**SECURITIES AND EXCHANGE COMMISSION**

Washington, D.C. 20549

**FORM 10-KSB**

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

For the transition period from                 to



Commission file number 333-94797

**HUDSON'S GRILL**

**INTERNATIONAL, INC**.



(Name of small business issuer in its charter)

Texas

(State or other jurisdiction of incorporation)

75-2738727

(IRS Employer Identification Number)

16970 Dallas Parkway, Suite 402, Dallas, Texas  75248

(Address of Principal Executive Offices)

Issuer's telephone number, including area code:

(972) 931-9237

Issuer's Internet Address:

www.hudsonsgrill.com

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

None                                                     None

(Title of each class)   (Name of each exchange on which registered)

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

Common Stock

(Title of each class)



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

Yes   X   No

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

[ ]

State issuer's revenues for its most recent fiscal year.

$454,943

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, 2006, was $.07 per share.  The issuer has 7,256,986
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 $507,989.

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

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

Check whether the issuer has filed all documents and reports required to be filed by
Section 12, 13 or 15 (d) of the Exchange Act after the distribution of securities under a
plan confirmed by a court.

Yes        No

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

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

7,256,986

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May
23, 2006, are incorporated by reference into Parts II and III.

PART I

ITEM 1. BUSINESS

Hudson's Grill International, Inc. (the "Company" or "Hudson's" or "Hudson's Grill"),
was incorporated on October 30, 1997, in Texas, and 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.  On December 31, 2005, there were twelve Hudson's
Grill restaurants; one started construction in January 2006, and was opened March 6, 2006;
all thirteen were franchised. Prior to December 31, 2005, the most recent franchise was
opened in July 2005, in Appleton, Wisconsin.  The Company's major focus is to expand
the Hudson's Grill operations through franchising instead of through ownership.  The
Hudson's Grill restaurants are currently operating in California, Michigan, Wisconsin,
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.

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 monitors the Company's franchisees in
the Upper Midwest.

In March 2005, the Company signed a franchise agreement for a new Hudson's Grill to be
built in Appleton, Wisconsin.  The franchisee, which is 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.

In April 2003, the Company held a meeting of its franchisees; the Company had not held
such meeting for several years.  This was held in Las Vegas.  About half of the franchisees
attended, as well as some interested prospective franchisees.  Common advertising and
specialized advertising was shown to the franchisees.

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.

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 increase efforts to add franchisees and has entered into an
agreement with Mr.  Jim Stabile in an effort to encourage the sales of more franchises in
the Upper Midwest.  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.  Furthermore, the Company may purchase real estate to provide
locations to lease to new franchisees.  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, 2005, the Company had twelve
franchised restaurants that were in operation, and one began construction in January 2006.
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 near enough to each other.

EMPLOYEES.

At December 31, 2005, 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 has been granted 5,000 monthly stock options beginning June 2005.
Her options are 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 will receive 15,000 shares of the Company's
stock each six months.  She was paid $46,950 in 2005.  The President was paid $37,500 in
2005; 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 will receive 54,000 shares of the Company's stock each six months instead of
stock options.

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. PROPERTIES

At December 31, 2005, 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.  The
Company's 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  It is
considering purchasing real estate, which it would then lease to franchisees.

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, 2006, 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, 2004    | High | Low
|-------------------------------------- | ---- | ---
|First Quarter ended March
31, 2004     | .13  | .03
|Second Quarter ended June
30, 2004     | .08  | .04
|Third Quarter ended
September 30, 2004 | .07  | .02
|Fourth Quarter ended
December 31, 2004 | .06  | .02

|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

As of March 1, 2006, the closing price of the Common Stock was $.07.  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

