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

Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).

Yes No X

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.

$468,309

State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to
the price at which the 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 last traded price as of March 1, 2007, was $.11 per share.
The issuer has 7,643,986 shares outstanding held by non-affiliates,
and all are voting common stock; thus, on that date the market
value of the voting and non-voting common equity held by non-affiliates
was $840,838.

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.

7,643,986

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held on May 23, 2007, are incorporated by reference into
Parts II and III.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Hudson's Grill International, Inc. (the "Company"
or "Hudson's" or "Hudson's Grill"), was incorporated
on October 30, 1997, in Texas, and certain 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 that
serve lunch and dinner and a wide range of alcoholic beverages.
As of December 31, 2006, there were twelve Hudson's Grill restaurants;
two restaurants have since closed; Santa Maria closed as of March
1, 2007, and El Paso West was closed as of February 9, 2007. El
Paso West was exempt from paying franchise fees under an agreement
made when the Hudson's concept was being created. Santa Maria
had struggled for some time and was the Company's last franchise
in California. New franchises were established in 2006 at Escanaba,
Michigan, and Plover and Oshkosh, Wisconsin. Appleton, Wisconsin,
and Simi Valley and San Luis Obispo, California closed in 2006.
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 Michigan, Wisconsin,
Iowa 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.

Two of the Company's franchises were closed in early 2007.
As of March 1, 2007, Santa Maria, California was closed. It was
the last franchise in California. As of February 9, 2007, the
Hudson's Grill franchise in the western part of El Paso, Texas,
was closed. The one in the eastern part of El Paso, Texas, remains
open.

In November 2006, the Company's franchisee in Simi Valley,
California, confirmed that it had closed permanently its Hudson's
Grill restaurant in Simi Valley. A new shopping mall opened nearby,
and customers were drawn from the shopping center to the new mall.

On October 9, 2006, the Company's newest franchise opened in
Plover. The franchise agreement had been signed on July 6, 2006,
and was opened by Acceleration LLC, which owns and operates the
Hudson's Grill restaurants in Wausau and Marshfield, Wisconsin.

On May 26, 2006, the Company signed a franchise agreement with
Service Solutions of Oshkosh, Inc., which is a company owned by
Jim Stabile, who used to be the Company's Upper Midwest representative.
Mr. Stabile owned the Appleton, Wisconsin, franchise until it
shut on November 29, 2006. The Oshkosh Hudson's Grill restaurant
opened for business on July 12, 2006.

In or just before May 2006, the Hudson's Grill restaurant located
in San Luis Obispo, California, closed, and Hornblowers, a restaurant
in Ventura, California, which owed the Company on a note receivable
that had previously been written down, closed.

In January 2006, the Company signed a franchise agreement for
a new Hudson's Grill restaurant to be built in Escanaba, Michigan.
The franchisee opened on March 6, 2006. This franchisee is affiliated
with the De Pere, Wisconsin, franchisee.

In May 2005, the Company modified its consulting agreement
with Mr. Jim Stabile, giving him additional responsibilities to
develop franchisees in the Upper Midwest, and granting him a portion
of royalty fees from new franchisees and a smaller portion of
fees from existing franchisees in that region. Mr. Stabile also
monitored the Company's franchisees in the Upper Midwest. The
consulting agreement was terminated in October 2006.

In March 2005, the Company signed a franchise agreement for
a new Hudson's Grill to be built in Appleton, Wisconsin. The franchisee,
which was owned by Mr. and Mrs. Jim Stabile, opened for business
in July 2005.

In October 2004, the Company signed a franchise agreement for
a new Hudson's Grill to be built in De Pere, Wisconsin. The franchisee
opened for business in February 2005.

In January 2004, the Company signed a franchise agreement for
a new Hudson's Grill to be built in Iowa. This is the Company's
first franchise in that state. The franchisee opened for business
in May 2005.

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
sixty employees, seventy percent of whom are part-time employees.

The restaurants have similar operations and offer similar food.
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.

The Company plans to expand solely by adding franchises. It
may also investigate developing other concepts (for example, a
sports bar), and it may expand if it feels that it can sell franchises
using new concepts. In 2006 it purchased the land and building
rented to the Oshkosh franchise, but it does not plan any future
acquisitions of real property.

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 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. Where permitted, cocktails,
beer and wine are also available. 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 assess how to grow its Hudson's
concept, but it hasn't decided on whether to push its Hudson's
Grill concept or try other concepts, including those that may
be more bar oriented. If the Company's cash flow will permit,
it may entertain partial ownerships in new franchisees, and it
might entertain developing additional, different concepts to franchise.
Except as stated above, the Company has no specific plans regarding
attempts to add franchisees.

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, 2006, the Company had twelve franchised
restaurants that were in operation, but from December 31, 2006,
to March 2, 2007, two franchised restaurants have closed. 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 is not practical
with the current franchisees because they are not located in near
proximity to each other.

EMPLOYEES.

At December 31, 2006, the Company employed one person full
time, who is the receptionist/administrative assistant/bookkeeper
for the Company; she is also the Secretary of the Company. She
had been granted 5,000 monthly stock options beginning June 2005.
Her options were identical to those granted to the president and
to the non-officer directors. Her grant of options ceased December
31, 2005, and instead starting January 2006, in addition to her
normal compensation, she has been receiving 15,000 shares of the
Company's stock each six months. She was paid $51,450 in 2006.
The President was paid $42,200 in 2006; each month he also was
granted options to purchase 18,000 shares of the Company's stock
for $.005 above the market price on the last day of the preceding
month; all options were granted with an exercise price at or in
excess of the fair market value at the grant date. The grant of
stock options ceased December 31, 2005. Beginning January 2006,
the President has been receiving 54,000 shares of the Company's
stock each six months instead of stock options. These grants were
suspended as of April 1, 2007.

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

REPORTS TO SECURITY HOLDERS

The Company files reports with the United States Securities
and Exchange Commission. It files the following periodic reports:
(1) Form 10-KSB; (2) Annual Report to Shareholders; (3) Definitive
Proxy material; and (4) Forms 10-QSB. It files Forms 3, 4, 5,
and 8-K on an as-needed basis.

ITEM 2. DESCRIPTION OF PROPERTIES

At December 31, 2006, 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 and is the President of the
Company. 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; currently there is only a de minimus amount
of such restaurant equipment that is not installed at its Oshkosh
property leased to one of its franchisees. To the extent the Oshkosh
equipment is part of the real property, it has a security interest
against it held by the mortgagor of that property. The Oshkosh
equipment is being leased to the franchisee as part of the lease
for the premises. The Company's other restaurant equipment is
now stored in a warehouse and is for sale. Currently, the Company
has no real property and has no real estate related investments
except for the real estate it rents to the Oshkosh, Wisconsin,
franchise. It does not plan to purchase any other real estate
in the foreseeable future.

