychiatry at Tulane in New Orleans, and at Denver
      General Hospital.




**L.
      Kelly Jones -** Mr.
      Jones has served as a member of our Board of Directors since July 2006. He
      founded and remains with the law firm of Jones & Cannon since 1980. Mr.
      Jones is certified in the area of commercial real estate law by the Texas Board
      of Legal Specialization and is the author of an article, “Texas Mechanics’ and
      Materialmen’s Lien Laws: A Guide Through the Maze,” which appeared in the Texas
      Bar Journal in March 1985. Mr. Jones’ areas of practice include corporate,
      construction, real estate, municipal law and commercial litigation. Mr. Jones
      served as Chief Executive Officer of VirTra Systems, Inc. (OTCBB: VTSI) from
      March 1997 until April 2006. Mr. Jones served from 1985 through 1989 on the
      Arlington City Council (Chairman, Budget and Audit Committee) and on the Stephen
      F. Austin State University Board of Regents from 1987 through 1993, where he
      was
      Chairman from 1991 through 1993. He holds a Juris Doctorate degree from the
      University of Texas and a Bachelor of Arts degree in political science from
      Stephen F. Austin State University.





There
      are
      no family relationships among the directors and executive officers. Except
      as
      set forth below, none of the directors or executive officers has, during the
      past five years:





(a)
            had
                any petition under the federal bankruptcy laws or any state insolvency
                law
                filed by or against, or a receiver, fiscal agent or similar officer
                appointed by a court for the business or property of, such person,
                or any
                partnership in which he was a general partner at or within two years
                before the time of such filing, or any corporation or business association
                of which he was an executive officer at or within two years before
                the
                time of such filing;(b)
            been
                convicted in a criminal proceeding or subject to a pending criminal
                proceeding;(c)
            been
                subject to any order, judgment, or decree, not subsequently reversed,
                suspended or vacated, of any court of competent jurisdiction or any
                federal or state authority, permanently or temporarily enjoining,
                barring,
                suspending or otherwise limiting his involvement in any type of business,
                securities, futures, commodities or banking activities;
                or(d)
            been
                found by a court of competent jurisdiction (in a civil action), the
                SEC or
                the Commodity Futures Trading Commission to have violated a federal
                or
                state securities or commodities law, and the judgment has not been
                reversed, suspended, or vacated.




**Compliance
      with Section 16(a) of the Exchange Act**




Section 16(a)
      of the Exchange Act requires our executive officers and directors and persons
      who own more than ten percent (10%) of our common stock to file reports of
      ownership and changes in ownership with the SEC and any exchange on which the
      common stock is listed for trading and to furnish us with copies of all Section
      16(a) reports filed. Based solely on our review of such reports and written
      representations of certain of such persons furnished to us during or with
      respect to the last fiscal year, we are unaware of any such person who failed
      to
      file on a timely basis reports required by Section 16(a) during the most recent
      fiscal year or prior fiscal years.





**Code
      of Business Ethics**





We
      have a
      Code of Business Ethics that governs all of our employees, including our CEO,
      CFO, principal accounting officer or persons performing similar functions.
      We
      will provide a copy of our code free of charge to any person upon written
      request to us at the following address: 90 Madison Street, Suite 700, Denver,
      CO
      80206 Attn: Corporate Secretary.


43


**Audit
      Committee Financial Expert**





Our
      Board
      of Directors has determined that there is no Audit Committee financial expert
      serving on our Audit Committee. As we are not a listed issuer as that term
      is
      defined in Rule 10A-3 under the Exchange Act, we are not required to have a
      financial expert serving on our Audit Committee.


44




**Item
      11. Executive Compensation**





The
      following table sets forth, for the last two fiscal years, the compensation
      earned for the services rendered in all capacities by our Chief Executive
      Officer (principal executive officer) and the Company’s two most highly
      compensated executive officers who earned more than $100,000. The individuals
      in
      the table are referred to herein as the "named executive officers."


