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.

$287,608

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).

The average bid and asked on March
8, 2002, was $.018 per share. The issuer has 7,256,986 shares
outstanding; thus, on that date the market value of the voting
stock was $130,636.

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.

7,256,986

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement
for the Annual Meeting of Shareholders to be held on May 24, 2002,
are incorporated by reference into Parts II and III.

PART I

ITEM 1. BUSINESS

Hudson's Grill International,
Inc. (the "Company" or "Hudson's" or "Hudson's
Grill"), was incorporated on October 30, 1997, in Texas,
and assets were transferred to the Company on December 1, 1997,
from its former parent, Hudson's Grill of America, Inc. ("HGA").
Currently, the Company 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 December 31, 2001, there were
eleven Hudson's Grill restaurants; all eleven were franchised,
and two are recent. In April 1999, a franchisee opened a Hudson's
Grill in Marquette, Michigan, and in December 2000, a franchisee
opened a Hudson's Grill in Wausau, Wisconsin. The company's major
focus is to expand the Hudson's Grill operations through franchising
instead of through ownership. The Hudson's Grill restaurants are
currently operating in California, Michigan, Wisconsin 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.

BRIEF SUMMARY OF MAJOR EVENTS
OVER THE PAST THREE YEARS.

On December 18, 2000, Acceleration,
LLC, a company associated with William W. Hall, formerly a Burger
King franchisee, opened a Hudson's Grill in Wausau, Wisconsin.
It is a free standing building that uses the new prototype developed
over the past several years.

On April 19, 1999, Sharfe, LLC,
a Michigan limited liability company and franchisee of the Company,
opened a Hudson's Grill Restaurant in Marquette, Michigan. The
restaurant is a free standing building, using the new prototype
that was used for the Jackson, Michigan, location, and is being
operated by Frank and Jim Stabile.

In January 1999, Hudson's Grill
of Richardson, Inc., a subsidiary of the Company's former parent,
HGA, opened a Hudson's Grill Restaurant in northern Dallas, near
Richardson, Texas, a suburb of Dallas. This new restaurant was
the first restaurant to open that was affiliated with the Company
and was not a restaurant associated with a franchisee. HGA closed
the restaurant February 2000 because of continuing losses.

In January 1999, the Carrollton,
Texas, franchisee decided to shut down the Hudson's Grill Restaurant
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.

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 by adding
franchises. 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.

The Company currently plans to
expand only after paying off its current debts. Once the debts
are paid, the Company plans to increase efforts to add franchisees,
and only if the Company's cash flow will permit, it may entertain
directly operating a Hudson's Grill. Once the debts are paid,
the Company also intends to hire a full time president to run
the Company.

HUDSON'S FRANCHISE AGREEMENTS.

The Company owns 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 December 31,
2001, the Company had eleven 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, of which one percent is to be paid to
the Company for collective 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. The Company is not currently collecting
the one percent advertising fees since collective advertising
does not make sense with the current franchisees because they
are too far from each other.

EMPLOYEES AND UNIONS.

At December 31, 2001, the Company
employed one person, who is the receptionist/administrative assistant/bookkeeper
for the Company. The President works only part time, and is paid
$1,000 a month; each month he also is granted seven year options
to purchase 50,000 shares of the Company's stock for $0.10 per
share.

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

ITEM 2. PROPERTIES

At December 31, 2001, the Company
was the primary lessee for its headquarters in Dallas, Texas.
The headquarters lease is month-to-month. The Company shares office
space with its largest shareholder, who is a part owner of the
lessor. The office space is sufficient to meet the Company's current
needs, and it expects that its needs will be satisfied with this
space for the foreseeable future.

All of the Company's restaurant
equipment is owned free and clear by the Company. The Company's
restaurant equipment is leased to a franchisee, who did not pay
any rent on the equipment in 2001. This restaurant equipment is
currently subject to sale, with a closing set for April 2002.
Currently, the Company has no real property and has no real estate
related investments.

ITEM 3. LEGAL PROCEEDINGS

The Company is not involved in
any legal proceedings at the current time. The Company knows of
no threatened legal actions.

ITEM 4. SUBMISSION OF MATTERS
TO A VOTE 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.