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" and now trades under the symbol "HGIIA.OB."
As of March 1, 2007, there were approximately 300 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 Company believes that it has about 700 shareholders when including
those whose shares are held in street name. The following table
sets forth the reported high and low prices of the Common Stock
for the periods indicated as regularly quoted by the NASD OTC
Bulletin Board, based on the infrequent transactions in the Company's
stock reported on quotemedia.com. 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, 2005    | High | Low
|-------------------------------------- | ---- | ---
|First Quarter ended March 31, 2005     | .07  | .03
|Second Quarter ended June 30, 2005     | .10  | .05
|Third Quarter ended September 30, 2005 | .11  | .05
|Fourth Quarter ended December 31, 2005 | .08  | .05

|FISCAL YEAR ENDED DECEMBER 31, 2006    | High | Low 
|-------------------------------------- | ---- | ----
|First Quarter ended March 31, 2006     | .08  | .045
|Second Quarter ended June 30, 2006     | .18  | .05 
|Third Quarter ended September 30, 2006 | .25  | .095
|Fourth Quarter ended December 31, 2006 | .25  | .10 

As of March 1, 2007, the closing price of the Common Stock
was $.11. Historical information about the price of the Company's
common stock can be obtained from the Internet by visiting the
following site operated by QuoteMedia: http://www.quotemedia.com
and using the stock symbol HGIIA, which represents Hudson's Grill
International, Inc.

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, 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 OR PLAN OF OPERATIONS

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AND OTHER PORTIONS OF THIS REPORT CONTAIN
FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
BY THE FORWARD-LOOKING INFORMATION. FACTORS THAT MAY CAUSE SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, AVAILABILITY OF FINANCIAL
RESOURCES FOR LONG TERM NEEDS, PRODUCT DEMAND, MARKET ACCEPTANCE
AND OTHER FACTORS DISCUSSED ELSEWHERE IN THIS REPORT. THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE
IN THIS REPORT.

IN GENERAL.

For the year ended December 31,
2006, the Company had a loss before income taxes of ($89,076).
This compares to income before income taxes of $95,468 for the
year ended December 31, 2005. Thus, income before income taxes
decreased by $184,544. This was mostly due to an increase in operating
costs of $79,815 and a decrease in other income(expense) of $118,095.
Total revenues remained about the same in 2006 as in 2005, increasing
only $13,366.

Net loss for the year ended December
31, 2006, was ($58,455), which compares to net income of $248,602
for the year ended December 31, 2005. Net income, therefore, decreased
by $307,057, which was the result of the decrease of $184,544
in income before income taxes and a decrease in the recognition
of income tax benefits of $122,513.

REVENUES.

The franchise fees from franchisees
open for more than a year in 2006 dropped significantly when compared
to their performance in 2005, reflecting decreased demand for
matured operations, adverse weather, the closure of three franchises,
and the slowdown and ultimate closure in 2007 of two franchises.
Same store franchise fees, not including initial franchise fees,
decreased $59,708. This was mostly due to the closed franchise
at Simi Valley, California (a $17,134 decrease) and slowdowns
at De Pere, Wisconsin (decrease of $20,519) and Dubuque, Iowa
(decrease of $7,371). These decreases were offset by new franchise
fee income streams from three new franchises that resulted in
$65,987 in new franchise fees and initial franchise fees of $40,000.
Rent income of $50,000 is new in 2006. It reflects the rent received
from the lease of the Company's real estate purchased for the
Oshkosh franchise.

COSTS AND EXPENSES.

Operating costs in 2006 were $446,448;
this is an increase of $79,815 from 2005, when operating costs
were $366,633. Other income(expenses) decreased $118,095 in 2006.

The increase in operating costs
was mostly the result of a $60,940 increase in general and administrative
expenses. General and administrative expenses increased because
of an increase of $37,410 in executive stock compensation (a non-cash
expense that reflects the value of stock issued to officers and
directors); an increase of $13,512 incurred by the Company's subsidiary
to repair and maintain the real property leased to the Company's
Oshkosh franchise; an increase in legal and accounting expenses
of $15,980 incurred by the Company and its subsidiary, which was
due to increased work from Sarbanes-Oxley requirements and the
additional work involved with setting up the subsidiary and incorporating
it into the Company's accounting system; and an increase of $13,500
in salaries.

The decrease of other income(expense)
was due to writing off notes receivables and from interest expense
on the mortgage used to purchase the real estate for the Oshkosh
franchise. The write off of notes receivable was associated with
the closing of Hornblowers, a restaurant sold by the Company's
former parent whose note had been assigned to the Company, and
the closing of the Company's franchise in Appleton, Wisconsin,
to whom the Company had advanced money in exchange for higher
royalty fees. The bad debt from these write-offs was $48,777.
Interest expense increased $62,792, reflecting the mortgage interest
paid on the Oshkosh real estate purchased in 2006.

LIQUIDITY AND CAPITAL RESOURCES.

At December 31, 2006, the Company
had negative working capital of ($57,470) as compared to December
31, 2005, when the Company had working capital of $154,225. This
is largely the result of a $125,803 decrease in cash and an increase
of accounts payable of $67,220 that were used as a down payment
on the purchase of the Oshkosh real estate and to finish out the
real estate so that it could be operated by the Oshkosh franchise.

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. At the present time,
these areas are mostly stagnating, and they are prone to affects
from adverse weather. As long as this continues, the year to year
sales at the Company's franchisees will likely be stagnating,
too. The Company, however, expects revenues (and cash flow) to
increase in the future if and when it attracts new franchises.

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 the net effect from inflation will be minimal now and in
the future.

The Company does sustain some
seasonal volatility in royalty revenues because its franchisees
are geographically and climactically near each other, and weather
and leisure time affect those franchises. Nonetheless, it does
not have any material commitments for capital expenditures and
doesn't plan any in the foreseeable future. Nevertheless, compliance
with section 404 of the Sarbanes-Oxley Act will place an extra
burden on the Company's financial resources that may become significant,
especially in the first half of the year when audit work and legal
work are intense and in the future could have a material adverse
effect on the Company's business, prospects, financial condition
and results of operations.

APPLICATION OF SIGNIFICANT ACCOUNTING
POLICIES.

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires the use of management's judgment in making
estimates and assumptions that affect amounts reported in the
financial statements and the accompanying notes. Summarized below
are the accounting policies management believes are most critical
to the preparation of the Company's consolidated financial
statements.

Initial franchise fees are recognized
as revenue only after the Company has substantially performed
or satisfied all material services or conditions relating to the
sale of a new franchise. Continuing franchise fees are recognized
as revenue as the fees are earned and collection from the franchisee
is reasonably assured. The Company uses the installment method
of accounting in those cases when revenue is collectible over
an extended period. An allowance for doubtful accounts, if deemed
necessary, is recorded based upon management's assessment of a
franchisee's inability to make payment.