**Name
                  and principle position**
              
              **Year**
              
              **Salary
                  ($)**
              
              **Bonus
                  ($)**
              
              **Stock
                  awards**
                **($)**
              
              **Option
                  awards ($)**
              
              **Non-equity
                  incentive plan compensation ($)**
              
              **Nonqualified
                  deferred compensation earnings**
                **($)**
              
              **All
                  other compensation ($)**
              
              **Total**
                **($)**(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)
              
              (i)
              
              (j)Marc
                  Geman
              
              
              2007
              
              
              150,000
              
              
              73,000
              
              
              -
              
              
              95,561
              
              
              -
              
              
              -
              
              
              -
              
              
              318,561Chief
                  Executive Officer
              
              
              2006
              
              
              79,500
              
              
              90,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              169,500Arnold
                  Tinter
              
              
              2007
              
              
              135,000
              
              
              25,000
              
              
              
              
              
              101,837
              
              
              -
              
              
              -
              
              
              -
              
              
              261,837Chief
                  Financial Officer
              
              
              2006
              
              
              15,000
              
              
              -
              
              
              25,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              40,000Anthony
                  Walker
              
              
              2007
              
              
              100,000
              
              
              10,000
              
              
              -
              
              
              48,843
              
              
              -
              
              
              -
              
              
              -
              
              
              158,843Chief
                  Operating Officer
              
              
              2006
              
              
              63,433
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              63,433





(1)
            In
                August 2006, Mr. Geman received an increase in his salary to $150,000
                per
                annum. Under Mr. Geman’s employment agreement, an increase to $360,000 per
                annum has been implemented. Bonuses awarded in 2006 and 2007 were
                granted
                by the Compensation Committee of the Board of Directors. Mr. Geman
                receives no compensation for his services as a
                director.(2)
            From
                September 2006 to July 2007, Mr. Tinter was compensated as an independent
                contractor at the rate of $5,000 per month. Subsequent to July 1,
                2007,
                Mr. Tinter became a full-time employee of our Company and under a
                verbal
                agreement received $12,500 per month as compensation. The bonus awarded
                in
                2007 was granted by the Compensation Committee of the Board of
                Directors.(3)
            In
                September 2006, Mr. Walker’s salary increased to $109,000 per annum. Under
                Mr. Walker’s employment agreement, an increase to $150,000 per annum has
                been implemented. Mr. Walker receives no compensation for his services
                as
                a director.





The
      following table sets forth, at December 31, 2007, information concerning
      unexercised options for each named executive officer. There were no stock awards
      outstanding at December 31, 2007.


**Name**
              
              **Number
                  of securities underlying unexercised options**
                **(#)**
                **exercisable**
              
              **Number
                  of securities underlying unexercised options**
                **(#)**
                **unexercisable**
              
              **Equity
                  incentive plan awards:**
                **Number
                  of securities underlying unexercised unearned
                  options**
                **(#)**
              
              **Option**
                **exercise
                  price**
                **($)**
              
              **Option**
                **expiration**
                **date**(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)Marc
                  Geman
              
              
              500,0001
                -
              
              
              -
                500,0002
              
              
              -
              
              $$
              0.63251.2600
              
              
              9/20/12
                12/14/12Arnold
                  Tinter
              
              
              50,0003
                400,0001
                -
              
              
              150,0004
                -
                500,0002
              
              
              -
                -
                -
              
              $$$
              0.25000.5750
                  1.1500
              
              
              1/25/12
                9/20/12
                12/14/12Anthony
                  Walker
              
              
              300,0001
              
              
              -
              
              
              -
              
              $
              0.6325
              
              
              9/20/12




45




(1)
            Options
                vested September 29, 2007.(2)
            100%
                of the options vest June 14, 2008.(3)
            Options
                vested January 25, 2007.(4)
            75,000
                options vest January 25, 2008 and 75,000 options vest January 25,
                2009.