In early 2001, the Company's Common
Stock, no par value, began trading over-the-counter on the NASD
OTC Bulletin Board under the National Association of Security
Dealers ("NASD") symbol "HGII." As of March
15, 2002, there were approximately 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, and the prices that are shown, are in U.S. Dollars. 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 DECEMBER 31, 2001        | High | Low
|------------------------------------------ | ---- | ---
|First Quarter ended March 31, 2001         | .02  | .01
|Second Quarter ended June 30, 2001         | .02  | .01
|Third Quarter ended September 30,
    2001 | .10  | .02
|Fourth Quarter ended December 31,
    2001 | .02  | .01

As of March 15, 2002, the closing
bid price of the Common Stock was $.011. Historical information
about the price of the Company's common stock can be obtained
from the Internet by visiting the following site operated by Yahoo.com:
http://finance.yahoo.com/q?s=HGIIA.OB&d=t

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, pay off the Company's debts, and
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

For the year ended December 31,
2001, the Company had a net income of $75,732. This compares to
net income of $112,781 for the year ended December 31, 2000. In
2001, $17,839 of the net income came from operations, while $57,893
came from other income. This compares with income from operations
in 2000 of $92,660 and other income in 2000 of $20,121.

The Company has disposed of all
of its direct and indirect restaurant operations and is solely
in the franchising business.

REVENUES.

Franchise revenues decreased due
to slackening demand nationwide; the slowdown in the United States
economy affected restaurant sales. Franchising revenues decreased
in 2001 to $287,608 from $307,495 for the year ended December
31, 2000. The 2000 revenues included initial franchise fees from
new restaurants of $55,000. The Company had no initial restaurant
franchise fees in 2001, but a new franchisee began operations
in 2001, and the franchise royalty fees from the new franchisee
offset some of the decline in initial franchising fees.

COSTS AND EXPENSES.

Operating costs in 2001 were $269,769;
this is an increase from 2000, when operating costs were $214,835.
The increase is a result of high legal expenses from litigation
and due to prior year costs that were reduced by $65,000 because
of the write-off of certain liabilities in prior years.

Settlement income increased substantially
in 2001 to $43,000 from none in 2000. This is due a settlement
in early 2001 with a former franchisee, in which the franchisee
paid an initial $10,000 and will be paying $3,000 monthly until
he has paid the Company a total of $108,000. Income from sale
of assets decreased in 2001 to $12,706 from $26,487 in 2000. This
decreased because income is recognized on an installment basis
as cash is collected; cash collections were lower in 2001, and
thus, less income was recognized.

LIQUIDITY AND CAPITAL RESOURCES.

At December 31, 2001, the Company
had negative working capital of $182,403 as compared to December
31, 2000, when the Company had negative working capital of $265,593.

Changes in its liquidity and capital
will depend mostly on continuing royalty fees received from franchisees
using the Company's trademark and restaurant concept. This in
turn will be reflective of the general economies in the areas
where Hudson's Grill restaurants are located.

The Company is currently allocating
more of its cash flow to pay off accounts payable; it plans to
continue to do so until all of its past due debts are essentially
paid off. This may take the next several years to accomplish.
The Company's cash balance of $23,894 at December 31, 2001, was
$2,840 more than at the year ended December 31, 2000.

The effects of inflation on the
Company are minimal. To the extent that the franchisees need to
raise prices to offset extra costs (and are able to pass the increased
costs onto customers), then the Company will have increased royalty
fees. Any increase in royalty fees will probably be offset in
increased operating costs of the Company. Thus, the Company expects
that increases from inflation will be minimal now and in the future.

The Company does not sustain much
seasonal volatility in revenues since its franchisees are dispersed
geographically and climactically. Additionally, it does not have
any material commitments for capital expenditures and doesn't
plan any in the foreseeable future.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.

Please see Note 12 to the Financial
Statements attached following Item 13.



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 May 24, 2002.



PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS; 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.

See the Index to the Financial
Statements in the beginning of the Independent Auditor's Report
for a list of the statements and items contained in the Independent
Auditor's Report.

There are no exhibits.

(b) Reports on Form 8-K

The Company filed the following
Form 8-K during the last quarter of the fiscal year ending December
31, 2001.

October 12, 2001. The Company disclosed that it had signed
a seven year consulting agreement with Roy Millender, a major
shareholder in the Company, in which he would consult with the
Company and provide inspection services of the Company's franchisees
located in California. In consideration for the consulting and
inspections, the Company issued to Mr. Millender 300,000 shares
of its private common stock and will pay Mr. Millender $1,200
monthly.



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 INTERNATIONAL,
    INC.