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, 2005, the Company had income before income taxes of
$95,468.  This compares to income before income taxes of $43,462 for the year ended
December 31, 2004.  Income before income taxes increased by $52,006.  This was mostly
due to an increase in revenues of $175,945, which was partially offset by an increase in
general and administrative expenses of $115,773 and a decrease in other income of $6,976.
The increase in revenues is a combination of several initial franchise fees and a greater
number of franchise operations on line paying full royalty fees.  The increase in general
and administrative expenses is largely a result of a substantial increase in consulting
expenses incurred for the Company's new Midwest regional supervisor and an increase in
training expenses incurred in the opening of several restaurants.  Net income for the year
ended December 31, 2005, was $248,602, which compares to $43,462 for the year ended
December 31, 2004.  Net income increased by $205,140, which was the result of an
increase of $52,006 in income before incomes taxes and the recognition of an income tax
benefit of $153,134 coming from the Company's recognition of deferred tax assets in
2005, which includes the removal of a valuation allowance of $139,000 that was recorded
as of December 31, 2004.

REVENUES.

The performance of franchisees open for more than a year in 2005 remained flat when
compared to their performance in 2004, reflecting flat demand for matured operations.
The increase of $175,945 in the Company's revenues, however, was largely created by
three new franchises that opened in 2005.  The three -- De Pere, Wisconsin, Dubuque,
Iowa, and Appleton, Wisconsin -- created new revenues of $194,226.  The increase in new
revenue was offset by a decrease of $12,828 in income from the buy down of royalty fees
by the Georgas Group in the early 1990's and the failure to collect any fees from the San
Luis Obispo, California franchise (a decrease of $5,683), which franchisee is having
financial difficulties.

COSTS AND EXPENSES.

Operating costs in 2005 were $366,633; this is an increase of $116,963 from 2004, when
operating costs were $249,670.  The increase is mostly due to higher salaries ($8,200);
higher legal and accounting expenses ($6,051); group insurance ($7,011); training for new
restaurants and travel ($36,243); consulting fees for the new Midwest regional supervisor
($43,341); and directors fees ($7,500).

Other income decreased by $6,976 in 2005.  This was mostly due to the completion in
2005 of the payment of a settlement with a former franchisee, which resulted in a decrease
in settlement income of $3,261, and a decrease in note income of $3,820.

LIQUIDITY AND CAPITAL RESOURCES.

At December 31, 2005, the Company had working capital of $154,225 as compared to
December 31, 2004, when the Company had working capital of $59,741.  This is largely
the result of a $97,773 decrease in current liabilities that were paid off from net income
and the recognition of non-refundable franchise fees with the opening of several
franchisees' restaurants in Spring 2005.

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.  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 with the opening of new
franchises.

In 2005 the Company completed paying off almost all of its debts, and thus, the Company
plans to retain the cash flow from profits.  The Company's cash balance of $125,803 at
December 31, 2005, was $3,565 less than at the year ended December 31, 2004.  The
Company will continue to increase its cash reserves in order to withstand any substantial,
future downturn in the U.S. economy and to provide funds to invest in new concepts,
restaurant buildings, and new franchisees.

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 not sustain much seasonal volatility in royalty revenues since its
franchisees are dispersed geographically and climactically.  Additionally, it does not have
any material commitments for capital expenditures and doesn't plan any in the foreseeable
future. 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 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 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.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 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 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.  The Company has recognized its deferred tax assets on its balance sheet
at December 31, 2005, and consequently it has recognized the corresponding income tax
benefit on its 2005 Statement 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.

The Company's significant accounting policies are more fully described in Note 2 to the
financial statements that are attached following Item 13.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
123R, "Share-Based Payment," which is a revision of SFAS 123 "Accounting for Stock-Based Compensation" and supersedes APB Opinion 25, "Accounting for Stock Issued to
Employees". SFAS 123R focuses primarily on share-based payments for employee
services, requiring these payments to be recorded using a fair-value-based method. The use
of APB 25's intrinsic value method of accounting for employee stock options has been
eliminated. As a result, the fair value of stock options granted to employees in the future
will be required to be expensed. The impact on the results of operations of the Company
will be dependent on the number of options granted and the fair value of those options. For
the Company, SFAS 123R will be effective in 2006.  In January 2006 the Company's
directors terminated the stock option plans for the directors and officers.  In its place, the
directors implemented a new plan that grants stock semi-annually on January 2nd and July
1st of each year to the directors and officers.  At each semi-annual distribution: (1) the
president will receive 54,000 shares; (2) the secretary, 15,000; and (3) the non-officer
directors, 30,000 shares.

