SECURITIES AND EXCHANGE COMMISSION

         Washington, D.C. 20549

               FORM 10-KSB

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


For the fiscal year ended January 3, 1999

For the transition period from                 to       
                    

Commission file number 0-13642


       HUDSON'S GRILL OF AMERICA, INC.
(Name of small business issuer in its charter)


California                                    95-3477313
(State or other jurisdiction of incorporation)(IRS Employer
Identification Number)


16970 Dallas Parkway, Suite 402, Dallas, Texas  75248
(Address of Principal Executive Offices)


Issuer's telephone number, including area code:
(972) 931-9237

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

None                    None                              
(Title of each class)   (Name of each exchange on which
                        registered)

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

Common Stock
(Title of each class)
               
Check whether the issuer (1) filed all reports required to be filed by Section 
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter 
period that the registrant was required to file such reports), and (2) has 
been subject to such filing requirements for the past 90 days. 

Yes   X    No      

Check if there is no disclosure of delinquent filers in response to Item 405 
of Regulation S-B not contained in this form, and no disclosure will be 
contained, to the best of registrant's knowledge, in definitive proxy or 
information statements incorporated by reference in Part III of this Form 
10-KSB or any amendment to this Form 10-KSB.

[ ]

State issuer's revenues for its most recent fiscal year. 
$742,823

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.  (See definition of affiliate in Rule 12b-2 of the Exchange Act).
Average bid and asked during the week ending 4/16/99 is $0.21.  The Issuer
has 6,056,986 shares outstanding; the market value of the voting stock is
$1,271,967.06.

Note:  If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.

(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PAST FIVE YEARS)

Check whether the issuer has filed all documents and reports required to be 
filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution 
of securities under a plan confirmed by a court.
Yes        No      


(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

State the number of shares outstanding of each of the issuer's classes of 
common equity, as of the latest practicable date.

6,056,986


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be 
held on June 10, 1999, are incorporated by reference into Parts II and III.


                 PART I

ITEM 1. BUSINESS

Hudson's Grill of America, Inc. (the "Company"), was incorporated on June 11, 
1979, in California, and the corporation has undergone several name changes 
since then. The Company amended its charter to its current name on June 
14, 1991.  Currently, the Company operates and franchises Hudson's Grill 
Restaurants.

Hudson's Grill Restaurants are full service restaurants which serve lunch and
dinner and a wide range of alcoholic beverages.  On January 3, 1999, there
were twelve(12) Hudson's Grill restaurants; all twelve were franchised. In
January 1999 a subsidiary of the Company opened a Hudson's Grill restaurant in
Dallas, Texas, and in April 1999, a franchisee opened a Hudson's Grill in
Marquette, Michigan.  The company's major focus has been to expand the
Hudson's Grill operations through franchising instead of through ownership,
but recently it has changed its emphasis; as funds permit, it now also plans
to open Hudson's Grills to operate as company stores.  The Hudson's Grill
restaurants are currently operating in  California, Michigan and Texas.  The
Company is still accepting franchises, but the franchise market and the
restaurant market are very competitive.  Many other franchisers have
substantially more capital, thereby making it much more difficult to compete
against them, and for that reason, the Company plans to open its own
restaurants as funds permit it to do so.


BRIEF SUMMARY OF MAJOR EVENTS OVER THE PAST THREE YEARS.

On April 19, 1999, Sharfe, L.L.C., a Michigan limited liability company,
opened a Hudson's Grill in Marquette, Michigan.  The restaurant is a free
standing building, using the new prototype that was used for the Dallas,
Texas, and Jackson, Michigan, locations, and is being operated by Frank and
Jim Stabile.

In February 1999, the Company settled its lawsuit with the landlord of a site
formerly operated by the Company in Westlake, California. The Company's share
of the settlement is $83,333, which will be paid over 52 months beginning
November 1, 2001.  The last franchisees at that location were not able to keep
up the rent, and the last franchisee closed its doors in 1998.  The landlord
sued the Company, several franchisees and a guarantor to recover on the
defaulted lease.

In January 1999, Hudson's Grill of Richardson, Inc., a subsidiary of the
Company, opened a Hudson's Grill restaurant in northern Dallas, near
Richardson, Texas, a suburb of Dallas.  This new restaurant is the first
Company restuarant to open in many years, and is the only Company operated
location.  It will be used for training, and if successful, the free standing
prototype will be duplicated whenever possible. 

The Company also announced in January 1999 that the Company's Carrollton,
Texas, franchisee had decided to shut down the Hudson's Grill in Carrollton. 
The location was on a month to month lease, and in the fall the owner of the
franchisee had decided to return to California.  Another franchisee, Burgers
of Lancaster, Inc., a Lancaster, California, franchisee, closed in mid-January
1999. The owners of the Lancaster franchisee had been in bankruptcy.

In December 1998, the Company's prospective Reno, Nevada, franchisee elected
to terminate its franchise agreement prior to initiating site selection or
construction.  The Company agreed to return a portion of the franchise fee
paid by the prospective franchisee in 1997.

In September 1998, a Company franchisee opened a Hudson's Grill in Jackson,
Michigan.

At the annual shareholders meeting held in May 1998, the Company's
shareholders approved, subject to the directors' discretion, the spinning off
to the Company's shareholders of one of the Company's subsidiaries, Hudson's
Grill International, Inc., an entity that contains most of the assets formerly
held by the Company.

On March 9, 1998, the Company's subsidiary, Hudson's Grill of Whittier, Inc.,
closed the Hudson's Grill located in Westlake, California, and turned the
premises and furniture, fixtures and equipment over to the landlord prior to
the end of the lease.  The lease for premises does not end until December 14,
2010. In April 1998, after a franchisee quit the premises, the Company decided
not to re-open the Hudson's Grill in Whittier, California, because of marginal
performance and the expense to upgrade the restaurant to local and national
standards.

In February 1998, the Company's franchisee in Guatemala, closed its Hudson's
Grill restaurant in Guatemala City.  On January 20, 1998, the Company formed
an affiliate, Hudson's Grill of Denton/Trinity, Inc., to operate the
Carrollton, Texas, Hudson's Grill.  The former Carrollton franchisee's
furniture, fixtures and equipment had been repossessed and its right to
possess the premises had been terminated by the landlord.  Afterward, the
landlord entered into a lease with the Company's affiliate to lease the
premises and the owner of the furniture, fixtures and equipment entered into a
lease with the affiliate also.  Subsequently, the affiliate was sold to a
franchisee. In January 1999, the franchisee decided not to renew its lease and
closed down the restaurant.

The Company formed a new subsidiary called Hudson's Grill International, Inc.
("International"), and as of December 1, 1997, most of the Company's assets
were transferred to the new subsidiary; the only liabilities that
International assumed were those associated with the operation of its
headquarters in Dallas, Texas. The subsidiary is incorporated in Texas; the
assets that formerly were operated by the Company essentially have been
transferred to the new subsidiary.


In August 1997 the franchisee of the Hudson's Grill located in Hurst, Texas,
closed his restaurant.  The franchisee had been in arrears with the Company,
and the Company had notified the franchisee that the Company planned to
terminate his franchise for non-payment of franchise fees. The Company has
subsequently terminated the franchise.

In July 1997, the Company's franchise development and area representation
agreements with Dr. S.L. Sethi and with Jotar, Inc., were also terminated
because neither developer had built or was building the required number of
franchised restaurants.

At its annual shareholders meeting held on May 27, 1997, the shareholders of
the Company approved a change in the Company's articles of incorporation to
authorize the issuance of up to 5,000,000 shares of preferred stock.

In May 1997 the Hudson's Grill located on Burnet Road in Austin, Texas, filed
a petition for protection under chapter 11 of the U.S. Bankruptcy Code.  The
case was converted to a chapter 7 liquidation in June.  The restaurant was
then closed, and the Company has terminated the franchise.  Because of
increased competition and less than expected sales, the Company's franchisee
in Paramus, New Jersey, decided to close the Hudson's Grill food court
operation in the Garden State Mall.  This was a first time, experimental
location inside a shopping mall.

On April 14, 1997, Mark Myers, of Jackson, Michigan, signed a franchise
agreement with the Company on behalf of Hudson's Grill of Jackson, Inc., a
Michigan corporation.  Mr. Myers is a principal of the new franchisee and
built a Hudson's Grill that opened in September 1998 in Jackson, Michigan. 
The new location is near the Jackson Regional Airport.  This became the
Company's first franchise in Michigan, and it is the first unit that was based
on the Company's new free standing building design.

Pursuant to an exchange of modifications and of notes, the Company agreed in
April 1997 to transfer its note from Famous Bars, Grills, and Cafes of
America, Inc. ("Famous"), as payment on the Company's debt to Mr. Travis
Bryant.  Prior to the exchange of the Famous note as payment in full to Mr.
Bryant, the Company canceled $118,221 of the Famous note in exchange for the
assignment to the Company by Famous of an additional royalty.  The additional
royalty consists of two percent of the gross sales made by four franchises
formerly owned by Famous.  The resulting Famous note was for $1,150,845, and
it was used to pay $1,150,845 in obligations owed to Mr. Bryant.  This
exchange was made effective December 29, 1996, and the Company took a charge
of $118,221 against general and administrative expenses for canceling the
note.