    By:

    David Osborn, President
|------------ | ----------------------------------------------------------------------------

Date: March 22, 2002

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   | President | March 22, 2002
|ROBERT W. FISCHER | Director  | March 22, 2002
|ANTHONY B. DUNCAN | Director  | March 22, 2002

f\sec\010330.O01

INDEPENDENT AUDITOR'S REPORT





PAGE

**INDEPENDENT AUDITOR'S REPORT**                                                                            F-1

**FORMER INDEPENDENT AUDITORS' REPORT**                                           
                                F-2

**FINANCIAL STATEMENTS**

Balance Sheets at December 31, 2001 and 2000                                            
                                F-3

Statements of Operations for the Years Ended December 31, 2001
and 2000                          
                             F-4

Statements of Stockholders' Deficit for the Years Ended December
31, 2001 and 2000                                                 F-5

Statements of Cash Flows for the Years Ended December 31, 2001
and 2000                                
                              F-6

**NOTES TO FINANCIAL STATEMENTS**                                                                                
                              F-7



Board of Directors

Hudson's Grill International, Inc.

Dallas, Texas

We have audited the accompanying balance sheet of Hudson's
Grill International, Inc. as of December 31, 2001, and the related
statements of operations, stockholders' deficit, and cash flows
for the year then ended. 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 audit.

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

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Hudson's Grill International, Inc. as of December 31, 2001,
and the results of its operations and its cash flows for the year
then ended in conformity with accounting principles generally
accepted in the United States of America.

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 a working
capital deficit and a stockholders' deficit, 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

January 31, 2002

Dallas, Texas

**FORMER INDEPENDENT AUDITORS' REPORT**

The Company's former independent auditors, King Griffin &
Adamson, P.C., have not consented to include their report accompanying
the Company's statements of financial condition and the related
statements of operations, stockholders' deficit and cash flows,
as of the dates and for the periods set forth in such report,
previously included in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2000. We have included such financial
information previously included in the Company's Annual Reports
on Form 10-KSB for the year ended December 31, 2000, solely for
historical and informational purposes, and to attempt to comply
with the financial statement requirements of Regulation S-B with
respect to this Report.

**BALANCE SHEETS**





|                                                                                                                                                                             |  | December 31,
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------
|                                                                                                                                                                             |  | 2001        
|**CURRENT ASSETS:**                                                                                                                                                          |  |             
|Cash                                                                                                                                                                         |  | $ 23,894    
|Accounts receivable, net of $0 allowance for doubtful accounts                                                                                                               |  | 22,313      
|Prepaid expenses and other                                                                                                                                                   |  | 9,993       
|Total current assets                                                                                                                                                         |  | 56,200      
|                                                                                                                                                                             |  |             
|**PROPERTY AND EQUIPMENT,**at cost**:**                                                                                                                                      |  |             
|Furniture and office equipment                                                                                                                                               |  | 15,813      
|Restaurant furniture and equipment                                                                                                                                           |  | 23,416      
|Total property and equipment                                                                                                                                                 |  | 39,229      
|Accumulated depreciation                                                                                                                                                     |  | (33,959)    
|Net property and equipment                                                                                                                                                   |  | 5,270       
|                                                                                                                                                                             |  |             
|**LONG-TERM RECEIVABLE**                                                                                                                                                     |  | 106,803     
|                                                                                                                                                                             |  |             
|Total assets                                                                                                                                                                 |  | $ 168,273   
|                                                                                                                                                                             |  |             
|LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                                                                       
|                                                                                                                                                                             |  |             
|**CURRENT LIABILITIES:**                                                                                                                                                     |  |             
|Line of credit                                                                                                                                                               |  | $ 14,299    
|Loans payable                                                                                                                                                                |  | 58,198      
|Accounts payable and accrued expenses                                                                                                                                        |  | 54,204      
|Accounts payable to related parties                                                                                                                                          |  | 99,612      
|Advances from related party                                                                                                                                                  |  | 12,290      
|Total current liabilities                                                                                                                                                    |  | 238,603     
|                                                                                                                                                                             |  |             
|**DEFERRED REVENUE**                                                                                                                                                         |  | 134,184     
|                                                                                                                                                                             |  |             
|Total liabilities                                                                                                                                                            |  | 372,787     
|                                                                                                                                                                             |  |             
|**COMMITMENTS AND CONTINGENCIES** (Notes 1 and 6)                                                                                                                            |  |             
|                                                                                                                                                                             |  |             
|**STOCKHOLDERS' DEFICIT:**                                                                                                                                                   |  |             
|Common stock, Class A, no par value; 100,000,000 shares authorized,
    7,256,986 and 6,656,986 (unaudited) shares issued and outstanding
    at 2001 and 2000, respectively |  | 142,545     
|Common stock, Class B, no par value; 15,000,000 shares authorized,
    no shares issued and outstanding                                                                      |  | -           
|Additional paid-in capital                                                                                                                                                   |  | -           
|Accumulated deficit                                                                                                                                                          |  | (347,059)   
|Total stockholders' deficit                                                                                                                                                  |  | (204,514)   
|                                                                                                                                                                             |  |             
|Total liabilities and stockholders' deficit                                                                                                                                  |  | $ 168,273   

