U.S Securities and Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-KSB

               [X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                      For the year ended September 30, 2004

      [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                                     0-23545
                                     -------
                             Commission File Number

                         Ultimate Franchise Systems, Inc.
                             ----------------------
        (Exact name of small business issuer as specified in its charter)

              Nevada                                   84-1317674
             --------                                  ----------
    (State or other jurisdiction of                   (IRS Employer
     incorporation or organization)                Identification Number)

         300 International Pkwy., Suite 100, Heathrow, Florida, 32746
         --------------------------------------------------------------
                    (Address of principal executive offices)

                                 (407) 333-8998
                                 --------------
                 (Issuer's telephone number including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          Common Stock, $.001 Par Value

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ]

The Registrant's revenue for the fiscal year ended September 30, 2004:
$3,136,377.

The aggregate market value of the voting and non-voting common equity held by
non-affiliates (computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity) as of
December 6, 2004 was $4,313,395 (for purposes of the foregoing calculation only,
each of the registrant's officers and directors is deemed to be an affiliate).

There were 15,023,194 shares of the registrant's common stock outstanding as of
December 6, 2004.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      None

          Transitional Small Business Disclosure Format: Yes [ ] No [X]

<PAGE>

                                     PART I

This Annual Report on Form 10-KSB contains certain statements concerning the
future that are subject to risks and uncertainties. Additional written or oral
forward-looking statements may be made by the Company from time to time, in
filings with the Securities and Exchange Commission or otherwise. Such
statements include, among other things, information concerning possible-future
results of operations, capital expenditures, the elimination of losses under
certain programs, financing needs or plans relating to products or services of
the Company, assessments of materiality, predictions of future events, and the
effects of pending and possible litigation, as well as assumptions relating to
the foregoing, and those accompanied by the words "believes", "anticipates,"
"estimates," "expects," "intends," "plans," or similar expressions. For those
statements we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.

You should specifically consider the various factors identified in this 10-KSB,
including the matters set forth in "Item 1. Description of Business"; "Item 3.
Legal Proceedings"; "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations"; and the Notes to Consolidated Financial
Statements that could cause actual results to differ materially from those
indicated in any forward-looking statements. Other factors that could contribute
to or cause such differences include, but are not limited to, unanticipated
increases in operating costs, labor disputes, capital requirements, increases in
borrowing costs, product demand, pricing, market acceptance, intellectual
property rights and litigation, risks in product and technology development and
other risk factors detailed in the Company's Securities and Exchange Commission
filings.

Readers are cautioned not to place undue reliance on any forward-looking
statements contained in this 10-KSB, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unexpected events.

ITEM 1. DESCRIPTION OF BUSINESS.

Form and Year of Organization

Ultimate Franchise Systems, Inc. (collectively "we" and "our"), was incorporated
on July 19, 1995 under the laws of the State of Colorado.

In July 2001, a vote of the shareholders approved a change of our corporate
domicile from the state of Colorado to Nevada. This change was formally made in
April 2002.

We are a franchise management and venture company with minority interests in
numerous restaurant concepts located throughout the United States. Our
headquarters are located in Heathrow, Florida. Currently, we have equity
interest in companies controlling approximately 585 franchised restaurant
locations and 40 weight loss clinics throughout the United States. Our strategy
continues to be one of growth through the acquisition of minority positions in
other restaurant franchise companies. This allows us to provide franchise
management services to other companies without any increase to operating
expenses and provides us with a more diversified portfolio of restaurant brands.
In addition, we offer guidance and assistance to the franchisees in areas such
as product preparation, equipment purchasing, marketing, administrative support
and employee training.

                                       1
<PAGE>

Restaurant Brands

In total, we have financial investments in 585 restaurants and 40 weight loss
clinics. Our equity interests include the following:
<TABLE>
<CAPTION>
                                              State of           Ownership    Predominant Restaurant
Corporation Name                            Incorporation        Percentage          Concept
----------------                          ------------------     ----------    ----------------------
<S>                                           <C>                  <C>         <C>
Central Park of America, Inc.                 Delaware               100%       "Central Park"
Obee's Franchise Systems, Inc.                Florida                100%       "Obee's Soup & Subs"
Franchise Management Company, LLC             Florida               33.3%       N/A
Fransaction, Inc.                             Florida                 59%       "New York Burrito"
Concept Acquisitions II, LLC                  Florida                 25%       "Flamers"
Jreck Subs, Inc.                              New York                20%       "Jreck Subs"
Li'l Dino Corporation                         North Carolina          20%       "Li'l Dino"
Quality Restaurant Ventures, Inc.             Florida                 19%       "Sobik's Subs"
Concept Acquisitions, Inc.                    California              18%       "Mountain Mike's"
Bevery Hills Weight Loss and Wellness, Inc.   Colorado                18%       "Weight Loss Forever"
Famous Food Group, Inc.                       Delaware                13%       "Uncle Al's Famous Hot Dogs"
Sea West Subs, Inc.                           Washington              10%       "SeaWest"
Piccadilly Restaurant Investment Group, LLC   Nevada                   1%       "Piccadilly's"
</TABLE>


Recent Acquisitions

Obee's Franchise Systems, Inc.

On June 16, 2004, we purchased all issued and outstanding common stock of Obee's
Franchise Systems, Inc. ("Obee's"). Obee's is the franchisor of the Obee's Soup
& Subs concept based in Port Charlotte, Florida with approximately 55 franchised
units located throughout the United States.

The purchase price of Obee's consisted of the issuance of 800,000 shares of our
common stock valued at $.64 per share ($512,000) as well as cash of $98,377. The
transaction was recorded as follows:

              Total consideration paid                               $  610,377
              Less fair value of assets acquired                     $  203,926
              Plus liabilities assumed                               $  912,703
                                                                     ----------
              Excess of cost over net assets acquired (goodwill)     $1,319,154
                                                                     ==========

The goodwill associated with this transaction was deemed to be impaired and was
expensed during the quarter ended June 30, 2004.

Recent Dispositions

Sobik's International Franchising, Inc.

On December 29, 2003, we sold our majority interest in Sobik's International
Franchising, Inc. ("Sobik's") to Quality Restaurant Ventures Corp. ("QRVC").
Under the terms of this agreement, we agreed to sell 17,445,664 shares of
Sobik's in exchange for $100,000 in cash, a note receivable of $900,000, and
1,000,000 shares of "Series A Convertible Preferred Stock" in Sobik's. This
preferred stock is convertible at our option and is anti- dillutive. If all
1,000,000 shares of the Series A Convertible Preferred stock were converted at
the same time, we would own 19% of the outstanding common stock of Sobik's. The
$900,000 note receivable requires QRVC to pay us quarterly interest only
payments of $15,750 until December 2004. At that time QRVC will pay us an
additional $100,000 in principal and continue to make quarterly interest
payments of $14,000 until December 31, 2005. At that time the remaining
principal balance will be amortized and paid in monthly principal and interest
installments of $13,489 until 2013. Subsequent to this transaction, an analysis
of the QRVC financials indicated inadequate cash flows provided from operations
to make payments on this note. As a result, we recorded a $500,000 impairment
charge to our note receivable during the year ended September 30, 2004.

                                       2
<PAGE>

Our Chief Executive Officer, Christopher Swartz is also a member of the QRVC
Board of Directors. The results of operations are included in our consolidated
financial statements up until the date of sale.

General Description of Business

We are a multi-brand franchise management and venture company that invests in
and manages franchise concepts predominately in the restaurant industry.

Franchise Programs

Ultimate Franchise Systems, Inc. is a leading restaurant franchisor with an
exclusive focus on growing leading restaurant brands.

We provide superior franchise brand management services which has resulted in
the creation of numerous regional market leaders.

Through the terms of our "Franchise Agreement" we authorize individuals and/or
companies to form or establish and operate concept restaurants at approved
locations. Under the agreement, we are obligated to provide certain services
both for the opening of, and the ongoing support of, each restaurant. Those
services generally include:

         -review and approval of restaurant location

         -review and approval of plans and layout design

         -identification of sources of supply of food purveyors and other
         suppliers

         -provide an operations manual with respect to service guidelines and
         restaurant management techniques

         -provide initial and ongoing training in acceptable methods of
         operations, food preparation techniques, management controls,
         accounting functions, legal framework of restaurant operations, human
         resources, promotional programs and public relations

         -provide ongoing support with respect to maintaining quality products
         and insuring such products are offered at competitive prices

         -perform ongoing consistency and quality inspections of restaurants in
         order to maintain uniform acceptable standards

We obtain prospective franchisees primarily from the ranks of our current and
former franchisees and employees, referrals from existing franchisees,
affiliations with industry experts and from selected marketing efforts such as
restaurant trade shows. We intend to develop new franchise locations primarily
through existing franchisees and industry affiliations. The primary selective
criteria considered in the review and approval of new franchisees is prior
experience in operating restaurants or comparable business acumen and the
existence of sufficient capital resources to reasonably insure success.

We believe we have a national presence which we intend to strengthen by
developing each of our regional concepts.

                                       3
<PAGE>

From time to time we will take over the operations of a restaurant from a
franchisee before the contract term has expired. We may operate such restaurants
until a suitable franchisee can be found, at which time all or part of our
investment in such operations may be recovered, or we may choose to close the
location.

Initial franchise fees are considered to be within industry norms and currently
are $12,500 for new locations in the sandwich segment, $20,000 in the hamburger
and Fresh-Mex segments, and $25,000 for Casual Dining (Gator's). Initial
franchise fees are due upon the execution of the Franchise Agreement. Ongoing
royalties are also considered to be within industry norms ranging from 4%-5% of
sales. In addition to ongoing royalties, all franchisees are required to
contribute 2%-4% of sales to a concept-based pooled marketing fund. We collect
weekly and monthly sales and other operating information from each franchisee.
We have agreements with most franchisees permitting us to electronically debit
the franchisees' bank accounts for the payment of royalties, marketing fund
contributions, and other amounts owed to us under the franchise agreement. This
system significantly reduces the resources needed to process receivables,
improves cash flow and helps to limit past due accounts related to these items.
Franchisees generally are required to purchase and install an approved point of
sale system that, among other things, allows us to poll sales information daily.
The following table sets forth and summarizes certain information about our
majority owned concepts and current franchise agreements:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                         No. of                     Avg. Royalty    Royalty
                                       Franchised                     Rate on       Rate on                    Currently
                                        Units at      Avg. Yrs.       Existing      Current      Price of       Selling
                                        Sept 30,      Remaining      Franchise     Franchise        New           New
               Concept                    2004       On Contract     Agreements    Agreement     Franchise     Franchises
 ----------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>           <C>            <C>           <C>        <C>
"Obee's"                                   62            12.3           7.0%           7.0%         15,000         Yes
"Central Park"                             42             8.6           4.3%           5.0%         20,000         Yes
"New York Burrito"                         32             7.3           7.0%           7.0%         15,000         Yes
 ----------------------------------------------------------------------------------------------------------------------------
</TABLE>

In connection with our mandatory monitoring program, all franchisees are
required to adhere to our specifications and standards on the selection and
purchase of products used in the operation of the restaurant. We provide a
detailed "product profile" of acceptable food, paper and supply items for each
concept. Franchisees requesting to use products not falling under the concept
"product profile" must first receive permission from us.

Suppliers

Each franchisee is obligated to purchase raw materials, both food and non-food,
from authorized and designated distributors who may only sell authorized and
approved raw materials purchased from approved manufacturers and suppliers. We
negotiate relationships with manufacturers and suppliers on a national level for
all products except produce, whether or not they bear our logos. We negotiate
and enter into recognition agreements authorizing approved distributors to
deliver raw products to our franchisee outlets from approved manufacturers and
suppliers. All products purchased by franchisees on a local level must meet our
quality standards. Franchisees may request approval of additional manufacturers,
suppliers or distributors subject to our approval. We base our approval upon a
number of conditions including price, quality, ability to service the system on
a national basis and such other reasonable standards as we may promulgate from
time to time. Currently, there are no other manufacturers, suppliers or
distributors approved by us other than those that we have designated.

                                       4
<PAGE>

We believe that if such regional and national distributors could no longer
provide such goods and services, adequate alternate suppliers or distributors
are available to provide such goods and services without a significant increase
in costs.

Government Regulation

Our principal activity of selling restaurant franchises is regulated by the
Federal Trade Commission (the "FTC") and various states. Such regulations govern
disclosure, performance and procedure in the sale and transfer of new and
existing franchises. In general the FTC's regulations require us to timely
furnish a franchise offering circular to prospective franchisees containing
prescribed information. Certain state laws also require registration of the
franchise offering circular with applicable state authorities. Other states
monitor or regulate the franchise relationship, particularly the sale, renewal
and termination of an agreement.

In October 1999, the FTC issued proposed changes to the FTC Rule that would
effect certain disclosure obligations in connection with franchise sales. These
proposed changes are still subject to public comment, and even if adopted as
proposed, we do not think the changes would materially effect our franchise
sales or other operations. We are not aware of any other probable pending
franchise legislation that in our view is likely to affect our operations
significantly. We believe that our operations comply in all material respects
with the FTC Rule and the applicable state franchise laws.

We are also subject to "Federal Fair Labor Standards Act", which governs minimum
wages, overtime, working conditions and other matters as well as the "Americans
With Disabilities Act".

From time to time we will operate company owned restaurants. While operating the
restaurants, we are subject to a variety of federal, state and local laws
regarding minimum wage standards, sanitation, health, fire, alcoholic beverage
and safety codes.

While we believe we are in compliance with all applicable federal, state and
local laws and regulations, there can be no assurance that we will continue to
meet the requirements of such laws and regulations. Such a default could result
in a withdrawal of approval to market franchises in one or more jurisdictions.
Any such loss of approval may have a material adverse effect upon our ability to
successfully market our franchises. Violations of federal and state franchising
laws and/or regulations regulating substantive aspects of our business activity
could subject us and our affiliates to rescission offers, monetary damages,
penalties or injunctive proceedings. In addition, under court decisions in
certain states, absolute and vicarious liability may be imposed upon franchisors
based upon the facts and circumstances of the claim. Current expected changes in
federal and individual state laws and regulations concerning the sale,
termination and non-renewal of franchises are not expected to have a material
impact on our operation. There can be no assurance that existing or future
franchise regulations will not have an adverse effect on our ability to maintain
and expand our franchise program.

Competition

We compete in the quick service and casual dining segments of the restaurant
industry. As a franchisor of restaurants, we compete on two fronts. First we
must attract successful franchisees; and, second, we must assist our franchisees
in attracting customers in each of those two niches of the restaurant industry.
We compete with an increasing number of national chains of quick service
outlets, several of which have dominant market positions, and possess
substantially greater financial resources and longer operating histories than
us.