The Company on January 23, 1997, closed on the sale of its interest in the
Hudson's Grill restaurant located in Pomona, California.  It sold its interest
in the restaurant for $114,200 and sold its liquor license for $6,000.  The
buyer was Burgers of Diamond Bar, a California general partnership led by Mr.
Mike Miller.  The buyer assumed the lease and agreed to lease equipment from
the Company for $2,500 per month for 96 months.  The company received $6,000
at closing and a note for $114,200, payable with interest at the greater of
12% or prime plus two percent.  The note is interest only for the first year,
and then it will be amortized over the next seven years.

In December 1996, the Company settled a trademark infringement lawsuit against
one of its former franchisees.  The former franchisee had operated a Hudson's
Grill in Bend, Oregon, and had been terminated as a franchisee for failure to
pay royalties.  The former franchisee's operations have been transferred to
new owners, and it no longer is or looks like a Hudson's Grill restaurant; the
former franchisee agreed to pay more than $31,000 to settle the case.

Also in December 1996, the Company signed its first international franchise. 
The franchise, since closed, was located in Guatemala City, Guatemala. The
Company also settled a lawsuit against it by an unpaid vendor of a former
joint venture.

In August 1996, the Company announced two new franchises to open in the 
future.  The new franchises were to be located in Fullerton, California, and
in Santa Clarita, California. Subsequently, the Fullerton franchisee elected
not to proceed with the operation of a Hudson's Grill restaurant. 

On July 17, 1996, the Company closed on the sale of its Hornblower's 
restaurant.  The sale was pursuant to an agreement for sale signed and 
announced in 1995.

On May 28, 1996, the Company's shareholders voted to increase the number of
authorized common shares in the company to 100,000,000 shares.



OPERATIONS AND RESTAURANT STYLE OF HUDSON'S:

Hudson's Grill is a full service, limited menu concept with alcoholic beverage
service.  The management teams work with the philosophy that the customer
should be viewed as their  "Guest".  They stress quality of product and
service, efficient flow of communications, integrity in job performance and
strong employee morale.  These restaurants range in size from 2,500 to 5,500
square feet.  The decor package has the theme of a "Classic Grill of the 50's
and 60's", with the front end of a Hudson's automobile coming through the wall
as a main feature.  Some restaurants are in free standing buildings, and some
are located within in-line shopping centers.  The average Hudson's Grill
employs approximately forty employees, seventy percent of whom are part-time
employees.

The restaurants have similar operations and offer similar food. The Company
plans to expand through adding franchises and building Company owned and
operated units.  Since the restaurant industry is very competitive, the
Company plans to attract loyal patrons by higher levels of service and more
exacting specifications for its products.


HUDSON'S MENU:

Most Hudson's Grill restaurants open at 11 a.m. and remain open until 
midnight, seven days a week, utilizing the same menu throughout all parts of 
the day.  They specialize in 1/3 pound hamburgers with the beef patties 
produced to very exacting specifications.  The menu also features an expanded 
chicken sandwich section using top quality chicken breasts and whole wheat 
buns.  Also on the menu are salads, sandwiches, a variety of appetizers, 
fajitas, tacos, and handmade milkshakes and malts.  Cocktails, beer and wine 
are also available with food.  The full service restaurant concept utilizes 
booths and tables with waiters and waitresses serving the guests.


HUDSON'S RESTAURANT DEVELOPMENT:

In contrast to its past plans to sell all of its directly owned restaurants,
the Company has constructed and opened a Hudson's Grill restaurant in the
Dallas, Texas, area to use for demonstration and testing purposes.  In
addition to this unit, the Company plans to expand by adding franchises. As
funds permit, the Company plans to open several Company owned stores for the
training of new franchisees and experimentation with menu items, ambience, and
service.  The new Company owned sites are being planned in response to
prospective franchisees who were concerned that the Company was not directly
involved with day to day operations so that the Company would know and
understand the problems that a franchisee faces.  Additionally, the Company
would like to accelerate expansion of the Hudson's Grill concept, and it feels
that opening Company owned restaurants will help. This expansion, however,
will be dependant on the Company's cash flow. 


HUDSON'S FRANCHISE AGREEMENTS:

The Company has been issued the trademark registrations for two "Hudson's
Grill" logos and for the "Hudson's" name.  It has also received registration
of its "Burgers*Shakes*Rock'n Roll" mark.   The Company has secured a permit
from the California Department of Corporations to issue Hudson's Grill
franchises in California and uses a Uniform Franchise Offering Circular where
permitted.  As of January 3, 1999, the Company had twelve(12) franchised
restaurants that were in operation.  The current standard terms to franchise a
restaurant are an initial fee of Thirty Five Thousand Dollars and a royalty of
four percent of sales, and require that three percent of sales be used for
advertising.  For these payments, the Company is obligated to do the
following: screen and train potential franchisees, review and approve sites,
and provide an operations manual and assistance.


EMPLOYEES AND UNIONS:

At January 3, 1999, the Company employed four (4) persons,
who were corporate employees.  One of the three employees was employed
part-time.

The Company is not a party to any collective bargaining
agreements.


ITEM 2. PROPERTIES

At January 3, 1999, the Company and its subsidiaries were the primary lessee
under leases for two(2) properties which include its headquarters and one (1)
restaurant in Dallas, Texas.  One of its subsidiaries was a primary lessee at
a former location in Whittier, California, which leasehold is currently in
litigation due to the vacation of those premises last year by the most recent
tenant. The leases have varying monthly rentals and expiration dates, which
range from as short as month to month for its headquarters to up to ten (10)
years for Dallas (Richardson), Texas.  A majority of restaurant leases provide
for a rental based on a percentage of gross sales against a minimum rent. The
Company shares office space with its largest shareholder.

As the Company opens more Company owned restaurants, it will become primarily
liable on more leases.  In the future, the Company intends to negotiate
shorter initial terms on leases and instead to have multiple options to renew
leases in order to limit its exposure to long term lease payments, especially
if locations are not successful.  This will also enable staying at locations
that are successful, but with the exposure of higher rental rates when options
for renewals are exercised.

All of the Company's restaurant equipment is owned free and clear by the
Company; most is leased to franchisees. The restaurant equipment used in the
Dallas location, which is operated by the Company's subsidiary, is leased from
Clifford J. Osborn, a shareholder of the Company.  Currently, the Company has
no real property and has no real estate related investments.


ITEM 3. LEGAL PROCEEDINGS

In March and April 1998, the Company was served with two lawsuits in
California.  Mr. and Mrs. Daniel Pearstein have sued the Company alleging that
they are entitled to recover losses sustained by them while they operated the
Hudson's Grill restaurant in Pomona, California.  The Company is defending
this lawsuit and believes that it has no merit.

The Company is also in litigation with the landlord of a location formerly
operated by the Company in Whittier, California.  Various subsidiaries and
franchisees had been operating the Hudson's restaurant at that site.  The
Company has left behind substantial furniture, fixtures and equipment, as well
as leasehold improvements.  The site remains unleased, and the landlord is
seeking substantial damages.

Additionally, in February 1999 the Company settled a lawsuit by one of its
subsidiaries' former landlord in Westlake, California.  A subsidiary of the
Company most recently operated a Hudson's Grill restaurant at the site after
taking over the operations from several previous owners and operators who had
failed at that location.  In March 1998 the subsidiary ceased operations at
that location and returned the premises and the furniture, fixtures and
equipment at that site to the landlord. The Company has agreed to pay
$83,333.33 toward the settlement of the case.


ITEM 4. SUBMISSION OF MATTERS OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of the fiscal year covered 
by this report to a vote of security holders of the Company through the 
solicitation of proxies or otherwise.


                 PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

MARKET INFORMATION

The Company's Common Stock, no par value, is traded in the over-the-counter
market and trades under the National Association of Security Dealers ("NASD")
symbol "HDSG".  It has several bulletin board market makers, but it has no
pink sheet market makers.  As of March 31, 1999, there were approximately
Three Hundred Twenty (320) registered holders of record of the Company's
Common Stock (this excludes shareholders whose stock is held by a nominee or
in "street name", because a nominee or street name holder is counted as one
registered shareholder even if a nominee is holding stock for many
shareholders).  The following table sets forth the reported high and low bid
prices of the Common Stock for the periods indicated as regularly quoted by
the NASD OTC Bulletin Board.  The table does not reflect offer prices.  The
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.

FISCAL YEAR ENDED JANUARY 3, 1999             High       Low
First Quarter ended March 31, 1998            3/32      3/32
Second Quarter ended June 30, 1998            3/32       .04
Third Quarter ended September 30, 1998        1/16      1/16
Fourth Quarter ended December 31, 1998         .10      .045

FISCAL YEAR ENDED DECEMBER 28, 1997           High       Low
First Quarter ended March 31, 1997            3/32      1/32
Second Quarter ended June 30, 1997            3/32      3/32
Third Quarter ended September 30, 1997        3/32      3/32
Fourth Quarter ended December 28, 1997        3/32      3/32

FISCAL YEAR ENDED DECEMBER 29, 1996           High       Low
First Quarter ended March 31, 1996            3/32      1/16
Second Quarter ended June 30, 1996             1/8      1/16
Third Quarter ended September 30, 1996        3/16      1/16
Fourth Quarter ended December 31, 1996        1/16      1/32



As of April 20, 1999, the closing bid price of the Common Stock was $.20. 
This information was obtained from the Stock Quote provided by "Yahoo" on the
Hudson's Grill internet site http://www.hudsonsgrill.com and from the National
Quotation Bureau, LLC, of New York City, New York. 