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, 2005, 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,
2005, 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 2005 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

Incorporated by reference from the Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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: March 31, 2006

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

|Signature         | Title     | Date          
|----------------- | --------- | --------------
|DAVID L. OSBORN   | President | March 31, 2006
|ROBERT W. FISCHER | Director  | March 31, 2006
|ANTHONY B. DUNCAN | Director  | March 31, 2006

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

**INDEX TO FINANCIAL STATEMENTS**

**PAGE**

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

**FINANCIAL STATEMENTS**

****Balance Sheets at December 31, 2005 and 2004 F-2

****Statements of Income for the Years Ended December 31, 2005 and 2004 F-3

Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2005

and 2004 F-4

Statements of Cash Flows for the Years Ended December 31, 2005 and 2004 F-5

**NOTES TO 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 balance sheets of Hudson's Grill International, Inc. as
of December 31, 2005 and 2004, and the related statements of income, 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.  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. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Hudson's Grill International, Inc. at December 31, 2005
and 2004, and the results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.





/s/Whitley Penn LLP



March 1, 2006

Dallas, Texas

| |                                        |                                                         | ****HUDSON'S GRILL
INTERNATIONAL, INC.                 |   |              |   |         
| | -------------------------------------- | ------------------------------------------------------- | ------------------------------------------------------ | - | ------------ | - | --------
| |                                        |                                                         |                                                        |   |              |   |         
| |                                        |                                                         | BALANCE
SHEETS                                         |   |              |   |         
| |                                        |                                                         |                                                        |   |              |   |         
| |                                        |                                                         | ASSETS                                                 |   |              |   |         
| |                                        |                                                         |                                                        |   | December
31, |   |         
| |                                        |                                                         |                                                        |   |              |   |         
| |                                        |                                                         |                                                        |   | 2005         |   | 2004    
| |                                        |                                                         |                                                        |   |              |   |         
| | Current
assets:                        |                                                         |                                                        |   |              |   |         
| |                                        | Cash and
cash
equivalents                               |                                                        | $ | 125,803      | $ | 129,368 
| |                                        | Accounts
receivable                                     |                                                        |   | 26,966       |   | 24,675  
| |                                        | Other
current
assets                                    |                                                        |   | 6,587        |   | 8,602   
| |                                        |                                                         | Total
current
assets                                   |   | 159,356      |   | 162,645 
| |                                        |                                                         |                                                        |   |              |   |         
| |                                        |                                                         |                                                        |   |              |   |         
| | Property
and
equipment, at cost:       |                                                         |                                                        |   |              |   |         
| |                                        | Furniture
and office
equipment                          |                                                        |   | 25,637       |   | 23,204  
| |                                        | Accumulated
depreciation                                |                                                        |   | (20,016)     |   | (17,834)
| |                                        |                                                         | Property
and
equipment, net                            |   | 5,621        |   | 5,370   
| |                                        |                                                         |                                                        |   |              |   |         
| | Deferred
tax assets                    |                                                         |                                                        |   | 153,134      |   | -       
| |                                        |                                                         |                                                        |   |              |   |         
| | Long-term
note
receivable, net         |                                                         |                                                        |   | 26,080       |   | 27,705  
| |                                        |                                                         |                                                        |   |              |   |         
| |                                        |                                                         | TOTAL
ASSETS                                           | $ | 344,191      | $ | 195,720 
| |                                        |                                                         |                                                        |   |              |   |         
| |                                        |                                                         |                                                        |   |              |   |         
| |                                        |                                                         | LIABILITIES AND
STOCKHOLDERS'
EQUITY                   |   |              |   |         
| | Current
liabilities:                   |                                                         |                                                        |   |              |   |         
| |                                        | Loan
payable                                            |                                                        | $ | -            | $ | 11,000  
| |                                        | Accounts
payable
and
accrued
expenses                   |                                                        |   | 5,131        |   | 8,919   
| |                                        | Accounts
payable to
related
parties                     |                                                        |   | -            |   | 12,985  
| |                                        | Deferred
franchise
fee                                  |                                                        |   | -            |   | 70,000  
| |                                        |                                                         | Total
current
liabilities                              |   | 5,131        |   | 102,904 
| |                                        |                                                         |                                                        |   |              |   |         
| | Deferred
revenue                       |                                                         |                                                        |   | 14,441       |   | 16,799  
| |                                        |                                                         |                                                        |   |              |   |         
| | Commitments and
contingencies (Note
6) |                                                         |                                                        |   | -            |   | -       
| |                                        |                                                         |                                                        |   |              |   |         
| | Stockholders'
equity:                  |                                                         |                                                        |   |              |   |         
| |                                        | Common
stock,
Class A,
no par
value,
100,000,000 shares |                                                        |   |              |   |         
| |                                        |                                                         | authorized,
7,256,986
shares
issued and
outstanding at |   |              |   |         
| |                                        |                                                         | December
31, 2005
and 2004                             |   | 142,545      |   | 142,545 
| |                                        | Common
stock,
Class B,
no par
value,
15,000,000 shares  |                                                        |   |              |   |         
| |                                        |                                                         | authorized, no shares
issued and
outstanding           |   | -            |   | -       
| |                                        | Retained
earnings
(deficit)                             |                                                        |   | 182,074      |   | (66,528)
| |                                        |                                                         | Total
stockholders' equity                             |   | 324,619      |   | 76,017  
| |                                        |                                                         |                                                        |   |              |   |         
| |                                        |                                                         | TOTAL
LIABILITIES AND
STOCKHOLDERS'
EQUITY             | $ | 344,191      | $ | 195,720 