Income taxes are accounted for
under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes".
Under this accounting method, deferred tax assets and liabilities
are determined based on the difference between the financial statement
and tax bases of assets and liabilities using the enacted tax
rates in effect for the year in which the differences are expected
to affect taxable income. A valuation allowance is established
when necessary to reduce deferred tax assets to the amounts expected
to be realized. Except for this last year, the Company has experienced
consistent net income over the last several years, and recently
it has also experienced a stable level of royalty fees. In the
past, the Company believed that it was not probable that it would
utilize its deferred tax assets. Based on forecasts that also
show consistent net income in the near future, the Company believes
that it will be able to utilize all of its deferred tax assets.
The Company has recognized its deferred tax assets on its balance
sheet at December 31, 2005 and 2006, and consequently it has recognized
the corresponding income tax benefit on its 2005 and 2006 Statements
of Income.

The Company is subject to various
claims and contingencies arising out of the normal course of business.
Liabilities related to commitments and contingencies are recognized
when a loss is probable and reasonably estimable.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.

In September 2006, the SEC published
Staff Accounting Bulletin Topic 1N, Financial Statements - Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements
in Current Year Financial Statements ("SAB 108"). SAB
108 addresses how a company should quantify the effect of an error
on the financial statements. The SEC staff concludes in SAB 108
that a dual approach should be used to compute the amount of a
misstatement. Specifically, the amount should be computed using
both the "rollover" (current year income statement perspective)
and "iron curtain" (year-end balance sheet perspective)
methods. SAB 108 does not address how to evaluate materiality,
that is, how to assess the quantitative and qualitative effects
of a misstatement on the financial statements. The SEC staff's
views on evaluating the materiality of an error are covered in
SAB Topic 1M, Financial Statements - Materiality ("SAB 99").
Companies that will need to change their method for computing
the amount of an error must adopt the dual approach for fiscal
years ending after November 15, 2006, which is effective with
our year ended December 31, 2006. A change in the method of quantifying
errors represents a change in accounting policy. Under FAS 154,
changes in accounting policy generally are accounted for using
retrospective application; however, SAB 108 permits public companies
to report the cumulative effect of the new policy as an adjustment
to opening retained earnings. The adoption of SAB 108 did not
impact our consolidated financial position, results of operations
or cash flows for the year ended December 31, 2006.

In June 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
an Interpretation of FASB Statement No. 109, Accounting for Income
Taxes (FIN 48), to create a single model to address accounting
for uncertainty in tax positions. FIN 48 clarifies the accounting
for income taxes by prescribing a minimum recognition threshold
a tax position is required to meet before being recognized in
the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company
will adopt FIN 48 as of January 1, 2007, as required. The cumulative
effect of adopting FIN 48 will be recorded in retained earnings
and other accounts as applicable. The Company believes that the
adoption of FIN 48 will not have an affect on the Company's consolidated
financial position, results of operations or cash flows.

In March 2006, the Emerging Issues
Task Force ("EITF") reached a tentative consensus on
Issue No. 06-3, How Sales Taxes Collected from Customers and Remitted
to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation) ("EITF
06-3"). EITF 06-3 addresses income statement classification
and disclosure requirements of externally-imposed taxes on revenue-producing
transactions. EITF 06-3 is effective for periods beginning after
December 15, 2006. We do not expect the implementation of EITF
06-3 to have a material impact on our consolidated financial position,
results of operations or cash flows.

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value and requires
enhanced disclosures about fair value measurements. SFAS 157 requires
companies to disclose the fair value of their financial instruments
according to a fair value hierarchy, as defined and may require
companies to provide additional disclosures based on that hierarchy.
SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within
those fiscal years. The Company believes that the adoption of
SFAS 157 will not have an affect on the Company's financial position
and results of operations.

ITEM 7. FINANCIAL STATEMENTS

Attached following Item 13.

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

None.

ITEM 8A. CONTROLS AND PROCEDURES.

The Company's management, including the Company's principal
executive officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) as of
the year ended December 31, 2006, the period covered by the Annual
Report on Form 10-KSB. Based upon that evaluation, the Company's
principal executive officer has concluded that the disclosure
controls and procedures were effective as of December 31, 2006,
to provide reasonable assurance that material information relating
to the Company is made known to management including the CEO.

There were no changes in the Company's internal control over
financial reporting that occurred during the Company's last fiscal
quarter of 2006 that have materially affected, or are reasonable
likely to materially affect, the Company's internal control over
financial reporting.

ITEM 8B. OTHER INFORMATION.

None.

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 AND RELATED STOCKHOLDER
MATTERS

Incorporated by reference from
the Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated by reference from
the Proxy Statement.

ITEM 13. EXHIBITS

Exhibits 31.1 and 32.1 are attached.

ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES

Incorporated by reference from
the Proxy Statement.

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: April 4, 2007

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 | April 4, 2007
|ROBERT W. FISCHER | Director  | April 4, 2007
|ANTHONY B. DUNCAN | Director  | April 4, 2007





**PAGE**



**REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM**F-1

**CONSOLIDATED FINANCIAL
STATEMENTS**

Consolidated Balance Sheets at
December 31, 2006 and 2005 F-2

Consolidated Statements of Operations
for the Years Ended December 31, 2006 and 2005 F-3

Consolidated Statements of Stockholders'
Equity (Deficit) for the Years Ended

December 31, 2006 and 2005 F-4

Consolidated Statements of Cash
Flows for the Years Ended December 31, 2006 and 2005 F-5

**NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS**F-6



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Shareholders of

Hudson's Grill International,
Inc.

We have audited the accompanying
consolidated balance sheets of Hudson's Grill International, Inc.,
and its subsidiary as of December 31, 2006 and 2005, and the related
consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated
financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Hudson's
Grill International, Inc., and subsidiary at December 31, 2006
and 2005, and the consolidated results of their operations and
their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States
of America.