There
      are
      no plans that provide for the payment of retirement benefits, or benefits that
      will be paid primarily following retirement, including but not limited to
      tax-qualified defined benefit plans, supplemental executive retirement plans,
      tax-qualified defined contribution plans and nonqualified defined contribution
      plans.





Other
      than as discussed below in “Executive Compensation - Employment Agreements,”
there are no contracts, agreements, plans or arrangements, written or unwritten,
      that provide for payment to a named executive officer at, following, or in
      connection with the resignation, retirement or other termination of a named
      executive officer, or a change in control of our company or a change in the
      named executive officer's responsibilities following a change in control, with
      respect to each named executive officer.





The
      following table sets forth, for the year ended December 31, 2007, the
      compensation earned for the services rendered in all capacities by our
      directors.





**Name**
            
            **Fees**
              **earned**
              **or
                paid**
              **in
                cash**
              **($)**
            
            **Stock
                awards**
              **($)**
            
            **Option
                awards**
              **($)**
            
            **Non-equity
                incentive plan compensation**
              **($)**
            
            **Nonqualified
                deferred compensation earnings**
              **($)**
            
            **All
                other compensation**
              **($)**
            
            **Total**
              **($)**(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)L.
                Kelly Jones1
            
            
            -
            
            
            -
            
            
            5,928
            
            
            -
            
            
            -
            
            
            64,000
            
            
            69,928Raymond
                BonAnno2
            
            
            -
            
            
            -
            
            
            5,928
            
            
            -
            
            
            -
            
            
            -
            
            
            5,928Presley
                Reed3
            
            
            -
            
            
            -
            
            
            5,928
            
            
            -
            
            
            -
            
            
            -
            
            
            5,928





(1)
            During
                the year ended December 31, 2007, Mr. Jones was awarded options to
                purchase 100,000 shares of common stock, all of which were outstanding
                at
                December 31, 2007. The exercise price of the options is $.25 per
                share. At
                December 31, 2007, 50,000 options have vested, 25,000 will vest January
                25, 2008 and 25,000 will vest January 25, 2009. The options expire
                January
                25, 2012. Other compensation represents fees paid to Jones and Cannon
                PC
                for legal services rendered in connection with real estate leases.
                Mr.
                Jones is a partner in the law firm.(2)
            During
                the year ended December 31, 2007, Mr. BonAnno was awarded options
                to
                purchase 100,000 shares of common stock, all of which were outstanding
                at
                December 31, 2007. The exercise price of the options is $.25 per
                share. At
                December 31, 2007, 50,000 options have vested, 25,000 will vest January
                25, 2008 and 20,000 will vest January 25, 2009. The options expire
                January
                25, 2012.(3)
            During
                the year ended December 31, 2007, Mr. Reed was awarded options to
                purchase
                100,000 shares of common stock, all of which were outstanding at
                December
                31, 2007. The exercise price of the options is $.25 per share. At
                December
                31, 2007, 50,000 options have vested, 25,000 will vest January 25,
                2008
                and 25,000 will vest January 25, 2009. The options expire January
                25,
                2012.





**Employment
      Agreements**





We
      have
      an employment agreement with our Chief Executive Officer, Marc Geman. His base
      salary is currently $360,000 per annum. The term is for three years and ends
      on
      August 13, 2009. If Mr. Geman is terminated without cause or resigns with good
      reason (as defined in his agreement, which good reason includes a change in
      control), then he receives a lump sum payment of his salary for a 12-month
      period as severance.





We
      have
      an employment agreement with our Chief Operating Officer, Anthony Walker. His
      base salary is currently $150,000 per annum. The term is for two years and
      ends
      on August 13, 2008. If Mr. Walker is terminated without cause or resigns with
      good reason (as defined in his agreement, which good reason includes a change
      in
      control), then he receives a lump sum payment of his salary for a 12-month
      period as severance.




