UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB

                                  ANNUAL REPORT
            Under Section 13 or 15(d) of the Securities Act of 1934
                    For the Fiscal Year Ended June 30, 1997

                             ARTHUR TREACHER'S, INC.
                 (Name of Small Business Issuer in Its Charter)

                       UTAH                                       34-1413104    
          (State or Other Jurisdiction of                      (I.R.S. Employer 
           Incorporation or Organization)                    Identification No.)

7400 Baymeadows Way, Suite 300, Jacksonville, Florida               32256
        (Address of Principal Executive Offices)                  (Zip Code)

                  (904) 739-1200
           (Issuer's Telephone Number)

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

       Title of Each Class                   Name of Each Exchange on Which
       to be so Registered                   Each Class is to be Registered
       -------------------                   ------------------------------

---------------------------------            ---------------------------------

---------------------------------            ---------------------------------

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

                          Common Stock, $.01 par value
                                (Title of 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 |___|
No |_X_| The Registrant  became subject to such filing  requirements  within the
past 90 days.

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B is 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. |_X_|

<PAGE>

     State issuer's revenues for its most recent fiscal year. $17,775,659

     Shares outstanding. 14,399,248

     State the aggregate market value of the voting stock held by non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock,  as of a specified  date within the past 60
days.  (See  definition  of  affiliate  in  Rule  12b-2  of the  Exchange  Act.)
$24,892,071

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.


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<PAGE>

                                     PART I

Item 1. Description of Business.

The Company is a fast service seafood  restaurant  chain based in  Jacksonville,
Florida.  The  Company's  principal  business is the  operation of Company owned
stores and the sale of franchises of "Arthur  Treacher's Fish & Chips" fast food
restaurants.  The Company has 117 restaurants in the Arthur  Treacher's  system,
consisting  of 63  Company  owned  restaurants  and 54  independently  owned and
operated franchised  locations.  The restaurants are located in 11 states in the
mid-western  and eastern  United  States as well as in  Washington  D.C. and the
province of Ontario, Canada.

     (A) Background

The Company was originally  founded in 1969 as Arthur  Treacher's  Fish & Chips,
Inc., a Delaware  corporation.  The Company operated a network of franchised and
Company owned  restaurants  in the United States and Canada.  The Company's main
product was its "Original Fish & Chips"  product  consisting of two fish fillets
coated with a special batter  prepared under a proprietary  formula,  deep-fried
golden  brown and  served  with  English-style  chips  and two corn  meal  "hush
puppies." The Company's other products included an assortment of other fried and
grilled seafood combination dishes including shrimp, clams and chicken.

In 1979, Mrs. Paul's,  Inc. ("Mrs.  Paul's")  purchased Arthur Treacher's Fish &
Chips,  Inc. Mrs. Paul's changed the products offered at the restaurants,  which
resulted in severe  dissatisfaction  among the  franchisees,  a reduction in the
number of  restaurants  and  litigation  between  certain  franchisees  and Mrs.
Paul's. In 1982, Lumara Foods of America, Inc. ("Lumara") acquired the assets of
Arthur  Treacher's  Fish & Chips,  Inc. from Mrs.  Paul's.  Lumara was unable to
achieve  profitability and consequently sought bankruptcy protection in 1983. In
December 1983,  Arthur  Treacher's  Inc., an Ohio  corporation,  entered into an
agreement  to  purchase  the assets of  Lumara,  during  Chapter  XI  bankruptcy
proceedings.  In February 1984,  Arthur  Treacher's  Inc., an Ohio  corporation,
merged  into  El  Charro,  Inc.,  a  Utah  corporation,  which  consummated  the
acquisition  of the assets of Lumara and changed its name to Arthur  Treacher's,
Inc.

The Company reduced its size from  approximately  200 to 117 stores between 1984
and 1997,  primarily  through  a net  reduction  from  more than 180  franchised
locations to 95  franchised  locations,  under the  management  of President and
principal shareholder,  James R. Cataland. In 1984, only 74 of the more than 180
franchised  locations were in good standing.  The franchise  network was rebuilt
and expanded in the early 1990's under the management of Mr. Cataland.

In 1993, three investors,  including Mr. Bruce R. Galloway, the current Chairman
of the Board of the  Company,  and Mr.  Fred Knoll,  a Director  designee of the
Company,  acquired  from the Company an aggregate of 2,000,000  shares of Common
Stock for  $1,000,000.  On May 31,  1996,  an investor  group  organized  by Mr.
Galloway  acquired  control of the Company through the purchase of an additional
2,000,000  shares  from  the  then  principal  shareholder  and  President,  Mr.
Cataland.


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<PAGE>

Contemporaneously  with such  acquisition,  Mr. R. Frank Brown became President,
Chief Executive  Officer and Treasurer of the Company,  and the current Board of
Directors was elected.

Under Mr. Brown's direction,  the Company has taken several steps to improve its
operations.  The  Company has also  commenced  testing of its  "Seafood  Grille"
concept,  reduced costs by changing to lower cost seafood  suppliers,  commenced
efforts  to  renegotiate  certain  property  leases,  hired  a new  Director  of
Marketing,  retained a new  advertising  agency,  held  regional  meetings  with
franchisees for the first time in several years,  attended franchise conventions
to promote the Company and produced new promotional and advertising materials.

On  November  27,  1996 the Company  purchased  100% of the common  stock of its
largest  franchisee,  MIE Hospitality,  Inc. (MIE),  whose operations include 32
restaurants in the midwest and northeast  United States.  The purchase price was
$4,232,976  (calculated  as  $2,250,000 in cash,  $1,139,563  in long-term  debt
assumed and $843,413,  which  represents the rights to acquire 275,625 shares of
Company common stock for no consideration at a future date.

Also during  1997,  the Company  acquired  eight  restaurants  in six  different
transactions all accounted for as purchases.  The purchase price,  which totaled
approximately  $544,000,  was  satisfied  by  cash,  common  stock,  or  assumed
liabilities.

MIE,  formerly  the  Company's   largest   franchisee  and  now  a  wholly-owned
subsidiary, had an exclusive territory in New York, Pennsylvania, New Jersey and
Delaware,  where it operated 33 stores.  The  Company  anticipates  that the MIE
Acquisition  will provide  opportunities  for  additional  expansion,  since the
Company can open additional  Company-owned stores and sell additional franchises
in states where MIE was the exclusive franchisee. Following the purchase of MIE,
the Company purchased six former franchised restaurants in the Detroit area. The
Company  believes  the six  restaurants  in the Detroit  area are  strategically
located  in  areas  with  a  concentration  of  Arthur  Treacher's  restaurants.
Management  believes that such  restaurants can be better managed by the Company
than by the former franchisees with no additional  administrative overhead being
incurred by the Company.

     (B) Franchises

The Company has 117  restaurants  in its system,  consisting of 63 Company owned
restaurants and 54 independently  owned and operated franchised  locations.  The
Company has two geographical options for franchises:  individual stores and area
development. However, the Company does have a franchisee that has agreed to open
one franchise for each of the next three years in  northeastern  Ohio,  although
such  franchisee does not have any exclusive  territory.  The Company also has a
franchisee  with an exclusive  franchise  for the  province of Ontario,  Canada,
where there are eight restaurants.

Pursuant to its franchise agreement, the Company provides its franchisees with a
method of operation,  including  trade secrets,  technical  knowledge,  a supply
distribution program and standards for customer service, quality control, decor,
layout, signs and accounting systems. The Company also


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<PAGE>

provides  centralized  advertising and cooperative  advertising  programs and an
initial training program, which is required for franchisees.  Each franchisee is
currently required to spend a minimum of three percent of monthly gross sales on
advertising.  In addition,  each franchisee must purchase certain private label,
proprietary  food,  paper supplies,  equipment and signage from Company approved
suppliers and  distributors.  The Company does not select  restaurant  sites for
franchisees,  but all sites are subject to the Company's  approval.  The Company
also requires  that its  franchisees  name the Company as an additional  insured
party on their property and casualty insurance policies and that vendors provide
subrogation to the Company with respect to their product liability insurance.

Pursuant to the Company's standard franchise agreement, which is incorporated in
its Uniform  Franchise  Offering  Circular,  the initial franchise fee for a one
unit  franchise  is  $19,500.  The fee for each  additional  franchise  declines
thereafter.  The  fee  for an  area  development  franchise  is  $49,500.  These
franchise  fees do not include the costs  associated  with the  operation of the
restaurant,  including food,  supplies,  labor,  equipment,  occupancy costs and
taxes.

Each  franchisee  is subject to a royalty fee of a maximum of six percent of the
franchisee's  gross  sales,  net of sales taxes and certain  other  adjustments,
based upon sales reports at the end of each calendar  month.  In the fiscal year
ended June 30, 1997, the Company  received a total of $484,885 in franchise fees
and royalty income.  Franchisees owning seven of such restaurants were more than
90  days  in  arrears  in  their  payment  of  royalties  to the  Company.  Most
franchisees,  including  the  Canadian  franchisee,  pay  royalties  at  a  rate
substantially  lower than six percent of gross sales, with an average royalty of
about three percent.  Reduced  royalty fees have been granted by the Company for
certain older  franchisees and for franchisees who operate multiple units. As of
September 15, 1997,  franchisees  operating seven  restaurants  have either been
notified of being in default for  non-payment  of  royalties or are more than 90
days in default on royalty  payments.  One of such  franchisees,  operating  two
restaurants,  and the Company  have  executed an  installment  payment plan with
respect to its delinquent payments.  The inability of the Company's  franchisees
to make payments on a timely basis will adversely affect the Company's liquidity
and its operations.

     (C) Corporate Strategy

The Company seeks to focus on three key areas of development:

          o    The "Seafood Grille" concept,
          o    Unit Expansion,
          o    Marketing, Advertising and Promotion.

     1. The "Seafood Grille" Concept

The Company is renovating its existing restaurants to adopt the "Seafood Grille"
concept to focus on grilled foods while  enhancing the Company's  existing brand
name.  The Company  has begun to expand its menu to include,  in addition to its
current fried fish dinner and fried chicken combinations,


                                       5
<PAGE>

a selection of grilled  seafood entrees and grilled  chicken  entrees,  together
with an assortment of vegetables and other side dishes. Several species of fish,
including  tuna,  cod,  mahi- mahi and salmon,  are being  developed in order to
complement the Company's existing line of seafood products.

Each fish fillet sold under the  "Seafood  Grille"  concept is deep  skinned and
flash-frozen  under a strict  recipe  developed  by the  Company.  At each store
location, the fillet is inserted into a special grilling unit for quick cooking.
Test  marketing  and  implementation  of this  concept  began in July  1996 at a
franchised location that the Company purchased in November 1996. As of September
15,  1997,  the Company  had  implemented  the  "Seafood  Grille"  concept in 21
restaurants.

The Company is developing a nationwide  implementation  plan, which will include
operations, marketing and advertising expenditures. The Company estimates that a
complete restaurant  renovation will cost approximately  $85,000 per restaurant.
Because  of the  high  cost of a  complete  renovation,  the  Company  has  also
implemented  the  "Seafood  Grille"  concept with a modified  renovation,  which
consists  primarily  of the  installation  of new  grilling  equipment  and, for
certain  restaurants,  new signage and  awnings.  The Company has  utilized  the
modified  renovation  in 17 of the 21  restaurants  which  offered the  "Seafood
Grille" as of  September  15,  1997.  The Company  anticipates  that most future
renovations  will utilize the less expensive  alternatives in order to limit the
Company's  capital  expenditures.  The  Company  anticipates  that  all  of  the
restaurants  currently  owned by the  Company  will offer the  "Seafood  Grille"
concept, although the cost of renovation will depend on such factors as the size
of the restaurant, whether the restaurant is free standing or in a mall, and the
amount of equipment to be installed.  Such  renovations will be made on a region
by  region  basis so that all  restaurants  within a  region  can  benefit  from
regional  advertising  and  marketing  promotions.  New  store  formats  may  be
developed to enable  consumers to view a wider  selection of the Company's  menu
selections.  New store displays may be exhibited at all restaurant  locations to
provide consumers with information such as caloric,  fat and cholesterol content
in each of the Company's menu items.  The Company cannot require  franchisees to
renovate  their stores to implement  the  "Seafood  Grille"  concept and has not
determined whether to provide incentives for such renovations.  Furthermore, the
conversion of any existing  restaurants  that may be purchased from  franchisees
will incur additional costs, a portion of which will come from operations.

     2. Unit Expansion

The  Company  intends  to open  more  Company  owned  and  operated  stores  and
franchised stores.  The Company's system has 117 restaurants,  of which 63 (54%)
are Company owned. The Company expects to achieve a ratio of  approximately  40%
of  the  restaurants  as  Company  owned  by the  year  2000  due  to  franchise
development. The Company will continue to build its network of Company owned and
franchised  restaurants in the United States with additional  locations in order
to increase the Company's  penetration into local markets.  The Company seeks to
expand both in its principal existing markets of Florida, Ohio, Michigan, Texas,
the New York  metropolitan  area and  Ontario  and in markets  where the Company
previously had a significant presence, including Virginia,


                                       6
<PAGE>

Maryland,  Washington D.C., Illinois and New England. The Company has no current
plans to expand outside of the United States and Canada.

The  Company  believes  that  the  purchase  of  MIE  will  provide   additional
opportunities for expansion,  since the Company may now open additional  Company
owned  stores  and  sell   additional   franchises  in  New  York,  New  Jersey,
Pennsylvania  and  Delaware,  where  MIE was the  exclusive  franchisee  and had
exclusive  development  rights. In addition,  the Company believed that it could
operate  the 32 stores  owned by MIE with  minimal  increase  in  administrative
overhead and that the  purchase of the 32 stores would  provide the Company with
more  flexibility and control over the  implementation  of the "Seafood  Grille"
concept.

Execution of its growth  strategy  requires the Company's  management  to, among
other things: (i) identify acquisition candidates who are willing to be acquired
at prices acceptable to the Company;  (ii) consummate  identified  acquisitions;
and (iii) obtain  financing for future  acquisitions.  The Company believes that
the  acquisition  of franchise  restaurants is preferable to opening new Company
owned  restaurants  where  there  is  a  concentration  of  other   restaurants,
particularly  Company owned  restaurants.  Such  concentration  of Company owned
restaurants  enables the Company to achieve more effective control of marketing,
economies of scale  regarding the purchase of supplies,  the deployment of field
personnel  and  advertising  and  thereby  improve the  restaurants'  operations
without any increase in central  administrative  overhead.  The Company believes
that  such  economies  of  scale  can be  achieved  if a  minimum  of six to ten
restaurants are in an area.

The Company does not anticipate  further  development  of its franchise  network
until the fiscal year  commencing  July 1997. The Company wants to implement the
"Seafood Grille" concept, purchase some restaurants from franchisees and improve
its image before again focusing on the sale of  franchises.  In order to develop
its franchise  system,  the Company  intends to develop joint  programs with new
corporate  franchisees for regional expansion  opportunities in certain selected
markets.  This program will entail a corporate  sponsor for a particular  region
based upon metropolitan  population densities. A region would typically be large
enough to cover an area that could accommodate ten or more store locations.  The
Company anticipates that a master franchise agreement would be executed with the
corporate  franchisee  providing  it with  rights to a  specified  region and to
support from the Company in order to develop the area within certain  guidelines
established by the Company relating,  among other things, to a minimum number of
restaurants to be opened within particular time periods.  Current  agreements do
not require any minimum  number of  restaurants to be opened in a region and the
Company currently has only one master franchise  agreement for Ontario,  Canada.
The  Company  also  intends  to grant  new  franchises  to  operators  of single
restaurants.  There can be no assurance,  however, that suitable franchisees can
be  located  or that  master  franchise  agreements  will be  reached  at  terms
acceptable to the Company.