                                       5
<PAGE>

The segments of the restaurant industry that we compete in are highly
competitive with respect to price, service, outlet location, and food quality
and are often affected by changes in consumer taste, local and national economic
conditions, population trends and local traffic patterns.

The three most prolific submarine sandwich chains we compete with are Subway,
Blimpie and Quiznos. Subway currently has approximately 19,000 units while
Blimpie and Quiznos each have about 1,700 and 2,500 units respectively. Both
Subway and Blimpie offer a low cost product in a fast food style environment
while Quiznos is positioned between the traditional fast food style of Subway
and Blimpie and full service dining. Through its regional concepts, the Company
offers a comfortable, fast food style, family atmosphere in which to dine on
higher quality food products.

Competitors of our Central Park hamburger chain include Checkers Drive-In
Restaurants and Back Yard Burgers. Checkers currently has approximately 410
units while Back Yard Burgers has about 105 units. Both Checkers and Back Yard
Burgers offer a drive-thru format, with a low cost product in a fast food style
environment.

A number of companies have adopted "value pricing" strategies in response to
flattening growth rates and/or declines in average sale per restaurant. Such
strategies could draw customers away from companies that do not engage in "value
pricing", or discount pricing, and could also negatively impact the operating
margins by attempting to match competition pricing points.

In addition to competing with these chains as restaurants, we also compete with
these and other fast food chains for qualified franchisees. Many franchisors,
including but not limited to, those in the restaurant industry, have greater
market recognition and financial resources than us. We believe our well
established regional concepts offer prospective franchisees the balance of a
moderately priced alternative with which to enter the fast food restaurant
industry and the pride of ownership in well established and recognized brands.

Employees

As of September 30, 2004 we had approximately 36 employees consisting of 16
administrative employees, and 20 employees at our one corporately owned Central
Park location.

Copy of Report

A copy of this report is available for review at the SEC Public Reference Room
located at 450 Fifth Street, N.W., Washington, DC 20549. You may obtain more
information regarding the operation of the Public Reference Room by calling
1-800-SEC-0330. You may also obtain a copy of this report via the internet at .


ITEM 2. DESCRIPTION OF PROPERTY

Our office space is leased at various terms up to September 2009.

A summary of all real estate locations owned or leased by us at September 30,
2004 are as follows:

                                       6
<PAGE>
<TABLE>
<CAPTION>
                                                       Owned                Base     Lease
                                                         or     Square     Monthly Expiration
Address of Property                           Type     Leased   Footage     Rent     Date
==============================================================================================
<S>                                         <C>       <C>         <C>       <C>       <C>
Leases not assigned to third parties

300 International Pkwy. Suite 100             Office     Leased      2,833   4,778    02/11/06
Heathrow, FL 32746

300 International Pkwy., Suite 180            Office     Leased        747   1,276    02/11/06
Hewthrow, FL 32746

300 International Pkwy., Suite 104            Office     Leased        712   1,187    10/31/06
Hewthrow, FL 32746

5751 Uptain Rd., Suite 301                    Office     Leased      1,129   1,200    05/31/07
Chattanooga, TN  37402

1376 Highland Avenue                          Land       Leased      N/A     1,614    02/28/06
Selma, AL

1777 Tamiami Tr., Suite 206                   Office     Leased     2,454    4,080    11/30/08
Port Charlotte, FL

7205 Waters Ave.                              Land       Leased       N/A    2,650    09/09/06
Savanah, GA 31406                                                  ------  --------
                                                                    7,875  $16,785
<CAPTION>

                                                       Owned                Base     Lease
                                                         or     Square     Monthly Expiration
Address of Property                           Type     Leased   Footage     Rent     Date
==============================================================================================
<S>                                         <C>       <C>         <C>       <C>       <C>
Leases that have been assigned to franchisee's, but which we remain contingently liable

6204 Lee Highway                              Land      Leased       N/A     1,600    04/01/08
Chattanooga, TN

West Broadway Street                          Land      Leased       N/A       750    06/06/06
West Memphis, AR

395 Inman St. SW                              Land      Leased       N/A       601    12/31/04
Cleveland, TN

3717 Mercer Blvd.                             Land      Leased       N/A     1,650    03/01/05
Macon, GA                                                                 --------
                                                                          $  4,601
                                                                          ========
</TABLE>

We believe we have obtained, and currently carry, adequate liability insurance
on all the properties we own or lease.

ITEM 3. LEGAL PROCEEDINGS

We are involved in various other lawsuits and litigation matters on an ongoing
basis as a result of our day-to-day operations. However, we do not believe that
any of these legal matters will have a material adverse effect on our financial
position or results of operations.

                                       7
<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

On April 19, 2004, the shareholders voted in favor of amending our employee
incentive plan. This increased the maximum allowable shares of our common stock
to be issued under this plan from 1,500,000 shares to 3,000,000 shares. In
addition, the shareholders voted in favor of electing Harold L. Kestenbaum to
our Board of Directors. Mr. Kestenbaum served as franchise and general counsel
to Sbarro, Inc., the national franchisor of over 900 family-style Italian
restaurants and, since March 1985, he has been a director of Sbarro, whose
securities were formerly listed on the New York Stock Exchange. In addition, he
currently sits on the Board of Directors of RezConnect Technologies, Inc., NYB
Foods Inc., Desert Moon Cafe Franchise Corp., GarageTek, Inc. and Wall Street
Deli Systems, Inc. From September 1983 to October 1989, he served as President
and Chairman of the Board of FranchiseIt Corporation, the first publicly traded
company specializing in providing franchise marketing and consulting services
and equity financing to emerging franchise companies, which he co-founded.

                                       8
<PAGE>

                                     PART II

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

Our Common Stock is listed on the OTC Bulletin Board under the symbol "UFSY".
The prices reported below reflect inter-dealer prices and are without
adjustments for retail markups, markdowns or commissions, and may not
necessarily represent actual transactions.

                                                      High Bid     Low Bid
                                                      --------     -------
Fiscal Year Ended September 30, 2003  First Quarter    $ .22        $ .16
                                     Second Quarter      .18          .14
                                      Third Quarter      .20          .10
                                     Fourth Quarter      .15          .12

Fiscal Year Ended September 30, 2004  First Quarter    $ .20        $ .12
                                     Second Quarter      .60          .16
                                      Third Quarter      .95          .44
                                     Fourth Quarter      .85          .41

Stockholders

As of December 6, 2004 there were approximately 2,700 holders of record of our
common stock.

Dividends

We have never paid any dividends on our Common Stock and do not expect to pay
any dividends on our common stock in the foreseeable future. Management
currently intends to retain all available funds for working capital and the
development of its business. Dividends, if declared, must be from funds legally
available after dividends are first paid to any senior series of equity
securities such as our Preferred Stock. Currently no surplus exists.

Recent Sale of Unregistered Securities

The following table sets forth information with respect to the sale or issuance
of unregistered securities over the last three fiscal years.
<TABLE>
<CAPTION>
                                                                                                                  Exempt From
                                                                                                                     1933 Act
                                      Value or                                                                    Registration
  Shares    Type of                   Consider-   To Whom                                                               In
  Issued   Security         Date       ation      Issued                       Business Purpose                    Reliance of:
------------------------------------------------------------------------------------------------------------------------------------
<S>         <C>         <C>           <C>       <C>                       <C>                                       <C>
   51,852   Common      Aug 07, 2002    500,000 TAS, LLC                   Sale of Common Stock                     Section 4(2)
  226,699   Common      Mar 31, 2002     34,004 5 Individuals              Restructuring of Debt                    Section 4(2)
  100,000   Common      Feb 20, 2002     25,000 Gary Pereira               Conversion of Debt                       Section 4(2)
  500,000   Common      Jul 23, 2002     50,000 Agricola Coco              Conversion of Debt                       Section 4(2)
  500,000   Common      Jul 23, 2002     50,000 Bain Investments           Conversion of Debt                       Section 4(2)
  250,000   Common      Jul 23, 2002     25,000 John Mitchell              Conversion of Debt                       Section 4(2)
  250,000   Common      Jul 23, 2002     25,000 James Spratt               Conversion of Debt                       Section 4(2)
  400,000   Common      Dec 11, 2002    100,000 Allor Trust                Sale of Stock for Cash                   Section 4(2)
  100,000   Common      Jan 24, 2003     14,000 4 Individuals              Consulting Services                      Section 4(2)
   50,000   Common      Feb 12, 2003      8,000 Gary Pereira               Consulting Services                      Section 4(2)
  100,000   Common      Mar 24, 2003     14,000 JAS Investments            Interest on Long-Term Debt               Section 4(2)
  200,000   Common      Mar 31, 2003     28,000 Wall Street Group          Consulting Services                      Section 4(2)
  100,000   Common      Apr 17, 2003     15,000 Barka Mat S.A.             Interest on Long-Term Debt               Section 4(2)
  100,000   Common      Sep 25, 2003     12,000 CLD IR, Inc.               Consulting Services                      Section 4(2)
      100   Common      Oct 20, 2003         20 Fred Pilon                 Interest on Long-Term Debt               Section 4(2)
   25,000   Common      Jan 16, 2004      4,250 4 Individuals              Consulting Services                      Section 4(2)
   25,000   Common      Jan 30, 2004      4,250 4 Individuals              Consulting Services                      Section 4(2)
  200,000   Common      Mar 31, 2004    120,000 Mitch Day                  Settlement of Redeemable Common Stock    Section 4(2)
   50,000   Common      Apr 06, 2004     47,500 Barka Mat S.A.             Interest on Long-Term Debt               Section 4(2)
   25,000   Common      Apr 06, 2004     23,750 4 Individuals              Consulting Services                      Section 4(2)
   50,000   Common      May 13, 2004     27,000 James Skalko               Interest on Long-Term Debt               Section 4(2)
  800,000   Common      Jun 16, 2004    512,000 8 Individuals              Acquisition of Obee's Franchise Systems  Section 4(2)
   31,650   Common      Jul 08, 2004     25,320 James Skalko               Interest on Long-Term Debt               Section 4(2)
   25,000   Common      Aug 02, 2004     15,500 4 Individuals              Consulting Services                      Section 4(2)
   42,094   Common      Aug 03, 2004     25,256 James Skalko               Interest on Long-Term Debt               Section 4(2)
</TABLE>

                                       9
<PAGE>

Options and Warrants

In February 1999, we approved the 1998 Incentive Plan ("Incentive Plan") to
enable us to offer employees and consultants equity interests. There are
3,000,000 shares designated under the Incentive Plan and are fully vested upon
grant. Since January, 1997 we have issued options and warrants to purchase our
common stock outside of the Incentive Plan. The following table describes
selected data with respect to unexercised options and warrants at September 30,
2004:
<TABLE>
<CAPTION>

1998 Incentive Plan

As of September 30, 2004 there were no outstanding options under the Incentive
Plan.

Outside of the Incentive Plan
----------------------------------------------------------------------------------------------------------------------------
      Date         Expiration                             Number of     Exercise
    of Grant          Date                Name              Shares       Price                Business Purpose
----------------------------------------------------------------------------------------------------------------------------
<S>              <C>             <C>                          <C>             <C>         <C>
Sep 30, 1998     Sep 30, 2006    Wall St. Group                  11,429         5.00      Investment Banking Services
Oct 15, 1999     Oct 15, 2004    Blaine Quick                    64,500         2.90      Business Expansion Consulting Services
Oct 15, 1999     Oct 15, 2004    Dr. Sol Lizerbram               12,500         5.00      Business Expansion Consulting Services
Oct 15, 1999     Oct 15, 2007    Wall St. Group                  12,500         5.00      Business Expansion Consulting Services
Oct 15, 1999     Oct 15, 2004    Richard Silberman               60,000         2.90      Business Expansion Consulting Services
Oct 15, 1999     Oct 15, 2004    Bradley Gordon                 100,000         2.90      Employee Compensation
Oct 15, 1999     Oct 15, 2004    Michael Cronin                 100,000         2.90      Employee Compensation
Oct 15, 1999     Oct 15, 2004    Richard Huey                    50,000         2.90      Employee Compensation
Oct 15, 1999     Oct 15, 2004    Kelly Swartz                     3,500         1.60      Business Expansion Consulting Services
Oct 15, 1999     Oct 15, 2004    Linda Patterson                  3,500         1.60      Business Expansion Consulting Services
Jul 31, 2000     Jul 31, 2007    Lloyd, Benton & Taylor          20,000         2.29      Business Expansion Consulting Services
Nov 30, 2000     Nov 30, 2005    Olympus Capital #1              10,000         1.00      Investment Relations Services
Nov 30, 2000     Nov 30, 2005    Olympus Capital #2              10,000         1.20      Investment Relations Services
Nov 30, 2000     Nov 30, 2005    Olympus Capital #3              10,000         1.50      Investment Relations Services
Dec 05, 2001     Dec 05, 2006    Noble International            429,791          .10      Investment Relations Services
Oct 01, 2002     Oct 01, 2007    Christopher Swartz             250,000          .08      Employee Compensation
Oct 01, 2002     Oct 01, 2008    Christopher Swartz             250,000          .08      Employee Compensation
Oct 01, 2002     Oct 01, 2007    Michael Cronin                 250,000          .08      Employee Compensation
Oct 01, 2002     Oct 01, 2008    Michael Cronin                 250,000          .08      Employee Compensation
Oct 01, 2002     Oct 01, 2007    14 Employees                   400,001          .08      Employee Compensation
Oct 01, 2002     Oct 01, 2008    14 Employees                   400,001          .08      Employee Compensation
                                                           ------------
                                 TOTAL                        2,697,722
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The weighted average exercise price of these outstanding options is $.53 outside
of the Incentive Plan. The aggregate of all options has a weighted average life
until expiration of 32.88 months. No options expired in 2004. No options were
granted in 2004.

                                       10
<PAGE>

The following table provides information about the Company's equity compensation
plans as of September 30, 2004 and including the Ultimate Franchise System's,
Inc. 1998 Stock Option Plan.
<TABLE>
<CAPTION>
                                  Equity Compensation Plan Information

                                        Number of                           Number of securities
                                    securities to be                         remaining available
                                       issued upon                           for future issuance
                                       exercise of      Weighted-average        under equity
                                       outstanding      exercise price of    compensation plans
                                        options,           outstanding           (excluding
                                      warrants and      options, warrants   securities reflected
          Plan Category                  rights            and rights          in column (a))
----------------------------------- ------------------ -------------------- ----------------------
                                           (a)                 (b)                   (c)
<S>                                     <C>             <C>                     <C>
Equity compensation plans
approved by security holders                      -     $         -                  150,000

Equity compensation plans not
approved by security holders                      -     $         -                        -
                                    ------------------ -------------------- ----------------------

Total                                             -                                  150,000
                                    ------------------ -------------------- ----------------------
</TABLE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Overview

As described in Item 1, management has significantly changed the direction of
the Company and the way its on-going revenue will be derived in the future.
Currently, we derive our revenue from several sources: sale of investment
securities, royalties, franchise fees, developer fees, company owned restaurants
sales and other franchise related activities. In the future, the Company's
revenue will be derived predominately from dividends, interest income,
management fees and the gain on disposition of assets.