/s/Whitley Penn LLP

April 4, 2007

Dallas, Texas



| |                                        |                                                         | HUDSON'S GRILL INTERNATIONAL, INC.                                |   |             
| | -------------------------------------- | ------------------------------------------------------- | ----------------------------------------------------------------- | - | ------------
| |                                        |                                                         |                                                                   |   |             
| |                                        |                                                         | CONSOLIDATED BALANCE SHEETS                                       |   |             
| |                                        |                                                         |                                                                   |   |             
| |                                        |                                                         | ASSETS                                                           
| |                                        |                                                         |                                                                   |   | December 31,
| |                                        |                                                         |                                                                   |   |             
| |                                        |                                                         |                                                                   |   | 2006        
| | Current assets:                        |                                                         |                                                                   |   |             
| |                                        | Cash and cash equivalents                               |                                                                   | $ | -           
| |                                        | Accounts receivable, net                                |                                                                   |   | 39,300      
| |                                        | Other current assets                                    |                                                                   |   | 4,352       
| |                                        |                                                         | Total current assets                                              |   | 43,652      
| |                                        |                                                         |                                                                   |   |             
| | Property and equipment, at cost:       |                                                         |                                                                   |   |             
| |                                        | Office furniture and equipment                          |                                                                   |   | 25,637      
| |                                        | Restaurant furniture and equipment                      |                                                                   |   | 132,027     
| |                                        | Land                                                    |                                                                   |   | 457,200     
| |                                        | Building                                                |                                                                   |   | 657,800     
| |                                        | Accumulated depreciation                                |                                                                   |   | (40,461)    
| |                                        |                                                         | Property and equipment, net                                       |   | 1,232,203   
| |                                        |                                                         |                                                                   |   |             
| | Other assets:                          |                                                         |                                                                   |   |             
| |                                        | Deferred tax assets                                     |                                                                   |   | 183,754     
| |                                        | Loan origination costs, net                             |                                                                   |   | 23,825      
| |                                        |                                                         |                                                                   |   |             
| | Long-term note receivable, net         |                                                         |                                                                   |   | -           
| |                                        |                                                         |                                                                   |   |             
| |                                        |                                                         | TOTAL ASSETS                                                      | $ | 1,483,434   
| |                                        |                                                         |                                                                   |   |             
| |                                        |                                                         | LIABILITIES AND STOCKHOLDERS' EQUITY                             
| | Current liabilities:                   |                                                         |                                                                   |   |             
| |                                        | Accounts payable and accrued expenses                   |                                                                   | $ | 46,523      
| |                                        | Accounts payable to related parties                     |                                                                   |   | 25,828      
| |                                        | Current portion note payable                            |                                                                   |   | 19,569      
| |                                        | Current portion note payable, related party             |                                                                   |   | 9,202       
| |                                        |                                                         | Total current liabilities                                         |   | 101,122     
| |                                        |                                                         |                                                                   |   |             
| | Deferred revenue                       |                                                         |                                                                   |   | -           
| |                                        |                                                         |                                                                   |   |             
| | Long-term note payable                 |                                                         |                                                                   |   | 1,054,765   
| | Long-term note payable, related party  |                                                         |                                                                   |   | 36,873      
| |                                        |                                                         |                                                                   |   |             
| | Commitments and contingencies (Note 6) |                                                         |                                                                   |   | -           
| |                                        |                                                         |                                                                   |   |             
| | Stockholders' equity:                  |                                                         |                                                                   |   |             
| |                                        | Common stock, Class A, no par value, 100,000,000 shares |                                                                   |   |             
| |                                        |                                                         | authorized, 7,514,986 and 7,256,986 shares issued and outstanding |   |             
| |                                        |                                                         | at December 31, 2006 and 2005, respectively                       |   | 167,055     
| |                                        | Common stock, Class B, no par value, 15,000,000 shares  |                                                                   |   |             
| |                                        |                                                         | authorized, no shares issued and outstanding                      |   | -           
| |                                        | Retained earnings                                       |                                                                   |   | 123,619     
| |                                        |                                                         | Total stockholders' equity                                        |   | 290,674     
| |                                        |                                                         |                                                                   |   |             
| |                                        |                                                         | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                        | $ | 1,483,434   

| |                        |                               |                                   | HUDSON'S GRILL INTERNATIONAL, INC.    |   |                         |   |          
| | ---------------------- | ----------------------------- | --------------------------------- | ------------------------------------- | - | ----------------------- | - | ---------
| |                        |                               |                                   |                                       |   |                         |   |          
| |                        |                               |                                   | CONSOLIDATED STATEMENTS OF OPERATIONS |   |                         |   |          
| |                        |                               |                                   |                                       |   |                         |   |          
| |                        |                               |                                   |                                       |   | Year Ended December 31,
| |                        |                               |                                   |                                       |   |                         |   |          
| |                        |                               |                                   |                                       |   | 2006                    |   | 2005     
| |                        |                               |                                   |                                       |   |                         |   |          
| | Revenues               |                               |                                   |                                       |   |                         |   |          
| |                        | Franchise and royalty fees    |                                   |                                       | $ | 378,309                 | $ | 359,943  
| |                        | Initial franchise fees        |                                   |                                       |   | 40,000                  |   | 95,000   
| |                        | Rent income                   |                                   |                                       |   | 50,000                  |   | -        
| |                        |                               | Total revenues                    |                                       |   | 468,309                 |   | 454,943  
| |                        |                               |                                   |                                       |   |                         |   |          
| | Operating costs:       |                               |                                   |                                       |   |                         |   |          
| |                        | General and administrative    |                                   |                                       |   | 425,391                 |   | 364,451  
| |                        | Depreciation and amortization |                                   |                                       |   | 21,057                  |   | 2,182    
| |                        |                               | Total operating costs             |                                       |   | 446,448                 |   | 366,633  
| |                        |                               |                                   |                                       |   |                         |   |          
| |                        |                               | Income from operations            |                                       |   | 21,861                  |   | 88,310   
| |                        |                               |                                   |                                       |   |                         |   |          
| | Other income(expense): |                               |                                   |                                       |   |                         |   |          
| |                        | Settlement income             |                                   |                                       |   | -                       |   | 240      
| |                        | Note income                   |                                   |                                       |   | -                       |   | 3,459    
| |                        | Interest income               |                                   |                                       |   | 857                     |   | 3,684    
| |                        | Write-off note and bad debts  |                                   |                                       |   | (48,777)                |   | -        
| |                        | Interest expense              |                                   |                                       |   | (63,017)                |   | (225)    
| |                        |                               | Total other income (expense)      |                                       |   | (110,937)               |   | 7,158    
| |                        |                               |                                   |                                       |   |                         |   |          
| |                        |                               | Income (loss) before income taxes |                                       |   | (89,076)                |   | 95,468   
| |                        |                               |                                   |                                       |   |                         |   |          
| |                        | Income tax benefit            |                                   |                                       |   | 30,621                  |   | 153,134  
| |                        |                               |                                   |                                       |   |                         |   |          
| | Net income (loss)      |                               |                                   |                                       | $ | (58,455)                | $ | 248,602  
| |                        |                               |                                   |                                       |   |                         |   |          
| | Net income per share-  |                               |                                   |                                       |   |                         |   |          
| |                        | basic and diluted             |                                   |                                       | $ | (0.01)                  | $ | 0.03     
| |                        |                               |                                   |                                       |   |                         |   |          
| | Weighted average       |                               |                                   |                                       |   |                         |   |          
| |                        | outstanding shares-           |                                   |                                       |   |                         |   |          
| |                        | basic                         |                                   |                                       |   | 7,449,068               |   | 7,256,986
| |                        |                               |                                   |                                       |   |                         |   |          
| |                        | diluted                       |                                   |                                       |   | 7,449,068               |   | 8,482,894