The Company  estimates  the cost of opening a new Company  owned  restaurant  at
between $50,000 and $200,000 per restaurant  (assuming the purchase,  not lease,
of new  equipment),  depending upon factors such as the size of the  restaurant,
the lease and local  construction  costs.  This cost includes the capability for
the "Seafood Grille" concept. By standardizing the construction and equipment


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<PAGE>

procurement  process of its  restaurant  network,  the Company  believes that it
could develop the economies of scale in the design and site selection process. A
supplementary  benefit of such an expansion  program could include  proposals to
arrange for regional or national  equipment  leasing and financing  programs and
the use of national or regional  contractors to provide  support for franchisees
wishing to expand.  There can be no assurance that such programs will be reached
at terms acceptable to the Company.

The Company's  proposed  expansion and store  renovations  will be dependent on,
among other things, market acceptance of the Company's "Seafood Grille" concept,
the availability of suitable  restaurant sites,  negotiation of acceptable lease
terms,  timely  development  of such  sites,  obtaining  landlords'  consents to
renovations,   constructing  or  renovating   restaurants,   hiring  of  skilled
management  and other  personnel,  the general  ability to  successfully  manage
growth  (including  monitoring  restaurants,  controlling  costs and maintaining
effective quality controls) and the availability of adequate  financing.  In the
case of franchised  restaurants,  the Company will be substantially dependent on
the management skills of its franchisees.

     3. Marketing, Promotion and Advertising

The Company  believes that its brand name is still recognized among consumers in
the  northeastern,  mid-western  and  southern  regions  of  the  United  States
primarily  because  the  Company's  primary  product  line  had  been a  popular
restaurant  concept  during the early  1970's.  The Company and its  franchisees
typically spend  approximately  three to four percent of gross sales per year on
advertising. In addition, suppliers provide the Company with rebates to be spent
by the  Company on  marketing.  In the fiscal  year  ended June 30,  1997,  such
marketing rebates were approximately  $356,000. The Company has broad discretion
in spending such marketing allowances.

Management  is  developing a marketing  campaign to  re-establish  the Company's
brand name.  Since June 1996, the Company has retained a new advertising  agency
and produced new television commercials.  System-wide promotion with coordinated
regional  advertising  represents an area of opportunity for the Company.  Local
advertising  by the Company and its  franchisees  has been, and continues to be,
the predominant form of promotion. The Company has hired a Director of Marketing
who has  developed  to produce  advertising  and  promotion  at the local  level
consisting of in-store  advertising,  local circulars,  promotions and newspaper
advertising.  By  utilizing  system-wide  promotion  with  regional  advertising
campaigns, the Company expects to achieve greater control and market breadth and
to increase  consumer  awareness of its products and services while  maintaining
creative  control over the Company's  brand image.  Such a program would provide
the Company with system-wide coverage using print, network and cable television,
national radio media.

The franchisees will be expected to pay a portion of the three percent currently
required to be spent on advertising  by each  franchisee to the Company as a fee
for such coordinated  advertising.  A portion of the approximately three percent
of gross sales  currently  spent by the Company for  advertising  Company  owned
stores would also be devoted to the coordinated campaign. The


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<PAGE>

amounts  collected  would be utilized  entirely  on  marketing  and  promotional
campaigns to benefit the entire franchise network.

     (D) Suppliers and Pricing

The  Company's  senior  management  (most of whom joined the Company  since June
1996) have  experience  with the supply and pricing issues  associated  with the
food industry. Seafood prices, particularly the price of pollack, are subject to
supply  problems  due to  environmental  and economic  factors.  The Company has
developed measures to minimize the effect on the Company.

The Company's principal product, "Fish and Chips," includes pollack. The Company
and  franchisees  utilize one supplier to the Company  owned stores for pollack.
The Company and its franchisees  use three suppliers for shrimp.  For the fiscal
year  ended  June 30,  1997,  purchases  of pollack  and  shrimp  accounted  for
approximately  20%  and  7%  of  the  Company's  operating  expenses,  excluding
occupancy costs, respectively.  The Company has reduced its costs since June 30,
1996 by utilizing new  suppliers of pollack and shrimp.  The Company also offers
salmon and tuna.  Such seafoods'  supplies and prices are subject to volatility.
Seafoods of the  quality  sought by the  Company  tend to trade on a  negotiated
basis depending upon supply and demand at the time of purchase. Supply and price
can be affected by multiple factors, such as weather,  politics and economics in
the  producing  countries.  An increase  in the prices of seafood,  particularly
pollack, could have an adverse effect on the Company's profitability.

The Company maintains relationships with certain seafood vendors in an effort to
obtain  seafood of the quality  and in the  quantity  demanded by the  Company's
customers. These relationships enable the Company to maintain its supply of fish
as well as affording the Company some price stability. The Company has sought to
mitigate the effects of price  volatility by entering into  agreements  with its
principal fish suppliers to provide fixed prices for seafood products during the
six months to one year duration of the  contracts.  Such fixed price  agreements
also help ensure the Company's supply of fish. The Company's written  agreements
regarding  pollack and shrimp expire in March 1998 and its  agreement  regarding
chicken  expires in December  1997.  Although the Company  anticipates  that the
agreements  will be  renewed  on  substantially  the same  terms as the  current
agreements,  there  can be no  assurance  that  the new  terms  will not be more
costly.  The  Company's  principal  suppliers  of seafood  products  are Odyssey
Enterprises, Inc. for fish products and Tampa Bay Fisheries for shrimp. However,
the Company believes that alternate  suppliers of pollack and other seafoods are
available  if the prices of pollack or other  seafoods  increase  substantially.
Management also intends to take advantage of changing  technologies with respect
to the "farming" and breeding of selected species of fish and seafood  products,
and currently purchases some fish products that are "farmed."

The Company uses  different  individual  suppliers  for many of its  significant
non-seafood  items. For example,  cups,  french fries,  chicken,  shortening and
proprietary fish batter are each purchased from different  individual  suppliers
under  oral and  written  agreements  which  set the  price  for one  year.  The
principal  suppliers  for  non-seafood  products are  Coca-Cola  (drink  syrup),
Griffith  laboratories (batter mix), Heinz U.S.A.  (sauces),  McCain Foods, Inc.
(potatoes), Phoenix Foods (chicken) and Wilsey


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<PAGE>

Foods, Inc.  (shortening).  All of the Company's  supplies are delivered by such
suppliers to one  distributor,  Fast Food  Merchandisers  Inc., who services the
Company's  restaurants  from  three  distribution  centers.  Any  disruption  in
supplies from such  suppliers  could  temporarily  have an adverse effect on the
Company's  operations,  although the Company  believes  that the supplier  could
readily be replaced.  Except with respect to the  Company's  proprietary  batter
mix,   franchisees   can  purchase  such   products  from  other   suppliers  or
distributors,  subject to the Company's  prior  approval.  The Company  received
approximately $127,000 from royalties on its batter mix sales in the fiscal year
ended June 30, 1997.

     (E) Competition

The restaurant  business is highly  competitive with respect to price,  service,
location and food quality and is generally  considered to be a mature  industry.
Competition  in the  industry  can be  expected  to  increase.  The  industry is
affected by changes in consumer eating habits and preferences,  local,  regional
and  national  economic  conditions,   demographic  trends,  automobile  traffic
patterns,  government  regulation,   employee  availability  and  commodity  and
operating cost fluctuations, many of which are beyond the Company's control. Any
unplanned or  unanticipated  changes in these factors could adversely affect the
Company.

There are numerous  well-established  competitors in the operating  areas of the
Company.  Restaurants operated or franchised by the Company compete directly not
only with quick service  restaurants  ("QSRs"),  but also with moderately priced
family and specialty restaurants. Significant competitors include fast food fish
restaurants such as Long John Silvers and Captain D's, casual dining restaurants
with a seafood emphasis such as Red Lobster and Landry's,  and other chains that
serve grilled seafood or chicken, or both.

The  Company's  primary  competitors  in the  fast  service  seafood  restaurant
business are Long John Silvers and Captain D's.  Both  competitors  have company
owned and  franchised  restaurant  operations  in certain  regions of the United
States.  Long John Silvers is the largest  competitor  with over 1,300 locations
nationwide.  Captain  D's, a wholly owned  subsidiary  of  Shoney's,  Inc.  with
approximately  600 units,  has a strong  regional  presence in the  southeastern
United States.  The amount of competition  varies among the Company's  principal
regional  markets.  Both Captain D's and Long John Silvers compete directly with
the  Company in Ohio and  Pennsylvania,  although  the level of  competition  is
highest in several  Pennsylvania  markets.  Long John Silvers competes  directly
with the Company in several of its markets in Florida.  In Ontario,  the Company
has significant  direct competition from independent fish and chips restaurants,
but less direct  competition from other major fast service seafood chains.  Many
of the Company's competitors possess substantially greater financial, marketing,
personnel  and other  resources  than  those of the  Company.  Such  competitive
pressures  limit the Company's  ability to increase food and beverage prices and
thus may limit the extent to which the  Company and its  franchisees  can offset
certain costs of doing business. There can be no assurance that well-established
competitors will not place additional restaurants in close proximity to those of
the Company and its franchisees.


                                       10
<PAGE>

The Company also faces vigorous  competition from other QSR chains in attracting
and retaining suitable franchises.  Beginning in the fiscal year commencing July
1, 1997, the Company plans to increase its number of franchised  restaurants but
there can be no  assurance  that it will be able to attract and retain  suitable
franchisees.

Competition  with the Company can take other forms.  The Company  also  competes
with  fast  food   restaurants  and  "casual  dining"   restaurants  that  offer
specialties  other than grilled fish and chicken.  Consumer  preferences tend to
shift and the variety of alternatives may affect consumer selection. A change by
consumers to other types of products such as pork or beef or to restaurants with
ethnic  themes such as Mexican,  Chinese or Italian can have a material  adverse
affect on the Company's sales.

The Company has developed a  concentration  of restaurant  locations in the food
courts of  regional  shopping  malls.  The  competition  in the malls  typically
consists of the seven to  thirteen  different  restaurant  concepts in each food
court.  Each food concept  generally  serves a  distinctive  menu item which may
compete,  directly or  indirectly,  with the Company.  There can be no assurance
that the Company will continue to be able to compete  effectively with such food
concepts.

     (F) Seasonality

The Company  derives a significant  portion of its sales during the November and
December holiday season,  which is reflected in the Company's  operating results
for the second  quarter.  This  seasonal  effect is  dependent  upon the general
retailing environment and customers' preference to shopping malls. Approximately
70% of the Company's  restaurants  are in shopping  malls.  The Company  derives
approximately  15% of its total annual  revenues  from  operations of the stores
located in shopping malls during the holiday season.

     (G) Employees

At August 31, 1997,  the Company had  approximately  700  employees.  A total of
approximately  575  employees  are paid on an  hourly  basis  and 125  employees
receive a salary.  Eight of the Company's employees perform executive functions.
Most of the Company's employees are employed at the Company's  restaurants.  The
Company  believes that the number of persons employed is adequate to conduct the
Company's  current level of operations.  The Company believes that it would need
an additional two to four administrative employees at its headquarters to manage
the anticipated  expansion.  The addition of new restaurants  will also increase
the number of employees at the restaurants.

Since many of the  Company's  employees  are paid  hourly  rates  related to the
federal minimum wage,  increases in the minimum wage will increase the Company's
operating expenses. The Federal government increased the minimum wage from $4.25
an hour to $4.75 per hour in October 1996 and to $5.15 in September  1997. As of
August 31, 1997, the Company employed 575 hourly workers,  approximately  50% of
whom are paid below $5.15 per hour.  The Company  believes that increases in the
minimum wage will cause  operating  costs to increase by less than 0.4% and that
such increased


                                       11
<PAGE>

cost will be offset by the Company's  recent menu price increase of four percent
and  increased  sales  and  reduced  costs  derived  from  improved   purchasing
procedures, of which there can be no assurance.

     (H) Government Regulation

The  Company's  business  is  subject  to  extensive  federal,  state  and local
government  regulation,  including  regulations relating to franchising,  public
health and safety,  zoning and fire codes.  The failure to obtain or retain food
or other  licenses  would  adversely  affect  the  operations  of the  Company's
restaurants.

The  Company is subject to federal and state laws,  rules and  regulations  that
govern the offer and sale of franchises. The Company is also subject to a number
of   state   laws   that   regulate   certain   substantive   aspects   of   the
franchisor-franchisee  relationship. If the Company is unable to comply with the
franchise laws, rules and regulations of a particular state,  relating to offers
and sales of  franchises,  the  Company  will be unable to engage in offering or
selling  franchises in such state. The Company believes it is in compliance with
such laws, rules and regulations and has not been cited for  non-compliance.  In
1995, the Federal Trade Commission  ("FTC")  conducted an investigation  related
specifically to the Company  following a complaint filed by certain  franchisees
but the FTC took no action. The complaint alleged various  misrepresentations by
the Company,  including  misrepresentations to the franchisees regarding (i) the
investment  risk,  earnings,  food  costs and  construction  costs that could be
expected by a  franchisee,  (ii) the rate of  expansion  of the number of Arthur
Treacher's  restaurants and (iii) the  availability of national  advertising and
marketing support.  The Company is not currently subject to any investigation by
any federal or state regulatory authority.

On a national  level,  the FTC  requires  the  Company  to  furnish  prospective
franchisees  with a  disclosure  document  which  complies  with the FTC's Trade
Regulation Rule (the "FTC Rule"). The Company's current FTC disclosure  document
is effective  for use in 37 states,  and the  District of Columbia,  that do not
require  registration  of  disclosure  documents.  However,  in the 13 remaining
states,  the  Company is  required to  register a  state-specific  document  and
receive an effective  registration  notice prior to the commencement of sales of
franchises in such states.  The Company is not  qualified to sell  franchises in
any state that requires a state specific  document although the Company believes
that it could  register in such states if it chose to offer  franchises  in such
states.  The Company has begun the registration  process in Illinois,  New York,
Virginia and Maryland.

The Company  will be required to update its FTC  disclosure  document to reflect
the occurrence of material  events.  The occurrence of any such events may, from
time to time,  require the Company to modify its disclosure  documents within 90
days or stop offering and selling  franchises  until the document is so updated.
There can be no assurance that the Company will be able to update its disclosure
document or become  registered  to offer or sell  franchises  in certain  states
consistent  with its expansion  plans or that the Company will be able to comply
with existing or future  franchise  regulations in any particular  state, any of
which could have an adverse effect on the Company.


                                       12
<PAGE>

     (I) Trade and Service Marks and Trade Secrets

The Company  believes that the "Arthur  Treacher's"  and the "Arthur  Treacher's
Fish & Chips" service marks and other service marks may have  significant  value
and are important to the  marketing of its  restaurants  and  products.  All are
registered  with the United  States  Patent  Office.  The Company has applied to
register  "Arthur  Treacher's  Seafood  Grille" as a service mark. The Company's
principal  "Arthur  Treacher's"  and "Arthur  Treacher's Fish and Chips" service
marks are subject to renewal for 10 year periods upon  application to the United
States Patent Office in 2007. The other service marks are subject to renewal for
10 year periods on various dates between 1999 and 2001.  Upon expiration of each
period, the marks may be renewed for successive 10 year periods. There can be no
assurance,  however,  that the Company's trade and service marks do not, or will
not,  violate the  proprietary  rights of others,  that the Company's  trade and
service  marks would be upheld if  challenged  or that the Company  would not be
prevented  from  using its trade or  service  marks.  Any of the  aforementioned
instances  could  have  a  material  adverse  effect  on  the  Company  and  its
franchisees.  The  Company's  trade and service  marks have not been and are not
subject to any  material  challenges  and the  Company  has acted to  vigorously
defend the marks in several  isolated  instances where alleged  infringement has
occurred.  The Company is aware of two restaurants in the New York  metropolitan
area which infringed on the Company's service mark in 1996, each of which ceased
such infringement upon demand by the Company.

The Company utilizes a proprietary batter mix in connection with the preparation
of its seafood products.  There can be no assurance that such recipe will not be
copied by a competitor  and that the  Company's  business  will not be adversely
affected.