| |                        |                               |                            | HUDSON'S
GRILL
INTERNATIONAL, INC. |   |                         |   |          
| | ---------------------- | ----------------------------- | -------------------------- | ---------------------------------- | - | ----------------------- | - | ---------
| |                        |                               |                            |                                    |   |                         |   |          
| |                        |                               |                            |                                    |   | STATEMENTS
OF
INCOME    |   |          
| |                        |                               |                            |                                    |   |                         |   |          
| |                        |                               |                            |                                    |   | Year
Ended
December 31, |   |          
| |                        |                               |                            |                                    |   |                         |   |          
| |                        |                               |                            |                                    |   | 2005                    |   | 2004     
| |                        |                               |                            |                                    |   |                         |   |          
| | Revenues               |                               |                            |                                    |   |                         |   |          
| |                        | Franchise fees                |                            |                                    | $ | 454,943                 | $ | 278,998  
| |                        |                               |                            |                                    |   |                         |   |          
| | Operating costs:       |                               |                            |                                    |   |                         |   |          
| |                        | General
and
administrative    |                            |                                    |   | 364,451                 |   | 248,678  
| |                        | Depreciation and
amortization |                            |                                    |   | 2,182                   |   | 992      
| |                        |                               | Total
operating
costs      |                                    |   | 366,633                 |   | 249,670  
| |                        |                               |                            |                                    |   |                         |   |          
| |                        |                               | Income
from
operations     |                                    |   | 88,310                  |   | 29,328   
| |                        |                               |                            |                                    |   |                         |   |          
| | Other
income(expense): |                               |                            |                                    |   |                         |   |          
| |                        | Settlement
income             |                            |                                    |   | 240                     |   | 3,501    
| |                        | Note
income                   |                            |                                    |   | 3,459                   |   | 7,279    
| |                        | Interest
income               |                            |                                    |   | 3,684                   |   | 5,113    
| |                        | Interest
expense              |                            |                                    |   | (225)                   |   | (1,759)  
| |                        |                               | Total
other
income         |                                    |   | 7,158                   |   | 14,134   
| |                        |                               |                            |                                    |   |                         |   |          
| |                        |                               | Income
before
income
taxes |                                    |   | 95,468                  |   | 43,462   
| |                        |                               |                            |                                    |   |                         |   |          
| |                        | Income
tax
benefit            |                            |                                    |   | 153,134                 |   | -        
| |                        |                               |                            |                                    |   |                         |   |          
| | Net
income             |                               |                            |                                    | $ | 248,602                 | $ | 43,462   
| |                        |                               |                            |                                    |   |                         |   |          
| | Net
income
per
share-  |                               |                            |                                    |   |                         |   |          
| |                        | basic and
diluted             |                            |                                    | $ | 0.03                    | $ | 0.01     
| |                        |                               |                            |                                    |   |                         |   |          
| | Weighted
average       |                               |                            |                                    |   |                         |   |          
| |                        | outstanding
shares-           |                            |                                    |   |                         |   |          
| |                        | basic                         |                            |                                    |   | 7,256,986               |   | 7,256,986
| |                        |                               |                            |                                    |   |                         |   |          
| |                        | diluted                       |                            |                                    |   | 8,482,894               |   | 8,301,095