DIVIDENDS

Common Stock

The Company has not paid cash dividends on its common stock, and the present 
policy of the Company's Board of Directors (the "Board") is to retain earnings 
attributable to common stock, if and when earned, to provide funds for the
operation and expansion of the Company's business.  The Company does not
expect to pay cash dividends on its common stock in the foreseeable future.


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION

For the year ended January 3, 1999, the Company had a net loss of Three
Hundred Twenty-three Thousand Nine Hundred One Dollars ($323,901).  This
compares to a net loss of Three Hundred Ninety-one Thousand One Hundred
Ninety-eight Dollars ($391,198) for the year ended December 28, 1997, and a
net loss of Two Hundred Sixty One Thousand Three Hundred Thirty Four Dollars
($261,334) for the year ended December 29, 1996. One Hundred Sixty-five
Thousand Seven Hundred Thirty Dollars ($165,730) of the 1998 losses were due
to losses on sales of restaurants, and One Hundred Seven Thousand Seven
Hundred Sixty Dollars ($107,760) were preopening expenses of the Richardson
restaurant. Three hundred Forty-six Thousand Sixty-seven Dollars ($346,067) of
the 1997 losses were attributable to closing restaurants and setting aside a
reserve for litigation expenses related to leases at former Hudson's Grills;
Forty-five Thousand One Hundred Thirty-one Dollars ($45,131) of the losses in
1997 were from ongoing operations, whereas Fifty Thousand Four Hundred Eleven
Dollars ($50,411) of the losses in 1998 were from ongoing operations.

Several years ago the Company began closing poorly performing restaurants and
selling the remaining profitable ones.  Losses due to restaurant closures
amounted to One Hundred Forty-six Thousand Sixty-seven Dollars ($146,067) for
the year ended December 28, 1997. The loss in 1997 resulted primarily from the
write-off of One Hundred Thirty Thousand Seven Hundred Ninety Dollars
($130,790) of equipment and improvements on the Westlake location, which was
abandoned in March 1998.

The Company has disposed of almost all of its direct and indirect restaurant
operations and is almost solely in the franchising business; since 1997 it has
proceeded to build and operate one Company owned restaurant, which will be
used as a model and training facility for future franchisees. This restaurant
was opened in January 1999.


REVENUES

Because the Company was holding its remaining restaurants for sale and those
restaurants were operated by third parties under joint venture agreements, it 
had no sales or expenses from restaurant operations after January 1994, except
for portions of each year, during which time the Company operated restaurants
that were temporarily taken back from prospective purchasers of the
restaurants.  The Company continued to record only joint venture revenues for
the remaining stores which were operated under joint venture agreements. 
These revenues ceased when the last joint venture stores were sold in 1996. 
The remaining restaurants which were subject to sales contracts, were not
operated as joint ventures but were being operated by their prospective
purchasers.  The prospective purchasers paid royalties and advertising fees
even though they were not yet franchisees, and these fees were being accounted
for separately from the royalties received from franchisees.  This non
franchise royalty fee income amounted to Fifteen Thousand Five Hundred
Seventy-two Dollars ($15,572) in the year ended December 28, 1997, and were
Forty Thousand Four Hundred Fifty Nine Dollars ($40,459) for the year ended
December 29, 1996; there were no such fees in 1998.  As the sale of these
restaurants is completed, the Company does not expect any future royalties
from restaurants under sales contracts, but rather these fees will be
accounted for as normal franchising revenues.

Franchise revenues dropped due to closures.  Franchising revenues decreased 
in 1998 to Two Hundred Eighty-Eight Thousand Nine Hundred Forty-three Dollars
($288,943) from Three Hundred Forty-one Thousand Five Hundred Forty-six
($341,546) for the year ended December 28, 1997.

Continuing franchise revenues decreased from Two Hundred Ninety One Thousand
Five Hundred Forty-Six Dollars ($291,546) for the year ended December 28,
1997, to Two Hundred Sixty Three Thousand Nine Hundred Forty-three Dollars
($263,943) for the year ended January 3, 1999.


COSTS AND EXPENSES

Since the Company is and has been selling or closing restaurants, an analysis
of restaurant costs of sales and of restaurant operating expenses is no longer
meaningful because almost all of the Company's restaurants have been or are
being sold and converted to franchises, or shut down.  Restaurant cost of
sales have risen from the temporary operating of restaurants held for sale as
described above or as a result of subsidiaries operating for short periods of
time during 1998 before closures or sales.  General and administrative
expenses, and the depreciation and amortization expenses for equipment leased
to restaurants will continue to be important, but are decreasing as various
assets are sold or abandoned to landlords.  General and administrative
expenses for the year ended January 3, 1999, decreased to Five Hundred Six
Thousand Forty Dollars ($506,040) from Seven Hundred Four Thousand Nine
Hundred Sixty Dollars ($704,960) for the year ended December 28, 1997, which
in turn decreased from Seven Hundred Ninety Eight Thousand Six Hundred Seventy
Five Dollars ($798,675) for the year ended December 29, 1996.

Under an oral agreement which ended December 31, 1997, the Company was paying
for a consultant whose job it was to increase the number of franchises and to
monitor the franchisees' restaurant operations.  Moreover, the consultant was
responsible for supervising most management and administrative functions of
the Company.  The consultant has since discontinued working for the Company,
but if he is involved in bringing in franchisees, he will be paid a portion of
the franchise fees paid by new franchisees signed by the consultant.  This
portion of general and administrative expenses is likely to decrease in the
future as the Company returns to building new restaurants, and as the Company
has less fixed expenses related to the terminated consulting agreement.

Depreciation and amortization, which for the year ended January 3, 1999, was
Nine Thousand Nine Hundred Eighty-nine Dollars ($9,989), for the year ended
December 28, 1997, was Thirty-two Thousand Eight Hundred Ninety-three Dollars
($32,893); and for the year ended December 29, 1996, was Fifty Eight Thousand
Three Hundred Seventy One Dollars ($58,371), has decreased to the extent that
furniture, fixtures and equipment have been sold to the purchasers of the
Company's restaurants, to the extent restaurants have been closed and written
off and to the extent that current furniture, fixtures and equipment age. 
This expense will increase in the future as the Company builds and operates
its own restaurants. 

Interest expense has decreased significantly since the year ended December 29,
1996.  The Company recorded interest expense of Seven Thousand Two Hundred
Eighty Dollars ($7,280) for the year ended January 3, 1999, and Six Hundred
Seventy-to Dollars ($672) for the year ended December 28, 1997; this compares
with Ninety Six Thousand Seven Hundred Thirty Four Dollars ($96,734) for the
year ended December 28, 1997.  A large part of the decrease resulted from the
exchange of notes owed to the Company to pay off obligations owed to Mr.
Travis Bryant.  The Company had only one remaining note payable after that
exchange, for $35,542, which was repaid in 1997.

Interest income has decreased significantly since the year ended December 29,
1996 for the same reason that interest expense has decreased.  The Company
received interest income of Eighty-one Thousand Nine Hundred Fifty-four
Dollars ($81,954) in the year ended December 28, 1997, and Forty Seven
Thousand Three Hundred Thirty Five Dollars ($47,335) in the year ended January
3, 1999.  It received interest income of One Hundred Eighty Thousand One
Hundred Thirty Five Dollars ($180,135) during the year ended December 29,
1996.  Thus, the net interest income (interest income minus interest expense)
has dropped somewhat.  In the year ended December 28, 1997, it was Eighty-one
Thousand Two Hundred Eighty-two Dollars ($81,282); it was Eighty Three
Thousand Four Hundred one Dollars ($83,401) for the year ended December 26,
1996; but it dropped to Forty Thousand Fifty Five Dollars ($40,055) for the
year ended January 3, 1999.


LIQUIDITY AND CAPITAL RESOURCES

At January 3, 1999, the Company had a negative working capital of Three
Hundred Thirty Three Thousand One Hundred Thirteen Dollars ($333,113) as
compared to December 28, 1997, when the Company had a negative working capital
of Six Thousand Eight Hundred Thirteen (negative $6,813).  The decrease is
largely due to a substantial increase in current liabilities.  The increase in
current liabilities was largely the result of a substantial increase in trade
accounts payable from $40,886 at fiscal year end 1997 to $291,772 at fiscal
year end 1998, resulting from costs incurred to build the Company's new
restaurant and from insufficient cash flow from operations.

After the Company has sold most or all of its restaurants, changes in its 
liquidity and capital will depend mostly on initial franchise fees and from 
continuing royalty fees received from franchisees using the Company's 
trademark and restaurant concept, rather than on equipment leasing, which 
should remain stable for the next several years.  As the Company resumes
building restaurants, its liquidity and working capital will again become more
dependent on net profits from direct restaurant operations.

Three Hundred Twenty-one Thousand Six Hundred Fourteen Dollars ($321,614) were
used in acquisitions of property and equipment in 1998, which essentially were
funded by an increase in accounts payable and by proceeds from long term debt.

In January 1997, the Company sold its Pomona, California, restaurant and
received a note receivable of $114,200 and a lease receivable of $155,000. 
This location is delinquent in its obligations to the Company as of January 3,
1999.  The Company's investment in this note receivable, net of deferred
income, was approximately $33,000 as of December 28, 1997.  This amount was
written off in 1998.  However, the Company believes the restaurant is a
sufficiently profitable location to allow it to recoup its investment should
it need to foreclose.  Also, the Company has obtained a judgment for the note
and lease receivables, which it is attempting to collect.