We
      have
      an employment agreement with our Chief Culinary Officer, Kevin Morrison. His
      base salary is currently $150,000 per annum. The term is for two years and
      ends
      on August 13, 2008. If Mr. Morrison is terminated without cause or resigns
      with
      good reason (as defined in his agreement, which good reason includes a change
      of
      control), then he receives a lump sum payment of his salary for a 12-month
      period as severance.


46
  **Item
        12. Security Ownership of Certain Beneficial Owners and Management and Related
        Stockholder Matters**





The
      following table sets forth certain information regarding beneficial ownership
      of
      our capital stock as of March 10, 2008 by (i) each person known by us to be
      the
      beneficial owner of more than five percent of the outstanding common stock,
      (ii)
      each director, (iii) each named executive officer, and (iv) all directors and
      executive officers as a group.





The
      number of shares beneficially owned is determined under the rules promulgated
      by
      the SEC, and the information is not necessarily indicative of beneficial
      ownership for any other purpose. Under those rules, beneficial ownership
      includes any shares as to which the person has sole or shared voting power
      or
      investment power and any shares that the person has the right to acquire within
      60 days of the date hereof, through the exercise or conversion of any stock
      option, convertible security, warrant or other right. Including those shares
      in
      the table does not, however, constitute an admission by the named shareholder
      that the shareholder is a direct or indirect beneficial owner of those shares.





Unless
      otherwise indicated, each person named in the table has sole voting power and
      investment power (or shares that power with that person's spouse) with respect
      to all shares of capital stock listed as owned by that person. Unless otherwise
      indicated, the address of each of the following persons is 90 Madison Street,
      Suite 700, Denver, Colorado 80206. All percentages of common stock beneficially
      owned by the listed persons are based upon 47,884,053 shares of common stock
      outstanding at March 10, 2008, and shares of common stock subject to options,
      warrants and convertible securities within 60 days of the date hereof are deemed
      to be outstanding for computing the percentage of the person holding such
      options, warrants or convertible securities but are not deemed to be outstanding
      for computing the percentage of any other person.




Title
                of Class
            
            Name
                and Address of Beneficial Owner
            
            Amount
                and Nature of
              Beneficial
                Ownership
            
            Percent
                of ClassCommon
                Stock
            
            
            Marc
                Geman (1)
            
            
            7,088,934
            
            
            14.50
            %Common
                Stock
            
            
            Anthony
                Walker (2)
            
            
            6,485,712
            
            
            13.46
            %Common
                Stock
            
            
            Kevin
                Morrison (3)
            
            
            5,921,038
            
            
            12.29
            %Common
                Stock
            
            
            L.
                Kelly Jones (4)
            
            
            644,500
            
            
            1.34
            %Common
                Stock
            
            
            Raymond
                BonAnno (5)
            
            
            2,645,445
            
            
            5.49
            %Common
                Stock
            
            
            Presley
                Reed (6)
            
            
            4,865,986
            
            
            9.72
            %Common
                Stock
            
            
            Arnold
                Tinter (7)
            
            
            1,025,000
            
            
            2.10
            %Common
                Stock
            
            
            EWM
                Investments (8)
            
            
            4,122,300
            
            
            8.61
            %Common
                Stock
            
            
            All
                Directors and Executive Officers as a Group (7 persons)
            
            
            28,676,615
            
            
            54.06
            %Preferred
                Stock
            
            
            Raymond
                BonAnno
            
            
            12
            
            
            1.70
            %Preferred
                Stock
            
            
            Presley
                Reed
            
            
            120
            
            
            17.02
            %





*
      Less
      than one percent


(1)
            Includes
                1,000,000 shares based on options exercisable within 60
                days.(2)
            Includes
                300,000 shares based on options exercisable within 60
                days.(3)
            Includes
                300,000 shares based on options exercisable within 60
                days.(4)
            Includes
                50,000 shares owned by Jones and Cannon, a law firm in which Mr.
                Jones is
                a partner, and 75,000 shares based on options exercisable within
                60
                days.(5)
            Includes
                2,360,445 shares owned of record by the BonAnno Family Partnership;
                Raymond BonAnno has voting and dispositive power over such
                shares,
                120,000 shares based on conversion of Series A Preferred Stock owned
                jointly by Mr. BonAnno and his wife, 90,000 shares based on exercise
                of
                warrants jointly owned by Mr. BonAnno and his wife, and 75,000 shares
                based on options exercisable within 60
                days.