Royalties

Royalties are based on a percentage of franchisees' net sales and are recognized
in the same period that the franchise store sales occur. Generally royalties are
earned at the rate of 4%-7% of sales. Royalties earned under newer franchise
agreements are paid by means of weekly automatic drafts by us drawn on
franchisee bank accounts. Royalties earned under older agreements are generally
paid by the remittance of a check payable to us on a weekly, bi-weekly or
monthly basis. A portion of the royalties received are paid to our area
developers as royalty service costs for providing on-going services to
franchisees in their respective territories (see Item 1.
Business-Franchising-Area Developers).

Franchise Fees

Franchise Fees are payments received from franchisees and are recognized as
revenue in the period in which the store opens. The franchise fee for a
franchisee's initial store is currently $10,000-$12,500 for submarine sandwich
restaurants and $20,000 for hamburger restaurants. Expenses associated with the
sale of franchises also include area developer fees and are included in
franchise servicing costs. Generally, area developers are paid one-half of the
franchise fees received or collected in their territory.

                                       11
<PAGE>

Area Developer Fees

We charge area developers a non refundable fee for the exclusive right to
develop and market a defined territory for a specified period of time.
Typically, a portion of the developer fee is paid in cash and the balance is
paid with a promissory note (see Item 1. Business-Franchising-Area Developers).
When we have fulfilled substantially all of our contractual obligations such as
training, providing manuals, and reasonable efforts to obtain and retain
trademark registrations, we recognize, as revenue, the cash portion of the fee
and the value of the promissory note. Certain performance obligations are
ongoing. On these the income has been deferred to future periods in which the
services will be substantially performed.

Restaurant Sales

Restaurant sales are reported from our one Company owned Central Park store
located in Selma Alabama. Management does not believe that the operating costs
of its Company owned stores are indicative of costs for franchised stores on a
systemwide basis. Store sales are expected to vary widely from year to year and
reflect the uncertainty of when, where and how long a store may be operated by
us before being returned to the franchising system.

Management Services

The management services segment is comprised of equity securities from other
restaurant concepts. These securities are issued to our company in exchange for
franchise services such as: purchasing, marketing, and general franchise
management.

Year Ended September 30, 2004 Compared to Year Ended September 30, 2003

Revenue

Total revenue increased $676,692 in 2004 over 2003 from $2,459,685 to
$3,136,377.

Franchise operations revenue increased $593,604, or 44.4%, from $1,335,858 in
2003 to $1,929,462 in 2004. The primary reason for this increase resulted from
the acquisition of Obee's Franchise Systems, Inc. in June 2004. As a result of
this acquisition, we realized approximately $512,000 in revenue from the sale of
restricted territories in Northern California to several development agents.

Retail restaurant sales in Company owned stores decreased $228,345 or 30.2% from
$756,213 in 2003 to $527,868 in 2004. This decrease resulted from the operation
of one company owned location in 2004 compared to two locations in 2003.

Management services revenue increased $170,830 or 46.5% from $367,614 in 2003 to
$538,444 in 2004. This increase primarily relates to our equity earnings in the
COAC II partnership. During 2004 we recognized $122,282 in revenue from earnings
generated by this partnership.

Equipment revenue for the year ended September 30, 2004 was $140,603. This was
the result of revenue generated from the sale of restaurant equipment to
franchisee's of the Obee's Soup and Sub Concept. Since this business does not
meet with our core business model we are currently evaluating other means to
source restaurant equipment to our franchisees'. In early 2005, we will decide
whether we will continue this segment of the Obee's franchise business.

                                       12
<PAGE>

Costs and Expenses

We segregate our operating expenses into six general categories as follows:

             Ongoing Franchise Servicing
             Retail Company Owned Store Cost of Sales and Expenses
             General Corporate Operating Expenses
             Consulting and Investor Relations
             Non-Cash
             Other

Franchise servicing costs, increased $323,706 or 43.5% from $743,498 in 2003 to
$1,067,204 in 2004. This increase resulted from three factors. First, franchise
servicing costs associated with our acquisition of Obee's Franchise Systems,
Inc. were $568,657 during the year ended September 30, 2004. Additionally, our
disposition of the Sobik's Subs concept in December 2003 resulted in a decrease
in franchise servicing costs of approximately $155,000 during 2004. Finally,
franchise servicing costs for our Central Park hamburger concept decreased
$106,488 in 2004 as a result of the formation of Franchise Management Company,
LLC. This partnership was formed in March 2004 in an effort to leverage human
resources with other franchise companies in the quick service hamburger segment.
The result of this partnership allowed us to eliminate three positions while
maintaining the same level of service for our franchisees'.

Retail cost of sales and operating expenses from company owned stores decreased
from $804,228 in 2003 to $532,211 in 2004. Retail cost of sales and operating
expenses as a percentage of retail sales decreased from 106.4% in 2003 to 100.1%
in 2004. This decrease was the result of operating only one company owned
location in 2004 compared to two locations in 2003.

General corporate operating expenses generally include: officers and office
support staff payroll and payroll costs; legal, audit and other professional
fees; office occupancy costs and other general administrative costs. These
administrative costs decreased $66,591 or 5.3% from $1,249,354 in 2003 to
$1,182,763 in 2004. This decrease was primarily the result of reduced salaries
and wages from the resignation of our Chief Operating Officer in February 2004.

Consulting and investor relations costs decreased $14,594 or 6.9% from $210,044
in 2003 to $195,450 in 2004.

Routine or recurring non-cash charges such as depreciation and amortization was
$15,324 in 2003 compared to $8,595 in 2004. The primary reason for the decrease
was the elimination of trademark amortization associated with the Sobik's Subs
concept. This concept was sold in December 2003 and as a result our trademark
amortization expense was reduced by $6,100 in 2004.

Interest expense increased $182,052 or 98.7% from $184,412 in 2003 to $366,464
in 2004. This increase is a direct result of an increase in borrowings of
long-term debt. Due to cash flow constraints and our cash investments into other
restaurant concepts, we borrowed $1,510,000 in new long-term debt in 2004.
Additionally, we assumed $308,209 in long-term debt from the acquisition of
Obee's Franchise Systems, Inc. Finally, we entered into new long-term debt
agreements totaling $91,861 in 2004 for the settlement of other outstanding
liabilities. These three factors increased our interest expense approximately
$200,000 in 2004.

Impairment of notes receivable and investment securities increased $471,943 or
75.6% from $624,500 in 2003 to $1,096,443 in 2004. During 2004 we agreed to an
early settlement of our $1.3 million dollar note receivable due from Grace
Ventures, LLC. This note was originally to be paid in quarterly installments
through 2011, however due to cash flow constraints we agreed to accept a lump
sum payment of $475,000 in August 2004 and continue to hold an additional note
receivable in the amount of $125,000. This note requires Grace Ventures, LLC to
pay us $25,000 in November 2004 and the remaining balance will be due in August

                                       13
<PAGE>

2008. As a result of this agreement the remaining balance on the original note
of $1.3 million dollars was expensed in 2004. Additionally, in 2004 we recorded
impairment charges for two notes receivable totaling $372,440. During 2003, we
recorded a valuation allowance on our note receivable from CFB Enterprises, Inc.
in the amount of $274,500. This valuation allowance represents 25% of the
carrying value of the note receivable and was recorded based on the possibility
that CFB will lack sufficient cash to be able to make payments on this debt.
Finally, in June 2003 we sold a note receivable with a carrying value of
$500,000 for $225,000 in cash. The difference between the cash received and the
carrying value was expensed at that time.

Impairment of goodwill increased $1,097,450 from $221,704 in 2003 to $1,319,154
in 2004. During 2004 we evaluated the goodwill associated with the acquisition
of Obee's Franchise Systems, Inc. This evaluation indicated that all the
goodwill associated with this acquisition was impaired. As a result, we recorded
goodwill impairment expense of $1,319,154 in 2004. During 2003 our analysis of
the Sobik's Subs goodwill suffered impairment. As a result, an impairment
expense of $221,704 was recorded in 2003.

Equity of losses from our ownership interests in other restaurant concepts
increased $53,294 from $789 in 2003 to $54,083 in 2004. This increase in loss
was the result of increased losses from our ownership interest in Fransaction,
Inc. In 2004 we were issued an additional 6 million shares of common stock in
this company. This increased our ownership percentage in the company from 29% to
59%. We continue to account for this investment under the equity method of
accounting.

During 2004 we agreed to sell our remaining Central Park restaurant located in
Selma, Alabama. The sale of this location will be completed in November 2004.
The sale of this location will result in a loss as this location has continued
to suffer diminishing sales revenue. As a result, we incurred an impairment
expense of $149,797 in 2004 to reduce the assets of this location to fair market
value.

Liquidity and Capital Resources

Net cash used in operating activities was $1,015,083 in 2004 compared to
$811,598 in 2003, an increase of $203,485.

Net cash of $141,818 was provided by investing activities in 2004 compared to
$328,458 in 2003, an increase of $186,640. This change is primarily the result
of two factors: First, our collections on notes receivable decreased $376,503
from $897,000 in 2003 to $520,497 in 2004. Second our cash investments into
other restaurant concepts decreased $206,979 from $650,000 in 2003 to $443,021
in 2004.

Net cash provided by financing activities was $956,838 in 2004 compared to
$195,011 used by financing activities in 2003. The change of $1,151,849
primarily results from our increased borrowings of long-term debt. In 2004 we
had new borrowings of long-term debt of $1,910,070 compared to $300,000 in 2003,
a change of $1,610,070. Additionally, payments on long-term debt increased
$342,621 from $588,511 in 2003 to $931,132 in 2004.

Working capital at September 30, 2004 was a deficit of $2,430,418 compared with
a deficit of $1,603,821 on September 30, 2003. Two significant items contributed
to the increase in our working capital deficit. The first was the increase in
our current portion of long-term debt which increased $885,988 from $788,489 in
2003 to $1,674,477 in 2004. This increase resulted from our acquisition of
Obee's Franchise Systems, Inc which increased current debt by $308,209.
Additionally, we entered into several short term debt agreements totaling
approximately $1,050,000. The second reason for the increase in our working
capital deficit relates to an increase in accounts payable and accrued expenses
which increased $252,390 and $147,442. respectively. These increases relates
primarily to the acquisition of Obee's Franchise Systems, Inc. in June 2004.

                                       14
<PAGE>

These issues have resulted in substantial doubt about our ability to continue as
a going concern.

To address this deficiency we have sourced three opportunities for large equity
investments into the company. This could enable us to continue as a going
concern.

The first opportunity is in the form of a 2.5 million ($2,500,000) dollar equity
investment. This investment would be in exchange for approximately thirty
percent (30%) of the company. This investment would also call for the creation
of a new Board of Director's seat as well as a stock option program. The stock
option program is being negotiated at the present time. We expect this equity
investment to be complete by the end of February 2005. We contemplate the use of
proceeds to be the following:

1. Five Hundred Thousand Dollars ($500,000) in working capital;
2. Two Million Dollars ($2,000,000) for acquisitions of new franchise systems.
We believe the acquisitions of the new revenue streams will allow us to reach
levels of operational profitability that coupled with infusion of working
capital, will allow us to grow exponentially in the coming year.

If this 2.5 million ($2,500,000) Dollar equity investment does not occur, then
we have two other sources to obtain one million dollars ($1,000,000) in equity
infusion respectively. In each case, these investments would be in exchange for
approximately ten percent (10%) of the company. We would contemplate only
accepting one of these equity investments.

The company has also made significant changes in how it will oversee and operate
its investments. The operating systems and, therefore, the cash flow have been
streamlined with all division Presidents now reporting to a newly hired Chief
Operating Officer. We believe this streamlining and the maturation of revenue
streams will now allow us to operate those entities profitably. The vast
majority of the initial cash requirements to oversee these investments are
behind us and in the coming years, we should now see the return on the capital
that was invested in these entities. Most specifically, we have consummated the
transaction which allowed us to facilitate the reverse merger of Obee's
Franchise Systems into a new publicly traded entity. This transaction, once
again, highlights our capabilities in creating transactions that create
significant value for our shareholders and the value of our venture partners. A
significant portion of our negative working capital pertains to the Obee's
acquisition and through this "spin off", this working capital deficit will no
longer be the obligation of Ultimate Franchise Systems, Inc. Furthermore, with
Obee's new position as a stand alone publicly traded company, they have sourced
the appropriate amount of capital in order to take care of their cash
requirements.

With the imminent resolution of our business transformation being complete, we
feel that we have addressed or will be addressing the financial challenges to
allow us to continue as a going concern.

There is no assurance that additional funding will be available, or if
available, it can be obtained on terms favorable to us. Failure to obtain such
funding could adversely affect our financial condition.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements. In accordance with the definition under the new
Securities and Exchange Commission rules, the following qualify as off-balance
sheet arrangements:

                                       15
<PAGE>

         o        Any obligation under certain guarantees or contracts;
         o        A retained or contingent interest in assets transferred to an
                  unconsolidated entity or similar arrangement that serves as
                  credit, liquidity or market risk support to that entity for
                  such assets;
         o        Any obligation under certain derivative instruments;
         o        Any obligation under a material variable interest held by the
                  registrant in an unconsolidated entity that provides
                  financing, liquidity, market risk or credit risk support to
                  the registrant, or engages in leasing, hedging or research and
                  development services with the registrant.

During 2004, we sold our majority interest in the Sobik's International
Franchising, Inc. restaurant concept. Under the terms of this agreement, we
agreed to sell 17,445,664 shares of Sobik's in exchange for $100,000 in cash, a
note receivable of $900,000, and 1,000,000 shares of "Series A Convertible
Preferred Stock" in Sobik's. This preferred stock is convertible at our option
and is anti- dillutive. If all 1,000,000 shares of the Series A Convertible
Preferred stock were converted at the same time, we would own 19% of the
outstanding common stock of Sobik's. The $900,000 note receivable requires QRVC
to pay us quarterly interest only payments of $15,750 until December 2004. At
that time QRVC will pay us an additional $100,000 in principal and continue to
make quarterly interest payments of $14,000 until December 31, 2005. At that
time the remaining principal balance will be amortized and paid in monthly
principal and interest installments of $13,489 until 2013. Subsequent to this
transaction, an analysis of the QRVC financials indicated inadequate cash flows
provided from operations to make payments on this note. As a result, we recorded
a $500,000 impairment charge to our note receivable during the year ended
September 30, 2004.