**STATEMENTS OF OPERATIONS**



|                                                                       |  | Years Ended December 31,
|---------------------------------------------------------------------- |  | ------------------------
|                                                                       |  | 2001                    
|                                                                       |  |                         
|**REVENUE**                                                            |  | $ 287,608               
|                                                                       |  |                         
|**OPERATING COSTS**                                                    |  | 269,769                 
|                                                                       |  |                         
|Income from operations                                                 |  | 17,839                  
|                                                                       |  |                         
|**OTHER INCOME (EXPENSE):**                                            |  |                         
|Settlement income                                                      |  | 43,000                  
|Income from sale of assets                                             |  | 12,706                  
|Interest income                                                        |  | 11,185                  
|Interest expense                                                       |  | (8,998)                 
|Other expense                                                          |  | -                       
|Total other income (expense), net                                      |  | 57,893                  
|                                                                       |  |                         
|**NET INCOME**                                                         |  | $ 75,732                
|                                                                       |  |                         
|**NET INCOME PER COMMON SHARE** - basic and diluted                    |  | $ .01                   
|                                                                       |  |                         
|**WEIGHTED AVERAGE COMMON SHARES OUTSTANDING** -
    basic and diluted |  | 6,981,986               
|                                                                       |  |                         
|                                                                       |  |                         
|                                                                       |  |                         
|                                                                       |  |                         
|                                                                       |  |                         

**STATEMENTS OF STOCKHOLDERS' DEFICIT**





|                                                     |  | Common Stock |  | Additional

    Paid-in |  | Accumulated |  | Deferred    |  |             
|---------------------------------------------------- |  | ------------ |  | ----------------------- |  | ----------- |  | ----------- |  | ------------
|                                                     |  | Shares       |  | Amount                  |  | Capital     |  | Deficit     |  | Compensation
|                                                     |  |              |  |                         |  |             |  |             |  |             
|**BALANCE**, January 1, 2000                         |  | 6,656,986    |  | $ 118,545               |  | $ 54,000    |  | $ (522,861) |  | $ (18,000)  
|                                                     |  |              |  |                         |  |             |  |             |  |             
|Compensation expense                                 |  | -            |  | -                       |  | -           |  | -           |  | 18,000      
|                                                     |  |              |  |                         |  |             |  |             |  |             
|Liabilities assumed from Parent                      |  | -            |  | -                       |  | (48,711)    |  | -           |  | -           
|                                                     |  |              |  |                         |  |             |  |             |  |             
|Net income                                           |  | -            |  | -                       |  | -           |  | 112,781     |  | -           
|                                                     |  |              |  |                         |  |             |  |             |  |             
|**BALANCE**, December 31, 2000                       |  | 6,656,986    |  | 118,545                 |  | 5,289       |  | (410,080)   |  | -           
|                                                     |  |              |  |                         |  |             |  |             |  |             
|Stock issued in connection with employment agreement |  | 300,000      |  | 18,000                  |  | (5,289)     |  | (12,711)    |  | -           
|                                                     |  |              |  |                         |  |             |  |             |  |             
|Stock issued in connection with consulting agreement |  | 300,000      |  | 6,000                   |  | -           |  | -           |  | -           
|                                                     |  |              |  |                         |  |             |  |             |  |             
|Net income                                           |  | -            |  | -                       |  | -           |  | 75,732      |  | -           
|                                                     |  |              |  |                         |  |             |  |             |  |             
|**BALANCE**, December 31, 2001                       |  | 7,256,986    |  | $ 142,545               |  | $ -         |  | $ (347,059) |  | $ -         
|                                                     |  |              |  |                         |  |             |  |             |  |             
|                                                     |  |              |  |                         |  |             |  |             |  |             
|                                                     |  |              |  |                         |  |             |  |             |  |             