|                                     |  | Common Stock |  | Retained Earnings |  |           
|------------------------------------ |  | ------------ |  | ----------------- |  | ----------
|                                     |  | Shares       |  | Amount            |  | (Deficit) 
|                                     |  |              |  |                   |  |           
|**BALANCE,** December 31, 2004       |  | 7,256,986    |  | $ 142,545         |  | $ (66,528)
|                                     |  |              |  |                   |  |           
|Net income                           |  | -            |  | -                 |  | 248,602   
|                                     |  |              |  |                   |  |           
|**BALANCE,** December 31, 2005       |  | 7,256,986    |  | $ 142,545         |  | $ 182,074 
|                                     |  |              |  |                   |  |           
|Stock issuance to Company executives |  | 258,000      |  | 24,510            |  |           
|Net loss                             |  | -            |  | -                 |  | (58,455)  
|                                     |  |              |  |                   |  |           
|**BALANCE,** December 31, 2006       |  | 7,514,986    |  | $ 167,055         |  | $ 123,619 
|                                     |  |              |  |                   |  |           



| |                                       |                                                        |                                             | HUDSON'S GRILL INTERNATIONAL, INC.           |                                       |                                |  |                         | 
| | ------------------------------------- | ------------------------------------------------------ | ------------------------------------------- | -------------------------------------------- | ------------------------------------- | ------------------------------ |  | ----------------------- | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| |                                       |                                                        |                                             | CONSOLIDATED STATEMENTS OF CASH FLOWS        |                                       |                               
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  | Year Ended December 31,
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  | 2006                    | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| | Cash Flows From Operating Activities: |                                                        |                                             |                                              |                                       |                                |  |                         | 
| |                                       | Net income (loss)                                      |                                             |                                              |                                       |                                |  | $ (58,455)              | 
| |                                       | Adjustments to reconcile net income (loss) to net cash |                                             |                                              |                                       |                                |  |                         | 
| |                                       |                                                        | provided by (used in) operating activities: |                                              |                                       |                                |  |                         | 
| |                                       |                                                        |                                             | Amortization of loan origination costs       |                                       |                                |  | 612                     | 
| |                                       |                                                        |                                             | Depreciation                                 |                                       |                                |  | 20,445                  | 
| |                                       |                                                        |                                             | Amortization of deferred revenue             |                                       |                                |  | (14,441)                | 
| |                                       |                                                        |                                             | Stock based compensation                     |                                       |                                |  | 37,410                  | 
| |                                       |                                                        |                                             | Write-off long term note receivable          |                                       |                                |  | 26,081                  | 
| |                                       |                                                        |                                             | Deferred tax assets                          |                                       |                                |  | (30,621)                | 
| |                                       |                                                        |                                             | Changes in operating assets and liabilities: |                                       |                                |  |                         | 
| |                                       |                                                        |                                             |                                              | Accounts receivable                   |                                |  | (12,334)                | 
| |                                       |                                                        |                                             |                                              | Other current assets                  |                                |  | 2,235                   | 
| |                                       |                                                        |                                             |                                              | Other assets                          |                                |  | (24,437)                | 
| |                                       |                                                        |                                             |                                              | Accounts payable and accrued expenses |                                |  | 28,492                  | 
| |                                       |                                                        |                                             |                                              | Accounts payable to related parties   |                                |  | 25,828                  | 
| |                                       |                                                        |                                             |                                              | Deferred franchise fees               |                                |  | -                       | 
| |                                       |                                                        |                                             |                                              |                                       | Net cash provided by           |  |                         | 
| |                                       |                                                        |                                             |                                              |                                       | operating activities           |  | 815                     | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| | Cash Flows From Investing Activities: |                                                        |                                             |                                              |                                       |                                |  |                         | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| |                                       | Repayment of notes receivable                          |                                             |                                              |                                       |                                |  | -                       | 
| |                                       | Purchase of property and equipment                     |                                             |                                              |                                       |                                |  | (1,247,027)             | 
| |                                       |                                                        |                                             |                                              |                                       | Net cash provided by           |  |                         | 
| |                                       |                                                        |                                             |                                              |                                       | (used in) investing activities |  | (1,247,027)             | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| | Cash Flows From Financing Activities: |                                                        |                                             |                                              |                                       |                                |  |                         | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| |                                       | Proceeds from issuance of notes payable                |                                             |                                              |                                       |                                |  | 1,125,000               | 
| |                                       | Repayment of line of credit and notes payable          |                                             |                                              |                                       |                                |  | (4,591)                 | 
| |                                       |                                                        |                                             |                                              |                                       | Net cash provided by           |  |                         | 
| |                                       |                                                        |                                             |                                              |                                       | (used in) financing activities |  | 1,120,409               | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| | Net Decrease In Cash                  |                                                        |                                             |                                              |                                       |                                |  | (125,803)               | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| | Cash, beginning of year               |                                                        |                                             |                                              |                                       |                                |  | 125,803                 | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| | Cash, end of year                     |                                                        |                                             |                                              |                                       |                                |  | $ 0                     | 
| |                                       |                                                        |                                             |                                              |                                       |                                |  |                         | 
| | Supplemental Disclosures:             |                                                        |                                             |                                              |                                       |                                |  |                         | 
| |                                       | Income taxes paid                                      |                                             |                                              |                                       |                                |  | $ 0                     | 
| |                                       | Interest paid                                          |                                             |                                              |                                       |                                |  | $ 63,017                | 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**HUDSON'S GRILL INTERNATIONAL, INC.**

**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. As of December 31, 2006, the Company provides
management and support services to twelve franchised restaurants
currently located in Texas, California, Michigan, Wisconsin and
Iowa.

**2. Summary of Significant Accounting Policies**

A summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying financial
statements follows:

*Basis of Accounting*

The accounts are maintained and the financial statements have
been prepared using the accrual basis of accounting in accordance
with accounting principles generally accepted in the United States
of America.

*Principles of Consolidation*

The consolidated financial statements include the accounts
of Hudson's Grill International, Inc., and its subsidiary. Significant
intercompany accounts and transactions have been eliminated in
consolidation.

*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 and the recording
of deferred tax assets.

*Cash and Cash Equivalents*

The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
At December 31, 2006 and 2005, the Company had no such investments.
The Company maintains deposits primarily in one financial institution,
which may at times exceed amounts covered by insurance provided
by the U.S. Federal Deposit Insurance Corporation ("FDIC").
At December 31, 2006 and 2005, the uninsured portion of these
deposits approximated $0 and $26,000, respectively. The Company
has not incurred any losses related to its cash on deposit with
financial institutions.