Our Chief Executive Officer, Christopher Swartz is also a member of the QRVC
Board of Directors. The results of operations are included in our consolidated
financial statements up until the date of sale.

Quantitative and Qualitative Disclosures About Market Risk

The Company believes that its revenues and results of operations have not been
significantly affected by inflation during the two years ended September 30,
2004.

One of the Company's long-term debt loans is subject to variable interest rates.
Significant fluctuations in interest rates therefore could have an adverse
effect on the Company and its ability to fund working capital requirements.

ITEM 7. FINANCIAL STATEMENTS

Attached hereto and filed as part of this Form 10-KSB are the consolidated
financial statements listed in the index to the Consolidated Financial
Statements at page F-1.

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

None

                                       16
<PAGE>

ITEM 8A. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with participation of our management,
including the Chief Executive Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the Chief Executive Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting members of the management to material information relating to the
Company required to be included in our periodic SEC filings.

(b) Changes in internal controls.

         No significant changes were made in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.

                                       17
<PAGE>

                                    PART III

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

Executive Officers and Directors of the Company

The following table sets forth certain information with respect to the executive
officers and directors. Each director holds such position until the next annual
meeting of our shareholders and until his successor has been duly qualified and
elected. Any of our officers may be removed, with or without cause, by the board
of directors.

--------------------------------------------------------------------------------
      Name                Age   Director/Date    Office or Position
                                 Elected
--------------------------------------------------------------------------------

Christopher M. Swartz     34   Yes/ Apr 1996   Chairman, President and Chief
                                               Executive Officer
Eric T. Swartz            38   Yes/ Apr 1996   Secretary
* Michael F. Cronin       48   No / Apr 2000   Chief Financial Officer/Treasurer
                                               and Chief Operating Officer
Richard Beattie           40   Yes/ Oct 2002   Director
Harold L. Kestenbaum      46   Yes/ Apr 2004   Director
--------------------------------------------------------------------------------

* Mr. Cronin resigned from the board of directors on February 29, 2004.

Christopher M. Swartz, Chairman, President and CEO has been Chairman, President
and Chief Executive Officer of the Company since April 1996 and Chairman,
President and Chief Executive Officer of JRECK Subs, Inc. since September 1994.
Mr. Swartz is on the Board of Directors of the Florida Restaurant Association
and has won multiple National leadership awards from the National Republican
Committee. Mr. Swartz is also a member of the board of our affiliate company
Weight Loss Forever International, Inc. Mr. Swartz is a 1992 honors graduate
from Syracuse University.

Eric T. Swartz has been a Director and Secretary since April, 1996. He was
awarded his J.D. degree and undergraduate degree from Syracuse University
College of Law and Syracuse University, respectively. From October 1993 to the
present he has been a partner in the Swartz Law Firm, P.C. and was associated
with the law firm of Pease and Willer after graduating from law school in 1992.
Mr. Swartz is the brother of Christopher M. Swartz.

Richard P. Beattie has had a very long and successful career as a developer and
operator of some of the largest and most respected restaurant chains in the
country. He is currently the largest franchisee of the Denny's corporation,
operating over 65 units and in November 2000 was presented with the award for
Developer of the Year for Denny's Inc. Mr. Beattie has been involved with the
Franchise Advisory Council for Denny's for nine years and served on several
corporate committees. He is also one of only eight Chili's franchisees with
ownership rights for the states of Washington and Oregon. In addition to the
eight Chili's restaurants he presently operates, there are two more under
development. Mr. Beattie is considered to be one of the top fifty franchise
operators in the country by most industry publications.

Mr. Kestenbaum served as franchise and general counsel to Sbarro, Inc., the
national franchisor of over 900 family-style Italian restaurants and, since
March 1985, he has been a director of Sbarro, whose securities were formerly
listed on the New York Stock Exchange. In addition, he currently sits on the
Board of Directors of RezConnect Technologies, Inc., NYB Foods Inc., Desert Moon
Cafe Franchise Corp., GarageTek, Inc. and Wall Street Deli Systems, Inc. From
September 1983 to October 1989, he served as President and Chairman of the Board
of FranchiseIt Corporation, the first publicly traded company specializing in
providing franchise marketing and consulting services and equity financing to
emerging franchise companies, which he co-founded.

                                       18
<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires executive officers
and directors, and persons who beneficially own more than 10% of the Company's
common stock, to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission. Executive officers,
directors and greater than 10% beneficial owners are required by SEC regulations
to furnish the Company with copies of all Section 16(a) forms they file.

Based solely on the Company's review of copies of such reports and written
representations from the Company's executive officers and directors, the Company
believes that its executive officers and directors complied with all Section
16(a) filing requirements during the fiscal year ended September 30, 2004.

ITEM 10. EXECUTIVE AND DIRECTOR COMPENSATION

Summary Compensation Table

The following table sets forth the cash compensation of our executive officers
and directors during each of the last three fiscal years. The remuneration
described in the table does not include the cost to the company of benefits such
as health insurance premiums, and other benefits, furnished to the named
executive officers, that are extended in connection with the ordinary conduct of
our business. The value of such benefits cannot be precisely determined, however
no executive officer named below received any such benefits in excess of the
lesser of $25,000 or 10% of such officer's cash compensation.
<TABLE>
<CAPTION>
                                          Summary Compensation Table

-----------------------------------------------------------------------------------------------------------------------
                           Annual Compensation                                       Long Term Compensation
-----------------------------------------------------------------------------------------------------------------------
   Name & Principal                                        Other Annual    Awards      Awards    Payouts    All Other
       Position            Year       Salary      Bonus    Compensation  ----------------------------------------------
                                                                         Restricted   Options      LTIP
                                                                         Stock in $   SARS (#)  Payouts
                                                                                                   ($)
-----------------------------------------------------------------------------------------------------------------------
<S>                     <C>         <C>          <C>          <C>          <C>     <C>           <C>         <C>
                           2004      $ 175,000     $ 0          $ 0          $ 0         0         $ 0         $ 0
 Christopher M. Swartz     2003      $ 175,000     $ 0          $ 0          $ 0         0         $ 0         $ 0
    President & CEO        2002      $ 175,000     $ 0          $ 0          $ 0     500,000       $ 0         $ 0
-----------------------------------------------------------------------------------------------------------------------
   Michael F. Cronin       2004      $ 58,333      $ 0          $ 0          $ 0         0         $ 0         $ 0
Chief Financial Officer    2003      $ 140,000     $ 0          $ 0          $ 0         0         $ 0         $ 0
& Chief Operating Officer  2002      $ 140,000     $ 0          $ 0          $ 0     500,000       $ 0         $ 0
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Mr. Cronin resigned from his position of Chief Financial Officer and Chief
Operating Officer on February 29, 2004.

                                       19
<PAGE>

Employment Contracts

None

Options and Rights Granted to Purchase Common Stock

The following table summarizes options and rights to purchase common stock that
were granted or issued to executive officers and directors over each of the last
three fiscal years:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                         Number                                                   Percent of
                                           of     Number of                                          Total
                                         Options  Shares of     Date of                 Exercise    Options
                                         Granted   Common       Grant                   Price of  Granted to
                                          (in       Stock        or         Expiration  Purchase   Employees
        Name              Position       Shares)  Purchased    Purchase        Date     Price     During Year
---------------------------------------------------------------------------------------------------------------------------
<S>                   <C>              <C>         <C>       <C>           <C>           <C>       <C>
Christopher M. Swartz President and    250,000               Oct 01, 2001  Oct 01, 2007  $ 0.08     13.9%
                      Chief Executive  250,000               Oct 01, 2001  Oct 01, 2008  $ 0.08     13.9%
                      Officer

Michael F. Cronin    Chief Financial   250,000               Oct 01, 2001  Oct 01, 2007  $ 0.08     13.9%
                     Officer and Chief 250,000               Oct 01, 2001  Oct 01, 2008  $ 0.08     13.9%
                     Operating Officer
---------------------------------------------------------------------------------------------------------------------------

Stock Appreciation Rights granted to our officers during 2004

The following  table sets forth  information  regarding the value of Options and
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                       Number of Securities Underlying         Value of In-The-Money
                                                        Unexercised Options and SAR's            Options and SAR's
                                                            at September 30, 2004              at September 30, 2004
----------------------------------------------------------------------------------------------------------------------------
                   Shares Acquired
Name and Position    on Exercise     Value Realized     Exercisable      Unexercisable     Exercisable   Unexercisable
----------------------------------------------------------------------------------------------------------------------------
<S>                  <C>                <C>             <C>               <C>                <C>             <C>
Christopher M. Swartz    None             None           500,000             None             $215,000        None
  President and
  Chief Executive
    Officer

Michael F. Cronin        None             None           600,000             None             $215,000        None
 Chief Financial
 Officer and Chief
 Operating Officer
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                       20
<PAGE>

Other

We do not carry officers & directors liability insurance or disability benefits
in excess of statutorily mandated amounts. Directors receive no compensation for
their duties.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information relating to the beneficial ownership
of the Company's Common Stock by those persons beneficially holding more than 5%
of the Company's common stock or held by our executive officers and directors,
and by all our officers and directors as a group as of September 30, 2004. The
address of each person is in care of the Company unless noted.

As used in the table, the term "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of a security, or the sole or shared
investment power with respect to a security (i.e. the power to dispose of, or to
direct the disposition of, a security). In addition, for purposes of this table,
a person is deemed to have "beneficial ownership" of any security if such person
has the right to acquire such security within sixty days.

--------------------------------------------------------------------------------
                               Name and Amount and
                      Address of      Officer        Nature of
    Title of          Beneficial         or         Beneficial        Percent of
     Class              Owner         Director         Owner             Class
--------------------------------------------------------------------------------
  Common Stock  Christopher M. Swartz   Yes       (a) 2,556,709         17.21%
  Common Stock       Eric Swartz        Yes              42,500          0.05 %
  Common Stock    Richard Beattie       Yes       (b)   100,000          0.07 %
         All Officers and Directors as a Group        2,699,209         24.30 %

(a)      Includes 1,537,037 shares of common stock owned by TAS LLC. Mr. Swartz
         is an 83% partner in TAS, and as such, is deemed to have beneficial
         ownership of 83% of the shares owned by TAS. It also includes 374,421
         shares of common stock owned by Tri-Emp Enterprises, a limited family
         partnership. Mr. Swartz is the general partner of Tri-Emp Enterprises,
         and as such, is deemed to have beneficial ownership of the shares owned
         by Tri-Emp Enterprises. It also includes 500,000 shares subject to
         options exercisable by Mr Swartz.

(b)      Includes 400,000 shares of common stock owned by The Allor Trust In
         October 2002, pursuant to a stock purchase agreement we issued 400,000
         shares of our common stock to The Allor Trust, ("Allor") in exchange
         for $100,000. In addition, Richard Beattie was appointed to our Board
         of Directors as a result of this transaction.

                                       21
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Formation of Joint Venture

In October 2002, we formed a joint venture with Concept Acquisitions, LLC.,
("COAC") The joint venture has purchased 100% of the assets in the Flamers
hamburger concept with 55 units throughout the Mid-Atlantic United States. The
purchase price consisted of $1,000,000 in cash and a note payable for $1,600,000
which will require principal and interest payments over a three year period with
a balloon payment due thereafter. The transaction was funded as follows:
<TABLE>
<CAPTION>
                                                                UFSI        COAC         Total
                                                             ----------- ------------ -------------
 <S>                                                           <C>         <C>           <C>
 Cash for equity position in Joint Venture                     350,000     350,000        700,000
 Cash for note receivable                                      300,000           -        300,000
                                                             ----------- ------------ -------------
 Total cash used for acquisition                               650,000     350,000      1,000,000
                                                             ======================================
</TABLE>

Conversion of Note Receivable to Equity

Subsequent to the formation of the COAC joint venture, in March 2003 we
converted our $300,000 note receivable issued to form the joint venture with
COAC into equity. Under the terms of the agreement, Ultimate Franchise Systems,
Inc. will receive the greater of $15,000 per month or 50% of the cash
distributions or sales proceeds of COAC II until December 31, 2005. Thereafter,
Ultimate Franchise Systems will be entitled to a 25% interest in cash
distributions and sales proceeds.

In addition, and in connection with this transaction we converted our note
receivable of $265,000 due from COAC into an equity interest in COAC. This
equity interest provides for UFSI to receive 18% of the cash distributions and
sales proceeds of COAC commencing after repayment by COAC of all outstanding
debt obligations which is expected to occur in April 2007.

Management Agreements

In December 2002, we entered into a letter agreements with Topper's Brick Oven
Pizza, Inc. ("Topper's") and Weight Loss Forever, International Inc. ("Weight
Loss Forever") whereby we will offer our expertise in purchasing, marketing,
franchise legal services, franchise sales, and general management to each
company in exchange for 6,000,000 shares of common stock of each company. The
value of these services is $500,000 and will be amortized over a 24 month period
beginning in December 2002.

In August 2004, we received 6,000,000 shares of common stock from Fransaction,
Inc in exchange for franchise management services we plan to provide this
company. As a result of this transaction we now own 59% of the issued and
outstanding shares of Fransaction, Inc.

                                       22
<PAGE>

Item 13. Exhibits and Reports on Form 8-K.

         a) Exhibits. The following exhibits are included as part of this report
at the location indicated:

              SEC
 Exhibit   Reference
  Number     Number        Title of Document                        Location
---------- --------- ----------------------------------------   ----------------

 Item 31             Certifications
---------- --------- ----------------------------------------   ----------------
  31.1         31    Certification of Chief Executive Officer   This filing
                     of Periodic Report pursuant to Rule
                     13a-14a and Rule 15d-14(a).

  32.1         32    Certification pursuant to 18 U.S.C.        This filing
                     Section 1350.



         (b) Reports on Form 8-K. During the year ended September 30, 2004,
Ultimate Franchise Systems, Inc. did not file any reports on Form 8-K.