|                                                                                  |  | Years Ended December 31,
|--------------------------------------------------------------------------------- |  | ------------------------
|                                                                                  |  | 2001                    
|                                                                                  |  |                         
|**CASH FLOWS FROM OPERATING ACTIVITIES:**                                         |  |                         
|Net income                                                                        |  | $ 75,732                
|Adjustments to reconcile net income to net cash used in operating
    activities: |  |                         
|Depreciation and amortization                                                     |  | 6,732                   
|Value assigned to stock issued for consulting services                            |  | 6,000                   
|Recognition of compensation expense                                               |  | -                       
|Write-off of accrued liabilities                                                  |  | -                       
|Amortization of deferred franchise fee                                            |  | (11,240)                
|Amortization of deferred income from sale of assets                               |  | (12,706)                
|Changes in operating assets and liabilities:                                      |  |                         
|Accounts receivable                                                               |  | (6,233)                 
|Prepaid expenses and other                                                        |  | 704                     
|Other non-current assets                                                          |  | -                       
|Accounts payable and accrued expenses                                             |  | (42,477)                
|Accounts payable to related parties                                               |  | (20,000)                
|Net cash used in operating activities                                             |  | (3,488)                 
|                                                                                  |  |                         
|**CASH FLOWS FROM INVESTING ACTIVITIES -**                                        |  |                         
|Repayment of note receivable                                                      |  | 18,672                  
|                                                                                  |  |                         
|**CASH FLOWS FROM FINANCING ACTIVITIES:**                                         |  |                         
|(Repayments of) borrowings from line of credit and loans payable                  |  | (7,444)                 
|Repayments of advances from related parties                                       |  | (4,900)                 
|Net cash used in financing activities                                             |  | (12,344)                
|                                                                                  |  |                         
|**NET INCREASE (DECREASE) IN CASH**                                               |  | 2,840                   
|                                                                                  |  |                         
|**CASH,**beginning of year                                                        |  | 21,054                  
|                                                                                  |  |                         
|**CASH**, end of year                                                             |  | $ 23,894                
|                                                                                  |  |                         
|**SUPPLEMENTAL DISCLOSURES:**                                                     |  |                         
|Income taxes paid                                                                 |  | $ -                     
|Interest paid                                                                     |  | $ 8,000                 
|                                                                                  |  |                         
|**NON-CASH FINANCING ACTIVITIES -**                                               |  |                         
|Debt assumed from Parent                                                          |  | $ -                     

**1.Organization and Basis of Presentation**

Hudson's Grill International, Inc. (the "Company")
was incorporated in the state of Texas on October 30, 1997. On
December 1, 1997, the Company became a wholly-owned subsidiary
of Hudson's Grill of America, Inc. ("HGAI" or the "Parent"),
a public company, and at that time HGAI transferred certain franchise
rights and agreements to the Company. On August 15, 2000 HGAI
registered the Company's common stock and distributed 100% of
the Company's shares to the stockholders of HGAI.

The Company owns the franchise rights to the *Hudson's Grill*
restaurant concept*.* The Company currently provides management
and support services to eleven franchised restaurants located
in Texas, California, Michigan and Wisconsin.

*Continuing Operations*

The accompanying 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 had a working capital deficit of $182,403 and a stockholders'
deficit of $204,514 as of December 31, 2001. These issues raise
substantial doubt about the Company's ability to continue as a
going concern. Management of the Company intends to continue to
sell franchises in an attempt to improve operating results. Management
also intends to use excess profits to pay down the Company's debts.
There can be no degree of assurance that the Company will be successful
in these efforts.

The accompanying financial statements do not include any adjustments
to reflect the possible effects on the recoverability and classification
of assets or classification of liabilities which may result from
the inability of the Company to continue as a going concern.

**2. Summary of Significant Accounting Policies**

*Cash and Cash Equivalents*

Cash consists of bank and money market accounts with financial
institutions. The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to
be cash equivalents.

*Property and Equipment*

Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful
lives of the assets (generally five to seven years). Depreciation
expense was $6,732 for the years ended December 31, 2001 and 2000.
Maintenance and repairs are expensed as incurred.

*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. There was no impairment
of the value of such assets for the years ended December 31, 2001
and 2000.

*Financial Instruments*

The recorded amounts of certain of the Company's financial
instruments including cash, accounts receivable, notes receivable,
accounts payable, and other liabilities approximate fair value
due to their short maturities. The carrying value of notes payable
approximates fair value based on borrowing rates currently available
to the Company for loans with similar terms.

*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 and collection is certain. Continuing franchise
fees are recognized as revenue as the fees are earned and become
receivable from the franchisee.

*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.
Pro forma disclosures of compensation expense determined under
the fair value option pricing model method required under Statement
of Financial Accounting Standards No. 123 ("SFAS 123"),
*Accounting for Stock-Based Compensation*, are discussed
in Note 8.

*Income Taxes*

The Company accounts for income taxes using the asset and liability
method which recognizes deferred tax assets and liabilities for
the future tax impact attributable to differences in the basis
of assets and liabilities reported for financial statement and
income tax purposes. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts expected to
be realized.