******STATEMENTS OF STOCKHOLDERS' EQUITY**

Years Ended December 31, 2005 and 2004

|                               |  | Common Stock |  | Retained
Earnings |  |            
|------------------------------ |  | ------------ |  | ----------------- |  | -----------
|                               |  | Shares       |  | Amount            |  | (Deficit)  
|                               |  |              |  |                   |  |            
|**BALANCE**,
December 31,
2003 |  | 7,256,986    |  | $
142,545         |  | $
(109,990)
|                               |  |              |  |                   |  |            
|Net
income                     |  | -            |  | -                 |  | 43,462     
|                               |  |              |  |                   |  |            
|**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  

| |                                       |                                                 |                                   |                                              |                                       | HUDSON'S
GRILL
INTERNATIONAL,
INC.        |  |                         |  |  |          
| | ------------------------------------- | ----------------------------------------------- | --------------------------------- | -------------------------------------------- | ------------------------------------- | ----------------------------------------- |  | ----------------------- |  |  | ---------
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       |                                                 |                                   |                                              |                                       | STATEMENTS
OF
CASH
FLOWS                  |  |                         |  |  |          
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       |                                                 |                                   |                                              |                                       |                                           |  | Year
Ended
December
31, |  |  |          
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       |                                                 |                                   |                                              |                                       |                                           |  | 2005                    |  |  | 2004     
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| | Cash
Flows
From
Operating
Activities: |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       | Net
Income                                      |                                   |                                              |                                       |                                           |  | $
248,602               |  |  | $
43,462 
| |                                       | Adjustments
to
reconcile net
income to
net
cash |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       |                                                 | provided by
operating
activities: |                                              |                                       |                                           |  |                         |  |  |          
| |                                       |                                                 |                                   | Depreciation
and
amortization                |                                       |                                           |  | 2,182                   |  |  | 992      
| |                                       |                                                 |                                   | Amortization
of
deferred
revenue             |                                       |                                           |  | (5,816)                 |  |  | (22,464) 
| |                                       |                                                 |                                   | Deferred tax
assets                          |                                       |                                           |  | (153,134)               |  |  | -        
| |                                       |                                                 |                                   | Changes in
operating
assets
and
liabilities: |                                       |                                           |  |                         |  |  |          
| |                                       |                                                 |                                   |                                              | Accounts
receivable                   |                                           |  | (2,291)                 |  |  | (5,205)  
| |                                       |                                                 |                                   |                                              | Other
current
assets                  |                                           |  | 2,015                   |  |  | (613)    
| |                                       |                                                 |                                   |                                              | Accounts
payable and
accrued
expenses |                                           |  | (3,788)                 |  |  | 1,163    
| |                                       |                                                 |                                   |                                              | Accounts
payable to
related
parties   |                                           |  | (12,985)                |  |  | (30,000) 
| |                                       |                                                 |                                   |                                              | Deferred
franchise
fees               |                                           |  | (70,000)                |  |  | 70,000   
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       |                                                 |                                   |                                              |                                       | Net
cash
provided by
operating
activities |  | 4,785                   |  |  | 57,335   
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| | Cash
Flows
From
Investing
Activities: |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       | Repayment
of
note
receivable                    |                                   |                                              |                                       |                                           |  | 5,083                   |  |  | 10,697   
| |                                       | Purchase of
property and
equipment              |                                   |                                              |                                       |                                           |  | (2,433)                 |  |  | (5,335)  
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       |                                                 |                                   |                                              |                                       | Net
cash
provided by
investing
activities |  | 2,650                   |  |  | 5,362    
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| | Cash
Flows
From
Financing
Activities: |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       | Repayment
of
notes
payable                      |                                   |                                              |                                       |                                           |  | (11,000)                |  |  | (24,000) 
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       |                                                 |                                   |                                              |                                       | Net
cash
used
in
financing
activities     |  | (11,000)                |  |  | (24,000) 
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| | Net
Increase
(Decrease) In
Cash       |                                                 |                                   |                                              |                                       |                                           |  | (3,565)                 |  |  | 38,697   
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| | Cash,
beginning of
year               |                                                 |                                   |                                              |                                       |                                           |  | 129,368                 |  |  | 90,671   
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| | Cash,
end of
year                     |                                                 |                                   |                                              |                                       |                                           |  | $
125,803               |  |  | $
129,368
| |                                       |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| | Supplemental
Disclosures:             |                                                 |                                   |                                              |                                       |                                           |  |                         |  |  |          
| |                                       | Income taxes
paid                               |                                   |                                              |                                       |                                           |  | $ 0                     |  |  | $ 0      
| |                                       | Interest paid                                   |                                   |                                              |                                       |                                           |  | $ 225                   |  |  | $
1,759  