The Company currently is in litigation concerning a former lease in Whittier,
California.  It has just settled a similar problem with a landlord at a former
leasehold in Westlake, California.  Pursuant to the settlement of the Westlake
lease, beginning November 2001, the Company is obligated to pay $83,333 to Roy
Millender, a guarantor of the lease and former director of the Company.  Mr.
Millender has agreed to pay the settlement with the landlord.  The Company and
another defendant agreed to make contributions to Mr. Millender.  The Company
does not know what the outcome will be regarding the Whittier lease; however,
the landlord is asking for several million dollars as damages.  Mr. Millender
is also a guarantor of that lease.  If the Company is required to contribute
any substantial funds to the settlement of the Whittier lease, then the
Company's liquidity and ability to fund ongoing operations will be greatly
impacted and possibly force the Company into bankruptcy.

The effects of inflation on the Company are minimal on the Company; however,
the recent raises in the minimum wage have affected franchisees and as a
result the Company raised the prices charged for various menu items.  To the
extent that the Company owns and opens new restaurants, the increases in
minimum wage will reduce the Company's profitability unless the increased menu
prices produce an increase in revenues equal to or more than the increase in
labor costs.

The Company does not sustain much seasonal volatility in revenues since its
franchisees are dispersed geographically and climactically.

Y2K Disclosure.  The Company does not believe that it will be affected by any
Y2K problems as it concerns computing and administration performed by the
issuer.  The Company may be affected by third parties, however, to an unknown
extent.  Such third party effects include problems with bank accounts (paying
and depositing funds) and with delays in receiving franchiser fees and
payments from franchisees who encounter Y2K problems. Since the Company does
not rely heavily on computer software and processing to run its business,
problems with changing software to accommodate the year 2000 and years
thereafter are not likely to have a material impact on the Company.

ITEM 7. FINANCIAL STATEMENTS

Attached following Item 13.


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND
ACCOUNTING AND FINANCIAL DISCLOSURE

Incorporated by reference from the Proxy Statement (the "Proxy
Statement") to shareholders relating to the annual meeting to
be held June 10, 1999.


                PART III


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; IN COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Incorporated by reference from the Proxy Statement.


ITEM 10. EXECUTIVE COMPENSATION

Incorporated by reference from the Proxy Statement.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

Incorporated by reference from the Proxy Statement.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from the Proxy Statement.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Financial Statements; Exhibits

Financial statements are incorporated by reference from Item
7, and are attached following this Item.

Independent Auditor's Report.

Consolidated Balance Sheets - As of January 3, 1999, and December 28, 1997

Consolidated Statements of Operations - Years ended January 3, 1999, December
28, 1997, December 29, 1996.

Consolidated Statements of Shareholders' Equity (Deficit)
- For the Period from December 31, 1995, through January 3, 1999.

Consolidated Statements of Cash Flows - Years ended January 3, 1999, December
28, 1997, and December 29, 1996.

Notes to Financial Statements.


There are no exhibits.

(b)  Reports on Form 8-K

The Company filed no Forms 8-K during the last quarter of
the fiscal year ending January 3, 1999.



               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.


         (Registrant) HUDSON'S GRILL OF AMERICA, INC. 

               By:                                           
              
                    David Osborn, President


               Date: May 11, 1999



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

Signature           Title                        Date


DAVID L. OSBORN     Chairman of the
                    Board and Chief
                    Executive Officer
                    and Director


ROBERT W. FISCHER   Director


                              
THOMAS SACCO        Director


f\sec\990420.O01


<PAGE>
  
  HUDSON'S GRILL OF AMERICA, INC.
  
  CONSOLIDATED FINANCIAL STATEMENTS AND
  INDEPENDENT AUDITOR'S REPORT
  
  FOR THE PERIODS ENDED
  
  JANUARY 3, 1999, DECEMBER 28, 1997, AND 
  DECEMBER 29, 1996
  

  
  
  
  
  
                INDEPENDENT AUDITOR'S REPORT
  
  
  
  Board of Directors
  Hudson's Grill of America, Inc.
  Dallas, Texas
  
  We have audited the accompanying consolidated balance
  sheets of Hudson's Grill of America, Inc. as of January 3,
  1999 and December 28, 1997, and the related consolidated
  statements of operations, shareholders' equity (deficit),
  and cash flows for the periods ended January 3, 1999,
  December 28, 1997, and December 29, 1996.  These financial
  statements are the responsibility of the Company's
  management.  Our responsibility is to express an opinion
  on the financial statements based on our audits.
  
  We conducted our audits in accordance with generally
  accepted auditing standards.  Those standards require that
  we plan and perform the audits to obtain reasonable
  assurance about whether the financial statements are free
  of material misstatement.  An audit includes examining, on
  a test basis, evidence supporting the amounts and
  disclosures in the financial statements.  An audit also
  includes assessing the accounting principles used and
  significant estimates made by management, as well as
  evaluating the overall financial statement presentation. 
  We believe that our audits provide a reasonable basis for
  our opinion.
  
  In our opinion, the consolidated financial statements referred
  to above present fairly, in all material respects, the
  financial position of Hudson's Grill of America, Inc. as of
  January 3, 1999 and December 28, 1997, and  the results of
  their operations and their cash flows for the periods ended
  January 3, 1999, December 28, 1997, and December 29, 1996 in
  conformity with generally accepted accounting principles.
  
  The accompanying financial statements have been prepared
  assuming that the Company will continue as a going concern.  As
  discussed in Note 1 to the financial statements, the Company
  has suffered recurring losses from operations and currently has
  a shareholders' deficit and certain contingent liabilities,
  which raise substantial doubt about its ability to continue as
  a going concern.  Management's plans in regard to these matters
  are described in Note 1.  The financial statements do not
  include any adjustments that might result from the outcome of
  this uncertainty.
  
  
  
  
  Hein + Associates LLP
  Certified Public Accountants
  
  
  March 19, 1999
  Dallas, Texas

                           F-1
<PAGE>
                   
<TABLE>

<CAPTION>
                     
                        HUDSON'S GRILL OF AMERICA, INC.
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                     ------
                                                                      JANUARY 3,     DECEMBER 28,

                                                                         1999           1997
                                                                      -----------    -----------
<S>                                                                   <C>            <C>
 
CURRENT ASSETS:
   Cash and cash equivalents                                          $    22,169    $    42,401
   Accounts receivable, net of allowance for doubtful
       accounts of $62,000 and $49,000, respectively                        9,992         58,359
   Other receivable                                                       101,633         11,471
   Current portion of notes and leases receivable                          60,350        100,000
   Prepaid expenses and other                                              26,354         23,185
                                                                      -----------    -----------
          Total current assets                                            220,498        235,416

PROPERTY AND EQUIPMENT, at cost:
   Leasehold improvements                                                 282,877          2,969
   Restaurant equipment                                                    91,477         33,378
   Furniture and fixtures                                                   5,851          5,851
                                                                      -----------    -----------
          Total property and equipment                                    380,205         42,198
Less accumulated depreciation and amortization                            (13,763)        (7,030)
                                                                      -----------    -----------
          Property and equipment, net                                     366,442         35,168

LONG-TERM PORTION OF NOTES AND LEASES
   RECEIVABLE, net of allowance of $0 and $33,000, respectively           134,521        791,858

LIQUOR LICENSES, net of accumulated amortization of $0
   and $30,000, respectively                                                3,288         30,815
OTHER ASSETS                                                               15,981         23,463
                                                                      -----------    -----------
          Total assets                                                $   740,730    $ 1,116,720
                                                                      ===========    ===========

                      LIABILITIES AND SHAREHOLDERS' DEFICIT
                      -------------------------------------

CURRENT LIABILITIES:
   Current portion of long-term debt and capital lease obligation     $     8,689    $      --
   Accounts payable - trade                                               291,772         40,886
   Advances - related parties                                              56,940           --
   Accrued liabilities                                                    196,210        201,343
                                                                      -----------    -----------
          Total current liabilities                                       553,611        242,229

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION,
    net of current portion
                                                                          258,884           --
OTHER LONG-TERM LIABILITIES                                               130,654        206,494

DEFERRED INCOME                                                           231,852        778,367

COMMITMENTS AND CONTINGENCIES (Notes 5 and 11)

SHAREHOLDERS= DEFICIT:
   Preferred stock, 5,000,000 shares authorized, none issued or
       outstanding                                                           --             --
   Common stock, no par value, 100,000,000 shares authorized,
       6,056,986 shares issued and outstanding                          4,456,457      4,456,457
   Accumulated deficit                                                 (4,890,728)    (4,566,827)
                                                                      -----------    -----------
          Total shareholders= deficit                                    (434,271)      (110,370)
                                                                      -----------    -----------
          Total liabilities and shareholders= deficit                 $   740,730    $ 1,116,720
                                                                      ===========    ===========

</TABLE>



                       
                                      
              See accompanying notes to these financial statements.
                                   F-2 

<PAGE>
                                       
<TABLE>

<CAPTION>

                       HUDSON'S GRILL OF AMERICA, INC.            