Item 14. Principal Accountant Fees and Services

The following table sets forth the aggregate fees for professional services
billed to us by our principal accounting firm, Berman Hopkins Wright & LaHam,
LLP, for the past two fiscal years. Such information is provided as of December
6, 2004 and, accordingly, the information for Fiscal 2004 may be subject to
change:

                                             Year Ended September 30,
                                             2004              2003
                                         -----------       -----------
       Audit Fees......................  $    76,343       $    62,852

       Tax Fees........................       26,452            22,354
                                         -----------       -----------
                                         $   102,795       $    85,206
                                         ===========       ===========

Tax fees are for the preparation of our U.S. corporate federal and state tax
returns. All work performed by our independent registered certified public
accountants must be pre-approved by our Audit Committee to ensure that all such
work is compatible with maintaining the principal accountant's independence.

                                       23
<PAGE>

                                   SIGNATURES

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

Ultimate Franchise Systems, Inc.
------- ------------------------
      (Registrant)



                                   President, Chief Financial
                                   Officer & Duly Authorized
                                   Officer Member of
01/13/05   Christopher M. Swartz   Board of Directors  /s/ Christopher M. Swartz
--------   ---------------------  -------------------  -------------------------
  Date          Print Name               Title                   Signature

                                       24
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries

                        Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


                                    Contents



Independent Auditors' Report on Consolidated Financial Statements............F-1

Consolidated Financial Statements:

     Consolidated Balance Sheets.......................................F-2 - F-3
     Consolidated Statements of Operations...................................F-4
     Consolidated Statements of Cash Flows.............................F-5 - F-6
     Consolidated Statements of Stockholders' Equity.........................F-7
     Notes to Consolidated Financial Statements.......................F-8 - F-34

                                       25
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of
Ultimate Franchise Systems, Inc.
Heathrow, Florida


We have audited the accompanying consolidated balance sheets of Ultimate
Franchise Systems, Inc. and subsidiaries as of September 30, 2004, and 2003, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ultimate Franchise
Systems, Inc. and subsidiaries as of September 30, 2004, and 2003 and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.

/s/ Berman Hopkins Wright & LaHam, CPA's, LLP

Berman Hopkins Wright & LaHam, CPA's, LLP
Melbourne, Florida
November 17, 2004                                                            F-1
<PAGE>
<TABLE>
<CAPTION>
                                Ultimate Franchise Systems, Inc. and Subsidiaries
                                          Consolidated Balance Sheets


                                                                             September 30,         September 30,
                                                                                 2004                   2003
---------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                    <C>
Assets
Current assets:
    Cash                                                                       $    104,656           $     21,083
    Accounts receivable                                                              38,746                 56,059
    Prepaid expenses                                                                  4,547                  6,014
    Current portion of notes receivable                                             192,213                132,796
---------------------------------------------------------------------------------------------------------------------
        Total current assets                                                        340,162                215,952
---------------------------------------------------------------------------------------------------------------------
Property and equipment, net                                                          94,780                 63,449
---------------------------------------------------------------------------------------------------------------------

Other assets:
    Goodwill                                                                      2,625,773              3,531,057
    Deferred loan costs, net                                                         49,103                114,563
    Notes receivable, net of current portion and allowance of
        $1,146,940 and $274,500, respectively                                     1,161,596              2,275,952
    Investment securities                                                           293,947                749,816
    Other Investments                                                             1,368,989              1,041,719
---------------------------------------------------------------------------------------------------------------------
        Total other assets                                                        5,499,408              7,713,107
---------------------------------------------------------------------------------------------------------------------
Total assets                                                                   $  5,934,350           $  7,992,506
=====================================================================================================================


Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements                                                     F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                Ultimate Franchise Systems, Inc. and Subsidiaries
                                     Consolidated Balance Sheets, Continued


                                                                             September 30,         September 30,
                                                                                 2004                   2003
---------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                    <C>
Liabilities and Stockholders' Equity
Current liabilities:
    Current portion of long-term debt                                          $  1,595,960           $    788,489
    Accounts payable                                                                451,657                199,267
    Deferred revenue                                                                 41,673                291,669
    Accrued expenses                                                                667,965                520,523
    Accrued preferred stock dividends                                                13,325                 19,825
---------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                         2,770,580              1,819,773
---------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portion                                              2,229,511              2,037,073
---------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                 5,000,091              3,856,846
---------------------------------------------------------------------------------------------------------------------
Minority interest                                                                         -                202,902
---------------------------------------------------------------------------------------------------------------------
Redeemable common stock                                                                   -                293,000
---------------------------------------------------------------------------------------------------------------------

Stockholders' equity:
    Series C convertible preferred stock, no par value, 120 shares
      authorized, issued and outstanding                                            120,000                120,000
    Common stock, $.001 par value, 100,000,000 shares authorized,
      15,023,194, and 13,749,350 shares issued and outstanding,
      respectively                                                               31,131,059             30,611,215
    Accumulated deficit                                                         (30,088,841)           (27,305,884)
    Accumulated other comprehensive (loss) income                                  (227,959)               214,427
---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                          934,259              3,639,758
---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                                     $  5,934,350           $  7,992,506
=====================================================================================================================


Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements                                                    F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                        Ultimate Franchise Systems, Inc. and Subsidiaries
                             Consolidated Statements of Operations


                                                                          Year             Year
                                                                          Ended           Ended
                                                                      September 30,   September 30,
                                                                          2004             2003
----------------------------------------------------------------------------------------------------
<S>                                                                  <C>              <C>
Revenues:
    Franchise operations                                             $  1,929,462     $  1,335,858
    Retail sales - company-owned stores                                   527,868          756,213
    Equipment sales                                                       140,603                -
    Management services                                                   538,444          367,614
----------------------------------------------------------------------------------------------------
                                                                        3,136,377        2,459,685

Operating costs and expenses:
    Franchise servicing costs                                           1,067,204          743,498
    Cost of retail sales and operating costs - stores                     532,211          804,228
    Cost of sales - equipment                                             224,674                -
    General and administrative                                          1,182,763        1,249,354
    Consulting and investor relations                                     195,450          210,044
    Amortization and depreciation                                           8,595           15,324
----------------------------------------------------------------------------------------------------
                                                                        3,210,897        3,022,448
----------------------------------------------------------------------------------------------------

Income (loss) from operations                                             (74,520)        (562,763)

Other income (expense):
    Interest, net                                                        (366,464)        (184,412)
    Impairment of notes receivable and investment securities           (1,096,443)        (624,500)
    Impairment of goodwill                                             (1,319,154)        (221,704)
    Equity of earnings/(losses) of unconsolidated subsidiary              (54,083)            (789)
    Gain on disposal of consolidated subsidiary                           243,340                -
    Minority interest in income of subsidiary                                   -           40,008
    Loss on the sale of company owned restaurant                         (149,797)               -
    Other, net                                                             49,764           40,000
----------------------------------------------------------------------------------------------------
                                                                       (2,692,837)        (951,397)
----------------------------------------------------------------------------------------------------
Net income (loss)                                                      (2,767,357)      (1,514,160)
----------------------------------------------------------------------------------------------------
Preferred stock dividends                                                 (15,600)         (15,600)
----------------------------------------------------------------------------------------------------

Net income (loss) applicable to common stock                         $ (2,782,957)    $ (1,529,760)
====================================================================================================

Weighted average number of common shares outstanding                   14,188,789       13,335,826

Earnings (loss) per basic and diluted common share:
    Net income (loss) per common share - basic                       $       (.20)    $       (.11)
    Net income (loss) per common share - diluted                          N/A              N/A
====================================================================================================

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements                                   F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                        Ultimate Franchise Systems, Inc. and Subsidiaries
                              Consolidated Statements of Cash Flows

                                                                      Year             Year
                                                                     Ended             Ended
                                                                 September 30,     September 30,
                                                                      2004             2003
-------------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>
Operating activities:
    Net income (loss)                                          $    (2,767,357)  $    (1,514,160)
    Adjustments to reconcile net loss to net cash used
      by operating activities:
       Amortization and depreciation                                     8,595            15,324
       Allowance for notes receivable                                  150,820           274,500
       Impairment of long-lived assets                               1,246,240           277,635
       Permanent impairment of goodwill                                      -           221,704
       Gain on settlement of long-term debt                                  -           (40,000)
       Discount on early settlement of notes receivable              1,274,796                 -
       Gain on sale of consolidated subsidiaries                      (243,340)                -
       Stock and stock options issued for services                      47,750            65,000
       Stock of majority owned subsidiary issued for services                -             8,563
       Stock issued for interest on long-term debt                     125,096
       Stock issued for restructuring of long-term debt                      -            29,000
       Minority interest in income (loss) of subsidiary                      -           (40,008)
       Amortized discounts on financial instruments                     11,796                 -
       Loss on settlement of redeemable common stock                   (23,517)                -
       Amortization of deferred loan costs to interest expense          65,460            65,460
       Capitalized interest on notes receivable                       (131,130)         (136,109)
       Unrealized gain on equity earnings of joint venture            (122,282)                -
       (Increase) decrease in:
         Accounts receivable                                           (60,566)              101
         Prepaid expenses                                                1,465            21,333
         Other assets                                                        -                 -
       Increase (decrease) in:
         Accounts payable                                             (274,576)           38,853
         Deferred revenue                                             (233,631)         (210,344)
         Accrued liabilities                                           (90,702)          111,550
-------------------------------------------------------------------------------------------------
Net cash used by operating activities                               (1,015,083)         (811,598)
-------------------------------------------------------------------------------------------------
Investing activities:
    Purchase of property and equipment                                  (2,690)           (2,550)
    Proceeds from sale of marketable securities                              -            57,000
    Issuance of notes receivable                                       (18,667)                -
    Proceeds from collection of dividends                                    -            27,008
    Cash used for investment in restaurant concepts                   (438,582)                -
    Cash from sale of majority owned subsidiary                         96,260                 -
    Cash used for formation of joint venture                                 -          (650,000)
    Cash used for formation of management company                      (30,000)                -
    Return of capital from managment company                            15,000                 -
    Proceeds from collection of notes receivable                       520,497           897,000
-------------------------------------------------------------------------------------------------
Net cash provided by investing activities                              141,818           328,458
-------------------------------------------------------------------------------------------------
Financing activities:
    Borrowings on long-term debt                                     1,910,070           300,000
    Proceeds from sale of common stock                                       -           100,000
    Dividends paid on preferred stock                                  (22,100)           (6,500)
    Payments on long-term debt                                        (931,132)         (588,511)
-------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities                       956,838          (195,011)
-------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                    83,573          (678,151)

Cash and cash equivalents, beginning of period                          21,083           699,234
-------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                       $       104,656   $        21,083
=================================================================================================

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements                                 F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                Consolidated Statements of Cash Flows, Continued


Certain supplemental disclosure of cash flow information and non-cash investing
and financing activities is as follows:


                                                                                         Year                 Year
                                                                                        Ended                 Ended
                                                                                    September 30,         September 30,
                                                                                         2004                  2003
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                   <C>
Cash paid for interest                                                           $         227,131     $          184,508
----------------------------------------------------------------------------------------------------------------------------
Conversion of note receivable into joint venture equity                          $               -     $          543,083
Accrued preferred stock dividends relieved                                                       -                 32,917
Acquisition of investment securities for services                                          600,000                500,000
Write down of non-refundable deposit of potential acquisition                                    -                 75,000
Unrealized gain / (loss) on marketable securities                                         (442,386)               214,427
Preferred stock dividends accrued                                                           15,600                 15,600
Stock returned to treasury for cancellation of subscription receivable                           -                687,500
Common stock issued for settlement of redeemable common stock                             (120,000)                     -
Stock adjustment for sale of Sobik subsidiary                                             (285,002)                     -
Note receivable received from sale of Sobik subsidiary                                    (900,000)                     -
Adjustment of majority interests from sale of Sobik subsidiary                            (202,902)                     -
Receipts of Series A preferred stock from sale of Sobik subsidiary                          (8,058)                     -
Note payable from settlement of redeemable common stock                                     60,000                      -
Stock issued for acquisiton of Obee's subsidiary                                           512,000                      -
Debt acquired in acquisiton of Obee's subsidiary                                           196,154                      -
Fixed assests acquired from Obee's subsidiary                                              (87,427)                     -
============================================================================================================================

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements                                                            F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                        Ultimate Franchise Systems, Inc. and Subsidiaries
                                        Consolidated Statements of Stockholders' Equity

                                                                                                              Accumulated
                                                                                                                Other
                                                                          Preferred                             Compre-
                                                    Common                 Series C                  Subscrip-  hensive
                                             ----------------------  -----------------  Accumulated    tion     Income     Total
                                              Shares       Amount     Shares   Amount     Deficit      Notes    (Loss)     Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>        <C>            <C>    <C>      <C>           <C>        <C>      <C>
Balance, September 30, 2002                 12,749,415  $31,096,152    120    $120,000 $(25,809,041) $(687,500) $      - $4,719,611
Issuance of common stock as payment of
 interest on long-term debt                    200,000       29,000      -           -            -          -         -     29,000
Excess of par value of subsidiary common
 stock issued for services                                    8,563      -           -            -          -         -      8,563
Stock returned to the treasury of the company  (50,065)    (687,500)     -           -            -    687,500         -          -
Issuance of common stock for cash              400,000      100,000      -           -            -          -         -    100,000
Stock issued for services                      450,000       65,000      -           -            -          -         -     65,000
Write off of preferred Series F dividends            -            -      -           -       32,917          -         -     32,917
Preferred dividends                                  -            -      -           -      (15,600)         -         -    (15,600)
Net loss                                             -            -      -           -   (1,514,160)         -         - (1,514,160)
Unrealized gain on investment securities             -            -      -           -            -          -   214,427    214,427
------------------------------------------------------------------------------------------------------------------------------------

Balance, September 30, 2003                 13,749,350  $30,611,215    120    $120,000 $(27,305,884) $       -  $214,427$ 3,639,758
Excess of par value of subsidiary common
 stock sold for cash and note receivable             -     (285,002)     -           -            -          -         -   (285,002)
Stock issued as interest on long-term debt     173,844      125,096      -           -            -          -         -    125,096
Stock issued for settlement of redeemable
 common stock                                  200,000      120,000      -           -            -          -         -    120,000
Stock issued for acquisition of subsidiary     800,000      512,000      -           -            -          -         -    512,000
Stock issued for services                      100,000       47,750      -           -            -          -         -     47,750
Preferred dividends                                  -            -      -           -      (15,600)         -         -    (15,600)
Net loss                                             -            -      -           -   (2,767,357)         -         - (2,767,357)
Unrealized loss on investment securities             -            -      -           -            -          -  (442,386)  (442,386)

Balance, September 30, 2004                 15,023,194  $31,131,059    120    $120,000 $(30,088,841) $       - $(227,959)$  934,259
====================================================================================================================================

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements                                                                   F-7
</TABLE>
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003



1.       Background Information

         Ultimate Franchise Systems, Inc. (collectively "we" and "our"), was
         incorporated on July 19, 1995 under the laws of the State of Colorado.
         On April 25, 2002, we changed our state of domicile from the State of
         Colorado to the State of Nevada.