*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, but 39 years
for buildings). Depreciation expense was $20,445 and $2,182 for
the years ended December 31, 2006 and 2005, respectively. Maintenance
and repairs are expensed as incurred.

*Long-Term Note Receivable*

Long-term note receivable represents a promissory note received
from the Company's former Parent in connection with the capitalization
of the Company (See Note 4). A deferred gain was carried over
to the Company at the time it received the promissory note, which
the former Parent had received when it sold Hornblowers, a restaurant
that was not modeled after the Hudson's Grill concept. The note
receivable is reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the note
receivable may not be recoverable. Recoverability of notes receivable
is determined based upon the Company's assessment as to whether
the maker of the note has the ability to make the required payments.
If notes receivable are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying
value exceeds management's estimated amount to be collected. No
impairment charge was recorded in 2005; however, the note was
considered totally impaired in 2006 when the owner of the Hornblowers
restaurant was evicted and the restaurant was closed. The note
was carried net of the deferred gain associated with it. The note
was carried on the Company's books at $0 and $76,200 in 2006 and
2005, respectively. The deferred gain of $50,120 was netted against
the carrying value in 2005. Due to the closure of the restaurant
in 2006, the note's net value of $26,081 was written off in 2006
as other expense.

*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. Rent income is recognized as revenue
according to Note 9.

*Fair Value of Financial Instruments*

In accordance with the reporting requirements of Statement
of Financial Accounting Standard ("SFAS") No. 107, *Disclosures
About Fair Value of Financial Instruments*, the Company calculates
the fair value of its assets and liabilities which qualify as
financial instruments under this statement and includes this additional
information in the notes to financial statements when the fair
value is different than the carrying value of these financial
instruments. The estimated fair value of accounts receivable,
notes receivable, accounts payable, loan payable and accrued liabilities
approximate their carrying amounts due to the relatively short
maturity of these instruments. None of these instruments are held
for trading purposes.

*Stock-Based Compensation*

Until December 31, 2005, the Company
president's compensation included the granting of stock options.
In 2005 the president was granted 18,000 stock options per month.
The Company also granted 10,000 stock options per month in 2005
to each of the two non-officer directors of the Company, as compensation
for services as directors. Additionally, beginning September 2005,
it granted 5,000 stock options per month to the Company's secretary.
All options were fully vested when granted and expire in seven
years. The Company ceased its stock option plan on December 31,
2005. Beginning January 1, 2006, the Company adopted a stock plan
in which stock will be issued on January 2nd and July 1st of each
year to its officers and directors. Each semi-annual grant will
consist of the following amount of shares of common stock being
issued: (1) 54,000 to the president; (2) 15,000 to the secretary;
and (3) 30,000 to each of the non-officer directors. The first
grant occurred January 17, 2006, and a second grant occurred on
July 12, 2006, resulting in $37,410 of additional general and
administrative expenses in 2006. Effective April 1, 2007, the
Company has suspended future grants.

The Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 123R,
*Share-Based Payment*, as of January 1, 2006, using the
modified prospective application method. This statement requires
the recognition of compensation expense when an entity obtains
employee services in exchange for stock-based payment transactions.

Prior to January 1, 2006, the
Company accounted for stock options granted to directors and employees
using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25, *Accounting for Stock Issued to Employees*,
("APB No. 25") and related interpretations. APB No.
25 required 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 period ended December 31, 2005. Accordingly,
no compensation cost was recognized in that period in 2005 for
its employee stock options in the accompanying consolidated financial
statements. The Company had adopted the disclosure provisions
of Statement of Financial Accounting Standard ("SFAS")
No. 123, *Accounting for Stock-Based Compensation*, ("SFAS
123") and SFAS No. 148, *Accounting for Stock-Based Compensation
- Transition and Disclosure - an Amendment of FASB Statement No.
123,*which required the Company to provide pro forma information
regarding net income and net income per share as if compensation
cost for the Company's stock options had been determined under
the fair value method prescribed by SFAS No. 123.

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 year ended December 31, 2005, on a pro
forma basis, would have been as follows:



|                                                                          | 2005       | 
|------------------------------------------------------------------------- | ---------- | 
|                                                                          |            | 
|Net income: as reported                                                   | $ 248,602  | 
|Add: Stock-based compensation expense included in reported net
    income | -          | 
|Deduct: Stock-based compensation determined under the                     |            | 
|fair value method                                                         | $ (29,598) | 
|Net income - pro forma                                                    | $ 219,004  | 
|                                                                          |            | 
|Net income per share:                                                     |            | 
|as reported - basic and diluted                                           | $ 0.03     | 
|Pro forma - basic and diluted                                             | $ 0.03     | 

The fair values of stock options granted during fiscal year
2005 were determined using the Black-Scholes option pricing model,
and using the following weighted average assumptions:



|               | 2005    | 
|-------------- | ------- | 
|               |         | 
|Volatility     | 152%    | 
|Interest rate  | 4.29%   | 
|Dividend yield | -%      | 
|Expected life  | 7 years | 

*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.

*Earnings Per Share*

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 antidilutive effect.

The following table sets forth the computation of basic and
diluted earnings per share:



|                                           | Year Ended December 31,
|------------------------------------------ | -----------------------
|                                           | 2006                   
|Numerator:                                 |                        
|Net income(loss)                           | $ (58,455)             
|                                           |                        
|Denominator:                               |                        
|Weighted average common shares outstanding | 7,449,068              
|Effect of dilutive stock options           | ----                   
|                                           |                        
|Dilutive weighted average common shares    | 7,449,068              
|                                           |                        
|Basic earnings(loss) per share             | $ (0.01)               
|Diluted earnings(loss) per share           | $ (0.01)               

At December 31, 2006 and 2005, the Company had 4,645,000 and
2,697,000 stock options that were not included in the dilutive
earnings per share calculation because the effect would have been
anti-dilutive. Such stock options were excluded in 2005 because
the exercise price of the stock options was greater than the average
market price of the Company's common stock in the applicable period.
Options were not included in the dilutive earnings per share calculation
for 2006 because the Company had a net loss in 2006.

*Concentrations of Credit Risk*

The Company's former parent sold a restaurant and took a promissory
note as consideration (see Note 4). The note was transferred to
the Company in 1997. The gain from the sale had been deferred
by the parent and was carried over with the note when the note
was transferred. The deferred gain was recognized on an installment
basis as the cash was received. At December 31, 2005, the balance
outstanding under the note receivable and the related deferred
gain were $76,200 and $50,120, respectively, and the note receivable
is shown on the balance sheet, net of the deferred gain. This
note went into default in 2006, and when the maker was closed,
the net balance of $26,081 was written off.

In the normal course of business, the Company extends unsecured
credit to franchisees, which are reflected on the Company's consolidated
balance sheets as accounts receivable. The Company's 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.
For the years ended December 31, 2006 and 2005, the Company had
bad debt expenses of $18,137 and $1,783 respectively.