In prior years, the Company was taxed as part of a consolidated
group. Beginning in August 2000, the Company began to be taxed
on a stand-alone basis.

*Per Share Data*

Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding for
the period. Diluted earnings per share is computed by dividing
net income by the weighted average number of common shares and
common stock equivalents outstanding for the period. Common stock
equivalents are excluded from the computation if such inclusion
would have an anti-dilutive effect. There were no dilutive common
stock equivalents at December 31, 2001 and 2000.

*Use of Estimates*

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ materially from
those estimates. Significant estimates made by the Company's management
include the allowance for doubtful accounts, carrying amount of
note receivable and contingent lease liabilities.

*Reclassifications*

Certain 2000 amounts have been reclassified to conform to the
2001 presentation.



**3. Franchise Activities**

Under the terms of the standard franchise agreement, franchisees
are obligated to pay the Company an initial franchise fee and
a weekly continuing franchise fee ("royalty") of generally
4% of gross restaurant revenues. Each franchisee 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.
During the years ended December 31, 2001 and 2000, the Company
received no contribution toward the marketing fund nor has the
marketing fund been maintained.

One franchisee agreed to pay a higher initial franchise fee
in return for a reduced royalty fee. The Company deferred its
recognition of the additional fee amount, and is amortizing it
into income through 2014. Unamortized initial franchise fee at
December 31, 2001 and 2000 of $62,640 and $73,880, respectively,
were included in deferred revenue.

During the year ended December 31, 2000 the Company added a
new franchisee in Wisconsin. The franchisee paid $30,000 to obtain
the rights to develop three restaurants in Wisconsin and paid
an initial franchise fee of $25,000 in connection with the first
restaurant, which opened in December 2000.

Franchising revenues consisted of the following for the years
ended December 31,:



|                                       |  | 2001      |  | 2000     
|-------------------------------------- |  | --------- |  | ---------
|                                       |  |           |  |          
|Initial franchise fee                  |  | $ -       |  | $ 55,000 
|Amortization of deferred franchise fee |  | 11,240    |  | 12,175   
|Royalty fees                           |  | 276,368   |  | 240,320  
|Total franchise revenue                |  | $ 287,608 |  | $ 307,495

**4. Sale of Assets**

Prior to the distribution transaction described in Note 1,
the Company's Parent sold a restaurant and agreed to receive a
promissory note as consideration. The note receivable is unsecured,
bears interest at prime plus 2%, and requires repayment over a
period of six years or until fully repaid. The note is collateralized
by certain assets of the restaurant sold. Unpaid balances under
the note at December 31, 2001 and 2000 were $106,803 and $125,475,
respectively. The gain on the sale was deferred and income is
being recognized on an installment basis. At December 31, 2001
and 2000, the deferred gain on the sale totaled $71,544 and $84,250,
respectively. The Company recognized income of $12,706 and $26,487
from the sale of these assets during the years ended December
31, 2001 and 2000, respectively.



**5. Debt**

In December 2000, the Company obtained a revolving line of
credit with a financial institution which provides for borrowings
of up to $30,000. Balances outstanding at December 31, 2001 and
2000 under the line of credit were $14,299 and $17,959, respectively.
Borrowings bear interest at a variable rate (13.75% at December
31, 2001) and are secured by the personal guarantee of the president
of the Company. Principal and interest payments are due on demand.

Loans payable consisted of the following at December 31,:



|                                                                                                                                                                      |  | 2001         |  | 2000        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------
|Bank credit card debt, interest at variable rate (approximately
    15% to 16% at December 31, 2001); unsecured and principal and
    interest payments due on demand |  | $
    13,198 |  | $
    16,982
|                                                                                                                                                                      |  |              |  |             
|Loan payable to a financial institution; interest at 7%, unsecured
    and principal and interest payments due on demand                                              |  | 45,000       |  | 45,000      
|                                                                                                                                                                      |  | $ 58,198     |  | $ 61,982    

**6. Commitments and Contingencies**

In January 2001, the Company received a judgment with respect
to certain assets previously written-off. The judgment and related
settlement agreement provided for $118,000 to be paid by the defendant
to the Company. The first payment on the settlement of $10,000
was received in January 2001. Thirty-six future payments of $3,000
per month were established, and began in February 2001.