         We are a franchise management and venture company with minority
         interests in numerous restaurant concepts located throughout the United
         States. Our headquarters are located in Heathrow, Florida. Currently,
         we have equity interest in companies controlling approximately 585
         franchised restaurant locations and 40 weight loss clinics throughout
         the United States. Our strategy continues to be one of growth. The
         majority of which is through the acquisition of minority positions in
         other restaurant franchise companies. This allows us to provide
         franchise management services to other companies without any increase
         to operating expenses and provides us with a more diversified portfolio
         of restaurant brands. In addition, we offer guidance and assistance to
         the franchisees in areas such as product preparation, equipment
         purchasing, marketing, administrative support and employee training.

2.       Liquidity and Capital Resources

         The accompanying consolidated financial statements have been prepared
         in conformity with accounting principles generally accepted in the
         United States of America, which contemplates continuation of the
         Company as a going concern. However, the Company has sustained
         substantial losses from operations in recent years. In addition, the
         Company has used, rather than provided, cash in its operations. The
         consolidated financial statements do not include any adjustments that
         might result from the outcome of this uncertainity.

         The Company has incurred losses in each of the past two years. As of
         September 30, 2004, it had an accumulated deficit of $30,088,841.
         During the fiscal year ended September 30, 2004, the Company incurred a
         loss of $2,767,357 and used cash in operations of $1,015,083. The
         Company's working capital deficit as of September 30, 2004 was
         2,430,418.

         To address this deficiency, we have a signed commitment from an
         individual to contribute $2.5 million dollars in the form of a
         convertible debenture. This individual has expressed an interest to
         convert this debenture into common stock immediately and as a result an
         addendum to this agreement is currently being negotiated. We expect
         that this will require us to issue approximately five million shares of
         our common stock and allow this individual to become a member of our
         Board of Directors. The proceeds from this investment will be used to
         fund our working capital deficit, fund our ongoing operations, and to
         make additional acquisitions of other restaurant concepts.

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements                F-8
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


2.       Liquidity and Capital Resources (continued)

         The company has also made significant changes in how it will oversee
         and operate its investments. The operating systems and, therefore, the
         cash flow have been streamlined with all division Presidents now
         reporting to a newly hired Chief Operating Officer. We believe this
         streamlining and the maturation of revenue streams will now allow us to
         operate those entities profitably. The vast majority of the initial
         cash requirements to oversee these investments are behind us and in the
         coming years, we should now see the return on the capital that was
         invested in these entities.

         With the imminent resolution of our business transformation being
         complete, we feel that we have addressed or will be addressing the
         financial challenges to allow us to continue as a going concern.

3.       Significant Accounting Policies

         Principles of Consolidation

         The consolidated financial statements include the accounts of Ultimate
         Franchise Systems, Inc. and its subsidiaries. All significant
         intercompany accounts and transactions have been eliminated in
         consolidation.

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements                F-9
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


3.       Significant Accounting Policies (continued)

         Use of Estimates

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

         Cash and Cash Equivalents

         For financial presentation purposes, we consider those short-term,
         highly liquid investments with original maturities of three months or
         less to be cash and cash equivalents.

         Property and Equipment

         Property and equipment are recorded at cost. Maintenance and repairs
         are charged to operations as incurred. Betterments and renewals are
         capitalized. When property and equipment are sold or otherwise disposed
         of, the asset account and the related accumulated depreciation accounts
         are relieved, and any gain or loss is included in operations.
         Depreciation is calculated using the straight-line method over the
         estimated useful lives of the assets, generally ranging from five to 40
         years. For the years ended September 30, 2004 and 2003, depreciation
         expense amounted to $6,562 and $7,191 respectively.

         Asset Impairment

         We regularly examine our long-lived assets for possible impairment
         indicators. If an impairment indicator is noted, the estimated
         undiscounted future cash flows of these assets are compared to the
         recorded value of the assets. If the net recorded value cannot be
         recouped, the assets are written down to their fair market value. For
         the years ended September 30, 2004 and 2003, we determined that certain
         investments and notes receivable had incurred impairment (see notes 5 &
         6). As a result, the accompanying consolidated statements of operations
         reflects a write-down of long-lived assets in the amount of $1,096,443
         and $624,500 respectively.

         Deferred Loan Costs

         Deferred loan costs are amortized ratably over the terms of the related
         loans. For the years ended September 30, 2004 and 2003, amortization of
         deferred loan costs amounted to $65,460 for both years.

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-10
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


3.       Significant Accounting Policies (continued)

         Goodwill

         Goodwill represents the excess of cost over the fair value of net
         assets acquired and is being examined regularly for impairment using
         the discounted future cash flows method. If any such impairment exists,
         the related assets are written down to fair value. During the year
         ended September 30, 2004 we reviewed the goodwill associated with our
         acquisition of Obee's Franchise Systems, Inc. This analysis indicated
         an immediate impairment of all goodwill associated with the
         acquisition. As a result, we recorded a $1,319,154 impairment charge
         during the third quarter of this year. Additionally, we agreed to sell
         our one remaining Central Park hamburger restaurant. This transaction
         will be consummated in November 2004, and will result in an impairment
         of the goodwill associated with this location. As a result, an
         impairment charge of $97,573 was recorded during the fourth quarter of
         2004.

         Revenue Recognition

         Continuing franchise royalty revenue is recognized monthly as earned.
         Initial franchise royalty revenue is recognized when all services or
         conditions relating to the sale of the individual franchise has been
         substantially performed. Revenues from company-owned stores and bakery
         products are recognized upon the sale of products.

         Advertising Costs

         Advertising costs are charged to operations as incurred. Advertising
         expenses were $15,440 and $13,219 for the years ended September 30,
         2004 and 2003, respectively.

         Accounting for Stock-Based Compensation

         The Financial Accounting Standards Board issued Statement 123 ("FAS
         123"), "Accounting for Stock-Based Compensation", which provides that
         expense equal to the fair value of all stock-based awards on the date
         of the grant be recognized over the vesting period.

         Alternatively, this statement allows entities to continue to apply the
         provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
         "Accounting for Stock Issued to Employees", whereby compensation
         expense is recorded on the date the options are granted equal to the
         excess of the market price of the underlying stock over the exercise
         price. We apply APB 25 and related interpretations in accounting for
         employee stock options.

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-11
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


3.       Significant Accounting Policies (continued)

         Investment Securities

         Our investment securities have been classified entirely as
         available-for-sale securities. Available-for-sale securities are
         recorded at cost and adjusted to fair market value on each subsequent
         balance sheet date. Any change in fair market value between the
         purchase date and all subsequent balance sheet dates is excluded from
         earnings. Rather, this amount is included as a component of other
         comprehensive income. It is our intention to hold investment securities
         for an indefinite period of time. Therefore, we have classified our
         investment securities as non-current assets.

         Upon disposal, the entire amount of a security's accumulated other
         comprehensive gain or loss is reclassified into the statement of
         operations as a component of the realized gain or loss on disposal.
         Realized gains or losses on the sale of investment securities are
         determined on the first-in, first-out ("FIFO") basis.

         A permanent impairment in value of equity securities classified as
         available for sale is an impairment that is other than temporary. If a
         permanent impairment is deemed to exist, the decline in value is
         reflected in current operations and the reduced carrying amount becomes
         the new cost basis from which other increases or decreases in value are
         measured.

         Fair Value of Financial Instruments

         Financial Accounting Standards Board Statement No. 107 ("FAS 107"),
         "Disclosures about Fair Value of Financial Instruments," requires
         disclosure of fair value information about financial instruments. Fair
         value estimates discussed herein are based upon certain market
         assumptions and pertinent information available to management as of
         September 30, 2004.

         The respective carrying value of on-balance-sheet financial instruments
         approximates their fair values. These financial instruments include
         cash and equivalents, accounts receivables, prepaid expenses, accounts
         payable, deferred revenue, accrued liabilities and accrued preferred
         stock dividends. Fair values were assumed to approximate carrying
         values for these financial instruments since they are short term in
         nature and their carrying amounts approximate fair values or they are
         receivable or payable on demand. The fair values of our notes
         receivable and long-term debt are estimated based upon the quoted
         market prices for the same or similar issues or on the current rates
         offered for instruments of the same remaining maturities. The carrying
         value of our notes receivable and long-term debt approximates their
         fair market value. Investment securities are stated at fair market
         value which are determined by quoted market prices or other valuation
         indicators.

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-12
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


3.       Significant Accounting Policies (continued)

         Earnings Per Common Share

         We have adopted the provisions of Financial Accounting Standards Board
         Statement No. 128 ("FAS 128"), "Earnings per Share". FAS 128 replaces
         the previously reported primary and fully diluted earnings per share
         with basic and diluted earnings per share. Unlike primary earnings per
         share, basic earnings per share exclude any dilutive effects of
         options, warrants and convertible securities. Diluted earnings per
         share are computed similarly to fully diluted earnings per share.

         Contingently issuable shares are included in basic earnings per share
         as of the date all necessary conditions have been satisfied.
         Contingently issued shares are included in diluted earnings per share
         based on the number of shares, if any, that would be issuable under the
         terms of the acquisition agreements if the end of the reporting period
         were the end of the contingency period.

         Potential common shares at September 30, 2004 and 2003 include
         2,229,794 stock options and warrants and approximately 450,000 shares
         from convertible notes payable, for both years. We also have a
         liability to issue 25,000 shares of common stock as of September 30,
         2004 and 2003, respectively. This liability to issue common stock of
         $58,650 is included as a component of accrued expenses on the
         accompanying consolidated balance sheets.

         Income Taxes

         We account for income taxes using the liability method. Under this
         method, deferred tax assets and liabilities are determined based on
         differences between financial reporting and tax bases of assets and
         liabilities. Measurement of deferred income tax is based on enacted tax
         rates and laws that will be in effect when the differences are expected
         to reverse, with the measurement of deferred income tax assets being
         reduced by available tax benefits not expected to be realized.

         Recent Accounting Pronouncements

         In January 2003, the FASB issued Interpretation 46, Consolidation of
         Variable Interest Entities. In general, a variable interest entity is a
         corporation, partnership, trust, or any other legal structure used for
         business purposes that either (a) does not have equity investors with
         voting rights or (b) has equity investors that do not provide
         sufficient financial resources for the entity to support its
         activities. Interpretation 46 requires a variable interest entity to be
         consolidated by a company if that company is subject to a majority of
         the risk of loss from the variable interest entity's activities or
         entitled to receive a majority of the entity's residual returns or
         both. The consolidation requirements of Interpretation 46 apply
         immediately to


Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-13
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


3.       Significant Accounting Policies (continued)

         Recent Accounting Pronouncements (continued)

         variable interest entities created after January 31, 2003. The
         consolidation requirements apply to transactions entered into prior to
         February 1, 2003 in the first fiscal year or interim period beginning
         after June 15, 2003. Certain of the disclosure requirements apply in
         all financial statements issued after January 31, 2003, regardless of
         when the variable interest entity was established. The adoption of the
         Interpretation on July 1, 2003 did not have a material impact on our
         financial statements.

         In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
         Derivative Instruments and Hedging Activities, which amends and
         clarifies accounting for derivative instruments, including certain
         derivative instruments embedded in other contracts, and for hedging
         activities under SFAS 133. The Statement is effective (with certain
         exceptions) for contracts entered into or modified after June 30, 2003.
         The adoption of this Statement has had no material impact on our
         financial statements.

         In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
         Instruments with Characteristics of both Liabilities and Equity. The
         Statement establishes standards for how an issuer classifies and
         measures certain financial instruments with characteristics of both
         liabilities and equity. It requires that an issuer classify a financial
         instrument that is within its scope as a liability (or an asset in some
         circumstances). It is effective for financial instruments entered into
         or modified after May 31, 2003, and otherwise is effective at the
         beginning of the first interim period beginning after June 15, 2003.
         The adoption of this Statement has had no material impact on our
         financial statements.

         Risk and Uncertainties

         The primary uncertainty which we face is our ability to locate
         knowledgeable franchisees who also have the financial resources to
         successfully operate the stores. In addition, we need to be able to
         identify appropriate locations for our newly franchised stores. We
         believe that we have taken the steps necessary to minimize these risks.

         Reclassifications

         Certain amounts in the 2003 financial statements have been reclassified
         to conform to the 2004 presentation.

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-14
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


4.       Disposition of Subsidiaries and Company Owned Restaurant Location

         Changes in goodwill and accumulated amortization for the years ended
         September 30, 2004 and 2003 are as follows:
<TABLE>
<CAPTION>
                                                                                  Accumulated          Net
                                                                  Goodwill       Amortization        Goodwill
         ---------------------------------------------------------------------------------------------------------
         <S>                                                  <C>                  <C>            <C>
         Balance, September 30, 2002                          $     4,175,853      $   (423,092)  $    3,752,761
         Impairment of Sobik's Subs                                  (221,704)                -         (221,704)
         ---------------------------------------------------------------------------------------------------------
         Balance, September 30, 2003                          $     3,954,149      $   (423,092)  $    3,531,057
         Acquisition of Obee's                                      1,319,154                 -        1,319,154
         Impairment of Obee's                                      (1,319,154)                -       (1,319,154)
         Sale of Sobik's                                           (1,053,897)          246,186         (807,711)
         Impairment of Central Park restaurant                        (97,573)                -          (97,573)
         ---------------------------------------------------------------------------------------------------------
         Balance, September 30, 2004                                2,802,679          (176,906)       2,625,773
         =========================================================================================================
</TABLE>

         Sobik's International Franchising, Inc.

         On December 29, 2003, we sold our majority interest in Sobik's
         International Franchising, Inc. ("Sobik's") to Quality Restaurant
         Ventures Corp. ("QRVC"). Under the terms of this agreement, we agreed
         to sell 17,445,664 shares of Sobik's in exchange for $100,000 in cash,
         a note receivable of $900,000, and 1,000,000 shares of "Series A
         Convertible Preferred Stock" in Sobik's. This preferred stock is
         convertible at our option and is anti- dillutive. If all 1,000,000
         shares of the Series A Convertible Preferred stock were converted at
         the same time, we would own 19% of the outstanding common stock of
         Sobik's. The $900,000 note receivable requires QRVC to pay us quarterly
         interest only payments of $15,750 until December 2004. At that time
         QRVC will pay us an additional $100,000 in principal and continue to
         make quarterly interest payments of $14,000 until December 31, 2005. At
         that time the remaining principal balance will be amortized and paid in
         monthly principal and interest installments of $13,489 until 2013.
         Subsequent to this transaction, an analysis of the QRVC financials
         indicated inadequate cash flows provided from operations to make
         payments on this note. As a result, we recorded a $500,000 impairment
         charge to our note receivable during the year ended September 30, 2004.