*Recent Accounting Pronouncements*

In September 2006, the SEC published Staff Accounting Bulletin
Topic 1N, Financial Statements - Considering the Effects of Prior
Year Misstatements When Quantifying Misstatements in Current Year
Financial Statements ("SAB 108"). SAB 108 addresses
how a company should quantify the effect of an error on the financial
statements. The SEC staff concludes in SAB 108 that a dual approach
should be used to compute the amount of a misstatement. Specifically,
the amount should be computed using both the "rollover"
(current year income statement perspective) and "iron curtain"
(year-end balance sheet perspective) methods. SAB 108 does not
address how to evaluate materiality, that is, how to assess the
quantitative and qualitative effects of a misstatement on the
financial statements. The SEC staff's views on evaluating the
materiality of an error are covered in SAB Topic 1M, Financial
Statements - Materiality ("SAB 99"). Companies that
will need to change their method for computing the amount of an
error must adopt the dual approach for fiscal years ending after
November 15, 2006, which is effective with our year ended December
31, 2006. A change in the method of quantifying errors represents
a change in accounting policy. Under FAS 154, changes in accounting
policy generally are accounted for using retrospective application;
however, SAB 108 permits public companies to report the cumulative
effect of the new policy as an adjustment to opening retained
earnings. The adoption of SAB 108 did not impact our consolidated
financial position, results of operations or cash flows for the
year ended December 31, 2006.

In June 2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109, Accounting for Income Taxes (FIN 48), to create a single
model to address accounting for uncertainty in tax positions.
FIN 48 clarifies the accounting for income taxes by prescribing
a minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements. FIN
48 also provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure
and transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company will adopt FIN 48 as of January
1, 2007, as required. The cumulative effect of adopting FIN 48
will be recorded in retained earnings and other accounts as applicable.
The Company believes that the adoption of FIN 48 will not have
an affect on the Company's consolidated financial position, results
of operations or cash flows.

In March 2006, the Emerging Issues Task Force ("EITF")
reached a tentative consensus on Issue No. 06-3, How Sales Taxes
Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement (That Is, Gross Versus
Net Presentation) ("EITF 06-3"). EITF 06-3 addresses
income statement classification and disclosure requirements of
externally-imposed taxes on revenue-producing transactions. EITF
06-3 is effective for periods beginning after December 15, 2006.
We do not expect the implementation of EITF 06-3 to have a material
impact on our consolidated financial position, results of operations
or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework
for measuring fair value and requires enhanced disclosures about
fair value measurements. SFAS 157 requires companies to disclose
the fair value of their financial instruments according to a fair
value hierarchy, as defined and may require companies to provide
additional disclosures based on that hierarchy. SFAS 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years.
The Company believes that the adoption of SFAS 157 will not have
an affect on the Company's financial position and results of operations.

**3. Franchise Activities**

Under the terms of the Company's 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, 2006 and 2005, the Company
received no contribution toward the marketing fund nor has the
marketing fund been maintained.

One franchisee agreed to pay an additional fee in return for
a reduced royalty fee. The Company deferred its recognition of
the additional fee amount, and was amortizing it into income through
2014. That franchisee closed on November 29, 2006. The unamortized
additional fees were written off at that time. Unamortized additional
fees at December 31, 2006 and 2005, of $0 and $14,441, respectively,
were included in deferred revenue.

During the year ended December 31, 2004, the Company added
two new franchisees, one in Wisconsin and one in Iowa. Each franchisee
paid an initial franchise fee in 2004 of $35,000 in connection
with its restaurant, one of which opened in February 2005, and
the other of which opened in May 2005. These two fees were recognized
in 2005. A third franchisee signed a franchise agreement in 2005
and opened for business in 2005, and its initial fees were recognized
in 2005. Two franchises opened in 2006; one was a second unit
for an existing franchisee, and the other was a third franchise.
Thus, the franchisees paid reduced rates according to the Company's
agreements with them. The total initial fees paid in 2006 were
$40,000. Franchising revenues consisted of the following for the
years ended December 31:



|                                        | 2006      | 2005     
|--------------------------------------- | --------- | ---------
|                                        |           |          
|Initial franchise fees                  | $ 40,000  | $ 95,000 
|Amortization of deferred franchise fees | 14,441    | 2,357    
|Royalty fees                            | 363,868   | 357,586  
|Total franchise revenue                 | $ 418,309 | $ 454,943

**4. Debt**

Loans payable consisted of the following at December 31:

|                                                                                                                                                         | 2006        | 2005
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ----
|Long term loan payable to a financial institution; interest at
    prime plus 1.5%, secured by real property; see Note 9 for details
    about the loan  | $ 1,074,334 | $ - 
|Long term loan payable to a related party; interest at prime
    plus 1%, secured by personal property; see Notes 8 and 9 for
    details about the loan | $ 46,075    | $ - 

Principal payments on these two loans are scheduled as follows.

|Long term loan payable, secured by real property            
|------------------------------------------------------------
|Year                                                        
|2007                                                        
|2008                                                        
|2009                                                        
|2010                                                        
|2011                                                        
|Remainder of term, estimated based on current interest rates
|Total                                                       



|Long term loan payable to related party,

    secured by personal property
|--------------------------------------------------------------------------
|Year                                                                      
|2007                                                                      
|2008                                                                      
|Total                                                                     

**5. Commitments and Contingencies**

The Company leases office space under a month-to-month lease.
Rent and utility expense totaled $19,857 and $17,600 for the years
ended December 31, 2006 and 2005, respectively. The Company's
aggregate lease commitment is one month's rent and utilities,
which averages $1,500 (See Note 9). The Company also has a long-term
agreement with a consultant that obligates the Company to pay
the consultant $1,200 per month until October 2008. A copier lease
commits the Company to make payments of $141 until August 2007.

**6. Income Taxes**

There was no provision for income taxes in the years ended
December 31, 2006 and 2005, due to the carryforward of net losses
("NOL") incurred in prior years. The Company had no
material deferred tax liabilities at December 31, 2006.

Deferred taxes consisted of the following at December 31:



|                            | 2006      | 2005     
|--------------------------- | --------- | ---------
|Deferred tax assets:        |           |          
|Prior Year Deferred revenue | $ -       | $ 22,000 
|Net operating loss          | 184,000   | 131,000  
|Total deferred tax assets   | 184,000   | 153,000  
|Deferred tax liability      | -         | -        
|Valuation allowance         | -         | -        
|Net deferred taxes          | $ 184,000 | $ 153,000

The net change in the valuation allowance for deferred tax
assets was no increase or decrease in 2006 and a decrease of $139,000
in 2005. Except for 2006, the Company has experienced consistent
net income over the last several years, and recently it has also
experienced consistent growth in royalty fees. In the past, the
Company believed that it might not be able to utilize its deferred
tax assets. Based on forecasts that also show consistent net income
in the near future, the Company now believes that it will be able
to utilize all of its deferred tax assets. Thus, it determined
in 2005 that a valuation allowance against its deferred tax assets
was no longer needed. It now recognizes its deferred tax assets
on its balance sheet, and consequently it has recognized the corresponding
income tax benefit on its 2006 Statement of Operations.