47




(6)
            Includes
                1,544,578 shares owned jointly by Presley and Patricia Reed, 1,146,408
                shares owned by the Presley Reed 1999 Family Trust, of which Patricia
                Reed, Mr. Reed’s wife, is the beneficiary, 1,200,000 shares based on
                conversion of Series A Preferred Stock owned jointly by Mr. Reed
                and his
                wife, 900,000 shares based on exercise of warrants jointly owned
                by Mr.
                Reed and his wife, and 75,000 shares based on options exercisable
                within
                60 days.(7)
            Includes
                1,025,000 shares based on options exercisable within 60
                days.(8)
            Ernest
                Moody has sole voting and dispositive power over the shares owned
                of
                record by EWM Investments.





**Equity
      Compensation Plan Information**





The
      following table provides information as of December 31, 2007 with respect to
      our
      2006 Stock Option Plan, the only compensation plan under which our equity
      securities are authorized for issuance, which plan was approved by our
      shareholders in 2006.





**Plan
                category**
            
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities
                reflected in column (a))**(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by security holders
            
            
            4,060,000
            
            $
            .76
            
            
            3,440,000Equity
                compensation plans not approved by security holders
            
            
            None
            
            
            
            
            
            NoneTotal
            
            
            4,060,000
            
            $
            .76
            
            
            3,440,000





**Change
      in Control**





To
      the
      knowledge of management, there are no present arrangements that may result
      in a
      change of control of the Company.





**Item
      13. Certain Relationships and Related Transactions, and Director
      Independence.**





In
      2006,
      Arnold Tinter, our Chief Financial Officer, received 100,000 shares from us
      as
      payment for financial consulting services he provided prior to being employed
      by
      the Company as its Chief Financial Officer.





On
      December 14, 2007, Raymond BonAnno and Presley Reed, two of our directors,
      Keith
      and Angela Oxenreider, the son-in-law and daughter of director Raymond BonAnno,
      and R. James BonAnno, Jr., the son of director Raymond BonAnno, participated
      in
      the transaction pursuant to which we sold an aggregate of 705 shares of Series
      A
      Preferred Stock and warrants to purchase an aggregate of 5,287,500 shares of
      common stock for an aggregate purchase price of $5,992,500. Mr. BonAnno and
      his
      wife purchased 12 shares of Series A Preferred Stock and warrants to purchase
      90,000 shares of common stock for $102,000. Mr. Reed and his wife purchased
      120
      shares of Series A Preferred Stock and warrants to purchase 900,000 shares
      of
      common stock for $1,020,000. Mr. and Mrs. Oxenreider purchased 12 shares of
      Series A Preferred Stock and warrants to purchase 90,000 of common stock for
      $102,000. Mr. BonAnno, Jr. purchased 12 shares of Series A Preferred Stock
      and
      warrants to purchase 90,000 of common stock for $102,000.


48
  In
        2007,
        Jones and Cannon PC, a law firm of which L. Kelly Jones (a director of the
        Company) is a partner, received for legal services rendered $19,000 in cash
        and
        50,000 shares of common stock valued at $20,000. As of December 31, 2007,
        we owe
        Jones and Cannon PC approximately $25,000 for legal services rendered.





**Director
      Independence**





The
      following members of the Company’s Board of Directors are independent directors
      as that term is defined by NASDAQ Rule 4200(a)(15): Raymond BonAnno, Presley
      Reed and L. Kelly Jones. Neither member of the Company’s Audit Committee, whose
      members are Marc Geman and L. Kelly Jones, meets the Audit Committee
      independence requirements of NASDAQ Rule 4350(d).