         Our Chief Executive Officer, Christopher Swartz is also a member of the
         QRVC Board of Directors. The results of operations are included in our
         consolidated financial statements up until the date of sale.

         Central Park Company Owned Store

         In September 2004, we agreed in principle to a sale of our corporately
         owned Central Park store located in Selma, Alabama. The sale was
         finalized in November 2004 and as a result


Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-15
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


4.       Disposition of Subsidiaries (continued)

         Central Park Company Owned Store (continued)

         the goodwill associated with this location has been determined to be
         impaired. A charge to earnings in the amount of $97,573 was taken in
         the fourth quarter of 2004.

5.       Acquisitions of Restaurant Concepts & Other Equity Investments

         Obee's Franchise Systems, Inc.

         On June 16, 2004, we purchased all issued and outstanding common stock
         of Obee's Franchise Systems, Inc. ("Obee's"). Obee's is the franchisor
         of the Obee's Soup & Subs concept based in Port Charlotte, Florida with
         approximately 55 franchised units located throughout the United States.

         The purchase price of Obee's consisted of the issuance of 800,000
         shares of our common stock valued at $.64 per share ($512,000) as well
         as cash of $98,377. The transaction was recorded as follows:

                  Total consideration paid                            $  610,377
                  Less fair value of assets acquired                  $  203,926
                  Plus liabilities assumed                            $  912,703
                                                                      ----------
                  Excess of cost over net assets acquired (goodwill)  $1,319,154
                                                                      ==========


         The goodwill associated with this transaction was deemed to be impaired
         and was expensed during the quarter ended June 30, 2004.

         Franchise Management Company, LLC.

         In January 2004, we completed the formation of Franchise Management
         Company, LLC. ("FMC"), whereby our Central Park brand will combine
         franchising revenues and expenses with other regional quick service
         restaurant concepts. The benefit of this type of partnership is
         twofold; first, we have been able to significantly reduce our overhead
         costs by spreading these costs over multiple brands. Second, we expect
         an increase in franchising revenue by increasing our purchasing power
         associated with the aggregation of these concepts. FMC began operations
         on March 1, 2004. Our initial investment in FMC was $30,000 which
         represents a 33.3% interest in this partnership. In June 2004, the
         Members of FMC elected to redistribute a portion of our initial
         investment. As a result, in June 2004 we received $15,000 as a partial
         return of our equity in this partnership.


Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-16
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


5.       Acquisitions of Restaurant Concepts & Other Equity Investments

         Piccadilly Restaurant Investment Group, LLC

         In March 2004, we invested $350,000 in exchange for an ownership
         interest in Bristol Equity Partners, LLC. Bristol Equity Partners, LLC
         is a private investment Florida limited liability company that was
         formed for the purpose of purchasing units of Piccadilly Restaurant
         Investment Group, LLC. Piccadilly Restaurant Investment Group, LLC
         purchased the assets of the Piccadilly Cafeteria restaurant concept on
         March 15, 2004. Piccadilly operates 136 cafeterias in 15 states
         primarily in the Southeast and Mid Atlantic regions. Our $350,000
         investment represents a 1% interest in Piccadilly Restaurant Investment
         Group, LLC.

         Concept Acquisitions II

         In October 2002, we formed a joint venture with Concept Acquisitions,
         LLC., ("COAC") The joint venture has purchased 100% of the assets in
         the Flamers hamburger concept that has 55 units throughout the
         Mid-Atlantic United States. The purchase price consisted of $1,000,000
         in cash and a note payable for $1,600,000 which will require principal
         and interest payments over a three year period with a balloon payment
         due thereafter. The transaction was funded as follows:
<TABLE>
<CAPTION>
                                                                UFSI        COAC         Total
                                                            ----------- ------------ -------------
         <S>                                                  <C>         <C>           <C>
         Cash for equity position in Joint Venture            350,000     350,000       700,000
         Cash for note receivable                             300,000           -       300,000
                                                              -------     -------     ---------
         Total cash used for acquisition                      650,000     350,000     1,000,000
                                                              =======     =======     =========
</TABLE>

         Subsequent to this transaction, in March 2003, we converted our
         $300,000 note receivable issued to form the joint venture into a
         reduced equity position in this joint venture. Under the terms of the
         agreement, Ultimate Franchise Systems, Inc. receives a guaranteed
         payment in the joint venture equal to the greater of $15,000 per month
         or 50% of the cash distributions or sales proceeds of COAC II until
         December 31, 2005. Thereafter, Ultimate Franchise Systems will be
         entitled to a 25% interest in cash distributions and sales proceeds.

         In addition, and in connection with this transaction we converted our
         note receivable of $265,000 due from COAC into an equity interest in
         COAC. This equity interest provides for UFSI to receive 18% of the cash
         distributions and sales proceeds of COAC commencing after repayment by
         COAC of all outstanding debt obligations which is expected to occur in
         October 2006.

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-17
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


6.       Notes Receivable

         Notes receivable are comprised of the following at September 30, 2004
         and 2003:
<TABLE>
<CAPTION>
                                                                                          2004               2003
           ---------------------------------------------------------------------------------------------------------
           <S>                                                                   <C>                <C>
           $900,000 note receivable from Quality Restaurant Ventures, LLC;
               interest is 7%. Interest only payments made quarterly until
               December 2005, Thereafter, monthly principal and interest
               payments until paid in full in 2013. (Net of allowance
               of $500,000, see note 4)                                                415,750                  -

           $1,300,000 note receivable from Grace Ventures Group, LLC; This note
               was paid at a discount under a early settlement
               agreement (see note 6 below)                                            125,000          1,320,000

           $260,682 non-interest bearing note receivable from Mahar Partnership
               from sale of building that was used in the Pastry Products Bakery
               operation. Payable in full by March 2009, net of $110,000
               allowance and unamortized discount of $38,230 at September 30, 2004.
               A 7% discount rate was used for this computation. (Mahar Partnership
               is a related party as our CEO Christopher Swartz is a Managing
               Member of Mahar Partnership)                                            112,452            210,248

           $1,000,000 notes receivable from CFB Enterprises from sale of Pastry
               Products; $90,000, interest-free, due in March 2003, and
               $900,000, accruing interest at 8%, due in equal quarterly
               payments from April 2005 through March 2012. Net of $536,940
               allowance. (CFB Enterprises is a related party as our CEO
               Christopher Swartz is a Managng Member of CFB Enterprises)              626,940            823,500

           $55,000 note receivable from Clark from sale of Seawest; due
               September 2004                                                           55,000             55,000

           Various notes receivable from related franchise concepts; with
               interest of 8% to 10%, payable in monthly principal and interest
               installments with maturity dates through September 2005.                 18,667                  -
           ---------------------------------------------------------------------------------------------------------
                                                                                     1,353,809          2,408,748

           Less current portion                                                       (192,213)          (132,796)
           ---------------------------------------------------------------------------------------------------------
                                                                                 $   1,161,596      $   2,275,952
           =========================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-18
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


7.       Permanent Impairment of Note Receivable & Related Party Transaction

         During the year ended September 30, 2004 we entered into an agreement
         with Grace Ventures, LLC to accept a discounted payment on their note
         to us. The note originally required Grace Ventures, LLC to pay us $1.3
         million dollars through 2011. Under this agreement we were paid
         $500,000 in August 2004 and continue to hold a note receivable for
         $125,000 which is due in 2008. As a result, we recorded a permanent
         impairment of this note in the amount of $724,003 during the year ended
         September 30, 2004.

         Our Chief Executive Officer Christopher Swartz is also a managing
         member of Grace Ventures, LLC.

8.       Concentrations and Credit Risk

         As indicated in the table above, we have several notes receivable with
         related parties. While we fully anticipate timely collection of these
         notes, their nature causes a possible credit risk.

9.       Investment Securities

         The following details an itemized list of our investment securities as
         of September 30, 2004.
<TABLE>
<CAPTION>
                                                                                  Current Market
                                                   Number of      Bid Price on       Value of         Valuation     Book Value
       Corporation Name            Percentage    Shares Owned       9/30/04         Investment        Allowance     on 9/30/04
--------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>     <C>            <C>             <C>               <C>               <C>
Beverly Hills Weight Loss and
Wellness, Inc.                             18%     8,697,368      $       0.02    $    173,947       $                $173,947

Famous Food Group, Inc.                    13%     6,000,000      $       0.02    $    120,000                 -      $120,000
                                                ----------------                 ----------------- ---------------- ------------
                                                  14,697,368                      $    293,947       $                $293,947


         The following summarizes our portfolio of investment securities as of
         September 30, 2004 and 2003:
<CAPTION>
         --------------------------------------------------------------------------------------
         <S>                                                                    <C>
         Carrying value at September 30, 2002                                   $      95,024
         Acquisition of investment securities                                         500,000
         Recognition of impairment in value of investment
           securities due to other than temporary decline in market value              (2,635)

         Sale of investment securities for cash                                       (57,000)

         Cumulative unrealized gains on investment securities                         214,427
         --------------------------------------------------------------------------------------

</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-19
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003
<TABLE>
<CAPTION>
         --------------------------------------------------------------------------------------
         <S>                                                                    <C>
         Carrying value at September 30, 2003                                   $     749,816
         Securities   issued  in  settlement  of  redeemable  common  stock
         liability                                                                    (13,483)

         Cumulative unrealized gains on investment securities                        (442,386)
         --------------------------------------------------------------------------------------

         Carrying value at September 30, 2004                                   $     293,947
         ======================================================================================

10.      Other Investments
<CAPTION>
         The following table summarizes our other long-term assets as of
         September 30, 2004 and 2003:
                                                                         2004             2003
         --------------------------------------------------------------------------------------------
         <S>                                                           <C>              <C>
         Equity in COAC II Joint Venture (See note 4)                  $  772,282       $  650,000
         Equity in Mountain Mike's (See note 4)                           243,084          243,084
         Investment in Uptown Restaurant Group                                  -           38,554
         Investment in Gators Franchising, LLC.                            30,565           35,864
         Investment in QRVC (See note 3)                                    8,058                -
         Investment in Franchise Management Company (See note 4)           15,000                -
         Investment in Piccadilly's (See note 4)                          300,000                -
         Trademarks, net of accumulated amortization                            -           74,217
         --------------------------------------------------------------------------------------------
                                                                       $1,368,989       $1,041,719
</TABLE>

         Our ownership interest in these companies is as follows:

                                                                    Method of
                     Corporation Name               Percentage   Accounting Used
         -----------------------------------------------------------------------
         Concept Acquisitions II, LLC                    25%      Equity Method
         Mountain Mike's                                 18%      Cost Method
         Uptown Restaurant Group                         59%      Equity Method
         Gator's Dockside Int'l Franchising, Inc.        10%      Cost Method
         Quality Restaurant Ventures, LLC                19%      Cost Method
         Piccadilly Restaurant Investment Group,
         LLC                                             >1%      Cost Method


Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-20
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


11.      Property and Equipment

         Property and equipment are comprised of the following at September 30,
         2004 and 2003:
<TABLE>
<CAPTION>
                                                                                        2004               2003
         ---------------------------------------------------------------------------------------------------------
         <S>                                                                       <C>                <C>
         Land and buildings                                                        $       -          $  34,554
         Machinery and equipment                                                      78,026             13,241
         Office and computer equipment                                                18,923             11,261
         Leasehold improvements                                                       17,343             17,343
         ---------------------------------------------------------------------------------------------------------
                                                                                     114,292             76,399
         Less accumulated depreciation                                               (19,512)           (12,950)
         ---------------------------------------------------------------------------------------------------------
         Net property and equipment                                                $  94,780          $  63,449
         =========================================================================================================

12.      Accrued Expenses

         Accrued expenses are comprised of the following at September 30, 2004
         and 2003:
<CAPTION>
                                                                                          2004               2003
         ----------------------------------------------------------------------------------------------------------
         <S>                                                                       <C>                <C>
         Accrued payroll and payroll-related items                                       4,885              3,219
         Accrued interest                                                              259,624            197,405
         Liability to issue common stock                                                58,650             58,650
         Accrued payroll taxes                                                         256,223                  -
         Accrued credit card payables                                                   78,518                  -
         Accrued fountain incentive due to related companies                                 -            249,482
         Other accrued expenses                                                         10,065             11,767
         ----------------------------------------------------------------------------------------------------------
                                                                                   $   667,965        $   520,523
         ==========================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-21
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


13.      Long-Term Debt

         Long-term debt consists of the following at September 30, 2004 and
         2003:
<TABLE>
<CAPTION>
                                                                                              2004            2003
           ---------------------------------------------------------------------------------------------------------
           <S>                                                                        <C>             <C>
           Note payable to former owners of acquired Central Park subsidiary,
               payable in monthly installments at the prime lending rate less
               0.5% (5.25% at September 30, 2004) of $6,670 through July 2005;
               collateralized by certain accounts receivable, real and personal
               property and inventory.                                                $     63,933    $    133,250

           Note payable to former owner of acquired Central Park subsidiary.
               Paid in February 2004.                                                            -         231,739

           Note payable to former owner of acquired Central Park subsidiary.
               Paid in February 2004.                                                            -          62,632

           Convertible note payable to individuals in the face amount of
               $950,000; monthly principal and interest payments at 7% until
               July 2010 of $12,952. The note is convertible into Company common
               stock at $1.00 per share beginning July 2001. This note is
               uncollateralized.                                                           922,698         934,608

           Convertible note payable to former owners of acquired Central Park
               subsidiary, interest accrues at 7% until July 2005 and then
               monthly principal and interest payments of $3,960 until July
               2010. The note is convertible into Company common stock at $1.00
               per share beginning July 2001. This note is uncollateralized.               200,000         200,000

           Three notes payable in the cumulative face amount of $600,000 issued
               in connection with the Central Park acquisition for non-compete
               agreements, these notes bear interest at 7% until July 2005 and
               then payable in equal aggregate monthly payments until July 2010.
               These notes are uncollateralized. One note with a face amount of
               $80,000 was retired in January 2003 for $40,000.                            520,000         520,000

           Note payable to former owner of acquired subsidiary; monthly
               principal and interest payments at 7% of $3,019 are due through
               July 2007; collateralized by royalty revenues generated by the
               Sobik's franchises. This note was assigned to Quality Restaurant
               Ventures Corp. in connection with our sale of the Sobik's Subs
               Concept in December 2003.                                                         -         126,054