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                           
                                                                    PERIODS ENDED
                                                     -----------------------------------------
                                                      JANUARY 3,     DECEMBER 28,  DECEMBER 29,          
                                                        1999           1997           1996
                                                     -----------    -----------    -----------  
<S>                                                  <C>            <C>            <C>
     
REVENUES:
   Net sales                                         $   301,440    $   226,009    $   109,806
   Franchising revenues                                  288,943        341,546        307,549
    Franchising fees from restaurants under
     sales contracts                                        --           15,572         40,459
   Joint venture revenues                                   --             --          107,662
   Equipment lease income                                 52,347         77,776         51,439
   Gain on sales of restaurants                           30,897         67,938         31,462
   Other                                                  69,196         66,161         67,773
                                                     -----------    -----------    -----------
       Total revenues                                    742,823        795,002        716,150

COST AND EXPENSES:
   Cost of sales                                         310,380        183,562        158,111
   General and administrative                            506,040        704,960        798,675
   Preopening costs                                      107,760           --             --
   Provision for litigation expenses                        --          200,000           --
   Depreciation and amortization                           9,989         32,893         58,371
   Loss on sales of restaurants                          165,730           --             --
   Loss on restaurant closures                              --          146,067           --
   Loss on sale of assets                                  6,880           --           45,728
                                                     -----------    -----------    -----------
       Total costs and expenses                        1,106,779      1,267,482      1,060,885
                                                     -----------    -----------    -----------
       Loss from operations                             (363,956)      (472,480)      (344,735)

OTHER INCOME (EXPENSE):
   Interest expense                                       (7,280)          (672)       (96,734)
   Interest income                                        47,335         81,954        180,135
                                                     -----------    -----------    -----------
       Total other income (expense)                       40,055         81,282         83,401
                                                     -----------    -----------    -----------

NET LOSS                                             $  (323,901)   $  (391,198)   $  (261,334)
                                                     ===========    ===========    ===========

BASIC AND DILUTED LOSS PER SHAR                      $      (.05)   $      (.06)   $      (.04)
                                                     ===========    ===========    ===========       

</TABLE>


             See accompanying notes to these financial statements.

                                      F-3
<PAGE>

<TABLE>

<CAPTION>

                         HUDSON'S GRILL OF AMERICA, INC.

            CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

          FOR THE PERIOD FROM DECEMBER 31, 1995 THROUGH JANUARY 3, 1999

                                    COMMON STOCK           ACCUMULATED
                              --------------------------   -----------
                                 SHARES        AMOUNT       DEFICIT          TOTAL
                              -----------   ------------   -----------    ------------    
<S>                           <C>           <C>            <C>            <C>

BALANCES, December 31, 1995     6,056,986   $ 4,456,457    $(3,914,295)   $   542,162

Net loss                             --            --         (261,334)      (261,334)
                              -----------   -----------    -----------    -----------
BALANCES, December 29, 1996     6,056,986     4,456,457     (4,175,629)       280,828

Net loss                             --            --         (391,198)      (391,198)
                              -----------   -----------    -----------    -----------

BALANCES, December 28, 1997     6,056,986     4,456,457     (4,566,827)      (110,370)

Net loss                             --            --         (323,901)      (323,901)
                              -----------   -----------    -----------    -----------
BALANCES, January 3, 1999       6,056,986   $ 4,456,457    $(4,890,728)   $  (434,271)
                              ===========   ===========    ===========    ===========

</TABLE>


             See accompanying notes to these financial statements.

                                       F-4


<PAGE>

<TABLE>

<CAPTION>

                         HUDSON'S GRILL OF AMERICA, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                               PERIODS ENDED
                                                                   ---------------------------------------
                                                                    JANUARY 3,  DECEMBER 28,   DECEMBER 29 
                                                                     1999        1997            1996       
                                                                   -----------  ------------   -----------
<S>                                                                <C>          <C>            <C>

CASH FLOWS FROM OPERATING ACTIVITIES:                                                                       
   Net loss                                                        $(323,901)   $(391,198)     $(261,334)   
   Adjustments to reconcile net loss to net cash                                                            
       used by operating activities:                                                                        
          Depreciation and amortization                                9,989       32,893         58,371    
          Loss on sale of assets                                       6,880         --           45,728    
          Loss (gain) on sales and closures of restaurants           134,833       78,129        (31,462)   
          Provision for bad debts                                     13,000       33,000           --      
   Changes in assets and liabilities:                                                                       
          Accounts receivable                                         46,838       (3,665)      (113,584)   
          Prepaid expenses and other                                  (3,169)      (6,694)           218    
          Accounts payable                                           250,886       (6,836)         9,493    
          Accrued liabilities and other                             (142,403)      53,644         61,935    
                                                                   ---------    ---------      --------- 
             Net cash used in operating activities                    (7,047)    (210,727)      (230,635)   
                                                                   ---------    ---------      ---------    
                                                                                                            
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                       
   Acquisitions of property and equipment                           (321,614)     (15,234)       (14,012)   
   Net proceeds from sales of assets                                  17,391         --          116,821    
   Notes receivable principal payments                                38,274      179,207        160,123    
   Leases receivable principal payments                               38,795       34,769         85,006    
   Decrease in other assets                                            7,482       11,248           --      
                                                                   ---------    ---------      ---------    
             Net cash provided by investing activities              (219,672)     209,990        347,938    
                                                                   ---------    ---------      ---------    
                                                                                                         
                                                                                                         
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                       
   Proceeds from long-term debt                                      207,500         --             --      
   Repayments of long-term debt                                       (1,013)     (35,542)       (86,918)   
                                                                   ---------    ---------      ---------    
             Net cash provided by (used in) financing activities     206,487      (35,542)       (86,918)   
                                                                   ---------    ---------      ---------    
                                                                                                            
NET( DECREASE) INCREASE IN CASH AND CASH                                                                    
  EQUIVALENTS                                                        (20,232)     (36,279)        30,385    
CASH AND CASH EQUIVALENTS, beginning of period                        42,401       78,680         48,295    
                                                                   ---------    ---------      ---------    
CASH AND CASH EQUIVALENTS, end of period                           $  22,169    $  42,401      $  78,680    
                                                                   =========    =========      =========    
                                                                                                            
SUPPLEMENTAL CASH FLOW INFORMATION -                                                                        
   Interest paid                                                   $   2,036    $     672      $  96,734    
                                                                   =========    =========      =========    
                                                                                                  

</TABLE>







                                   -Continued-

                                      F-5

<PAGE>





                         HUDSON'S GRILL OF AMERICA, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS, continued


     SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:

     Year Ended January 3, 1999
     --------------------------
     In connection with the  acquisition of property and equipment,  the Company
     (1) executed a capital lease agreement for $28,359,  (2) incurred long-term
     debt of $32,727 and (3) received  advances from related parties of $56,940.
     In addition,  the Company  recorded a receivable of $101,633 from the owner
     of the  property  related  to  reimbursement  of  certain  of the  costs of
     construction of a restaurant..

     Year Ended December 28, 1997
     ----------------------------
     In connection  with the sale of a restaurant,  the Company  received a note
     receivable of $114,200 and a lease receivable of approximately $155,000.

     Year Ended December 29, 1996
     ----------------------------
     In connection  with the sale of a restaurant,  the Company  received a note
     receivable of $294,000.

     In connection with the sale of another  restaurant,  the Company received a
     note  receivable of $282,086 and a lease  receivable of $450,000.  The note
     and  lease  receivable  were  foreclosed  on during  1996 and the  location
     repossessed.

     A note and lease receivable in the total amount of $195,000 were foreclosed
     upon by the Company and the location repossessed.

     A note receivable in the amount of $1,269,066,  including  accrued interest
     due from a related  party was  decreased by $118,221 by the Company and the
     remaining  note  receivable was assigned to the holder of a note payable in
     the amount of $1,150,845,  including accrued interest, in full satisfaction
     of the note payable.




             See accompanying notes to these financial statements.

                                       F-6



<PAGE>


                         HUDSON'S GRILL OF AMERICA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                 
1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     -----------------------------------------------------------

     Hudson's  Grill of America,  Inc. (the  "Company")  franchises and owns and
     operates full-service restaurants, primarily in California and Texas. As of
     January 3, 1999,  the Company has twelve  franchised  restaurants.  In late
     1998, the Company completed construction of a training store in Richardson,
     Texas  which  is  owned  and  operated  by a  subsidiary  of  the  Company.
     Previously,  the  Company  had owned two  restaurants,  both of which  were
     closed in early 1998. In January 1998, the Company took over the operations
     of a franchised restaurant which it subsequently sold in 1998.

     The  consolidated   financial   statements  include  the  Company  and  its
     wholly-owned subsidiaries, Equipco, Inc., Hudson's Grill of Whittier, Inc.,
     Hudson=s Grill International,  Inc., and Hudson's Grill of Richardson, Inc.
     All significant intercompany balances and transactions have been eliminated
     in consolidation.

     Fiscal Year
     -----------
     The Company's  fiscal year is a fifty-two  week period ending on the Sunday
     nearest December 31. The fiscal years 1998, 1997, and 1996 ended on January
     3, 1999, December 28, 1997 and December 29, 1996, respectively.

     Cash and Cash Equivalents
     -------------------------
     Cash and cash  equivalents  for purposes of reporting cash flows consist of
     cash and  short-term  investments  purchased  with an original  maturity of
     three months or less.

     Non-Current Assets
     ------------------
     Depreciation   of  property   and   equipment  is   recognized   using  the
     straight-line method over the estimated lives of the assets (generally five
     to seven  years).  Amortization  of  leaseholds  is  recognized  using  the
     straight-line method over the shorter of the initial term of the respective
     lease or the service life of the leased asset.

     Liquor licenses are recorded at cost and are amortized over ten years.