**Item
      14. Principal Accounting Fees and Services.**




The
      following table sets forth fees billed to us by Gordon, Hughes and Banks, LLP,
      our registered public accounting firm, during the fiscal years ended
      December 31, 2007 and December 31, 2006 for: (i) services
      rendered for the audit of our annual financial statements and the review of
      our
      quarterly financial statements; (ii) services rendered that are reasonably
      related to the performance of the audit or review of our financial statements
      and that are not reported as Audit Fees; (iii) services rendered in
      connection with tax compliance, tax advice and tax planning, and (iv) all
      other services rendered.




December
                31,
            
            December
                31,2007
            
            2006Audit
                Fees
            
            $
            40,820
            
            $
            25,263Audit-Related
                Fees
            
            
            —
            
            
            —Tax
                Fees
            
            
            —
            
            
            —All
                Other Fees
            
            
            —
            
            
            —Total
                fees
            
            $
            40,820
            
            $
            25,263


49


**PART
      IV**





**Item
      15. Exhibits, Financial Statements Schedules.**





(a)
      Documents filed as a part of this report





(1) *Financial
      Statements*





The
      Consolidated Financial Statements of Spicy Pickle Franchising, Inc. and its
      subsidiaries and the Independent Registered Public Accounting Firm’s report
      dated March 17, 2008, are incorporated by reference to Item 8 of this
      report.





(2) *Financial
      Statement Schedules*





Not
      required.





(b)
      Exhibits




**Exhibit**
              **Number**
            
            **Exhibit
                Description**3.1
            
            Amended
                Articles of Incorporation of the Registrant (1)3.2
            
            Bylaws
                (2)4.1
            
            Certificate
                of Designation of Series A Variable Rate Convertible Preferred Stock
                (3)10.1
            
            Employment
                Agreement - Marc Geman (2)*10.2
            
            Employment
                Agreement - Anthony Walker (2)*10.3
            
            Employment
                Agreement - Kevin Morrison (2)*10.4
            
            2006
                Stock Option Plan (2)10.5
            
            Promissory
                Note to Spicy Pickle, LLC (2)10.6
            
            Securities
                Purchase Agreement dated as of December 14, 2007 (4)10.7
            
            Form
                of Warrant (5)10.8
            
            Registration
                Rights Agreement dated as of December 14, 2007 (6)10.9
            
            Lock-Up
                Agreement of Marc Geman (7)10.10
            
            Form
                of Lock-Up Agreement executed by other officers and directors
                (8)21.1
            
            List
                of Subsidiaries (9)31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Executive
                Officer (9)31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Financial
                Officer (9)32.1
            
            Section
                1350 Certification of Chief Executive Officer (9)32.2
            
            Section
                1350 Certification of Chief Financial
                Officer (9)




(1)
            Incorporated
                by reference to the exhibit of the same number to the registrant’s
                Amendment No. 1 to Registration Statement on Form SB-2 filed on December
                12, 2006.(2)
            Incorporated
                by reference to the exhibit of the same number to the registrant’s
                Registration Statement on Form SB-2 filed on October 26,
                2006.(3)
            Incorporated
                by reference to the exhibit of the same number to the registrant’s Current
                Report on Form 8-K filed on December 19, 2007.(4)
            Incorporated
                by reference to Exhibit 10.1 to the registrant’s Current Report on Form
                8-K filed on December 19, 2007.(5)
            Incorporated
                by reference to Exhibit 10.2 to the registrant’s Current Report on Form
                8-K filed on December 19, 2007.(6)
            Incorporated
                by reference to Exhibit 10.3 to the registrant’s Current Report on Form
                8-K filed on December 19, 2007.(7)
            Incorporated
                by reference to Exhibit 10.4 to the registrant’s Current Report on Form
                8-K filed on December 19, 2007.(8)
            Incorporated
                by reference to Exhibit 10.5 to the registrant’s Amendment No. 1 to
                Current Report on Form 8-K filed on December 27, 2007.(9)
            Filed
                herewith.*
            Indicates
                a management contract or compensatory plan or
                arrangement.