Income taxes payable for the year ended December 31, 2006 and
2005, were reduced by approximately $0 and $4,000, respectively,
through the utilization of NOL carryforwards in those years. At
December 31, 2006, NOL carryforwards of approximately $540,000
were available to offset future taxable income and expire through
2025.

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



|                                     | 2006 | 2005  
|------------------------------------ | ---- | ------
|                                     |      |       
|Federal income tax at statutory rate | 34%  | 34%   
|Reversal of valuation allowance      | -    | (194%)
|Total effective income tax rate      | 34%  | (160%)

**7. Stock Options**

The Company president's compensation is established at the
sole discretion of the board of directors and included the granting
of stock options. The Company also granted stock options to each
of its two directors as compensation for their services as directors
and also began granting stock options in June 2005 to the Company's
secretary. During the year ended December 31, 2005, stock options
were granted monthly and a total of 216,000, 240,000 and 35,000
stock options were granted to the president, directors and secretary,
respectively. Effective January 1, 2006, the Company discontinued
the grant of stock options.

All options granted during 2005 vested immediately, were issued
with an exercise price of $0.005 above the last bid price 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 option activity:



|                                 | Options   | Weighted Average Exercise Price
|-------------------------------- | --------- | -------------------------------
|                                 |           |                                
|Outstanding at December 31, 2004 | 4,274,000 | $ 0.07                         
|Granted                          | 491,000   | 0.07                           
|Cancelled                        | -         | 0.00                           
|Outstanding at December 31, 2005 | 4,765,000 | $ 0.07                         
|Granted                          | -         | 0.00                           
|Cancelled                        | 120,000   | 0.10                           
|Outstanding at December 31, 2006 | 4,645,000 | $ 0.07                         

The weighted average fair value of stock options granted during
2005 was $0.06 on the date of grant using the Black-Scholes option
pricing model.

The following table summarizes information about stock options
outstanding at December 31, 2006:



|                                            | Options Outstanding |                          | Options Exercisable                
|------------------------------------------- | ------------------- | ------------------------ | -----------------------------------
|Weighted Average Remaining Contractual Life | Number Outstanding  | Range of Exercise Prices | Weighted Average
    Exercise Price
|                                            |                     |                          |                                    
|1 year                                      | 2,210,000           | $0.10                    | $0.10                              
|3 years                                     | 1,488,000           | $0.01-0.035              | $0.02                              
|4.5 years                                   | 456,000             | $0.025-0.095             | $0.05                              
|5.5 years                                   | 491,000             | $0.045-0.085             | $0.07                              
|                                            | 4,645,000           |                          | $0.07                              

The intrinsic value of exercisable and outstanding options
at December 21, 2006, was $161,070.

**8. 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, 2006 and 2005, the cost of these services to the Company were
$61,005 and $39,500, respectively. Related amounts included in
accounts payable to related parties at December 31, 2006 and 2005,
were approximately $26,000 and $0, respectively.

In 2006, the Company borrowed money from a director to assist
in the purchase of real property. The initial loan was for $50,000,
and bears interest at a rate of prime plus 1%. The long term balance
of the note at December 31, 2006 is $36,873, and the current portion
is $9,202. The note matures on May 23, 2008, with a balloon payment
of the remaining balance.

The Company leases its corporate office space from a firm in
which the president of the Company is a partner. Rental and utility
costs for the office space was approximately $19,900 and $17,600
for the years ended December 31, 2006 and 2005, respectively.

One of the directors of the Company is also a franchisee of
one restaurant. As part of an agreement with the Company, made
prior to the formation of the Company and prior to the director
joining the board of directors of the Company, the restaurant
pays no monthly royalty fee. Correspondingly, the Company has
no obligation to provide any services to this restaurant. Other
than being released from paying royalty fees, the restaurant must
comply with the Company's standard franchise agreement.

The Company also paid certain expenses on behalf of HGAI, its
former parent. These expenses in 2005 included tax preparation
costs of $1,900; California franchise taxes of $800; and estimated
legal expenses of $2,412.

**9. Building and Land**

On June 9, 2006, HGI-Oshkosh LLC
("HGIO"), a Texas limited liability company and wholly
owned subsidiary of the Company, purchased a building and land
in Oshkosh, Wisconsin, for $1,115,000. It also purchased furniture
and equipment for $114,927, which was used to finish out the building
as a Hudson's Grill. HGIO borrowed $1,075,000 on a twenty year
note from the Upper Peninsula State Bank in Escanaba, Michigan,
and $50,000 from the Company, to buy the building, land, furniture
and equipment; the Company borrowed the $50,000 that it loaned
to HGIO from Border City Ale House, Inc. ("BCAH"), a
company owned by Anthony B. Duncan, one of the Company's directors.

The Upper Peninsula State Bank
note has a variable interest rate of 1.5% over the prime rate
as quoted by the *Wall Street Journal*; the monthly payments
are $10,178. The BCAH note has a variable interest rate of 1.0%
over the prime rate as quoted by the *Wall Street Journal*;
the first twenty-two monthly payments are $1,090. The unpaid balance
of the BCAH note is due on May 23, 2008. HGIO leased the building,
land, furniture and equipment to Service Solutions of Oshkosh,
Inc., a franchisee of the Company.

The lease is for twenty years
and is a triple net lease; the rent escalates over time and also
provides for percentage rent. The monthly rent in 2006 is $10,000.
The rent increases 6% every three years. The Company recognized
rental income according to the terms of the lease, and not on
a straight line basis in order to reflect the actual rents it
receives; this is due to the inherent risks in the franchising
industry and uncertainty regarding the lives of franchises. Rent
income is scheduled as follows.



|Oshkosh, Wisconsin Lease
|------------------------
|Year                    
|2007                    
|2008                    
|2009                    
|2010                    
|2011                    
|Remainder of term       
|Total                   

**10. Concentration of Revenue Risk**

The Wausau, Marshfield and Plover, Wisconsin, franchisees are
affiliated; these three franchisees together account for 31% and
23% of franchise fees and 30% and 36% of accounts receivable for
2006 and 2005, respectively.

**11. Subsequent Events**

In February 2007 the Company was no longer able to contact
its franchisee in Santa Maria , California, and now presumes that
the franchise is closed. The Company's franchisee in El Paso closed
one of its restaurants, but this will not impact the Company's
revenues since the Texas franchisee does not pay royalty fees
to the Company.