     Impairment of Long-Lived Assets
     -------------------------------
     In  accordance  with  Statement of Financial  Accounting  Standards No. 121
     ("SFAS 121"),  "Accounting for the Impairment of Long-Lived  Assets and for
     Long-Lived  Assets to be Disposed  of",  the Company  evaluates  long-lived
     assets for impairment whenever events or changes in circumstances  indicate
     that the carrying  amount of long lived assets may not be  recoverable.  An
     impairment loss would be recognized when estimated future undiscounted cash
     flows  associated  with an asset and its eventual  disposition is less than
     the asset's carrying amount.

     Revenue Recognition
     -------------------
     Initial franchise fees are recognized as revenue when all material services
     or  conditions  relating to the sale have been  substantially  performed or
     satisfied.  Continuing franchise fees are recognized as revenue as the fees
     are earned and become receivable from the franchisee.

     Income Taxes
     ------------
     Income taxes are provided for the tax effects of  transactions  reported in
     the financial  statements and consist of taxes  currently due plus deferred
     taxes related primarily to differences between the financial and income tax
     reporting  bases of assets and  liabilities.  The  deferred  tax assets and
     liabilities   represent  the  future  tax  return   consequences  of  those
     differences, which will either be taxable or deductible when the assets and
     liabilities are recovered or settled.


                                      F-7

<PAGE>

                         HUDSON'S GRILL OF AMERICA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Stock-Based Compensation
     ------------------------
     The Company  accounts for stock  options and warrants  granted to directors
     and employees in accordance with Accounting Principles Board Opinion No. 25
     ("APB No. 25").  "Accounting  for Stock Issued to  Employees",  and related
     interpretations.  Required pro forma  disclosures of  compensation  expense
     determined  under the fair value option pricing model method  prescribed by
     Statement  of  Financial   Accounting   Standards  No.  132  ("SFAS  132"),
     "Accounting for Stock-Based Compensation", are presented in Note 7.

     Income (Loss) per share
     -----------------------
     Income  (loss) per share is  calculated  in  accordance  with  Statement of
     Financial Accounting Standards No. 128 ("SFAS 128"),  "Earnings Per Share".
     Basic income (loss) per share is computed  based upon the weighted  average
     number of common  shares  outstanding  during the  period.  Diluted  income
     (loss)  per  share  takes  common  equivalent  shares  into  consideration.
     However,  common  equivalent  shares are not  considered if their effect is
     antidilutive. Common stock equivalents consist of outstanding stock options
     and warrants. Common stock equivalents are assumed to be exercised with the
     related  proceeds  used to  repurchase  outstanding  shares except when the
     effect would be antidilutive. Common equivalent shares were antidilutive in
     the periods ended January 3, 1999, December 28, 1997, December 29, 1996.

     The weighted average number of shares outstanding used in the income (loss)
     per share  computation  was 6,056,986 for each of the periods ended January
     3, 1999, December 28, 1997, and December 29, 1996.

     Segment Data
     ------------
     During  1998,  the  Company  adopted  Statement  of  Financial   Accounting
     Standards  No.  131  ("SFAS  131"),   "Disclosures  about  Segments  of  an
     Enterprise and related Information". SFAS 131 establishes standards for the
     way  public  business   enterprises  report  financial   information  about
     operating  segments  and  supercedes  SFAS  14,  "Financial  Reporting  for
     Segments of a Business  Enterprise",  by replacing the  "industry  segment"
     approach with the "management" approach. The management approach designates
     the internal  reporting  that is used by  management  for making  operating
     decisions  and  assessing  performance  as  the  source  of  the  Company's
     reportable segments.  SFAS 131 also requires disclosures about products and
     services,  geographic areas and major  customers.  The adoption of SFAS 131
     did not affect the Company's  results of operations or financial  position,
     but did affect the disclosure of segment information (see Note 11).

     Preopening Costs
     ----------------
     During 1998, the Company  adopted  Statement of Position 98-5 ("SOP 98-5"),
     "Reporting  of the Costs of Start-up  Activities".  SOP 98-5  requires that
     start-up activity costs, such as those associated with the opening of a new
     restaurant be expensed as incurred.  Preopening costs primarily  consist of
     training  and other costs  incurred to develop  new  restaurant  management
     teams, and the food, beverage and supplies costs incurred in the testing of
     equipment,  concept  systems,  and  recipes.  Prior to 1998,  the impact of
     recording  preopening costs was not material to the consolidated  financial
     statements.

     Continued Operations
     --------------------
     The accompanying  consolidated financial statements have been prepared on a
     going concern  basis,  which  contemplates  the  realization  of assets and
     liquidation of  liabilities  in the normal course of business.  The Company
     has  incurred  recurring  losses from  operations  and has a  shareholders=
     deficit of $434,271,  as of January 3, 1999.  In addition,  the Company has
     significant  contingent  liabilities  for future  lease  payments on closed
     restaurant locations as described in Note 5. These issues raise substantial
     doubt  about  the  Company's  ability  to  continue  as  a  going  concern.

                                      F-8

<PAGE>

                         HUDSON'S GRILL OF AMERICA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Management of the Company has recently  opened a Company  owned  restaurant
     location  and  intends  to  continue  to sell  franchises  in an attempt to
     improve  operating   results.   They  also  believe  the  contingent  lease
     liabilities can be settled  without a  significantly  adverse effect on the
     Company.

     Use of Estimates
     ----------------
     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the reported amounts of assets and liabilities and
     disclosure  of  contingent  assets  and  liabilities  at  the  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during  the  reporting  period.   Significant  items  in  the  accompanying
     financial statements that include estimates are notes and leases receivable
     and lease contingencies.  Actual results could differ materially from those
     estimates.

     Reclassifications
     -----------------
     Certain  reclassifications  have  been  made  to  conform  the  prior  year
     financial    statements   to   the   current   year    presentation.    The
     reclassifications have no effect on net loss.

2.   FRANCHISE ACTIVITIES
     --------------------
     In 1991,  the Company  commenced  franchising  its Hudson's  Grill concept.
     Under the terms of the standard  franchise  agreement,  the franchisees are
     obligated to pay the Company an initial franchise fee of $25,000 (increased
     to $35,000  for  agreements  executed  after  October  1998),  and a weekly
     continuing  royalty fee of generally 4% of gross restaurant  revenues,  and
     must spend 3% of gross sales on approved advertising, including a weekly 1%
     marketing fee  contributed to the Company's  marketing fund. The Company is
     obligated to provide initial training,  continuing  management  assistance,
     administration   of   advertising   and  sales   promotion   programs   and
     establishment and monitoring of a marketing fund.

     Franchising revenues consisted of:
                                                                               
                                                     PERIODS ENDED
                                       -----------------------------------------
                                       JANUARY 3,    DECEMBER 28,   DECEMBER 29,
                                        1999          1997           1996
                                       ----------    ------------   ------------
Initial franchise revenues             $ 25,000      $ 50,000       $  20,000 
Continuing franchise revenues           263,943       291,546         287,549   
                                       --------      --------       ---------   
    Total franchise revenues           $288,943      $341,546       $ 307,549   
                                       ========      ========       =========   
                                                                   
3.   NOTES AND LEASES RECEIVABLE
     ----------------------------

     In connection with the sale of a restaurant in 1997, the Company received a
     $114,200 note with  interest  equal to the greater of prime plus 2% or 12%.
     Terms of the note require  monthly  payments of interest only for one year,
     and then  eighty-four  monthly  payments in amounts  necessary to repay the
     remaining  principal  and interest on the note.  At December 28, 1997,  the
     balance of the note was $81,200,  net of an allowance of $33,000.  The note
     was written off during the year ended January 3, 1999 as described below.


     In connection with the sale of a restaurant in 1996, the Company received a
     $294,000  note  with  interest  at  10.25%.   Terms  of  the  note  require
     forty-seven  monthly  payments of  principal  and  interest of $6,400 and a
     final  payment of $76,655.  At January 3, 1999 and December  28, 1997,  the
     balance of the note was $194,871 and $234,507, respectively.

                                      F-9

<PAGE>
                         HUDSON'S GRILL OF AMERICA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     In connection with the sale of a restaurant in 1994, the Company received a
     $262,800  note with  interest  equal to the greater of prime plus 2% or 9%,
     adjusted on a quarterly  basis.  Terms of the note require monthly payments
     of interest  only for one year,  and then  ninety-six  monthly  payments in
     amounts  necessary  to repay the  remaining  principal  and interest on the
     note. At December 28, 1997, the balance of the note was $235,272.  The note
     was written off during the year ended January 3, 1999 as described below.

     Certain  assets  of the  restaurant  sold  collateralize  each of the notes
     referred to above.

     The Company  also leased  restaurant  equipment  to the  purchasers  of the
     restaurants  sold in  1997  and  1994  mentioned  above.  The  leases  were
     classified as  sales-type  leases.  At December 28, 1997,  the net carrying
     value of the leases  was  $340,879.  However,  the lease  receivables  were
     written off during the year ended January 3, 1999 as described below.