50





**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




SPICY PICKLE FRANCHISING, INC.Date:
                March 21, 2008
            By:
            /s/
                Marc GemanMarc
                Geman, Chief Executive Officer





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





Signature
            
            Title
            
            Date/s/
                Marc Geman
            
            Chief
                Executive Officer and Chairman of the
            
            March
                21, 2008Marc
                Geman
            
            Board
              (Principal Executive Officer)/s/
                Arnold Tinter
            
            Chief
                Financial Officer (Principal Financial
            
            March
                21, 2008Arnold
                Tinter
            
            and
              Accounting Officer)/s/
                Anthony Walker
            
            Director
            
            March
                21, 2008Anthony
                Walker/s/
                Presley Reed
            
            Director
            
            March
                21, 2008Presley
                Reed/s/
                Raymond BonAnno
            
            Director
            
            March
                21, 2008Raymond
                BonAnno/s/
                L. Kelly Jones
            
            Director
            
            March
                21, 2008L.
                Kelly Jones





**EXHIBIT
      INDEX**





**Exhibit
                Number**
            
            **Exhibit
                Description**3.1
            
            Amended
                Articles of Incorporation of the Registrant (1)3.2
            
            Bylaws
                (2)4.1
            
            Certificate
                of Designation of Series A Variable Rate Convertible Preferred Stock
                (3)10.1
            
            Employment
                Agreement - Marc Geman (2)10.2
            
            Employment
                Agreement - Anthony Walker (2)10.3
            
            Employment
                Agreement - Kevin Morrison (2)10.4
            
            2006
                Stock Option Plan (2)10.5
            
            Promissory
                Note to Spicy Pickle, LLC (2)10.6
            
            Securities
                Purchase Agreement dated as of December 14, 2007 (4)10.7
            
            Form
                of Warrant (5)10.8
            
            Registration
                Rights Agreement dated as of December 14, 2007 (6)10.9
            
            Lock-Up
                Agreement of Marc Geman (7)10.10
            
            Form
                of Lock-Up Agreement executed by other officers and directors
                (8)21.1
            
            List
                of Subsidiaries (9)31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Executive
                Officer (9)31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Financial
                Officer (9)32.1
            
            Section
                1350 Certification of Chief Executive Officer (9)32.2
            
            Section
                1350 Certification of Chief Financial
                Officer (9)





(1)
            Incorporated
                by reference to the exhibit of the same number to the registrant’s
                Amendment No. 1 to Registration Statement on Form SB-2 filed on December
                12, 2006.(2)
            Incorporated
                by reference to the exhibit of the same number to the registrant’s
                Registration Statement on Form SB-2 filed on October 26,
                2006.(3)
            Incorporated
                by reference to the exhibit of the same number to the registrant’s Current
                Report on Form 8-K filed on December 19, 2007.(4)
            Incorporated
                by reference to Exhibit 10.1 to the registrant’s Current Report on Form
                8-K filed on December 19, 2007.(5)
            Incorporated
                by reference to Exhibit 10.2 to the registrant’s Current Report on Form
                8-K filed on December 19, 2007.(6)
            Incorporated
                by reference to Exhibit 10.3 to the registrant’s Current Report on Form
                8-K filed on December 19, 2007.(7)
            Incorporated
                by reference to Exhibit 10.4 to the registrant’s Current Report on Form
                8-K filed on December 19, 2007.(8)
            Incorporated
                by reference to Exhibit 10.5 to the registrant’s Amendment No. 1 to
                Current Report on Form 8-K filed on December 27, 2007.(9)
            Filed
                herewith.