                                       13
<PAGE>

Item 2.   Description of Property.

The Company's  principal  executive  offices are located at 7400 Baymeadows Way,
Jacksonville,  Florida 32256 (904-739-1200).  The Company rents its 7,600 square
feet of headquarters space for an annual rent of approximately $134,000 pursuant
to a lease which expires in 2001.  The Company  believes  that its  headquarters
space is adequate for its proposed expansion.

The Company's 63 restaurants  include 32 restaurants  located in premises leased
by the Company, 30 located in premises leased by MIE, a wholly-owned  subsidiary
of the Company, and one in a property owned by MIE. In addition, with respect to
five leases,  the Company either  guarantees  the  obligations of franchisees or
leases the  properties  and subleases  them to  franchisees.  The Company's free
standing  restaurants are each approximately 2,000 square feet and the Company's
restaurants located in malls are each approximately 400 to 1,100 square feet.

The leases have remaining terms ranging from one to 16 years. Many of the leases
contain  renewal  options  for  periods  of five to 10  years.  The  Company  is
reviewing  whether to continue to operate any marginal  restaurants  acquired in
the MIE Acquisition  and to renegotiate the terms of each restaurant  lease upon
the  expiration  of each lease.  The following  chart sets forth the  expiration
dates of the terms of (i) the leases of Company owned restaurants,  and (ii) the
Company's  leases which are subleased to  franchisees  and leases of franchisees
which are guaranteed by the Company.

                                  Leases Subject
                                  to Guarantees
  Number of Leases                 or Subleases             Expiration Date
  ----------------                 ------------             ---------------
         6                               0                      1997
         4                               1                      1998
         7                               0                      1999
         3                               1                      2000
        14                               0                      2001
        11                               2                      2002
        13                               0                      2003
         7                               1                      2004
         3                               0                      After 2004


                                       14
<PAGE>

Item 3.   Legal Proceedings

In the normal course of the  Company's  business,  certain  actions may be filed
against the Company for which the Company and its legal counsel,  do not believe
would  warrant any merit.  Such  actions may prove to be  meritorious  and could
result in settlements  which could  materially and severely affect the financial
condition  of the Company.  The Company is involved in various  other claims and
legal actions arising in the ordinary  course of business.  As of June 30, 1997,
the Company has not made any  provisions  for any actions,  including the action
discussed below.  There can be no assurance that any actions against the Company
would be  resolved  in favor of the  Company  nor  that  such  actions  would be
dismissed.

ATAC  Corporation  and  Patrick  Cullen v.  Arthur  Treacher's,  Inc.  and James
Cataland,  Case No. 1:95CV 1032, in the U.S. District Court,  Northern District,
Ohio Eastern Division

On November 16, 1994, the Company  terminated the agency agreement of a Regional
Development  Representative,  ATAC  Corporation,  on the grounds  that the agent
breached  the  agreement  by  assigning  the agency  agreement  to a third party
without  the  consent  of the  Company.  On May 9,  1995,  ATAC  filed the above
lawsuit; however, ATAC did not inform the Company of the lawsuit (via service of
process  as  prescribed  by the Ohio  Rules of Civil  Procedure).  ATAC  seeks a
minimum of  $2,750,000  in  compensatory  damages  and  $6,000,000  in  punitive
damages.

On August 31, 1995,  ATAC's counsel informed the Company that a lawsuit has been
filed.  ATAC alleges that the Company  terminated  the contract  without  cause,
tortiously interfered with other business relationships,  wrongful conversion of
the territory,  restraint of trade and price-fixing,  breach of contract, fraud,
RICO and conversion.  The Company has filed a partial motion on the pleadings to
dismiss James Cataland,  Sr. and William  Saculla from the lawsuit.  The Company
has also filed a Motion for Judgment on the Pleading which requests the court to
dismiss all claims. If successful,  ATAC will only be allowed to proceed under a
breach of contract theory.

The Company  believes that the lawsuit is an attempt by plaintiffs to regain the
territory by forcing the Company to defend  expensive  litigation at significant
expense and that the plaintiffs' claims are without merit. The Company has filed
a  counterclaim  against ATAC seeking a Declaratory  Judgment that ATAC does not
have a service contract with the Company in certain areas which the Company does
business,  that ATAC has  committed  breach of contract  and that the Company is
entitled to indemnification for previous lawsuits which have occurred because of
the actions of ATAC on behalf of the Company.

In the opinion of management, the ultimate disposition of these matters will not
have  a  material  adverse  effect  on the  Company's  consolidated  results  of
operations of financial position.


                                       15
<PAGE>

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

          Not Applicable.


                                       16
<PAGE>

                                     PART II

Item 5.   Market for Common Equity and Related Stockholder Matters.

     The  following  table sets  forth the high and low  prices for the  periods
indicated as reported by the National  Daily  Quotation  Service,  Inc.  between
dealers and do not include retail  mark-ups,  mark-downs,  or commissions and do
not  necessarily  represent  actual  transactions,  as reported by the  National
Association of Securities Dealers Composite Feed or other qualified inter-dealer
quotation medium. As of September 19, 1997, the closing bid price was $3.125 per
share.

                                     Low                      High
                                     ---                      ----
1996 Fiscal Year:

First Quarter                       0.500                     1.063
Second Quarter                      0.375                     0.906
Third Quarter                       0.250                     0.875
Fourth Quarter                      0.500                     3.125

1997 Fiscal Year:

First Quarter                       2.000                     3.375
Second Quarter                      3.000                     3.375
Third Quarter                       3.000                     3.875
Fourth Quarter                      3.000                     3.313

     The Common  Stock is  recorded on the NASD  Bulletin  Board with the symbol
ATCH. As of June 30, 1997, the number of record holders of the Company's  Common
Stock was 565.


                                       17
<PAGE>

     Dividends

     To date,  the Company has not paid any dividends on its Common  Stock.  The
payment of  dividends,  if any,  in the future is within the  discretion  of the
Board of  Directors  and will depend upon the  Company's  earnings,  its capital
requirements and financial  condition,  and other relevant factors.  The Company
does not intend to declare any dividends in the foreseeable  future, but instead
intends  to retain  all  earnings,  if any,  for use in the  Company's  business
operations.  No dividends may be distributed with respect to the Common Stock so
long as there are accrued and unpaid  dividends on the Series A Preferred Stock.
The amount of accumulated  and unpaid  dividends on the Series A Preferred Stock
was approximately $96,000 as of June 30, 1997.

     In  conjunction  with the  acquisition  of MIE,  the  former  owners of MIE
(Magee)  and the Company  amended the terms of the Series B Preferred  Stock and
agreed that no dividends would accumulate on such Preferred Stock after November
30,  1996.  The Company  also agreed to pay Magee an amount equal to the accrued
dividends on the Series B Preferred  Stock through  November 30, 1996 (which was
$390,417)  in full on September 1, 1998.  In addition,  the 490,000  outstanding
shares of Series B  Preferred  Stock are now  allowed to be  convertible  at the
auction of the holder or the Company at any time,  and the  conversion  rate was
increased  so that  Magee  will  receive  765,625  shares of Common  Stock  upon
conversion for no additional consideration.  The Company has not determined when
it will require conversion of the Series B Preferred Stock into Common Stock.

Item 6.   Management's Discussion and Analysis or Plan of Operation.

This Management's  Discussion and Analysis of Financial Condition and Results of
Operations  of the  Company  should be read in  conjunction  with the  Financial
Statements and Notes thereto appearing elsewhere in this Registration Statement.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995.

     Information set forth herein contains  "forward-looking  statements"  which
can be identified by the use of forward-looking  terminology such as "believes,"
"expects,"  "may," "should" or  "anticipates"  or the negative  thereof or other
variations thereon or comparable terminology,  or by discussions of strategy. No
assurance can be given that the future  results  covered by the  forward-looking
statements will be achieved. The Company cautions readers that important factors
may affect the Company's  actual  results and could cause such results to differ
materially from forward-looking  statements made by or on behalf of the Company.
Such factors include,  but are not limited to, changing market  conditions,  the
impact  of  competitive  products,  pricing  and  acceptance  of  the  Company's
products.

Overview

The  Company's  principal  sources of revenues  are from the  operations  of the
Company owned  restaurants  and the receipt of royalties from  franchisees.  The
Company's cost of sales includes food,


                                       18
<PAGE>

supplies  and  occupancy  costs (rent and  utilities at Company  owned  stores).
Operating  expenses  include  labor  costs  at  the  Company  owned  stores  and
advertising,  marketing and maintenance  costs.  Franchise  services and selling
expenses include fees payable to regional representatives and their expenses and
the  salary  of the  Company's  Director  of  Franchise  Services.  General  and
administrative  expenses  include  costs  incurred  for  corporate  support  and
administration,  including the salaries and related expenses of personnel at the
Company's  headquarters  in  Jacksonville,   Florida  (except  the  Director  of
Franchise  Services),  the costs of operating the headquarters offices (rent and
utilities) and certain related costs (travel and entertainment).

Results of Operations

The following  discussion  includes the following  periods:  (i) the fiscal year
ended June 30, 1997 ("Fiscal 1997") and (ii) the fiscal year ended June 30, 1996
("Fiscal  1996") and the fiscal year ended June 30, 1995  ("Fiscal  1995").  The
financial  results of the Company  have been audited as of the full fiscal years
ended June 30, 1997,  June 30, 1996 and June 30, 1995.  Fiscal 1997 reflects the
operation  of MIE as of  November  27,  1996  (the date of  consummation  of the
acquisition).

Fiscal 1997 and Fiscal 1996

The Company's revenues increased 126% to $17,775,659 for Fiscal 1997 compared to
Fiscal 1996. This increase was primarily driven by the Company's  acquisition of
MIE,  an  operator  of 32  Arthur  Treacher's  Fish & Chips  restaurants,  which
generated revenue of approximately  $8,400,000 and the purchase or assumption of
nine additional  franchise  restaurants.  Comparable store sales for restaurants
operated a minimum of 12 months  increased  1.13% in Fiscal 1997 compared to the
Fiscal  1996.  The  increase in revenues was also  stimulated  by new  marketing
campaigns, new menu promotion items such as scallops, oysters and popcorn shrimp
and an aggressive approach to retain quality restaurant management.

The most significant  increase from revenues came from restaurant  sales,  which
increased  155% to  $16,934,481  in Fiscal 1997 compared to $6,648,564 in Fiscal
1996.  Franchise  and royalty  income  decreased  44% to $484,885 in Fiscal 1997
primarily because of the acquisition of 41 franchised restaurants.

The Company's total cost and expenses  excluding  depreciation  and amortization
and interest  increased 122% to  $19,033,592  for Fiscal 1997 compared to Fiscal
1996.  Approximately  $544,000 of the  increase  resulted  from  settlements  of
lawsuits,  lease  cancellations  and start-up cost  associated  with the Seafood
Grille  concept in the Detroit  market.  With the  addition of 41  Company-owned
restaurants, including 32 purchased from MIE, total costs and expenses increased
compared to Fiscal 1996,  although  total cost as a percentage to sales declined
1.75% from Fiscal 1996.

Regional representative fees, which are included in operating expenses are based
on the  number  of  representatives  and  the  amount  of  royalty  income  from
franchisees in a representative's region. Such


                                       19
<PAGE>

fees  declined  compared to Fiscal 1996 in  conjunction  with the purchase of 41
franchise  restaurants.  Each  representative  acted as the Company's  exclusive
agent in a designated territory to market and supervise  individual  franchisees
and to sell franchise  opportunities.  Each  representative  received 50% of the
royalties  received by the Company under each franchise  agreement and $9,000 of
the $19,500 initial franchise fee paid by each franchisee in such territory. The
Company has two remaining  regional  representatives  but the development of the
regional representative program has been discontinued by the Company.

Cost  of  sales  from  restaurant  operations,   which  excludes  occupancy  and
depreciation,  declined by 3.2% in Fiscal 1997 compared to Fiscal 1996 primarily
due to an aggressive effort to increase the Company's purchasing efficiencies by
reducing contract prices with several major suppliers of fish, shrimp,  chicken,
potatoes and cooking oil.

General and  administrative  expenses  increased to  $2,050,734  for Fiscal 1997
compared  to  $1,097,350  for  Fiscal  1996 as a result  of the  settlements  of
lawsuits,  disputes regarding leases and fees related to a consulting  agreement
with the former Chief Executive  Officer which became effective on June 1, 1996.
These expenses  totaled  approximately  $681,000 in Fiscal 1997,  which included
approximately $137,000 to the former Chief Executive Officer.

Interest  expense  for Fiscal 1997 was  $163,130  compared to $168,513 in Fiscal
1996.  Although  total  outstanding  debt  increased,  the  decrease in interest
expense was a function of improved  interest  rates on new debt with  respect to
recent acquisitions of restaurants.

Depreciation and amortization increased to $724,968 in Fiscal 1997 from $290,120
in Fiscal  1996.  This  increase was  primarily  caused by the increase in fixed
assets from the acquisition of restaurants.

As a  result  of  the  foregoing,  particularly  the  increase  in  general  and
administrative  expenses,  the Company's net loss was  $2,079,022 in Fiscal 1997
compared to a loss of $1,154,340 in Fiscal 1996.

On May 23, 1997 the Internal Revenue Service accepted the Company's  proposal of
payment of  $20,000  and the  forfeiture  of  $1,180,064  of the  Company's  net
operating  loss  for the  period  prior  to 1992 and  removed  all  restrictions
relative to the use of the Company's  remaining net operating losses for the tax
periods prior to 1992 and all  subsequent net operating  losses.  As a result of
this agreement,  the Company determined it has additional deferred tax assets of
$1,025,088 related to net operating loss carry forwards.  This entire amount was
recorded  during  1997 and has  been  offset  by an  increase  in the  valuation
allowance.

Fiscal 1996 and Fiscal 1995

The Company's revenues increased to $7,877,910 in Fiscal 1996 from $7,218,455 in
Fiscal 1995,  an increase of 9%. The most  significant  increase was in sales at
Company owned restaurants,  where revenues increased 18% to $6,648,564 in Fiscal
1996. Although the number of Company owned stores increased from 23 at the ended
of Fiscal 1995 to 24 at the end of Fiscal 1996, revenues at


                                       20
<PAGE>

Company  owned  stores  increased   principally  through  the  purchase  of  six
restaurants from franchisees which, in the aggregate,  had substantially  higher
sales than the  aggregate  sales of the three  Company  owned  stores  that were
closed and the one Company  owned store that was sold to a franchisee  in Fiscal
1996.  Franchise  and  royalty  income  declined  22% to $861,867 in Fiscal 1996
primarily because of the reduction in the number of franchised  restaurants from
123 at the end of Fiscal 1995 to 103 at the end of Fiscal 1996.

The Company's  total costs and expenses,  excluding  interest,  increased 16% to
$8,863,737  in Fiscal  1996.  The cost of  sales,  including  occupancy,  except
depreciation,  at Company  owned stores  increased  16% to  $3,856,776 in Fiscal
1996. As a percentage of Company owned  restaurants'  sales,  the cost of sales,
including occupancy,  except depreciation,  decreased from 59% in Fiscal 1995 to
58% in Fiscal 1996. The Company's  operating expenses increased 5% to $3,619,491
in Fiscal 1996. As a percentage of revenues,  operating  expenses decreased from
48%  in  Fiscal  1995  to  46%  in  Fiscal   1996.   Fees  payable  to  regional
representatives  declined  in  conjunction  with the  decline in  revenues  from
franchisees.  The Company's general and administrative expenses increased 56% to
$1,097,350  in Fiscal 1996 compared to Fiscal 1995. As a percentage of revenues,
general and administrative  expenses increased to 14% in Fiscal 1995 from 10% in
Fiscal  1996 as a result of  settlements  of  lawsuits  and  disputes  regarding
leases.