**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, 2005, 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.

*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, the carrying amount of a note receivable 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, 2005 and 2004, 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, 2005 and
2004, the uninsured portion of these deposits approximated $26,000 and $39,000,
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).
Depreciation expense was $2,182 and $992 for the years ended December 31, 2005 and
2004, 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 or 2004. The note is carried net of the deferred gain associated with it. The note was
carried on the Company's books at $76,200 and $81,283 in 2005 and 2004, respectively.
The deferred gain of $50,120 and $53,578 was netted against the carrying value in 2005
and 2004, respectively.

*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.

*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*

The Company accounts 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 requires compensation expense be recognized for grants of stock options
when the quoted market price of the Company's common stock on the date the options
were granted exceeds an option's exercise price. The Company did not grant any stock
options with an exercise price that was less than the fair market value of the stock at the
date of grant during the years ended December 31, 2005 and 2004. Accordingly, no
compensation cost has been recognized for its employee stock options in the
accompanying financial statements. The Company has adopted the disclosure provisions of
Statement of Financial Accounting Standards ("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 require 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 years
ended December 31, 2005 and 2004, on a pro forma basis, would have been as follows:

|                                                                      | 2005       | 2004      
|--------------------------------------------------------------------- | ---------- | ----------
|                                                                      |            |           
|Net income: as reported                                               | $ 248,602  | $ 43,462  
|Add: Stock-based
compensation expense
included in reported net
income | -          | -         
|Deduct: Stock-based
compensation determined
under the                 |            |           
|fair value method                                                     | $ (29,598) | $ (21,157)
|Net income - pro forma                                                | $ 219,004  | $ 22,305  
|                                                                      |            |           
|Net income per share:                                                 |            |           
|as reported - basic and
diluted                                       | $ 0.03     | $ 0.01    
|Pro forma - basic and diluted                                         | $ 0.03     | $ -       

The fair values of stock options granted during fiscal years 2005 and 2004 were
determined using the Black-Scholes option pricing model, and using the following
weighted average assumptions:

|               | 2005    | 2004   
|-------------- | ------- | -------
|               |         |        
|Volatility     | 152%    | 217%   
|Interest rate  | 4.29%   | 4.24%  
|Dividend yield | -%      | -%     
|Expected life  | 7 years | 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,
|------------------------------------------ | -----------------------
|                                           | 2005                   
|Numerator:                                 |                        
|Net income                                 | $ 248,602              
|                                           |                        
|Denominator:                               |                        
|Weighted average common
shares outstanding | 7,256,986              
|Effect of dilutive stock
options           | 1,225,908              
|                                           |                        
|Dilutive weighted average
common shares    | 8,482,894              
|                                           |                        
|Basic earnings per share                   | $ 0.03                 
|Diluted earnings per share                 | $ 0.03                 

At December 31, 2005 and 2004, the Company had 2,697,000 and 2,596,000 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 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.