The Company's former parent, HGAI, is involved in litigation
arising from a lease associated with franchised restaurant location
that had ceased operations. In addition, the Parent is secondarily
liable under other leases for restaurants it sold in prior years.
None of these restaurants, lease agreements or obligations were
transferred to or assumed by the Company. The Company, based upon
consultation with its legal counsel, is of the opinion that the
Parent's actual and contingent obligations with respect to these
leases ultimately will not be attributable to the Company, but
that if a creditor obtained a judgment against the Parent, stock
in the Company formerly held by HGAI could be subject to attachment
or execution by the creditor. The Company believes these matters
will not have a material adverse effect on the Company's financial
condition or results of operations, and no provision for any estimated
loss is reflected in the accompanying financial statements.



**7. Income Taxes**

There was no provision for income taxes in the years ended
December 31, 2001 and 2000 due to the carryforward of net losses
("NOL") incurred in prior years. The Company had no
material deferred tax liabilities at December 31, 2001 and 2000.

Deferred taxes consisted of the following at December 31,:



|                          |  | 2001      |  | 2000     
|------------------------- |  | --------- |  | ---------
|Deferred tax assets:      |  |           |  |          
|Deferred revenue          |  | $ 46,000  |  | $ 54,000 
|Net operating loss        |  | 247,000   |  | 265,000  
|Total deferred tax assets |  | 293,000   |  | 319,000  
|Valuation allowance       |  | (293,000) |  | (319,000)
|Net deferred taxes        |  | $ -       |  | $ -      

The net change in the valuation allowance
for deferred tax assets was a decrease of $26,000 and $17,000
in 2001 and 2000, respectively. The changes related primarily
to changes in the NOL.

At December 31, 2001 NOL carryforwards of approximately $726,000
were available to offset future taxable income and expire through
2018.

The Company's effective income tax rate varied from the federal
statutory rate for the years ended December 31, as follows:



|                                     |  | 2001   |  | 2000  
|------------------------------------ |  | ------ |  | ------
|                                     |  |        |  |       
|Federal income tax at statutory rate |  | 34 %   |  | 34 %  
|Net operating loss carryforward      |  | (34 %) |  | (34 %)
|Total effective income tax rate      |  | 0 %    |  | 0 %   

**8. Stock Options**

The Company president's compensation is established at the
sole discretion of the Board of Directors and includes the granting
of stock options. During 2000, the Company granted the president
100,000 stock options per month in lieu of salary. Effective February
2001, the president received a monthly salary of $1,000 and was
granted 50,000 stock options per month. The Company granted the
president options to purchase a total of 650,000 and 1,200,000
shares of the Company's common stock in each of the years ended
December 31, 2001 and 2000, respectively.

The Company also grants 10,000 stock options per month to each
of the directors of the Company as compensation for services as
directors. The Company granted the directors options to purchase
240,000 shares of the Company's common stock in each of the years
ended December 31, 2001 and 2000.

All options vested immediately, were issued with an exercise
price of $0.10, which exceeded the market value of the Company's
common stock on the date of grant, and expire seven years from
the date of grant.

The following is a summary of stock options transactions:



|                                 |  | Options   |  | Weighted

    Average

    Exercise

    Price
|-------------------------------- |  | --------- |  | ----------------------------------------------
|                                 |  |           |  |                                               
|Outstanding at January 1, 2000   |  | -         |  | $ -                                           
|Granted                          |  | 1,440,000 |  | 0.10                                          
|Exercised                        |  | -         |  | -                                             
|Forfeited                        |  | -         |  | -                                             
|Outstanding at December 31, 2000 |  | 1,440,000 |  | $ 0.10                                        
|Granted                          |  | 890,000   |  | 0.10                                          
|Exercised                        |  | -         |  | -                                             
|Forfeited                        |  | -         |  | -                                             
|Outstanding at December 31, 2001 |  | 2,330,000 |  | $ 0.10                                        
|                                 |  |           |  |                                               

Employee stock options are valued
on the date of grant using the Black-Scholes option pricing model.
The weighted average fair value of options granted during 2001
was insignificant.

The following table summarizes information about options outstanding
at December 31, 2001:



|                              |  | Options Outstanding     |  |                                                                 |  | Options Exercisable                           
|----------------------------- |  | ----------------------- |  | --------------------------------------------------------------- |  | ----------------------------------------------
|Range of

    Exercise Prices |  | Number

    Outstanding |  | Weighted

    Average

    Remaining

    Contractual

    Life |  | Weighted

    Average

    Exercise

    Price
|                              |  |                         |  |                                                                 |  |                                               
|$0.10                         |  | 2,330,000               |  | 6 years                                                         |  | $0.10                                         

As permitted by SFAS 123, the Company
applies APB No. 25 in accounting for its employee stock options,
which requires compensation expense be recognized for grants of
stock options when the quoted market price of the Company's common
stock on the date the options were granted exceeds an option's
exercise price. The Company did not grant any stock options with
an exercise price that was less than the fair market value of
the stock at the date of grant during the years ended December
31, 2001 and 2000. Accordingly, no compensation cost has been
recognized for its employee stock options in the accompanying
financial statements. Had compensation cost for the Company's
stock options been determined consistent with the SFAS 123 fair
value approach, the Company's net income and net income per common
share for the years ended December 31, 2001 and 2000 would not
have been significantly different from the results reflected in
the accompanying statements of operations.