Interest  expenses for Fiscal 1996 also  increased to $168,513  from $101,818 in
Fiscal 1995 as a result of increased  payments to Bank One, the restructuring of
lease  obligations and interest payable on promissory notes issued in connection
with the purchase of restaurants  from  franchisees and  restructuring  of lease
obligations.

Depreciation  and  amortization  increased  69% to  $290,120 in Fiscal 1996 as a
result  of the  acquisition  of the five new  Company  owned  stores  and  costs
associated with the closing of three Company owned stores.  The Company also did
not benefit from any net operating loss carry forward in Fiscal 1996.

As a result of the foregoing,  the Company's net loss increased to $1,154,340 in
Fiscal 1996 from $389,998 in Fiscal 1995.

Liquidity and Capital Resources

The Company has financed its operations  principally  from revenues derived from
Company owned stores and royalty income from franchisees,  private placements of
equity  and a line of credit  from a bank.  The  Company's  current  liabilities
exceeded its current  assets by $599,694 at June 30, 1997 compared to $1,252,796
at June 30, 1996. The Company had cash and short-term investments of $867,847 at
June 30, 1997  compared to $990,683 at June 30,  1996.  Particularly  before the
installation  of new  management  and change in control in June 1996,  operating
losses  caused the Company to suffer  liquidity  problems,  which  included  the
Company's  inability  to make  certain  lease and note  payments  when due.  The
Company  became in  arrears  with  respect  to  certain  leases  because of poor
performance  by  stores  in those  locations.  The  Company  had  also  incurred
indebtedness in


                                       21
<PAGE>

connection  with (i) the  conversion of past due amounts under certain leases to
indebtedness and (ii) the repurchase of certain franchises,  but several of such
restaurants   were  unable  to  generate   sufficient   revenues  to  repay  the
indebtedness.

In order to increase its working capital and alleviate such liquidity  problems,
the Company sold  3,042,463  shares of Common Stock in a private  placement  for
aggregate  gross  proceeds of $1,873,552  from June through  September 1996 (the
"June Private Placement") and sold 3,163,911 shares of Common Stock in a private
placement  for aggregate  gross  proceeds of $5,631,761 in November and December
1996 (the "November  Private  Placement").  The Company  utilized  approximately
$400,000 of the proceeds of the June Private Placement to provide  collateral to
Bank  One as  security  for  the  then  outstanding  indebtedness  of  $750,000,
approximately  $350,000 to satisfy trade  payables that were  outstanding  as of
June  1,  1996,   approximately   $250,000  to  fund  losses  from   operations,
approximately $166,000 for expenses incurred in connection with the offering and
the change of control of the Company  through the hiring of Mr. R. Frank  Brown,
approximately  $125,000  for  advertising  and  public  relations  and the costs
associated with the hiring of new management personnel,  approximately  $105,000
for (i) the repayment of notes due former  franchisees who had sold  restaurants
to the Company and (ii) lease obligations, approximately $142,000 for accounting
and legal expenses  incurred in conjunction with and after the private placement
and with respect to the defense of ongoing litigation and approximately  $78,000
for  placement  fees in  connection  with the private  placement.  See  "Certain
Transactions."

The Company used  $2,250,000 of the proceeds of the November  Private  Placement
for the cash portion of the purchase of MIE. The Company anticipates that (i) an
improvement  in  the  operations  of  the  stores   purchased  from  MIE,  which
contributed revenues of approximately  $8,400,000 for Fiscal 1997, (ii) revenues
which may be generated from Company owned stores which the Company plans to open
in MIE's former  territory and (iii) the  additional  franchise fees and royalty
income  from  additional  franchises  to be sold in such states will each have a
positive impact on liquidity.

The Company used $355,000 of the proceeds of the November  Private  Placement to
satisfy its remaining  obligations to Bank One The Company has also utilized the
proceeds of the November Private Placement for restaurant  renovations to expand
the Seafood Grille  concept,  acquisition of restaurants and settlements of past
due amounts to certain  landlords  and  settlement  of certain  litigation.  The
Company is now current regarding lease payments on all of its restaurant leases.

The Company anticipates that it will need additional capital to fund investments
in capital  expenditures  related to the  Seafood  Grille  concept.  The Company
expects to spend  approximately  $2,000,000 through June 30, 1998 to develop the
Seafood Grille concept in additional  markets in the United States.  The Company
also expects to spend  approximately  $1,000,000 in working  capital to renovate
its existing  Company owned  restaurants  to  selectively  introduce the Seafood
Grille concept.

For Fiscal 1997, the Company experienced  negative cash flow resulting primarily
from start-up expenses related to the introduction of the Seafood Grille concept
into  the  Detroit   marketplace,   legal  and  lease  obligation   settlements,
integration expenses related to the acquisitions of M.I.E. and other


                                       22
<PAGE>

restaurants.  The Company  believes the costs incurred in the development of the
Seafood  Grille  concept  will enable the Company to  re-position  itself in the
marketplace  for quick  service  restaurants,  as the Company can  emphasize its
broiled food products.

The  management  of the Company has  reduced  certain  costs since the change of
control in June 1996 and continues to seek opportunities to reduce the Company's
operating costs. Since March 30, 1997, Management of the Company has reduced its
administrative  staff and has reassigned various middle management  positions to
yield a cost savings of approximately  $275,000  annually.  Since June 30, 1996,
the Company has changed  suppliers and  distributors to further reduce costs. In
addition to these measures,  management has also initiated a menu price increase
of approximately four percent. The increase in prices was the Company's first in
three years.

The Company believes that its current cash resources, cash flow from operations,
cost  savings  (including  equipment  leasing  opportunities  and  new  supplier
relationships)  and the  anticipated  proceeds  from the  proposed  sale of real
estate at one location will be sufficient to adequately fund its current working
capital  needs  through  the  fiscal  year  commencing  July 1,  1997,  although
additional  financing may be required for all planned capital  expenditures.  In
the event that the  Company  needs  additional  working  capital to finance  its
operations or capital expenditures, the Company believes it could meet its needs
through either additional borrowings or the sale of additional equity,  although
there can be no assurance  that the Company would be successful in obtaining any
such financing, or on what terms such transactions could be effected.


                                       23
<PAGE>

Item 7.   Financial Statements.

     The  financial  statements  are filed as part of this Annual Report on Form
10-KSB.

Item 8.  Changes in and Disagreements with Accountants.

     By unanimous  vote of the Board of  Directors on March 27, 1997,  KPMG Peat
Marwick LLP was ratified as the Company's new principal independent accountants.
The Company has not had any  disagreements  regarding  the  presentation  of its
financial  statements or the  application of any Generally  Accepted  Accounting
Principles with its former accountants.


                                       24
<PAGE>

                                    PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons.

      Name                    Age                  Position
      ----                    ---                  --------
Bruce R. Galloway             39             Chairman of the Board

R. Frank Brown                48             President, Chief Executive Officer,
                                                Treasurer and Director

Skuli Thorvaldsson            55             Vice Chairman of the Board

Fred Knoll                    41             Director (Designee)

Heinz Schimmelbusch           53             Director (Designee)

Dennis S. Bookshester         58             Director (Designee)

William F. Saculla            45             Secretary


Directors

Bruce R.  Galloway.  Mr.  Galloway  has been  Chairman of the Board of Directors
since May 1996. Mr.  Galloway is currently a managing  director of Burnham,  the
placement agent in the November Private  Placement,  an NASD  Broker/Dealer  and
investment  bank  based in New  York.  Prior to  joining  Burnham  in 1993,  Mr.
Galloway was a senior vice  president at  Oppenheimer  & Company,  an investment
bank and NASD  Broker/Dealer  based in New York,  from 1991  through  1993.  Mr.
Galloway holds a B.A.  degree in Economics from Hobart College and an M.B.A.  in
Finance from New York University's Stern Graduate School of Business.

R. Frank Brown.  Mr. Brown has served as  President,  Chief  Executive  Officer,
Treasurer  and  Director  since May 1996.  From May 1995 to May 1996,  Mr. Brown
worked as a consultant to an investment group associated with the Company. Prior
to working for the Company,  Mr. Brown was associated  with Shoney's and Captain
D's.  From August 1992 to May 1995, he operated,  as a franchisee,  two Shoney's
restaurants in northern  Utah.  From November 1984 to August 1992, Mr. Brown was
President of Captain D's. From August 1978 through November 1984, Mr. Brown held
numerous  positions  within the Captain D's  organization,  including Group Vice
President,  Vice  President  of  Franchise  Operations,  Director  of  Franchise
Operations,  Director of Personal  and  Training,  Personal  Recruiter  and Unit
Manager. Mr. Brown is a 1972 Graduate of Purdue University,  where he received a
B.A. degree in Psychology.


                                       25
<PAGE>

Skuli  Thorvaldsson.  Mr.  Thorvaldsson  has been Vice  Chairman of the Board of
Directors since May 1996. Mr.  Thorvaldsson has been the Chief Executive Officer
of the Hotel Holt in Iceland since 1980.  Since 1992, Mr.  Thorvaldsson has been
the  President of NTS  Financial  Services,  Ltd. Mr.  Thorvaldsson  has various
diversified interests in food court services, travel agency and pork processing.
He  is  also  a  master  franchisee  of  Domino's  Pizza  in  Scandinavia.   Mr.
Thorvaldsson is a director of Allied Resources Corp. Mr. Thorvaldsson  graduated
from the  Commercial  College of Iceland and the  University of  Barcelona.  Mr.
Thorvaldsson received his Degree in Law from the University of Iceland.

Fred Knoll. Mr. Knoll is a Director designee of the Company.  Since 1987, he has
been the principal of Knoll  Capital  Management,  L.P., a venture  capital firm
specializing in the information  technology industry.  From 1989 until 1993, Mr.
Knoll was Chairman of the Board of Directors of Telos  Corporation  (formerly C3
Inc.), a computer systems integration company with approximately $200 million in
annual sales. From 1985 to 1987, Mr. Knoll was an investment manager for General
American Investors,  responsible for the technology portfolio, and served as the
United States  representative  on investments  in leveraged  buyouts and venture
capital  for Murray  Johnstone,  Ltd.  of Glasgow,  Scotland.  Mr.  Knoll is the
Chairman of the Board of Thinkings  Tools Inc.  and of Lamar  Signal  Processing
Ltd., and he is a director of numerous  companies  including  Spradling Holdings
Ltd. and U.S.  Energy  Systems Inc. Mr. Knoll is on the Board of Advisors of SRI
International  (the European division of Stanford  Research  Institute) and is a
co-manager of the Valor Capital Management and Valor International  public stock
funds. Mr. Knoll holds a B.S. in Electrical Engineering and Computer Science and
a B.S. in Management  from  Massachusetts  Institute of Technology and an M.B.A.
from Columbia University in Finance and International Business.

Heinz C. Schimmelbusch. Mr. Schimmelbusch is a Director designee of the Company.
He is  Chairman,  President  and Chief  Executive  Officer  of  Allied  Resource
Corporation  ("Allied"),  a  company  founded  by Mr.  Schimmelbusch  in 1994 to
develop  companies  active in mining,  advanced  materials  and  recycling.  Mr.
Schimmelbusch  is also  Chairman of Alanx  Corporation,  a producer of composite
ceramics for wear solutions;  Chairman and Chief Executive  Officer of Puralube,
Inc., which is commercializing an advanced process for re-refining used oil; and
a Director of Northfield  Minerals Inc., a gold mining and  exploration  company
listed on the Toronto Stock Exchange.  Mr.  Schimmelbusch has been a Director of
Safeguard Scientific  Corporation,  a company whose shares are listed on the New
York Stock Exchange,  since 1989. Prior to 1994, Mr.  Schimmelbusch was Chairman
of the Management  Board of  Metallgesellschaft  AG,  Germany,  a  multinational
company in the process  industries,  and  Chairman of the  Supervisory  Board of
LURGI AG, Germany's  leading process  engineering firm; of Buderus AG, a leading
manufacturer of commercial and residential  health  equipment;  of Dynamit Nobel
AG, a  leading  manufacturer  of  explosives;  and  Norddeutsche  Affinerie  AG,
Europe's largest copper producer. Mr. Schimmelbusch also served on the Boards of
several  leading  German   Corporations  and  institutions,   including  Allianz
Versicherungs AG, Munich; Philipp Holzmann AG, Frankfurt; Mobil Oil AG, Hamburg;
Teck Corporation,  Vancouver; and others. Mr. Schimmelbusch has been the founder
and  Chief  Executive  Officer  of a  number  of  public  companies  in  process
industries,  including:  Inmet  Corporation,  Toronto,  Canada  (formerly Metall
Mining  Corporation);   Methanex  Corporation,  Vancouver,  Canada;  and  B.U.S.
Umweltservice AG, Frankfurt,


                                       26
<PAGE>

Germany.  Mr. Schimmelbusch served as a Member of the Presidency and Chairman of
the  Environmental  Division  of the  German  Industrial  Association  (BDI) and
represented  Germany  on the  Executive  Board of the  International  Chamber of
Commerce,  Paris, where he held the office of Vice President.  Mr. Schimmelbusch
received his graduate  degree (with  distinction)  and his doctorate  (magna cum
laude) in Economics from the University of Tubigen, Germany.

Dennis S.  Bookshester  Mr.  Bookshester is a Director  designee of the Company.
Since  1991,  he has been a  business  consultant.  In January  1997,  he became
President and Chief Executive  Officer of H20 Plus, LLP. From 1990 through 1991,
he served as President and Chief  Executive  Officer of Zale  Corporation.  From
1984 through  1989,  he served as Vice  Chairman of Carson Pirie Scott & Company
and as Chairman and Chief Executive  Officer of its retail  division.  From 1983
through  1984, he served as the  President  and Chief  Executive  Officer of the
Department  Stores  Division of Carson Pirie Scott & Company.  From 1977 through
1983, he held various executive positions with Associated Dry Goods Corporation,
where he served as President of its Caldor,  Inc.  subsidiary  from 1982 through
1983,  as  Chairman  and Chief  Executive  Officer of Sibley,  Lindsay  and Curr
Division  from 1978 through 1982 and as  President  of such  division  from 1977
through 1978.  From 1961 through 1977 he was with Federated  Department  Stores,
Inc. where he became Senior Vice President of Merchandising.  Mr. Bookshester is
a Director of Evans, Playboy Enterprises Inc., AMRE, Fruit of the Loom, Sundance
Homes,  American Gem  Corporation  and the University of Chicago Council for the
Graduate School of Business.  Mr. Bookshester  received his B.S. degree from the
University of Alabama in 1960.

William F.  Saculla.  Mr.  Saculla has served as Secretary of the Company  since
1984.  Mr.  Saculla  is  responsible  for  the  Company's   financial  reporting
activities and internal controls. Mr. Saculla earned a B.S. degree in Accounting
from Youngstown State University in 1978.

Each  Director is elected to serve until the  Company's  next annual  meeting of
Shareholders and until his successor is duly elected and qualified. There are no
agreements  with respect to the election of  directors.  Executive  officers are
appointed  annually by the Board of Directors and each executive  officer serves
at the discretion of the Board of Directors.  The Director designees have agreed
to become members of the Board of Directors upon the Company obtaining  Director
and  Officer  liability  insurance.  The  Company  has  requested  bids for such
insurance to several  insurance  companies and will obtain such  insurance  upon
acceptance of a bid.

Other Key Employees

Michael D. Proulx,  Director of  Franchise  Services.  Mr.  Proulx has served as
Director of Franchise  Development  since  January  1994.  He was the owner of a
Company  franchise from December 1992 through August 1996, when it was purchased
by the Company.  Prior to October 1992,  Mr. Proulx was a  Commissioned  Officer
serving  as a Pilot and  Intelligence  Officer in the  United  States  Army with
assignments  that included  that of Company  Commander,  Airfield  Commander and
Brigade Operations Officer.  Mr. Proulx is a 1973 graduate of Cornell University
where he received a B.S.


                                       27
<PAGE>

degree in Economics.  Mr. Proulx also received an M.S.  degree in  International
Relations from Troy State University in 1988.