*Concentrations of Credit Risk*

In the normal course of business, the Company extends unsecured credit to franchisees. In
addition, 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 is recognized on an installment basis as the cash is
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. The Company's note receivable and
accounts receivable are subject to potential credit risk. The maximum exposure assuming
non-performance by the debtors is the amount shown on the balance sheet at the date of
non-performance. The Company believes that an adequate allowance for uncollectible
accounts has been established. The allowance for uncollectible accounts is continually
monitored, and adjustments are made as necessary. For the year ended December 31, 2005
and 2004, the Company had bad debt expenses of $1,783 and $664 respectively.

*Recent Accounting Pronouncements*

In December 2004, the FASB issued SFAS 123R, *Share-Based Payment*, which is a
revision of SFAS 123, *Accounting for Stock-Based Compensation*, and supersedes APB
Opinion 25, *Accounting for Stock Issued to Employees*. SFAS 123R focuses primarily on
share-based payments for employee services, requiring these payments to be recorded
using a fair-value-based method. The use of APB 25's intrinsic value method of accounting
for employee stock options has been eliminated. As a result, the fair value of stock options
granted to employees in the future will be required to be expensed. The impact on the
results of operations of the Company will be dependent on the number of options granted
and the fair value of those options. For the Company, SFAS 123R will be effective in
2006.

*Reclassification*

Certain 2004 amounts have been reclassified to conform to the 2005 presentation. In 2004,
the deferred income associated with the Company's note receivable was included in
deferred revenue. In 2005, the deferred income associated with the note receivable was not
included in deferred revenue but instead was offset against the note receivable. Thus, for
comparative presentation purposes, the same was done for 2004, resulting in reclassified
2004 amounts consistent with the presentation shown for 2005.

**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, 2005 and 2004, 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 is amortizing it into
income through 2014. Unamortized additional fees at December 31, 2005 and 2004, of
$14,441 and $16,799, 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. Franchising revenues consisted of the following for
the years ended December 31:

|                                        | 2005      | 2004     
|--------------------------------------- | --------- | ---------
|                                        |           |          
|Initial franchise fees                  | $ 95,000  | $ -      
|Amortization of deferred
franchise fees | 2,357     | 15,185   
|Royalty fees                            | 357,586   | 263,813  
|Total franchise revenue                 | $ 454,943 | $ 278,998

**4. Long-Term Note Receivable**

Prior to the distribution transaction described in Note 1, the Company's Parent sold a
restaurant and agreed to receive a promissory note as consideration; subsequently, the
Parent transferred the note to the Company as part of the Company's capitalization. The
note bears interest at 6%, requires monthly principal and interest payments of $1,600 until
fully repaid and is collateralized by certain assets of the restaurant sold. Unpaid balances
under the note at December 31, 2005 and 2004, were $76,200 and $81,283 respectively.
The deferred gain associated with the sale was also carried over to the Company, and it is
being recognized on an installment basis as cash is received. At December 31, 2005 and
2004, the deferred revenue on the note totaled $50,120 and $53,578, respectively. The
Company recognized income of $3,459 and $7,279 from the note as note income during
the years ended December 31, 2005 and 2004, respectively.

**5. Debt**

Loan payable consisted of the following at December 31:

|                                                                                                                     | 2005 | 2004    
|-------------------------------------------------------------------------------------------------------------------- | ---- | --------
|Loan payable to a financial
institution; interest at 7%,
unsecured and principal and
interest payments due on
demand | $ -  | $ 11,000

**6. Commitments and Contingencies**

The Company leases office space under a month-to-month lease. Rent and utility expense
totaled $17,600 and $16,200 for the years ended December 31, 2005 and 2004,
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.

**7. Income Taxes**

There was no provision for income taxes in the years ended December 31, 2005 and 2004,
due to the carryforward of net losses ("NOL") incurred in prior years. The Company had no
material deferred tax liabilities at December 31, 2005.