**9. Related Party Transactions**

A law firm associated with a director of the Company provides
legal services to the Company. During the years ended December
31, 2001 and 2000, the cost of these services to the Company were
approximately $52,900 and $69,200, respectively. Related amounts
included in accounts payable to related parties at December 31,
2001 and 2000 were approximately $98,600 and 109,600, respectively.

During 2000, the Company assumed a loan of a former employee
of the Parent with a financial institution. This loan is unsecured
and bears interest at 7%. The balance outstanding on the loan
was $45,000 at December 31, 2000 and 2001. Principal and interest
payments are due on demand.

During 2000, the Company assumed the bank credit card debt
of a former employee. The obligation is unsecured, bears interest
at a variable rate, and is due on demand. Outstanding balances
at December 31, 2001 and 2000 of $13,198 and $16,982, respectively,
were included in loans payable.

The Company leases its corporate office space from a firm in
which the president of the Company is a partner. Rental cost for
the office space was approximately $16,400 and $21,000 for the
years ended December 31, 2001 and 2000, respectively. Unpaid rent
expense to this firm included in accounts payable to related parties
was immaterial at December 31, 2001. The unpaid balance at December
31, 2000 was approximately $10,000.

One of the directors of the Company is also a franchisee of
two restaurants. As part of an agreement with the Company, these
restaurants pay no monthly franchise fee.

Advances from related party consisted of amounts due to an
organization owned by the president of the Company for expenses
paid on the Company's behalf.



**10. Stockholders' Deficit**

In February 2001, 300,000 shares of common stock were issued
to the interim president of the Company in connection with an
employment agreement entered into in 1999. Under the agreement,
the Company made a commitment to issue the stock for services
provided by the president from December 1, 1999 through May 31,
2000. The estimated value of the shares of $18,000 had been recorded
as additional paid-in capital in 1999. Related compensation expense
was deferred and recognized in 2000.

In November 2001, 300,000 shares of common stock were issued
to a consultant. Under a related consulting agreement, the Company
issued the stock for management services to be provided through
October 2008 relative to the operation and franchising of restaurants
in California. The estimated value of the shares of $6,000 was
recognized as consulting expense in 2001.

During 2000, the Company assumed certain liabilities owed by
HGAI to its creditors. This transaction was treated as a stockholder
distribution in the accompanying statements of stockholders' deficit.
At the time of assumption, these balances totaled $48,711.



**11. Concentrations of Credit Risk**

In the normal course of business, the Company extends unsecured
credit to franchisees. In addition, the Company's parent sold
a restaurant and took an unsecured promissory note as consideration.
The income from the sale has been deferred and is recognized on
an installment basis. At December 31, 2001, the balance outstanding
under the note receivable and the related deferred income were
$106,803 and $71,544, respectively. The Company's note receivable
and accounts receivable are subject to potential credit risk.
The maximum exposure assuming non-performance by the debtors is
the amount shown on the balance sheet at the date of non-performance.
The Company believes that an adequate allowance for uncollectible
accounts has been established. The allowance for uncollectible
accounts is continually monitored, and adjustments are made as
necessary.



**12. Recent Accounting Pronouncements**

In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141 ("SFAS
141"), *Business Combinations*, and Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), *Goodwill
and Other Intangible Assets*. SFAS 141 requires the purchase
method of accounting for business combinations initiated after
June 30, 2001 and eliminates the pooling-of-interests method.
SFAS 142, which is effective for fiscal years beginning after
December 15, 2001, requires among other things, the discontinuance
of goodwill amortization. Adoption of these new standards will
not have a material effect on the Company's financial statements.

In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, *Accounting
for the Impairment or Disposal of Long-Lived Assets*("SFAS
144"), which addresses accounting and reporting for the impairment
or disposal of long-lived assets and discontinued operations.
SFAS 144 requires that those long-lived assets be measured at
the lower end of carrying amount or fair value less cost to sell,
whether reported in continuing operations or discontinued operations.
The Company will adopt the provisions of SFAS 144 effective January
1, 2002, applied prospectively. Adoption of this new standard
is not expected to have a material effect on the Company's financial
statements.