Jana Williams,  Director of Marketing.  Ms. Williams rejoined the Company as the
Director  of  Marketing  in June  1996.  Prior to  this,  Ms.  Williams  was the
Marketing  and Media  Coordinator  for the Company from December 1993 to January
1996.  From January 1996 to June 1996,  she was an Account  Coordinator at Harte
Hanks Direct Marketing. From January 1992 to June 1993, Ms. Williams served as a
Convention Coordinator for Technol Medical Products, Inc., in Fort Worth, Texas.
From May 1986 through  January 1992, she served as Women's  Services  Specialist
for the Team Bank in Dallas,  Texas.  Ms.  Williams  is a 1990  graduate  of the
University of Texas, Arlington where she earned a B.A. in Marketing.

Committees

In  December  1996,  the Board of  Directors  formed the  following  committees:
Executive,  Compensation and Audit. The Board of Directors  elected Frank Brown,
Bruce  Galloway  and  Skuli  Thorvaldsson  to  the  Executive   Committee.   The
Compensation  Committee  of the Board of  Directors  was  formed  to review  the
Company's executive compensation proposals, subject to the approval of the Board
of  Directors.  The  Compensation  Committee is composed of Dennis  Bookshester,
Skuli Thorvaldsson and Bruce Galloway.  The Audit Committee was formed to advise
the Board in matters relating to the audit of the Company's financial statements
and the Company's financial reporting systems.  The Board elected Messrs.  Bruce
Galloway,  R. Frank Brown, Skuli  Thorvaldsson,  William Saculla,  the Company's
Secretary,  and George Koo, an independent advisor to the Company, as members of
the Audit Committee.

In addition, the International Advisory Committee was formed to advise the Board
of Directors  regarding  international  operations and expansion  opportunities,
although without the power to obligate the Company. The Board selected Gudmundur
Jonsson,  David Baron,  Valdimar Thomasson,  Evan Binn, Gisly Martinsson,  Lorie
Karnath and Hans Rutkowski to the International Advisory Committee.


                                       28
<PAGE>

Item 10.  Executive Compensation.

     The following  table provides  certain summary  information  concerning the
compensation  paid or  accrued  by the  Company  to or on  behalf  of its  Chief
Executive  Officer  and the other  named  executive  officers of the Company for
services  rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended June 30, 1997, 1996 and 1995.

(a) Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                                       Long-Term Compensation

                                                 Annual Compensation                                  Awards Payouts    Payouts
                                ---------------------------------------------------                   --------------    -------
Name and                                                  Other Annual   Restricted     Securities         LTIP        All Other
Principal Position     Year     Salary          Bonus     Compensation   Stock          Underlying         Payouts     Compensation
                                                                         Award(s)       Options/SARs
<S>                    <C>      <C>             <C>       <C>            <C>            <C>                <C>              <C>
R. Frank Brown         1997     $125,000.00     0.00      $0.00          0.00           20,000             $0.00            0
President, CEO,                                                                         shares of
Treasurer                                                                               Common Stock

                       1996      $10,025.00     0.00      $0.00          0.00           700,000            $0.00            0
                                                                                        shares of
                                                                                        Common Stock

                       1995           $0.00     0.00      $0.00          0.00                0             $0.00
</TABLE>


                                       29
<PAGE>

(b)  Option/SAR Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                              Number of Securities         Percent of total
                              Underlying Options/SARs      options/SARs granted to
Name                          granted                      employees in fiscal year     Exercise or base price       Expiration Date
<S>                           <C>                          <C>                          <C>                          <C>
R. Frank Brown (1)            20,000 shares of Common      100%                         $3.37                        2002-2005
                              Stock
</TABLE>

----------
(1)  25% of the  options  vest each year over a period of four years  commencing
     March 27, 1997 and are exercisable for five years after vesting.

(c) Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values

<TABLE>
<CAPTION>
                     Shares acquired on                          Number of Unexercised             Value of unexercised in-the-money
Name                 exercise               Value Realized       options/SARs at June 30, 1996     options/SARs at June 30, 1997
<S>                  <C>                    <C>                  <C>                               <C>                  
R. Frank Brown(1)    0                      0                    720,000 options                   $192,500 Exercisable,
                                                                                                   $770,000 Unexercisable

                                                                 145,000 Exercisable
                                                                 575,000 Unexerciseable
</TABLE>

----------
(1)  25% of the  options  for 20,000  vest each year over a period of four years
     commencing March 27, 1997 and are exercisable for five years after vesting.
     20% of the options for 700,000  shares vest each year over a period of five
     years  commencing  June 1, 1997 and are  exercisable  for five years  after
     vesting.

(d) Long-Term Incentive Plans -- Awards in Last Fiscal Year

<TABLE>
<CAPTION>
                                                                                         Estimated future payouts under
                                                                                           non-stock price based plans
                         Number of shares,       Performance or other period     -------------------------------------------------
Name                     units or other rights   until maturation or payout      Threshold               Target            Maximum
<S>                      <C>                     <C>                                <C>                    <C>               <C>
R. Frank Brown(1)        20,000                  March 1997-March 2001              N/A                    N/A               N/A
</TABLE>

----------
(1)  25% of these options vest each year over a period of four years  commencing
     March 27, 1997 and are exercisable for five years after vesting.

Mr. R. Frank Brown has executed an employment  agreement  with the Company which
provides  for a salary of $125,000  per year for a term of two years  commencing
June 1, 1996. The agreement is renewable annually for additional one year terms.
Pursuant to the employment  agreement,  the Company granted Mr. Brown options to
purchase an aggregate of 700,000 shares of Common Stock,  with an exercise price
of $1.375 per share with respect to 350,000 shares and an exercise price of


                                       30
<PAGE>

$2.125 per share with respect to 350,000 shares.  20% of these options vest each
year over a period of five years commencing June 1, 1997 and are exercisable for
five years after vesting.  In the event that Mr. Brown's employment  contract is
not  renewed,  he will only be  entitled to exercise  those  options  which have
vested as of the date of termination.  In March 1997, Mr. Brown received options
to  purchase  20,000  shares of Common  Stock at a  purchase  price of $3.37 per
share.  25% of  these  options  vest  each  year  over a  period  of four  years
commencing March 27, 1997. The Company has also purchased  $1,000,000 of key man
life insurance on Mr. Brown, of which the Company is the beneficiary.  Ownership
of the policy will be  assigned to Mr.  Brown upon  termination  of Mr.  Brown's
employment. Mr. Brown also receives a car allowance of $600 per month.

Item 11.  Security Ownership of Certain Beneficial Owners and Management.

     The following  table sets forth  information  as of September 15, 1997 with
respect to  officers,  directors  and persons who are known by the Company to be
beneficial  owners  of more than 5% of the  Company's  Common  Stock.  Except as
otherwise  indicated,  the Company  believes that the  beneficial  owners of the
Common Stock listed below, based on information  furnished by such owners,  have
sole  investment  and voting  power  with  respect  to such  shares,  subject to
community property laws where applicable.

Shareholder                                        Shares            Percentage
--------------------------------------------------------------------------------
Bruce R. Galloway(1)                             1,812,334              11.7
Lifeyrissjodur Austurlands                       1,179,875               8.2
Skuli Thorvaldsson(2)                            1,172,666               8.0
Evan Binn and Ronna Binn(3)                        925,094               6.4
Fred Knoll (4)                                     843,916               5.9
Liferissjodur Vestmannaeyinga                      823,125               5.7
Lifeyrissjodurinn Hlif                             821,875               5.7
AFC Enterprises, Inc.(5)                           776,666               5.4
Magee Industrial
  Enterprises, Inc.(6)                             765,625               5.1
R. Frank Brown(7)                                  195,000               1.3
Heinz Schimmelbusch(8)                              76,668               0.5
William Saculla(9)                                  18,000               0.1
Dennis Bookshester(10)                              10,000               ---

Officers and Directors as a Group(11)            4,128,584              26.5%

Total Outstanding Shares (12)                   14,399,248


                                       31
<PAGE>

Notes

(1)  Mr. Bruce R. Galloway is the Chairman of the Board of the Company. Includes
     (i) warrants to purchase 430,000 shares of Common Stock at a purchase price
     of $1.51,  which  warrants  are  exercisable  through  May 31,  2001,  (ii)
     warrants to purchase  250,000 shares of Common Stock which are  exercisable
     at an exercise price of $3.00 per share through December 31, 2001 and (iii)
     warrants to purchase 5,000 shares of Common Stock which are  exercisable at
     an  exercise  price of $3.37 per share  through  March 27,  2002.  Does not
     include  warrants to purchase  15,000 shares of Common Stock at an exercise
     price of $3.37  per  share for five  years,  5,000 of which  vest each year
     commencing March 27, 1998.

(2)  Includes  (i)  warrants to  purchase  250,000  shares of Common  Stock at a
     purchase  price of $1.51,  which warrants are  exercisable  through May 31,
     2001,  (ii)  warrants to purchase  50,000  shares of Common Stock which are
     exercisable through January 9, 1997 at an exercise price of $3.00 per share
     and (iii)  warrants  to  purchase  5,000  shares of Common  Stock which are
     exercisable at an exercise price of $3.37 per share through March 27, 2002.
     Does not include  warrants to purchase  15,000 shares of Common Stock at an
     exercise price of $3.37 per share for five years,  5,000 of which vest each
     year  commencing  March 27, 1998.  Includes  867,666 shares of Common Stock
     owned by NTS  Financial  Services,  Inc.,  of  which  Mr.  Thorvaldsson  is
     President.

(3)  Includes  warrants to purchase  50,000  shares of Common Stock owned by Mr.
     and Mrs. Binn,  which warrants are exercisable at a purchase price of $1.51
     per share through May 31, 2001.

(4)  Mr.  Fred  Knoll,  a Director  designee of the  Company,  owns  warrants to
     purchase 10,000 shares of Common Stock at an exercise price of $3.37, which
     warrants are exercisable through March 27, 2002. Includes 833,916 shares of
     Common Stock owned by Knoll Capital Management, Inc., of which Mr. Knoll is
     the sole shareholder.

(5)  Includes  warrants to purchase  100,000 shares of Common Stock owned by Mr.
     Andrew  Catapano,   President  of  AFC   Enterprises.   Such  warrants  are
     exercisable at a purchase price of $1.51 per share through May 31, 2001.

(6)  Gives  effect to the  conversion  of 490,000  shares of Series B  Preferred
     Stock into 765,625 shares of Common Stock for no additional consideration.

(7)  Mr. R. Frank Brown is the President, Chief Executive Officer, Treasurer and
     a Director of the Company.  Includes  140,000  options  granted  which have
     vested but does not include  560,000  options granted which have not vested
     pursuant to Mr.  Brown's  employment  agreement to purchase an aggregate of
     700,000 shares of Common Stock,  with an exercise price of $1.375 per share
     with  respect to 350,000  shares and an exercise  price of $2.125 per share
     with  respect to 350,000  shares.  20% of such options vest each year for a
     period of five years commencing June 1, 1997. Includes warrants to purchase
     5,000 shares of Common


                                       32
<PAGE>

     Stock which are exercisable at an exercise price of $3.37 per share through
     March 27,  2002.  Does not include  warrants to purchase  15,000  shares of
     Common Stock at an exercise price of $3.37 per share for five years,  5,000
     of which vest each year commencing March 27, 1998

(8)  Mr.  Heinz  Schimmelbusch,   a  Director  designee,   disclaims  beneficial
     ownership of 133,334 shares of Common Stock held in trust for his children.
     Includes  warrants  to  purchase  10,000  shares of Common  Stock which are
     exercisable through March 27, 2002 at an exercise price of $3.37 per share.

(9)  Mr. William  Saculla is the Secretary of the Company.  Includes  options to
     purchase 3,000 shares of Common Stock at a price of $2.65 per share through
     August 31, 2002.  Does not include options which have been granted but have
     not vested to purchase  12,000  shares of Common  Stock at a price of $2.65
     per share.  20% of such options vest for a period of five years  commencing
     September 1, 1998.

(10) Includes  warrants  to  purchase  10,000  shares of Common  Stock which are
     exercisable through March 27, 2002 at an exercise price of $3.37 per share.

(11) Involves  66,668  shares of Common  Stock and  warrants to purchase  30,000
     shares of Common Stock owned by Directors designees.

(12) Gives no effect to the  issuance  of any  shares of Common  Stock  upon the
     exercise of any outstanding options or warrants,  including:  (i) 1,335,000
     shares of Common Stock upon the exercise of currently  exercisable warrants
     with an exercise  price of $1.51 per share,  (ii) 400,000  shares of Common
     Stock upon the exercise of currently  exercisable warrants with an exercise
     price of $3.00 per share,  (iii)  316,391  shares of Common  Stock upon the
     exercise of currently exercisable warrants issued to the placement agent of
     the November Private Placement,  with an exercise price of $3.30 per share,
     (iv) 110,000  shares of Common  Stock  issuable to employees of the Company
     other  than Mr.  Brown for an  exercise  price of $2.65,  which vest over a
     period of five years commencing September 1, 1997, (v) 5,000 other warrants
     with an exercise price of $3.00 per share  exercisable  through January 31,
     2002, and (vi) 700,000 shares of Common Stock issuable upon the exercise of
     options which vest over a period of five years issued to Mr. Brown, and the
     issuance of 862,514  shares of Common Stock upon  conversion  of all of the
     outstanding shares of Series A and Series B Preferred Stock.

     Magee  Industrial  Enterprises  is the sole owner of the 490,000  shares of
     Series B Preferred Stock which is convertible into 765,625 shares of Common
     Stock. Twenty  shareholders,  none of whom are affiliated with the Company,
     own all of the 89,200 outstanding shares of Series A Preferred Stock, which
     are convertible into 96,889 shares of Common Stock.


                                       33
<PAGE>

Item 12.  Certain Relationships and Related Transactions.

On May 31, 1996, Mr. James R. Cataland sold 2,000,000  shares of Common Stock to
an investor  group led by Mr.  Bruce  Galloway,  the  Company's  Chairman of the
Board, for an aggregate sale price of $1,200,000. With respect to such 2,000,000
shares, Mr. Galloway purchased 416,667 shares, NTS Financial Services,  LTD. (an
affiliate  of Mr.  Thorvaldsson,  the  Company's  Vice  Chairman  of the  Board)
purchased  416,666 shares,  Lifeyrissjodurinnn  Hilf (an Icelandic pension fund)
purchased  546,875  shares,  Heinz  Schimmelbusch  and  members  of  his  family
purchased 200,000 shares and certain non-affiliates of the Company purchased the
remaining  419,792 shares.  Contemporaneously  with such sale, James A. Cataland
and William  Saculla  resigned  from the Board of Directors of the Company,  Mr.
Cataland  resigned as President of the Company and Messrs.  Galloway,  Brown and
Thorvaldsson were elected to the Board of Directors. Mr. Galloway paid $0.60 per
share purchased from Mr.  Cataland,  but received no placement fee in connection
therewith. Certain other purchasers of the balance of 2,000,000 shares of Common
Stock from Mr.  Cataland and  3,042,463  shares of Common Stock from the Company
paid $0.64 per share. Of the $0.64 purchase price per share, $0.04 per share was
paid as a  placement  fee to Mr.  Galloway,  and other  broker/dealers,  and Mr.
Cataland  and the Company  received  $0.60 per share from such  investors.  With
respect to such private placement,  approximately $40,000 in placement fees were
paid to Mr. Bruce Galloway in his capacity as a placement  agent.  Upon the sale
of his shares of Common  Stock,  Mr.  Cataland  was retained by the Company as a
consultant  under a consulting  agreement.  Under this  agreement,  Mr. Cataland
receives  a  consulting   fee  of  $100,000  per  year,   payable  in  bi-weekly
installments for two years which commenced June 1, 1996.