Deferred taxes consisted of the following at December 31:

|                          | 2005      | 2004     
|------------------------- | --------- | ---------
|Deferred tax assets:      |           |          
|Deferred revenue          | $ 22,000  | $ 24,000 
|Net operating loss        | 131,000   | 139,000  
|Total deferred tax assets | 153,000   | 163,000  
|Deferred tax liability    | -         | (24,000) 
|Valuation allowance       | -         | (139,000)
|Net deferred taxes        | $ 153,000 | $ -      

The net change in the valuation allowance for deferred tax assets was a decrease of
$139,000 in 2005 and a decrease of $63,000 in 2004. 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 2005 Statement of Income.

Income taxes payable for the year ended December 31, 2005 and 2004, were reduced by
approximately $4,000 and $20,000, respectively, through the utilization of NOL
carryforwards in those years. At December 31, 2005, NOL carryforwards of approximately
$386,000 were available to offset future taxable income and expire through 2019.

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

|                                     | 2005   | 2004 
|------------------------------------ | ------ | -----
|                                     |        |      
|Federal income tax at
statutory rate | 34%    | 34%  
|Reversal of valuation
allowance      | (194%) | (34%)
|Total effective income tax
rate      | (160%) | 0%   

**8. Stock Options**

The Company president's compensation is established at the sole discretion of the board of
directors and includes the granting of stock options. The Company also grants 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.

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 January 1,
2004   | 3,818,000 | $ 0.07                         
|Granted                          | 456,000   | 0.05                           
|Cancelled                        | -         | 0.00                           
|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                         

The weighted average fair value of stock options granted during 2005 and 2004 was $0.06
and $0.05, respectively, on the date of grant using the Black-Scholes option pricing model.

The following table summarizes information about stock options outstanding at December
31, 2005:

|                                            | Options Outstanding |                          | Options Exercisable            
|------------------------------------------- | ------------------- | ------------------------ | -------------------------------
|Weighted
Average
Remaining
Contractual
Life | Number
Outstanding  | Range of
Exercise
Prices | Weighted
Average
Exercise Price
|                                            |                     |                          |                                
|2 years                                     | 2,330,000           | $0.10                    | $0.10                          
|4 years                                     | 1,488,000           | $0.01-0.035              | $0.02                          
|5.5 years                                   | 456,000             | $0.025-0.095             | $0.05                          
|6.5 years                                   | 491,000             | $0.045-0.085             | $0.07                          
|                                            | 4,765,000           |                          | $0.07                          

**9. Related Party Transactions**

A law firm associated with a director of the Company provides legal services to the
Company. During the years ended December 31, 2005 and 2004, the cost of these services
to the Company were $39,500 and $39,300, respectively. Related amounts included in
accounts payable to related parties at December 31, 2005 and 2004, were approximately $0
and $13,000, respectively.

The Company assumed a loan of a former employee of the Parent with a financial
institution (see Note 5). The balances outstanding on the loan were $0 and $11,000 at
December 31, 2005 and 2004, respectively. Principal and interest payments are due on
demand.

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
$17,600 and $16,200 for the years ended December 31, 2005 and 2004, respectively.

One of the directors of the Company is also a franchisee of two restaurants. 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, these restaurants pay no monthly
royalty fee. Correspondingly, the Company has no obligation to provide any services to
these restaurants. Other than being released from paying royalty fees, the two restaurants
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. In 2004, these expenses included tax
preparation costs of $4,046; California franchise taxes and penalties of $5,851; and
estimated legal expenses of $1,493.

**10. Concentration of Revenue Risk**

The Wausau and Marshfield, Wisconsin, franchisees are affiliated; these two franchisees
together account for 23% and 37% of revenue and 36% and 38% of accounts receivable for
2005 and 2004, respectively.

**11. Subsequent Events**

In January 2006 the Company signed a franchise agreement with an affiliate of its De Pere,
Wisconsin franchisee. The new franchise was for a Hudson's Grill restaurant to be located
in Escanaba, Michigan. On March 6, 2006, the new restaurant opened.

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