     During 1998,  both of the  purchasers of the  restaurants  sold in 1997 and
     1994 defaulted on their respective note and lease agreements.  As a result,
     the  Company  recognized  a loss  on the  sale  of  restaurants  in 1998 of
     $165,730, which represents the net carrying value of the receivables offset
     by the deferred income associated with the sales of the restaurants

<TABLE>

<CAPTION>

4.   Long-Term Debt
     --------------

     Long-term debt at January 3, 1999 consists of the following:
<S>                                                                                   <C>

     Note payable to a shareholder, interest at 12%, principal and accrued 
        interest due April 2000, collateralized by restaurant assets.                 $ 150,000

     Note payable to an entity owned by the Company's president, interest at 
        12%, principal and accrued interest due April 2000,  collateralized by
        subordinated interest in restaurant assets.                                      90,227

     Equipment lease obligation payable in monthly installments of $1,016
        through September 2001 (see Note 5).                                             27,346
                                                                                      ---------
     Total                                                                              267,573
     Less current portion                                                                 8,689
                                                                                      ---------       
     Long-term debt                                                                   $ 258,884
                                                                                      =========
</TABLE>

     At January 3, 1999,  future  maturities of long-term debt are summarized as
follows:

     Fiscal year:
                              1999               $  8,689
                              2000                250,287
                              2001                  8,597
                                                 --------
                              Total              $267,573
                                                 ========

     Subsequent to January 3, 1999 the Company  received an additional  $50,000 
in connection with the note payable to the shareholder.

5.   Commitments and Contingencies
     -----------------------------

     Capital Leases
     --------------
     The Company leases certain  equipment under a capital lease agreement which
     expires in 2001.  At the end of the lease term,  the Company has the option

                                      F-10

<PAGE>

                         HUDSON'S GRILL OF AMERICA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     to purchase the equipment for an amount equal to 10% its original cost. The
     value of the  equipment,  totaling  $28,359,  is included  in property  and
     equipment at January 3, 1999.

     Subsequent  to January  3,  1999,  the  Company  executed  a capital  lease
     agreement with a shareholder of the Company in connection with property and
     equipment  of the  Company's  Richardson,  Texas  restaurant.  Terms of the
     agreement  require minimum lease payments of $4,500 payable monthly through
     March  2006.  At the end of the lease  term,  the Company has the option to
     purchase the equipment for an amount equal to its fair market value.

     Operating Leases
     ----------------
     The Company's  restaurant  buildings are leased under  noncancellable lease
     agreements  having terms  expiring at various dates through 2010. One lease
     provides for two 5 year renewals,  at the option of the Company,  to extend
     the term of the lease through 2013 and 2018,  respectively.  Certain leases
     are guaranteed by former  directors.  In addition to minimum lease payments
     (see  below),  the leases  generally  provide  that the  Company pay taxes,
     maintenance,  insurance and certain other operating expenses  applicable to
     the leased  property,  plus a  percentage  of gross  receipts  in excess of
     certain limits stated in the lease  agreements.  The payments on several of
     the leases have been made by other  parties  during 1998,  1997 and 1996 in
     connection with agreements to sell those restaurants.

     Commitments
     -----------
     At January 3, 1999,  future minimum lease payments on capital and operating
     leases are summarized as follows:

     Fiscal Year:
                                                    Capital         Operating
                                                   ----------       ----------
              1999                                 $   12,192       $  202,596
              2000                                     12,192          202,596
              2001                                      9,144          216,797
              2002                                        --           227,124
              2003                                        --           227,124
              Thereafter                                  --         1,512,569
                                                   ----------       ---------- 
              Total minimum lease payments             33,528       $2,588,806
                                                                    ==========
              Amount representing interest             (6,182)
                                                   ----------
              Capital lease obligation (Note 4)    $   27,346
                                                   ==========
                  
     In  addition to the leases  discussed  above,  the Company has  assigned to
     respective  purchasers  certain  building leases covering five  restaurants
     previously  sold. The Company is secondarily  liable for the lease payments
     should the purchaser not fulfill their responsibility under the leases. The
     future lease payments for these restaurants total approximately  $4,680,000
     at January 3, 1999.  In  addition,  the Company may be  secondarily  liable
     under other leases for restaurants sold in prior years.

     Total rent expense for operating  leases were  $65,051, $98,826 and $28,892
     for the periods ended  January 3, 1999,  December 28, 1997 and December 29,
     1999, respectively.

     Contingencies
     -------------
     During 1998,  the Company  closed its Westlake and Whittier  locations  and
     ceased paying rent under the related  lease  agreements.  As a result,  the


                                      F-11

<PAGE>


                         HUDSON'S GRILL OF AMERICA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Company recognized a loss on restaurant closures as of December 28, 1997 of
     $146,067,  which represents the book value of the restaurant equipment that
     was forfeited to the  landlords.  However,  the Westlake and Whittier lease
     agreements  do not  expire  until  2010  and  2011,  respectively,  and the
     remaining  payments  under  the  lease  agreements  are each  approximately
     $1,500,000.

     The  landlords  for each  location  filed a lawsuit  against the Company to
     attempt  to  recover  any  losses  they  may  incur.  The  Company  and two
     co-guarantors  reached  an  agreement  with the  landlord  of the  Westlake
     location to pay $500,000 to settle the  landlord's  claim.  The Company and
     the two co-guarantors have negotiated an agreement to divide the settlement
     cost,  such that the Company's  share would total  $83,333,  to be paid out
     over several  years.  Management  of the Company  believes the agreement to
     divide the settlement cost is final,  but it has not yet been signed by the
     parties.  The Company and its legal counsel believe the Company has several
     courses of action to mitigate any additional  liability  under the Whittier
     lease  agreement,   but  that  the  additional  liability  could  range  up
     to$950,000.

     The future  lease  payments  under the  Whittier  lease are included in the
     future minimum lease payment  schedule above. The future lease payments for
     the Westlake lease are not included in the schedule, due to the settlement.

     In March 1998, a former franchisee  initiated an action against the Company
     claiming   damages  related  to  losses  sustained  by  the  franchisee  in
     connection  with a joint  venture  agreement  with the Company to operate a
     restaurant location. Damages claimed by the franchisee are between $140,000
     and  $350,000,  plus  punitive  damages.  The Company and its legal counsel
     believe  the  lawsuit to be without  merit and intend to defend  vigorously
     against this action.

     The Company has accrued  $185,000 as of January 3, 1999 for legal and other
     settlement  costs related to the three matters described above.

     In 1998,  the Company  transferred  certain  assets and  liabilities to its
     wholly-owned  subsidiary Hudson's Grill  International,  Inc. ("HGI").  The
     Company may distribute to its  shareholders  the shares of HGI and register
     those shares with the Securities and Exchange Commission.

6.   INCOME TAXES
     ------------

     There was no income  tax  provision  in 1998,  1997 and 1996 due to the net
     losses incurred in those years.

     Temporary  differences  between  accounting  for income  tax and  financial
     reporting purposes give rise to deferred income taxes as follows:

                                                 JANUARY 3,         DECEMBER 28,
                                                   1999                1997
                                               ------------         ------------
       Deferred tax asset:
          Depreciation                         $  152,000           $  165,000
          Accrued settlement                       63,000               68,000
          Deferral income and rent                 79,000              251,000
          Net operating loss                      400,000              231,000
          Valuation allowance                    (694,000)            (715,000)
                                               ----------           ----------
                                               $    --              $     --
                                               ==========           ==========
                                                      
     At January 3, 1999 the Company had net operating  loss (NOL) and investment

                                      F-12

<PAGE>
 
                         HUDSON'S GRILL OF AMERICA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     tax credit  carryforwards  for Federal income tax purposes of approximately
     $1,200,000 and $180,000, respectively. Use of these carryforwards (with the
     exception of approximately $1,030,000 of the NOL carryforward) are limited.

7.   SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION
     -------------------------------------------------

     Preferred Stock
     ---------------
     The Company is  authorized  to issue up to  5,000,000  shares of  preferred
     stock.  It can be issued with rights and  preferences  as determined by the
     Company's board of directors.

     Stock Option Plans
     ------------------
     The Company has an incentive  stock option plan ("ISO") which  provides for
     the issuance of options to officers, directors and employees to purchase up
     to 825,000 shares of the Company's common stock. Options are exercisable at
     prices  equal to the fair market  value of common  stock at the grant date,
     vest 20% annually and expire  generally within five years. The Company also
     has a Directors'  Stock  Option Plan  ("DSO").  This plan  provides for the
     issuance  of up to 200,000  shares of stock to  non-employee  directors  in
     increments of 10,000 shares every two years.  Options will be issued at the
     average of the closing  bid-ask price on the date of the grant.  No options
     were outstanding as of January 3, 1999, December 28, 1997, and December 29,
     1996 under either plan.

     Other Options and Warrants
     --------------------------
     In January 1994, in connection  with a debt  restructuring  agreement,  the
     Company issued warrants to a former director.  The warrants are exercisable
     for  4,000,000  shares of common  stock at $.0625  per share and  expire in
     2004. The exercise price  approximated the market value of the stock at the
     time of grant.  None of the  warrants  had been  exercised as of January 3,
     1999.

     During 1995, the Company granted options to an officer to purchase  400,000
     shares of common stock with 100,000  shares  vesting each year from 1995 to
     1998.  The  exercise  price is the  market  price at time of  vesting.  The
     exercise  prices of the shares vested in 1997, 1996 and 1995 are $.14, $.17
     and $.11 per share, respectively. All the options expire, if not exercised,
     in May  2003.  During  1997,  the final  100,000  options  due  under  this
     agreement were canceled.