On May 31, 1996,  Messrs.  Bruce  Galloway,  Skuli  Thorvaldsson  and  Gudmundur
Jonsson agreed to be jointly and severally liable for the Company's  obligations
to Bank One under a term loan in the original  principal  amount of $750,000 and
Mr. Andrew Catapano,  the President of AFC Enterprises (a principal  shareholder
of the Company) agreed to guarantee $187,500 of the Company's obligations.  Upon
repayment of the loan on December 2, 1996, the guarantees  were  terminated.  In
consideration  for  such  guarantors  providing  the  guarantees  and  providing
approximately   $170,000  to  fund  certain  expenses  in  connection  with  the
acquisition of Mr.  Cataland's  shares and the placement of the Company's Common
Stock in May 1996, the Company issued 555,000 warrants to Mr. Galloway,  250,000
warrants  to Mr.  Thorvaldsson,  250,000  warrants  to Mr.  Jonsson  and 100,000
warrants to Mr. Catapano.  Such warrants are exercisable at a price of $1.51 for
a period of five years through May 31, 2001.

On August 26, 1996, the Company  purchased  substantially  all of the assets and
selected liabilities of Proulx Properties,  Inc., a corporation owned by Michael
Proulx,  the  Company's  Director  of  Franchise  Services.  The  assets  of the
corporation  consisted of a  franchised  restaurant  located in Port  Charlotte,
Florida.  The  purchase  price was 22,000  shares of Common Stock of the Company
valued at $68,750. On the date of the transaction,  the average of the Company's
closing bid and asked prices was $3.125 per share.


                                       34
<PAGE>

On  November  27,  1996 the Company  purchased  100% of the common  stock of its
largest  franchisee,  MIE Hospitality,  Inc. (MIE),  whose operations include 32
restaurants in the midwest and northeast  United States.  The purchase price was
$4,232,976  (calculated  as  $2,250,000 in cash,  $1,139,563  in long-term  debt
assumed and $843,413,  which  represents the rights to acquire 275,625 shares of
Company  common stock for no  consideration  at a future date. As of the date of
the  acquisition,  Magee was owned by 11 individuals and 10 trusts,  all of whom
are relatives or trusts for the benefit of relatives.  None of such shareholders
own more  than 10% of the  issued  and  outstanding  stock  of  Magee.  Harry M.
Katerman, the owner of 8.8% of the stock of Magee is the President of Magee.

The  $1,139,563  principal  amount  of  remaining  debt  owed by MIE to Magee is
evidenced by a promissory note (the "Magee Note") payable in 10 equal semiannual
installments,  with the  first  payment  being due on June 1, 1998 and the final
payment being due on December 1, 2002.  The  principal  amount of the Magee Note
bears  interest at the rate of eight  percent  (8%) per annum,  and  interest is
payable every six months  commencing  June 1, 1997. In the event of a closing of
any financing by the Company in excess of $10,000,000, provided that the debt or
equity  financing  which results in equaling or exceeding  the  aggregate  gross
proceeds of  $10,000,000  is a debt or equity  financing for gross proceeds of a
minimum of  $5,000,000  (other than any purchase  money  financing in connection
with the acquisition of any assets) or the sale of all or  substantially  all of
the  capital  stock  of the  Company  or MIE,  the  balance  of all  outstanding
principal  and  interest  under  the Magee  Note  shall be  immediately  due and
payable.

The 490,000 shares of Series B Preferred  Stock of the Company owned by MIE were
transferred  to Magee in connection  with the Company's  acquisition of MIE. The
Series B Preferred  Stock is convertible  into 765,625 shares of Common Stock of
the Company at the option of the Company  commencing April 27, 1997. The Company
agreed to pay Magee an amount  equal to the  accrued  dividend  on the  Series B
Preferred  Stock of $390,417  through  November 30, 1996 in full on September 1,
1998. Such obligation  shall not bear interest and no dividends have accumulated
on such Preferred Stock since November 30, 1996.

In connection  with the November  Private  Placement,  Bruce  Galloway  received
$71,000 as selling  commissions.  Burnham,  the placement  agent of the November
Private Placement,  had agreed to pay Mr. Galloway, the Chairman of the Board of
the Company and a Managing  Director  of Burnham,  20% of the cash  compensation
payable to Burnham in consideration for his services rendered in connection with
the November Private Placement.

Effective  January 10, 1997, the Company  issued  250,000  warrants to Mr. Bruce
Galloway,  100,000  warrants  to Mr.  George  Koo (an  advisor to the Board) and
50,000  warrants to Mr. Skuli  Thorvaldsson.  The warrants are exercisable for a
term of five years at an exercise  price of $3.00 per share.  The warrants  were
issued for  services  rendered in  connection  with the  acquisition  of MIE and
represented  the  reinstatement  of 400,000  warrants  previously  issued to Mr.
Galloway (with an exercise price of $0.60 per share) which had expired in August
1995.


                                       35
<PAGE>

Item 13.  Exhibits and Reports

     (a)  Exhibits

           3.1.1    *Registrant's Certificate of Incorporation

           3.1.2    *Agreement  and Plan of  Reorganization  and First  Addendum
                    dated December 5, 1983

           3.1.3    *Certificate of Merger dated January 23, 1984

           3.1.4    *Articles of Merger dated January 27, 1984

           3.1.5    *Articles of Amendment  to Articles of  Incorporation  dated
                    January 27, 1984

           3.1.6    *Amendment  to Articles of  Incorporation  dated January 27,
                    1986

           3.1.7    *Articles of Amendment  to Articles of  Incorporation  dated
                    June 28, 1996

           3.2      *Registrant's Bylaws

           4.1      *Form of Common Stock Certificate

           4.2      *Certificate of Designation on Series A Preferred Stock

           4.3      *Certificate of Designation on Series B Preferred Stock

           10.1     *Purchase   Agreement  dated  May  31,  1996  between  James
                    Cataland and Registrant

                         Exhibits
                         --------
                         *Exhibit A - Option Agreement (See Exhibit 10.16)
                         *Exhibit B - Consulting Agreement (See Exhibit 10.14)

                         Schedules
                         ---------
                         **Schedule A - States of Incorporation and
                           Qualification

                         **Schedule B - Financial Statements
                         **Schedule C - Taxes
                         **Schedule D - Contracts
                         **Schedule E - Accounts Receivable
                         **Schedule F - Litigation


                                       36
<PAGE>

                         **Schedule G - Conflicting Interests
                         **Schedule H - Leases **Schedule I - Franchises
                         **Schedule J - Trademarks
                         **Schedule K - Payroll Register
                         **Schedule L - Employment Contracts
                         **Schedule M - Insurance Policies

           10.2     *Employment  Agreement  dated June 1, 1996  between R. Frank
                    Brown and Registrant

           10.3     *Purchase  Agreement dated November 27, 1996, between M.I.E.
                    Hospitality and Registrant

                         Schedules
                         ---------
                         **Schedule 1       Notice of Target Inter-Company Debt

                         **Schedule 1(b)    Seller's  Distribution Schedule (See
                                            Exhibit 10.17)

                         **Schedule B       Qualifications       as      Foreign
                                            Corporations   in   Delaware,    New
                                            Jersey, New York

                         **Schedule 2(a)    Capital    Stock    Representations,
                                            Exceptions, etc.

                         **Schedule 2(b)    Exceptions   to  GAAP  and  Ordinary
                                            Course of Business  since  September
                                            30, 1996, etc.

                         **Schedule 2(c)    Disclosure of  Liabilities of M.I.E.
                                            Hospitality    Not    Disclosed   in
                                            Financial    Statements   or   Other
                                            Schedules

                         **Schedule 2(d)    Exceptions     to    Tax    Returns,
                                            Representations and Warranties

                         **Schedule 2(e)    List of assets owned or leased, etc.

                         **Schedule 2(f)    Exceptions    to    Usability    and
                                            Salability of Inventories

                         **Schedule 2(g)    Contracts, Notices, Defaults, etc.


                                       37
<PAGE>

                         **Schedule 2(g)(5) Insurance policies and bonds

                         **Schedule 2(g)(6) Banks

                         **Schedule 2(g)(7) Interests  in  entities  having been
                                            party to transaction  with M.I.E. in
                                            past 12 months

                         **Schedule 2(g)(8) Consents  or   approvals   of  third
                                            parties

                                            required

                         **Schedule 2(g)(9) Accounts receivable aging schedule

                         **Schedule 2(i)    Salary  increases,   contracts  with
                                            employees,  agents, etc., and M.I.E.
                                            benefit   plans;   M.I.E.    payroll
                                            roster;     Collective    Bargaining
                                            Agreements

                         **Schedule 2(k)    Legal Actions

                         **Schedule 2(l)    Patents  and  trademarks,  licenses,
                                            etc.

                         **Schedule 2(m)    List of  Indemnification  Given  for
                                            M.I.E.   Hospitality   for   Patent,
                                            Trademark or Copyright Infringement

                         **Schedule 2(o)    Insurance  Policies,   see  Schedule
                                            2(g)(5)

                         **Schedule 2(p)    Outstanding  Loans  or  Advances  or
                                            Obligations   to   Make   Loans   or
                                            Advances

                         **Schedule 2(r)    Environmental

                         **Schedule 3(b)    Consents required for performance by
                                            Buyer

                         **Schedule 3(d)    Preferred     Stock    Rights    and
                                            Preferences

                         **Schedule 3(e)    Buyer Financials


                                       38
<PAGE>

                         **Schedule 5       Consents  and Release of  Guarantees
                                            Received   by   M.I.E.   Hospitality
                                            (Identified Leases)

                         **Schedule 5(i)    Consents   to   Lease,   etc.,   not
                                            received

                         **Schedule 7(e)    Actual Knowledge (individuals)

                         **Schedule 12(i)   Target Working Capital Statement

                         Exhibits
                         --------
                          *Exhibit A        M.I.E. Note (See Exhibit 10.8)

                          *Exhibit B        Buyer Guaranty (See Exhibit 10.4)

                          *Exhibit C        Buyer Note (See Exhibit 10.7)

                         **Exhibit 2(b)     Balance  Sheets  and  statements  of
                                            Income as of 12/31/95 and 9/30/96

                         **Exhibit D        Form of Questionnaire

                         **Exhibit D-1      Responses to Questionnaire

                          *Exhibit E        Escrow Agreement (See Exhibit 10.5)

                          *Exhibit F        General Mutual Releases (See Exhibit
                                            10.6)

           10.4    *Guaranty Surety Agreement dated November 27, 1996 by Arthur
                    Treacher's, Inc.
     
           10.5     *Escrow  Agreement  dated  November  27,  1996 among  Arthur
                    Treacher's, Inc. Seller and Brown Brothers Harriman & Co.
     
           10.6     *Mutual  Release  Agreement  dated November 27, 1996,  among
                    M.I.E.  Hospitality,  Inc. and Magee Industrial Enterprises,
                    Inc.
     
           10.7     *Promissory  Note dated  November 27, 1996 for $390,417 from
                    M.I.E.  Hospitality,  Inc.  in  favor  of  Magee  Industrial
                    Enterprises Inc.
     
           10.8     *Promissory Note dated November 27, 1996 for $1,139,563 from
                    M.I.E.  Hospitality,   Inc  in  favor  of  Magee  Industrial
                    Enterprises, Inc.


                                       39
<PAGE>

           10.9     *Uniform Franchise Offering Circular as of January 1, 1997

           10.10    *Form of Franchise Agreement as of January 1, 1997

           10.11    *Form of Warrant exercisable at $1.51 per share

           10.12    *Form of Warrant to Burnham Securities, Inc.

           10.13    *Form of Stock Option to Employees

           10.14    *Consulting  Agreement  dated  May 31,  1996  between  James
                    Cataland and Registrant

           10.15    *Termination  Agreement  dated May 31,  1996  between  James
                    Cataland and Registrant

           10.16    *Option   Agreement  dated  March  29,  1996  between  James
                    Cataland and Skuli Thorvaldsson

           10.17    *Schedule 1(b) to the Purchase  Agreement dated November 27,
                    1996 between M.I.E. Hospitality and Registrant .

           10.18    *Form of agreement with holders of Series A Preferred Stock

           11.1     *Statement of Computation of Per Share Earnings

           21.      *List of Subsidiaries

           27.      *Financial Data Schedules

*    Previously Filed with Form 10-SB Declared Effective on August 12, 1997

**   Not Included with previous filings.


                                       40
<PAGE>

                                   SIGNATURES

     In accordance  with the  Securities  Exchange Act of 1934,  the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                        ARTHUR TREACHER'S, INC.
                                              (Registrant)

Date:  September 28, 1997               By   /s/ R.Frank Brown
                                             --------------------------
                                             R. Frank Brown,
                                             President, Chief Executive Officer,
                                             Treasurer

<TABLE>
<CAPTION>
            Name                                        Title                                 Date
            ----                                        -----                                 ----

<S>                                         <C>                                         <C> 
/s/ R. Frank Brown                          Director, President, Chief Executive        September 28, 1997
-----------------------------------         Officer, Treasurer
R. Frank Brown                     


/s/ Bruce Galloway                          Director, Chairman of                       September 28, 1997
------------------------------------        the Board
Bruce Galloway                      

                                            Director                                    September __, 1997
-----------------------------------
Skuli Thorvaldsson
</TABLE>

                                       41
<PAGE>



                             ARTHUR TREACHER'S, INC.



                   Index to Consolidated Financial Statements






                                                                         Page
                                                                         ----

Independent Auditors' Report of KPMG Peat Marwick LLP                    F-2

Independent Auditors' Report of Lytkowski & Pease, Inc.                  F-3

Consolidated Balance Sheets as of June 30, 1997 and 1996                 F-4

Consolidated Statements of Operations for the years ended
     June 30, 1997 and 1996                                              F-6

Consolidated Statements of Stockholders' Equity (Deficit) 
     for the years ended June 30, 1997 and 1996                          F-7

Consolidated Statements of Cash Flows for the years ended
     June 30, 1997 and 1996                                              F-8

Notes to Consolidated Financial Statements                               F-9


                                       F-1


<PAGE>




                          Independent Auditors' Report
                          ----------------------------


The Board of Directors
Arthur Treacher's, Inc.:

We  have  audited  the  accompanying   consolidated   balance  sheet  of  Arthur
Treacher's, Inc. as of June 30, 1997, and the related consolidated statements of
operations,  stockholders'  equity  (deficit),  and cash flows for the year then
ended.  These  consolidated  financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Arthur Treacher's,
Inc. as of June 30,  1997,  and the results of their  operations  and their cash
flows for the year then ended, in conformity with generally accepted  accounting
principles.

                                        KPMG Peat Marwick LLP




Jacksonville, Florida
August 29, 1997


                                       F-2


<PAGE>




                          Independent Auditors' Report
                          ----------------------------


The Board of Directors
Arthur Treacher's, Inc.:

We  have  audited  the  accompanying   consolidated   balance  sheet  of  Arthur
Treacher's, Inc. as of June 30, 1996, and the related consolidated statements of
operations,  stockholders'  equity  (deficit),  and cash flows for the year then
ended.  These  consolidated  financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Arthur Treacher's,
Inc. as of June 30,  1996,  and the results of their  operations  and their cash
flows for the year then ended, in conformity with generally accepted  accounting
principles.



                                        Lytkowski & Pease, Inc.


Cleveland, Ohio
September 20, 1996


                                       F-3


<PAGE>




                             ARTHUR TREACHER'S, INC.

                           Consolidated Balance Sheets

                             June 30, 1997 and 1996


<TABLE>
<CAPTION>
Assets                                                           1997         1996
------                                                           ----         ----
<S>                                                           <C>           <C>      
Current assets:
  Cash and cash equivalents                                     $867,847      990,683
  Accounts receivable, net of allowance of $25,900
      in 1997 and $39,000 in 1996                                137,598      147,122
  Inventories                                                    288,663       68,668
  Prepaid expenses                                               181,544       34,867
                                                              ----------   ----------
           Total current assets                                1,475,652    1,241,340
                                                              ----------   ----------

Property and equipment, at cost (notes 2 and 4):
  Land                                                           150,000         --
  Buildings                                                      306,300      156,300
  Leasehold improvements                                       4,160,812    1,404,295
  Furniture, fixtures, and equipment                           3,166,180    1,254,176
                                                              ----------   ----------
                                                               7,783,292    2,814,771
  Less accumulated depreciation                                2,112,778    1,424,317
                                                              ----------   ----------
           Property and equipment, net                         5,670,514    1,390,454

Deposits                                                         151,451       23,976
Goodwill, net of accumulated amortization of $9,524 in 1997      317,016         --
Other                                                              8,233       14,534
                                                              ----------   ----------

              Total assets                                    $7,622,866    2,670,304
                                                              ==========   ==========
</TABLE>


                                                                     (Continued)


                                       F-4


<PAGE>



                             ARTHUR TREACHER'S, INC.

                     Consolidated Balance Sheets, continued

                             June 30, 1997 and 1996


<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity (Deficit)                                  1997           1996
----------------------------------------------                                  ----           ----
<S>                                                                          <C>               <C>    
Current liabilities:
  Accounts payable                                                           $1,050,956        923,379
  Accrued expenses and other liabilities (note 3)                               654,527        514,555
  Current maturities of long-term debt (note 4)                                 369,863      1,056,202
                                                                            -----------    -----------
           Total current liabilities                                          2,075,346      2,494,136

Long-term debt , net of current maturities (note 4)                           1,570,305        458,923
Other liabilities                                                               392,705         46,379
                                                                            -----------    -----------
              Total liabilities                                               4,038,356      2,999,438
                                                                            -----------    -----------

Stockholders' equity (deficit) (note 9):
  Preferred stock 2,000,000 shares authorized:
      Series A convertible, par value $1; 87,800 shares
           issued and outstanding                                                87,200         87,800
      Series B convertible, par value $1; 490,000 shares
           issued and outstanding                                               490,000        490,000
  Common stock $.01 par value; authorized 25,000,000 shares,
      issued and outstanding 14,399,248 shares at June 30, 1997
      and 11,118,620 shares at June 30, 1996                                    143,992        111,186
  Additional paid-in capital                                                  9,704,248      3,731,347
  Accumulated deficit                                                        (6,840,930)    (4,371,491)
                                                                            -----------    -----------
                                                                              3,584,510         48,842
      Less subscriptions receivable                                                --         (377,976)
                                                                            -----------    -----------

           Total stockholders' equity (deficit)                               3,584,510       (329,134)
                                                                            -----------    -----------

Commitments and contingencies (notes 5 and 8)

          Total liabilities and stockholders' equity                         $7,622,866      2,670,304
                                                                            ===========    ===========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       F-5


<PAGE>



                             ARTHUR TREACHER'S, INC.

                      Consolidated Statements of Operations

                             June 30, 1997 and 1996



<TABLE>
<CAPTION>
                                                                         1997            1996
                                                                         ----            ----
<S>                                                                  <C>               <C>      
Revenues:
  Restaurant sales                                                   $16,934,481       6,648,564
  Franchise fees and royalties                                           484,885         861,867
  Other revenues                                                         356,293         367,479
                                                                    ------------    ------------
           Total revenues                                             17,775,659       7,877,910
                                                                    ------------    ------------

Operating expenses:
  Cost of sales, including occupancy except depreciation (note 5)      9,445,874       3,856,776
  Operating expenses                                                   7,536,984       3,619,491
  Depreciation and amortization                                          724,968         290,120
  General and administrative expenses (note 8)                         2,050,734       1,097,350
                                                                    ------------    ------------
           Total operating expenses                                   19,758,560       8,863,737
                                                                    ------------    ------------

               Loss from operations                                   (1,982,901)       (985,827)

Other income (expenses):
  Interest expense, net of interest income of $57,851 in 1997           (105,279)       (168,513)
  Other income, net                                                        9,158            --
                                                                    ------------    ------------

           Net loss                                                  $(2,079,022)     (1,154,340)
                                                                    ============    ============

Net loss per common share                                            $      (.16)           (.14)
                                                                    ============    ============

Weighted average number of outstanding shares                         13,115,395       8,273,032
                                                                    ============    ============
</TABLE>


See accompanying notes to consolidated financial statements.


                                       F-6



<PAGE>



                             ARTHUR TREACHER'S, INC.

            Consolidated Statements of Stockholders' Equity (Deficit)

                       Years ended June 30, 1997 and 1996


<TABLE>
<CAPTION>
                                                              Additional
                                     Preferred     Common       Paid in     Accumulated  Subscriptions
                                       Stock        Stock       Capital       Deficit      Receivable      Total
                                       -----        -----       -------       -------      ----------      -----
<S>                                   <C>            <C>        <C>          <C>             <C>         <C>      
Balance at June 30, 1995              $577,800        80,762    2,183,748    (3,217,151)         --        (374,841)
Common stock issued                       --          23,625    1,415,722          --            --       1,439,347
Stock issuance costs                      --            --       (388,231)         --            --        (388,231)
Warrants issued for services              --            --        148,931          --            --         148,931
Common stock subscribed                   --           6,799      427,406          --        (434,205)         --
Stock issuance costs                      --            --        (56,229)         --          56,229          --
Net loss                                  --            --           --      (1,154,340)         --      (1,154,340)
                                    ----------    ----------   ----------    ----------    ----------    ----------
Balance at June 30, 1996               577,800       111,186    3,731,347    (4,371,491)     (377,976)     (329,134)

Subscription received, net                --            --          3,711          --         377,976       381,687
Preferred stock redeemed                  (600)         --           --            --            --            (600)
Common stock issued                       --          32,519    5,657,325          --            --       5,689,844
Stock issued for restaurant
     purchases                            --             287       88,464          --            --          88,751
Common stock conversion rights
     issued for MIE acquisition
     (note 2)                             --            --        843,413          --            --         843,413
Stock issuance costs                      --            --       (770,980)         --            --        (770,980)
Warrants issued for services              --            --        150,968          --            --         150,968
Preferred stock dividend declared         --            --           --        (390,417)         --
                                                                                                           (390,417)
Net loss                                  --            --           --      (2,079,022)         --      (2,079,022)
                                    ----------    ----------   ----------    ----------    ----------    ----------
Balance at June 30, 1997              $577,200       143,992    9,704,248    (6,840,930)         --       3,584,510
                                    ==========    ==========   ==========    ==========    ==========    ==========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       F-7


<PAGE>




                             ARTHUR TREACHER'S, INC.

                      Consolidated Statements of Cash Flows

                             June 30, 1997 and 1996

<TABLE>
<CAPTION>
                                                                       1997           1996
                                                                       ----           ----
<S>                                                                <C>             <C>        
Operating activities:
  Net loss                                                         $(2,079,022)    (1,154,340)
  Adjustments to reconcile net loss to net cash
      provided by operating activities:
           Depreciation and amortization                               724,968        290,120
           Loss on disposition of restaurants                           27,061         95,112
           (Increase) decrease in accounts receivable                   (6,818)        24,742
           (Increase) decrease in deposits and other assets            (67,174)         4,363
           (Increase) decrease in prepaid expenses                    (116,475)       127,294
           (Increase) decrease in inventory                            (42,317)        21,380
           (Decrease) increase in accounts payable                     (69,078)       268,006
           (Decrease) increase in accrued expenses and
              other liabilities                                        (86,961)       237,438
                                                                   -----------    -----------
               Net cash used in operating activities                (1,715,816)       (85,885)
                                                                   -----------    -----------

Investing activities:
  Purchase acquisitions of restaurants                              (1,842,681)      (410,230)
  Capital expenditures                                              (1,076,240)          --
  Proceeds from disposition of restaurants                              19,500         18,000
                                                                   -----------    -----------
               Net cash used in investing activities                (2,899,421)      (392,230)
                                                                   -----------    -----------

Financing activities:
  Issuance of common stock                                           5,689,844      1,439,347
  Cash received from common stock subscribed                           381,687           --
  Stock issuance costs                                                (620,012)      (239,300)
  Proceeds from long-term debt                                         226,738        490,852
  Principal payments on long-term debt                              (1,185,856)      (248,286)
                                                                   -----------    -----------
               Net cash provided by financing activities             4,492,401      1,442,613
                                                                   -----------    -----------

Net (decrease) increase in cash and cash equivalents                  (122,836)       964,498

Cash and cash equivalents beginning of year                            990,683         26,185
                                                                   -----------    -----------
Cash and cash equivalents end of year                                 $867,847        990,683
                                                                   ===========    ===========

Supplemental disclosure of cash flow information:
  Cash paid for interest                                              $159,539        142,280
                                                                   ===========    ===========

Supplemental disclosure of noncash transactions:
  Long-term debt assumed in restaurant purchases                    $1,401,661           --
                                                                   ===========    ===========
  Common stock conversion rights issued for restaurant purchases      $843,413           --
                                                                   ===========    ===========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       F-8


<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements

                             June 30, 1997 and 1996




(1)  Summary of Significant Accounting Policies

     (a)  Description of the Business

          Arthur  Treacher's Inc. (the "Company") owns,  operates and franchises
          quick service seafood  restaurants under the names "Arthur  Treacher's
          Fish & Chips" and  "Arthur  Treacher's  Seafood  Grille."  At June 30,
          1997, the Company owned and operated 63 restaurants  and franchised an
          additional 54 restaurants,  located in 11 states and Canada,  with the
          greatest  concentrations  in the northeast and midwest  regions of the
          United States.

     (b)  Principles of Consolidation

          The  consolidated  financial  statements  include the  accounts of the
          Company  and  its   wholly-owned   subsidiaries,   Arthur   Treacher's
          Management  Company and Arthur  Treacher's  Advertising  Company.  All
          material   intercompany   transactions   have   been   eliminated   in
          consolidation.  Certain 1996 amounts have been reclassified to conform
          to presentation adopted during 1997.

     (c)  Cash and Cash Equivalents

          The Company  considers all highly liquid  investments with an original
          maturity of ninety days or less to be cash equivalents.

     (d)  Inventories

          The Company  values its  inventories  at the lower of cost  (first-in,
          first-out method) or market.

     (e)  Property and Equipment

          Property  and  equipment   are  recorded  at  cost  less   accumulated
          depreciation.  Depreciation is provided on a straight-line  basis over
          the estimated useful lives of the respective assets, which ranges from
          3 to 10 years.


                                       F-9


<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements






(1)  Summary of Significant Accounting Policies, continued

     (f)  Recoverability of Long-Lived Assets

          The Company  adopted the provisions of SFAS No. 121,  "Accounting  for
          the Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be
          Disposed Of," on July 1,1996.  This Statement requires that long-lived
          assets and certain identifiable intangibles be reviewed for impairment
          whenever events or changes in circumstances indicate that the carrying
          amount of an asset may not be recoverable. Recoverability of assets to
          be held and used is measured by a comparison of the carrying amount of
          an asset to future  net cash flows  expected  to be  generated  by the
          asset. If such assets are considered to be impaired, the impairment to
          be recognized  is measured by the amount by which the carrying  amount
          of the assets  exceed the fair value of the  assets.  Adoption of this
          Statement did not have a material  impact on the  Company's  financial
          position or results of operations.

     (g)  Income Taxes

          The Company  utilizes the asset and liability method of accounting for
          income taxes.  Under this method,  deferred tax assets and liabilities
          are  recognized  for  the  future  tax  consequences  attributable  to
          differences  between  the  financial  statement  carrying  amounts  of
          existing  assets and  liabilities  and their  respective tax bases. In
          addition,  the method requires the recognition of future tax benefits,
          such as net operating loss and business tax credit  carryforwards,  to
          the extent that  realization of such benefits is more likely than not.
          Deferred tax assets and  liabilities  are measured  using  enacted tax
          rates  expected to apply to taxable income in the years in which those
          temporary  differences  are expected to be  recovered or settled.  The
          effect on deferred tax assets and liabilities of a change in tax rates
          is  recognized  in income in the period that  includes  the  enactment
          date.

     (h)  Franchise Operations

          Franchise  royalties,  which are based upon a percentage  of franchise
          restaurants'  sales,  are  recognized as income on the accrual  basis.
          Initial  franchise  fees  are  typically  included  in  revenues  when
          substantially all services and conditions  relating to the sale of the
          franchise  have been  performed  or  satisfied,  which occurs when the
          franchised restaurant commences operations. Initial franchise fees for
          area franchise agreements are recognized as income on a pro rata basis
          as the restaurants are opened.


                                      F-10


<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements






(1)  Summary of Significant Accounting Policies, continued

     (i)  Pre-Opening Costs

          Costs  associated with opening new restaurants are expensed during the
          period incurred.

     (j)  Per share data

          Net loss per  common  share  outstanding  is  computed  based upon the
          weighted  average number of common stock and common stock  equivalents
          outstanding  during  the  period.  Common  stock  equivalents  include
          convertible preferred stock and common stock options and warrants. The
          dilutive  impact of common  stock  options and warrants is included in
          the  calculation  of net loss per share when the exercise  price falls
          below the market price. Net loss per share on a fully diluted basis is
          not different from net loss per common share  outstanding  and thus is
          not disclosed separately.

     (k)  Estimates

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

     (l)  Stock Options and Warrants

          Prior to July 1, 1996,  the Company  accounted for its grants of stock
          options and warrants in accordance  with the  provisions of Accounting
          Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
          Employees," and related interpretations. As such, compensation expense
          would be  recorded  on the date of grant  only if the  current  market
          price of the underlying  stock exceeded the exercise price. On July 1,
          1996, the Company  adopted SFAS No. 123,  "Accounting  for Stock-Based
          Compensation," which permits entities to recognize as expense over the
          vesting period the fair value of all stock-based awards on the date of
          grant. Alternatively, SFAS No. 123 also allows entities to continue to
          apply the  provisions  of APB Opinion No. 25 and provide pro forma net
          income and pro forma earnings per share disclosures for employee stock
          option grants made in 1996 and future years as if the fair-value-based
          method  defined  in SFAS No. 123 had been  applied.  The  Company  has
          elected to  continue  to apply the  provisions  of APB  Opinion 25 and
          provide the pro forma disclosure provisions of SFAS No. 123.


                                      F-11


<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements



(1)  Summary of Significant Accounting Policies, continued

     (m)  Goodwill

          Goodwill,   which  has  been   recorded  as  a  result  of   purchased
          acquisitions,  is amortized over the period  estimated to benefit from
          the acquired assets and rights, which is twenty years.

     (n)  Recent Accounting Pronouncements

          During February 1997, the Financial  Accounting Standards Board issued
          Statement  of  Financial  Accounting  Standard  No.  128,  (SFAS  128)
          "Earnings per Share." SFAS 128 governs the computation,  presentation,
          and disclosure  requirements for earnings per share (EPS) for entities
          with publicly  held common stock.  SFAS 128 was issued to simplify the
          computation  of EPS and  replaces  the Primary  and fully  diluted EPS
          calculations  currently in use with  calculations of Basic and Diluted
          EPS. SFAS 128 is effective for financial  statements  for both interim
          and annual  periods  ending  after  December  15,  1997,  and  earlier
          application is not permitted.  The Company will begin to calculate its
          EPS in  compliance  with SFAS 128 for the period  ended  December  31,
          1997.


(2)  Acquisitions

     On November 27, 1996 the Company  purchased 100% of the common stock of its
     largest franchisee,  MIE Hospitality,  Inc. (MIE), whose operations include
     32 restaurants in the midwest and northeast United States.  The transaction
     has been  accounted  for as a purchase and the results of  operations  have
     been included in the accompanying  consolidated  financial  statements from
     the  date  of  acquisition   forward.  The  purchase  price  of  $4,232,976
     (calculated as $2,250,000 in cash, $1,139,563 in long-term debt assumed and
     $843,413,  which represents the rights to acquire 275,625 shares of Company
     common  stock  for no  consideration  at a future  date  (note 9)) has been
     allocated  to the  tangible  net assets of MIE and the  remaining  $326,540
     recorded as goodwill. In addition,  $736,877 of deferred tax liabilities of
     MIE were  offset by the  Company's  deferred  tax  assets,  resulting  in a
     decrease in the deferred tax valuation allowance.