<TABLE>

<CAPTION>

     The  following  table  summarizes  the option and warrant  activity for the
     years ended:

                                            JANUARY 3,                   DECEMBER 28,                 DECEMBER 29,
                                              1999                          1997                          1996
                                       ---------------------       -----------------------      ------------------------
                                                    Weighted                      Weighted                      Weighted
                                                     Average                       Average                       Average
                                       Number       Exercise        Number        Exercise       Number of      Exercise
                                       of Shares      Price        of Shares         Price          Shares        Price
                                      ----------    --------       ----------     --------       ---------      --------
<S>                                    <C>              <C>         <C>             <C>          <C>             <C>

    Outstanding, beginning
    of year                            4,300,000        .07         4,200,000          .07        4,200,000          .09
       Granted to officer
         and director                       --          --            100,000          .14          100,000          .17
       Expired                              --          --              --            --           (100,000)        1.00
       Exercised                            --          --              --            --              --             --   
                                       ---------     ------         ---------       ------       ----------       ------
    Outstanding, end of year           4,300,000        .07         4,300,000          .07        4,200,000          .07
                                       =========     ======         =========       ======       ==========       ======

</TABLE>


                                      F-13

<PAGE>

                         HUDSON'S GRILL OF AMERICA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     As of January 3, 1999,  4,300,000 options and warrants are exercisable.  If
     not previously  exercised,  warrants and options outstanding will expire as
     follows:

                  Period Ending
                December 28, 1997         Number of           Weighted Average
                                            Shares             Exercise Price

                     2003                   300,000                    .14
                     2004                 4,000,000                    .06
                                          ---------                   ----   

                                          4,300,000                    .07
                                          =========                   ====

     The  weighted  average  exercise  price  equaled  the market  price for all
     warrants and options  granted  during the periods ended  December 28, 1997,
     and December 29, 1996.

     Pro Forma Stock Based Compensation Disclosures
     ----------------------------------------------
     As  reflected  in Note 1,  the  Company  applies  APB  No.  25 and  related
     interpretations  in  accounting  for its  stock  options.  Accordingly,  no
     compensation  cost  has  been  recognized  for  grants  of  options  to the
     employees  since the  exercise  prices were not less than the fair value of
     the Company's common stock on the measurement  date. Had compensation  been
     determined  based on the fair  value at the  measurement  dates for  awards
     under those plans consistent with the method prescribed by SFAS No.123, the
     Company's  net loss and loss per share  would have been  changed to the pro
     forma amounts indicated below.

                                                         PERIOD ENDED
                                                DECEMBER 28,        DECEMBER 29,

                                                   1997                 1996
                                                   -----                ----

      Net loss
           As reported                       $  (391,198)          $ (261,334)
           Pro forma                            (399,558)            (276,334)
      Net loss per common share
           As reported                       $      (.06)          $     (.04)
           Pro forma                                (.06)                (.05)


     The fair value of the options  granted in 1997 and 1996 were  estimated  on
     the date of vesting using the Black-Scholes  option-pricing  model with the
     following weighted assumptions:

                                                           PERIOD ENDED
                                                     DECEMBER 28,   DECEMBER 29,

                                                         1997            1996
                                                     ------------   ------------

      Expected volatility                                132.3%         116.3%
      Risk-free interest rate                             5.75%          6.25%
      Expected dividends                                   --             --
      Expected terms (in years)                            6              7

8.   RELATED PARTY TRANSACTIONS
     --------------------------

     The  Company has amounts  payable to an officer and to a  shareholder  that
     total $56,940 at January 3, 1999. The payables result from advances made by
     these related parties.

                                      F-14

<PAGE>

                         HUDSON'S GRILL OF AMERICA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     During the periods ended January 3, 1999 and December 38, 1997, the Company
     incurred $41,000 and $69,000, respectively for legal services provided by a
     firm associated with a director of the Company.

     Additional related party transactions are described in Note 4.

9.   FINANCIAL INSTRUMENTS
     ---------------------

     Concentrations of Credit Risk 
     Credit risk  represents the accounting loss that would be recognized at the
     reporting  date  if   counterparties   failed   completely  to  perform  as
     contracted. Concentrations of credit risk (whether on or off balance sheet)
     that arise from  financial  instruments  exist for groups of  customers  or
     counterparties when they have similar economic  characteristics  that would
     cause  their  ability  to  meet  contractual  obligations  to be  similarly
     effected by changes in economic or other  conditions.  In  accordance  with
     FASB  Statement  No.  105,   Disclosure  of  Information   about  Financial
     Instruments  with  Off-Balance-Sheet  Risk and Financial  Instruments  with
     Concentrations  of Credit Risk,  the credit risk amounts  shown do not take
     into account the value of any collateral or security.

     Financial  instruments  that  subject the  Company to credit  risk  consist
     principally  of accounts  receivable,  cash on deposit and notes and leases
     receivable.

     At January 3, 1999, accounts receivable totaled $9,992, net of an allowance
     for doubtful accounts of $62,000.  The Company does not require  collateral
     for accounts  receivable,  but performs periodic credit  evaluations on its
     customers' financial condition and believes that the allowance for doubtful
     accounts is adequate.

     The  Company  periodically  maintains  cash  balances  in  excess  of  FDIC
     insurance limits.

     Notes and leases receivables are described in Note 3.

     Fair Value of Financial Instruments
     -----------------------------------
     The  estimated  fair values of the  Company's  financial  instruments  were
     determined by management using available market information and appropriate
     valuation  methodologies.  The estimates are not necessarily  indicative of
     the amounts the Company could realize in a current market exchange.

     At  January  3, 1999,  cash,  accounts  receivable,  other  receivable  and
     accounts  payable  have fair values that  approximate  book values based on
     their short term or demand  maturity.  The fair values of notes  receivable
     and notes payable are based on estimated discounted cash flows.  Management
     believes the fair values of these  instruments  approximate  book values at
     January 3, 1999.

10.  YEAR 2000
     ---------

     The Company and/or other entities with which the Company transacts business
     could be adversely  affected by the year 2000 problem,  which is the result
     of computer  programs  being  written  using two digits rather than four to
     define the applicable year. Any programs that have time-sensitive  software
     may recognize a date using "00" as the year 1900 rather than the year 2000.
     This could result in a major system failure or miscalculations. The Company
     has taken actions it believes are  reasonably  designed to address the year
     2000  problem  with  respect to computer  systems in use, but has not fully
     determined  the  impact on their  future  operations  or the costs they may
     incur to remediate the problem. There can be no assurance the actions taken

                                      F-15

<PAGE>

                         HUDSON'S GRILL OF AMERICA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     by the  Company  will be  sufficient  to avoid any  adverse  impacts to the
     Company. However, management believes the year 2000 problem will not have a
     materially adverse effect on the Company.

11.  OPERATING SEGMENT INFORMATION
     -----------------------------
 
     Full service  restaurants are owned and operated by the Company or operated
     by independent owners under a franchise agreement. Accordingly, the Company
     categorizes  its  operating  segments  based  on  ownership  of  underlying
     business  enterprises.   Management  evaluates  financial  performance  and
     allocates  resources  based on the revenue  streams  associated  with these
     operating segments.  Revenues from Company operated  restaurants consist of
     food  and  beverage  sales.  Revenues  from  franchise  operations  are  as
     described in Note 2 and  includes  income  derived  from leased  equipment.
     Certain restaurants have been operated under joint venture arrangements and
     sales contracts and the Company presents them with the franchise  operating
     segment due to similarity of associated revenues.

     Operating segment information is summarized as follows:
                                                                           
                                                    PERIOD ENDED
                                    JANUARY 3,      DECEMBER 28,   DECEMBER 29,
                                       1999            1997            1996
                                    -----------     ------------   ------------
       Segment revenue:
          Company                    $  301,440     $  226,009     $  109,806
          Franchise                     341,290        434,894        507,109
                                     ----------     ----------    -----------

                    Total               642,730        660,903        616,915

          Other revenue                 100,093        134,099         99,235
                                     ----------     ----------     ----------

          Consolidated revenues      $  742,823     $  795,002     $  716,150
                                     ==========     ==========     ==========

     Operating  costs and revenues are not  reported to  management  by segment.
     Management measures profit and loss on a company-wide basis, therefore such
     segment information is not presented.

     The  assets  attributable  to  the  Company's  operating  segments  consist
     primarily of accounts  receivable,  property and equipment,  note and lease
     receivables,  liquor licenses and other non-current  items.  Segment assets
     exclude  corporate  assets  consisting  of cash  and cash  equivalents  and
     corporate  office  property and  equipment  as well as certain  unallocated
     prepaid expense and supply items.

     Operating segment asset information is summarized as follows:
<TABLE>

                                               JANUARY 3,           DECEMBER 28,        DECEMBER 29,
                                                   1999                  1997                1996
                                               ------------         ------------        ------------
<S>                                            <C>                  <C>                 <C>

       Segment assets:
          Company                              $    448,296          $    37,754         $    27,186
          Franchise                                 236,454            1,003,597           1,216,218
                                               ------------          -----------        ------------
                  
                    Total                           684,750            1,041,351           1,243,404

       General corporate assets                      55,980               75,369             108,656
                                               ------------          -----------         -----------  

       Consolidated assets                     $    740,730          $ 1,116,720         $ 1,352,060
                                               ============          ===========         ===========

       Expenditures for long-lived 
       assets

          Company                              $    276,921          $    13,434         $      --
          Franchise                                   --                    --                  --
          Other                                       --                   1,800              14,012                    
                                               ------------          -----------         -----------
                    Total                      $    276,921          $    15,234         $    14,012
                                               ============          ===========         ===========

                               F-16

</TABLE>

<PAGE>