     The  following  unaudited  pro forma  financial  information  presents  the
     combined results of operations of the Company and MIE as if the acquisition
     had  occurred  as of the July 1,  1996 and 1995.  The pro  forma  financial
     information  does not  necessarily  reflect the results of operations  that
     would have  occurred had the Company and MIE  constituted  a single  entity
     during such periods. Pro forma total revenues of $23.7 million and $22.7 in
     1997 and 1996, respectively.  Pro forma net loss of $1.72 million and $1.59
     in 1997 and  1996,  respectively,  and pro forma net loss per share of $.13
     and $.19 in 1997 and 1996, respectively.


                                      F-12

<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements



(2)  Acquisitions, continued

     Also during 1997, the Company  acquired eight  restaurants in six different
     transactions  all  accounted for as purchases.  The purchase  price,  which
     totaled  approximately  $544,000,  was satisfied by cash,  common stock, or
     assumed  liabilities.  The  entire  purchase  price  was  allocated  to the
     tangible assets of the acquired entities. The results of operations of each
     entity was included in the consolidated  financial statements from the date
     of acquisition. None of the acquisitions were significant to the operations
     of the Company during 1997 or 1996.


(3)  Accrued Expenses and Other Liabilities

     Accrued liabilities consisted of the following at June 30, 1997 and 1996:

                                                         1996             1995
                                                         ----             ----

          Accrued professional fees                   $142,500             --
          Accrued taxes                                328,093          234,581
          Other                                        183,934          279,974
                                                      --------         --------
              Total accrued liabilities               $654,527          514,555
                                                      ========         ========
      

(4)  Long-Term Debt

     Long-term debt consisted of the following at June 30, 1997 and 1996:

                                                              1997          1996
                                                              ----          ----
      Notes payable:
        Notepayable due in quarterly  installments of 
          $140,969, including interest at 8%, beginning 
          June 1, 1998 maturing December 2002, unsecured    $1,139,563       --


                                      F-13


<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements






(4)  Long-Term Debt, continued

<TABLE>
<CAPTION>
                                                                         1997          1996
                                                                         ----          ----
<S>                                                                   <C>             <C>    
 Notes  payable  to banks,  due in  monthly  installments  totaling
     $2,667, including interest at rates ranging from 10% to 12.5%,
     maturing through
     November 2001, secured by property and equipment                 $   98,424       79,360

 Various notes  payable  related to the  acquisition  of franchised
     restaurants,  due in monthly  installments  of  principal  and
     interest at rates ranging from 8% to 16.1%,  maturing at dates
     through 2007, secured
     by property and equipment                                           601,031      497,510

 Line of credit, interest only payable at the prime rate,
     amount paid in full December 1996                                      --        750,000

 Note payable due in monthly installments of $13,741,
     including interest at 10%, maturing in April 1998,
     secured by property and equipment                                   101,150      188,255
                                                                      ----------   ----------
                                                                       1,940,168    1,515,125
Less current maturities                                                  369,863    1,056,202
                                                                      ----------   ----------

        Total long-term debt                                          $1,570,305      458,923
                                                                      ==========   ==========
</TABLE>


                                      F-14


<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements






(4)  Long-Term Debt, continued

     Principal  maturities  of  long-term  debt  for the  next  five  years  and
     thereafter at June 30, 1997 are as follows:

                      Year ending June 30,                     Amount
                      --------------------                     ------

                           1998                             $  369,863
                           1999                                323,141
                           2000                                343,564
                           2001                                315,126
                           2002                                328,389
                           Thereafter                          260,085
                                                            ----------
                              Total                         $1,940,168
                                                            ==========
                                              
     The Company  considers  the carrying  value of its  long-term  debt to be a
     reasonable  estimation of its fair value based on the current  market rates
     available to the Company for debt of the same remaining maturities.


(5)  Leases

     The Company is the lessee under various long-term  operating leases for the
     land and buildings in which its owned and franchised  restaurants  operate.
     The  leases  generally  range  between  five and twenty  years and  usually
     provide for renewal options.

     The  majority  of the leases  require  the  Company to be billed for taxes,
     insurance, utilities, and maintenance costs of the leased property. Certain
     of the leases  require  additional  (contingent)  rental  payments if sales
     volumes at the related restaurants exceed specified limits.

     Base rent expense for Company owned restaurants,  net of sublease income of
     $9,000  and  $6,000  in 1997  and  1996,  respectively,  was  approximately
     $1,691,000  and  791,000,  for the  years  ended  June 30,  1997 and  1996,
     respectively.


                                      F-15


<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements




(5)    Leases, continued

       The following summarizes future minimum lease payments, for Company owned
       restaurants,   required   for  leases  that  have  initial  or  remaining
       noncancelable terms in excess of one year as of June 30, 1997:

                      Year ending June 30,                     Amount
                      --------------------                     ------

                           1998                            $ 2,270,570   
                           1999                              2,209,456
                           2000                              2,093,782
                           2001                              1,933,935
                           2002                              1,445,519
                           Thereafter                        1,705,455
                                                           -----------
                              Total                        $11,658,717
                                                           ===========


     The Company  also  conditionally  guarantees  the payment of certain  lease
     obligations of its franchisees. The amount of this conditional guarantee is
     approximately $163,000 for each of the next five years.


(6)  Income Taxes


     Income tax benefit  attributable to income from  continuing  operations for
     the years ended June 30,  1997 and 1996, differed from the amounts computed
     by applying the U.S.  Federal income tax rate of 34% to income before taxes
     as follows:

                                                             1997        1996
                                                             ----        ----

Computed "expected" tax benefit                          $(729,988)    (392,476)
Increase (decrease) in income taxes resulting from:
     Non-deductible meals and entertainment                 11,973       11,563
     Goodwill amortization                                   3,238           XX
     Change in valuation allowance                         742,596      375,276
     Other, net                                            (27,819)       5,637
                                                         ---------    ---------
                                                         $    --           --
                                                         =========    =========


                                      F-16


<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements






(6)  Income Taxes, continued

     The tax  effects of  temporary  differences  that give rise to  significant
     portions of deferred  tax assets and  liabilities  as of June_30,  1997 and
     1996 are as follows:

                                                          1997            1996
                                                          ----            ----

Deferred tax assets:
    Net operating loss carryforward                   $2,022,284         318,263
    Property and equipment                                  --            63,244
    Allowance for doubtful accounts                        8,806          10,892
    Other                                                   --            51,791
                                                      ----------      ----------
        Total gross deferred tax assets                2,031,090         444,190
        Less valuation allowance                       1,392,894         356,387
                                                      ----------      ----------
             Net deferred tax assets                     638,196          87,803
                                                      ----------      ----------

Deferred tax liabilities:
    Property and equipment                               638,196            --
    Royalty fees                                            --            14,000
    Other                                                   --            68,103
                                                      ----------      ----------
        Total deferred tax liabilities                   638,196          82,103
                                                      ----------      ----------
             Net deferred tax assets                  $     --           5,700
                                                      ==========      ==========


     During 1997,  the Company  reached an agreement  with the Internal  Revenue
     Service regarding the amount of net operating loss carryforwards  available
     for future use. As a result of this  agreement,  the Company  determined it
     had additional  deferred tax assets of $1,025,088 relating to net operating
     loss  carryforwards.  This entire  amount was recorded  during 1997 and has
     been offset by an increase in the valuation allowance.

     At June 30,  1997,  the  Company  had  approximately  $5.9  million  of net
     operating loss carryforwards  available for use, which expire through 2012.
     In assessing the realizability of deferred tax assets, management considers
     whether it is more likely than not that some portion or all of the deferred
     tax assets will not be realized.  The ultimate  realization of deferred tax
     assets is dependent upon the generation of future taxable income during the
     periods in which those temporary differences become deductible.  Management
     considers the schedule of reversal of deferred tax assets, projected future
     taxable income, and tax planning strategies in making the assessment.


                                      F-17


<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements



(7)  Stock Options and Stock Warrants

     During  1997  and  1996,  the  Company  has  granted  316,500  and  700,000
     nonqualified  stock  options,  respectively,  to certain key  employees and
     directors to purchase shares of the Company's common stock at a price equal
     to or in excess of the market price of the stock,  vesting over a five year
     period.  These  options  were  granted  as  compensation  and the number of
     options granted was determined based on specific individual  circumstances.
     The shares issuable under these option grants are nonregistered  shares and
     the Company has no  requirement  to register such shares.  The Company does
     not have a formal stock option plan.

     The per share  weighted-average  fair value of stock  options  granted  was
     calculated using the Black Scholes  option-pricing model with the following
     weighted-average  assumptions: 1997 - no expected dividend yield, risk-free
     interest rate of 6.4% weighted average  expected  volatility of 8.6% and an
     expected  life of 5 years;  1996 - no expected  dividend  yield,  risk-free
     interest rate of 6.6%,  weighted average expected  volatility of 21% and an
     expected  life of 5 years.  In addition,  for 1997 and 1996 the Company has
     discounted the market price of the stock,  on the date of option grant,  by
     35% in  consideration  of the  restrictions  on the sale of the  underlying
     shares.  The  fair  value on the date of grant  for  options  granted  with
     exercise  prices in excess  of the  market  price of the stock was $.02 and
     $.03 for 1997 and 1996,  respectively.  For options  granted with  exercise
     prices equal to the market price of the stock,  the fair value was $.13 for
     1996.  No options  were granted  with  exercise  prices equal to the market
     price of the stock in 1997.

     The Company applies APB Opinion No. 25 in accounting for option grants and,
     accordingly, no compensation cost has been recognized for its stock options
     in the  consolidated  financial  statements.  Had  the  Company  determined
     compensation  cost  based on the fair value at the grant date for its stock
     options  under SFAS No.  123,  the  Company's  net loss would not have been
     materially  impacted for the effects of such  calculation in either 1997 or
     1996.

     In addition,  during 1997 and 1996 the Company granted 721,391 warrants and
     1,930,000  warrants,  respectively,   (valued  at  $150,968  and  $148,931,
     respectively)  to purchase shares of Company common stock to  non-employees
     in return for services  provided in connection  with the  Company's  equity
     offerings.   These   warrants  have  been  recorded  at  fair  value  using
     substantially the same criteria as discussed above for the stock options.


                                      F-18


<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements



(7)  Stock Option Plan and Stock Warrants, continued

     Stock  option  and  warrant  activity  during the  period  indicated  is as
     follows:


<TABLE>
<CAPTION>
                                                                             Weighted-
                                                            Number of         Average
                                                             Shares        Exercise Price
                                                             ------        --------------
<S>                                                        <C>               <C>  
Balance at June 30, 1995                                        --             $--
   Granted:                                                                 
     Exercise price equal to market price of stock           350,000          1.38
     Exercise price in excess of market price of stock     2,280,000          1.60
   Exercised                                                    --            --
   Canceled                                                     --            --
                                                          ----------         -----
Balance at June 30, 1996                                   2,630,000          1.57
                                                                            
   Granted:                                                                 
     Exercise price equal to market price of stock           405,000          3.00
     Exercise price in excess of market price of stock       632,891          3.14
   Exercised                                                    --            --
   Canceled                                                 (652,500)         1.61
                                                          ----------         -----
Balance at June 30, 1997                                   3,015,391         $1.96
                                                          ==========         =====
</TABLE>
                                                                            
                                                                               
     The following table presents information regarding all options and warrants
     outstanding at June 30, 1997.

                          Weighted
         Number of         Average                              Weighted
       Warrants and       Remaining           Range of           Average
          Options        Contractual          Exercise          Exercise
        Outstanding         Life               Prices             Price

         1,685,000         5.0 years        $   1.38 - 1.51      $  1.48
           460,000         9.0 years            2.13 - 2.65         2.25
           870,391         5.4 years            3.00 - 3.37         3.17
     -------------    --------------        ---------------      -------

         3,015,391         5.7 years        $   1.38 - 3.37      $  1.96
     =============    ==============        ===============      =======


                                      F-19


<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements






(7)  Stock Option Plan and Stock Warrants, continued

     The following  table presents  information  regarding  options and warrants
     currently exercisable at June 30, 1997.


              Number of                                         Weighted
            Warrants and                Range of                 Average
               Options                  Exercise                Exercise
             Exercisable                 Prices                   Price

               1,405,000           $      1.38 - 1.51           $    1.50
                  92,000                  2.13 - 2.65                2.19
                 756,391                  3.00 - 3.37                3.02
           -------------           ------------------           ---------
               2,253,391           $      1.38 - 3.37           $    2.03
           =============           ==================           =========


(8)  Commitments and Contingencies

     Included  in  general  and  administrative  expenses  in  the  accompanying
     consolidated statement of operations is approximately $544,000 and $403,000
     for the years ending June 30, 1997 and 1996,  respectively,  related to the
     settlement of lawsuits, lease cancellations and other items. The Company is
     involved in various other claims and legal actions  arising in the ordinary
     course of business. In the opinion of management,  the ultimate disposition
     of these matters will not have a material  adverse  effect on the Company's
     consolidated results of operations or financial position.

     The Company has entered into an  agreement  with its former  President  and
     Chief Executive Officer to provide consulting  services to the Company at a
     rate of $100,000  per year,  commencing  June 1, 1996 and  expiring in June
     1998.


                                      F-20


<PAGE>



                             ARTHUR TREACHER'S, INC.

                   Notes to Consolidated Financial Statements



(9)  Stockholders' Equity

     During 1996, the Company sold 3,042,463 shares of Common Stock in a private
     placement for  aggregate  gross  proceeds of  $1,873,552  (the June Private
     Placement) and sold 3,163,911 shares of Common Stock in a private placement
     for  aggregate  gross  proceeds of  $5,631,761  during  1997 (the  November
     Private  Placement).  The Company utilized the proceeds of the June Private
     Placement  to  repay   outstanding   indebtedness  and  as  cash  flow  for
     operations.  The proceeds from the November Private  Placement were used to
     acquire MIE, as described in note 2, and to repay additional debt.

     In  addition,  as  described  in note 2, the Company  issued  approximately
     28,700 shares of its common stock as part of acquiring eight restaurants.

     The holders of the Series A Preferred  Stock are  entitled to a  cumulative
     dividend of $0.10 per share per annum.  Such dividends  accrue annually but
     are  payable if and when the Company  declares a dividend.  The Company has
     not paid any dividends  with respect to the Series A Preferred  Stock.  The
     87,200  outstanding shares of Series A Preferred Stock are convertible into
     96,889 shares of Common Stock for no additional consideration at the option
     of the holder of the stock.  The Series A Preferred  Stock is entitled to a
     liquidation  preference  of $1.00 per share,  plus any  accrued  and unpaid
     dividends. The Series A Preferred Stock may be redeemed by the Company at a
     redemption price of $1.00 per share plus all accrued and unpaid  dividends.
     The amount of accumulated and unpaid dividends was approximately $96,000 as
     of June 30, 1997.

     In conjunction  with the acquisition of MIE (see note 2), the former owners
     of MIE (Magee) and the Company  amended the terms of the Series B Preferred
     Stock and agreed that no dividends would accumulate on such Preferred Stock
     after  November  30,  1996.  The Company also agreed to pay Magee an amount
     equal to the  accrued  dividend  on the Series B  Preferred  Stock  through
     November 30, 1996 (which was  $390,417)  in full on  September 1, 1998.  In
     addition,  the 490,000  outstanding  shares of Series B Preferred Stock are
     now allowed to be convertible at the option of the holder or the Company at
     any time, and the conversion  rate was increased so that Magee will receive
     765,625  shares of Common  Stock upon  conversion  (an  increase of 275,625
     shares,  valued at $843,413 and  included as part of the purchase  price of
     MIE) for no additional  consideration.  The Company has not determined when
     it will  require  conversion  of the Series B  Preferred  Stock into Common
     Stock.


                                      F-21