           Four notes payable to individuals with an aggregate face amount of
               $350,000; all unpaid principal and interest at 8% currently
               past-due; collateralized by a personal guarantee of our chief
               executive officer.                                                           80,000          80,000

           Two notes payable to individuals with an aggregate face amount of
               $150,000; quarterly interest at 15%; principal and interest
               payments of $10,840 continue through July 2006. Non-collateralized           73,587         102,935

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-22
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


           Three notes payable to individuals; monthly interest-only payments at
               15% due through November 2004, at which time any remaining unpaid
               principal and interest is due; these notes are uncollateralized
               and are net of unamortized loan costs of $162,000 and $138,000
               respectively. We are in arrears with respect to the interest
               payments and thus have classified these notes as currently due.             162,000         138,000

           Note payable to a corporation; monthly interest only payments at 12%
               until September 2003; thereafter quarterly principal and interest
               payments of $77,000 until fully paid in June 2004. This note was
               restructured in June 2004.                                                        -         226,000

           Note payable to a corporation; monthly principal and interest payments
               at 13% until October 2005.                                                  280,840               -

           Note payable to several individuals; monthly interest only payments
               at 12.5% until July 2006; thereafter monthly principal and
               interest payments of $12,043 until fully paid in July 2009.                 360,000               -

           Note payable to an individual in settlement of our redeemable common
               stock liability. Requires quarterly payments of $7,500 until June
               2006. This note does not require us to pay interest.                         52,500               -

           Note payable to five individuals with an aggregate face amount of
               $85,000; monthly interest only payments at 15% due through March
               11, 2003, at which time principal is due; upon mutual agreement
               between parties the note may be extended for an additional twelve
               month period; this note is collateralized by a personal guaranty
               and a UCC-1 filing on the royalty stream of Sobik's. Two of these
               notes payable with a face value of $25,000 were paid in 2003. The
               remaining three notes were paid in 2004.                                          -          60,000

           Note payable to an individual; monthly interest only payments at 15%
               until March 2004; at that time the entire principal balance will
               be due.                                                                     200,000               -

           Note payable to three individuals with an aggregate face amount of
               $800,000; interest on these notes is 15%. Monthly principal and
               interest payments of $22,265 are required until paid in full in
               November 2007. These notes are secured through a security
               agreement that pledge the assets and royalty stream of our
               Central Park hamburger concept as collateral. These notes are
               also personally guaranteed by our CEO Christopher Swartz.                   670,220               -

           Note payable to a bank which was due in July 2004. Interest rate on
               this note is 6%. This note was paid in full in November 2004                 96,154               -

           Note payable to an individual. Due in December 2004. Interest rate is
               8%.                                                                         100,000               -

           Various uncollateralized notes payable; due with various monthly
               principal and interest payments; maturing at various dates through
               July 2004.                                                                   43,539          10,344
                                                                                   ---------------------------------
                                                                                         3,825,471       2,825,562

           Less current portion                                                         (1,595,960)       (788,489)
           ---------------------------------------------------------------------------------------------------------

           Total long-term debt                                                       $  2,229,511    $  2,037,073
           =========================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-23
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


13.      Long-Term Debt (continued)

         Interest expense on long-term debt during the years ended September 30,
         2004 and 2003 amounted to $541,298 and $344,574, respectively.

         The annual maturities of long-term debt for the five years subsequent
         to September 30, 2004 are as follows:

                                                               Total
                  -------------------------------------------------------
                  2005                                    $   1,595,960
                  2006                                          893,861
                  2007                                          508,169
                  2008                                          320,185
                  2009                                          286,054
                  Thereafter                                    221,242
                  -------------------------------------------------------
                                                          $   3,825,471
                  =======================================================

14.      Stockholders' Equity

         The following is a synopsis of significant transactions involving
         stockholders' equity accounts:

         Preferred Series C

         In September 1997, we designated and issued 120 shares of no par value
         Series C convertible preferred stock ("Preferred Series C") in
         connection with the acquisition of Quality Franchise Systems, Inc.. The
         preferred series C stock is entitled to cumulative dividends at a rate
         of $32.50 per share per quarter and is convertible into common stock at
         a rate of 13.32 shares of common stock for each preferred share with a
         face amount of $1,000. The stock is redeemable at our option or in
         liquidation at a rate of $1,000 per share.

         Redeemable Common Stock

         In connection with our acquisition of Seawest, the prior owner of
         Seawest had the right to require us to repurchase 9,000 shares at a
         purchase price of $32.55 per share for a total repurchase value of
         $293,000. In March 2004, we settled this obligation by issuing a note
         payable of $60,000, 200,000 shares of our common stock, and investment
         securities we hold in other restaurant companies. The note payable
         requires us to make eight quarterly payments of $7,500 beginning in
         April 2004. This resulted in a gain of $23,517 calculated as follows:

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-24
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


14.      Stockholders' Equity (continued)
<TABLE>
<CAPTION>
                                                             Number of
                                                             Shares       Bid Price on
                     Company                                 Issued     Settlement Date      Total Market Value
                     -------                                 ------     ---------------      ------------------
         <S>                                                <C>                <C>               <C>
         Ultimate Franchise Systems,
         Inc.                                                 200,000          $ 0.60            $    120,000
         Quality Restaurant Ventures,
         Inc.                                               1,000,000            0.04                  40,000

         Weight Loss Forever, Inc.                            300,000            0.27                  81,000

         Fransaction, Inc.                                    200,000            0.18                  36,000
                                                                                                 ------------
                                                                                                      277,000

         Plus note payable                                                                             60,000
                                                                                                 ------------
         Total consideration                                                                          337,000

         Less carrying value of redeemable option                                                     293,000
         Plus realized gain on investment securities                                                   67,517
                                                                                                 ------------
         Gain on settlement of redeemable common stock                                           $     23,517
                                                                                                 ============
</TABLE>

         In addition, the value of the securities listed above will be evaluated
         on April 1, 2005. If at that time the aggregate value of these
         securities is below $293,000, we are required to issue additional
         securities to compensate for this difference. At this time it is not
         possible to estimate the market price of these securities and no
         additional liability has been recorded at this time.

         Stock Issued for Settlement of Redeemable Common Stock Liability

         In March 2004, we issued 200,000 shares of common stock as part of the
         settlement agreement of our redeemable common stock. The fair market
         value of these shares at the time of the settlement was $120,000.

         Stock Issued for Services

         For the years ended September 30, 2004 and 2003, we issued 100,000 and
         450,000 shares of common stock, respectively, in exchange for
         consulting and legal services. The aggregate fair value of these shares
         was $47,750 and $65,000, respectively, based on the market value of the
         stock on the date of issuance.

         Stock Issued as Interest on Long-Term Debt

         For the years ended September 30, 2004 and 2003, we issued 173,844 and
         200,000 shares of common stock, respectively, as payment of interest on
         Long-Term debt. The aggregate fair

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-25
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


14.      Stockholders' Equity (continued)

         Stock Issued as Interest on Long-Term Debt (continued)

         value of these shares was $125,096 and $29,000, respectively, based on
         the market value of the stock on the date of issuance.

         Stock Issued for Acquisition of Obee's Franchise Systems, Inc.

         In June 2004, we issued 800,000 shares of our common stock to acquire
         all the outstanding common stock of Obee's Franchise Systems, Inc. The
         fair market value of these shares at the time of the transaction was
         $512,000.

         Authorized Number of Common Shares

         We have currently authorized 100,000,000 shares of our common stock to
         be issued.

         Common Stock Options and Warrants

         In February 1999, we approved the 1998 Incentive Plan ("Incentive
         Plan") to enable us to offer our employees and consultants' equity
         interests. There are 3,000,000 shares designated under the Incentive
         Plan and are fully vested upon grant.

         The Company had 2,697,723 options outstanding at September 30, 2004 all
         of these options are issued outside of the Incentive Plan. Changes in
         options outstanding for the years ended September 30, 2004 and 2003
         under the Incentive Plan and options outstanding outside of the
         Incentive Plan are summarized as follows:

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-26
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


14.      Stockholders' Equity (continued)

         Options Within the Incentive Plan

         There are no outstanding options within the Incentive Plan.


         Options Outside of the Incentive Plan
<TABLE>
<CAPTION>
                                                                                                        Weighted-
                                                                                     Weighted-            Average
                                                                                       Average         Fair Value
                                                                                      Exercise         of Options
                                                                     Shares              Price            Granted
           ---------------------------------------------------------------------------------------------------------
           <S>                                                       <C>             <C>              <C>
           Balance, September 30, 2002                            2,834,151          $   1.94                  -
           Granted                                                        -                 -                  -
           Less options expired                                    (136,429)         $  27.95                  -
           ---------------------------------------------------------------------------------------------------------
           Balance, September 30, 2003                            2,697,723          $    .65                  -
           Granted                                                        -                 -                  -
           Less options expired                                           -          $      -                  -
           ---------------------------------------------------------------------------------------------------------
           Balance, September 30, 2004                            2,697,723          $    .53                  -
           =========================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-27
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


14.      Stockholders' Equity (continued)

         The following table summarizes information about options outstanding at
         September 30, 2004:
<TABLE>
<CAPTION>
                                                                     Options Outstanding and Exercisable
                                                           ---------------------------------------------------------
                                                                                     Weighted-          Weighted-
                                                                                       Average            Average
           Range of                                                                  Remaining           Exercise
           Exercise Prices                                           Shares   Contractual Life              Price
           ---------------------------------------------------------------------------------------------------------
           <S>                                                    <C>              <C>                       <C>
           $08 to $2.00                                           2,290,723        38.3 months               $.10
           $2.01 to $38.40                                          407,000         2.1 months              $2.95
           ---------------------------------------------------------------------------------------------------------

                                                                  2,697,723       32.88 months               $.53
           =========================================================================================================
</TABLE>

         The Financial Accounting Standards Board issued Statement No. 123 ("FAS
         123"), "Accounting for Stock-Based Compensation", which provides that
         expense equaled to the fair value of all stock based awards on the date
         of the grant over the testing period be recognized.

         Pursuant to APB 25, however, no compensation cost has been recognized
         for options granted to employees at exercise prices which equal or
         exceed the market price of our common stock at the date of grant.
         Options granted at exercise prices below market prices are recognized
         as compensation cost measured as the difference between market price
         and exercise price at the date of grant. No options were issued in
         2004, therefore no proforma presentation of net income and earning per
         share is required.

15.      Commitments and Contingencies

         Operating Leases

         We lease office space and restaurant land space under certain operating
         leases which expire on various dates through September 2009. Total rent
         expense for the years ended September 30, 2004 and 2003 was $178,255
         and $150,133, respectively.

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-28
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


15.      Commitments and Contingencies (continued)

         Future annual minimum lease payments due under these operating leases
         for the five year subsequent to September 30, 2004 are as follows:

                  2005                                       $   187,635
                  2006                                           106,267
                  2007                                            63,578
                  2008                                            56,677
                  2009                                             9,919
                  --------------------------------------------------------
                                                             $   424,076
                  ========================================================

         Management Agreements

         In December 2002, we entered into letter agreements with Topper's Brick
         Oven Pizza, Inc. ("Topper's") and Weight Loss Forever, International
         Inc. ("Weight Loss Forever") whereby we will offer our expertise in
         purchasing, marketing, franchise legal services, franchise sales, and
         general management to each company in exchange for 6,000,000 shares of
         common stock of each company. The value of these services is $500,000
         and is being amortized over a 24 month period which began in December
         2002.

         In August 2004, we entered into a letter agreement with Fransaction
         Inc. Whereby Fransaction, Inc. issued us 6 million shares of their
         common stock in exchange for ongoing franchise services we will provide
         them. This increased our ownership in Fransaction, Inc. from 29% to 59%
         of all issued and outstanding stock in the company.

         Legal Issues

         We are involved in various other lawsuits and litigation matters on an
         ongoing basis as a result of our day-to-day operations. However, we do
         not believe that any of these legal matters will have a material
         adverse effect on our financial position or results of operations.

         Franchise Agreements

         Under the terms of the various franchise agreements, which are for
         terms ranging from 10 to 15 years and contain various renewal options,
         the franchisees are obligated for the payment of the following fees.

         o        Franchise Fees - In accordance with the terms of the franchise
                  agreements, the Company receives an initial franchise fee of
                  $10,000 to $25,000.

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-29
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


15.      Commitments and Contingencies (continued)

         Franchise Agreements (continued)

         o        Royalties - The Company receives royalties ranging from 4% to
                  7% of gross sales from the franchisees' operations of the
                  restaurants.

         o        Advertising Fund - The franchise agreements require the
                  franchisees to contribute to an advertising fund based upon 2%
                  to 4% of gross sales. The funds are maintained in separate
                  bank accounts, and their use is restricted solely for
                  advertising, marketing and public relations programs and
                  materials to develop the goodwill and public image of each of
                  the respective franchises.

16.      Income Taxes

         The components of income tax expense (benefit) for the years ended
         September 30, 2004 and 2003 are as follows:
<TABLE>
<CAPTION>
                                                                                          2004               2003
           ---------------------------------------------------------------------------------------------------------
           <S>                                                                <C>                <C>
           Current:
               Federal                                                        $              -   $              -
               State                                                                         -                  -
           ---------------------------------------------------------------------------------------------------------
                                                                                             -                  -
           ---------------------------------------------------------------------------------------------------------
           Deferred:
               Federal                                                                 573,075            346,000
               State                                                                    63,675             42,000
           ---------------------------------------------------------------------------------------------------------
                                                                                       636,750            388,000
           ---------------------------------------------------------------------------------------------------------
           Total current and deferred income taxes                                     636,750            388,000
           ---------------------------------------------------------------------------------------------------------
           Increase / (Decrease) in valuation allowance                               (636,750)          (388,000)
           ---------------------------------------------------------------------------------------------------------
           Total income taxes                                                 $              -   $              -
           =========================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-30
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


16.      Income Taxes (continued)

         Our net deferred tax asset is comprised of the following at September
         30, 2004 and 2003:
<TABLE>
<CAPTION>
                                                                                          2004               2003
           ---------------------------------------------------------------------------------------------------------
           <S>                                                                <C>                <C>
           Current deferred tax asset:
               Allowance for doubtful accounts                                $              -   $              -
               Prepaid interest                                                              -                  -
           ---------------------------------------------------------------------------------------------------------
                                                                                             -                  -
           Less, valuation allowance                                                         -                  -
           ---------------------------------------------------------------------------------------------------------
           Net current deferred tax asset                                     $              -   $              -
           ---------------------------------------------------------------------------------------------------------
           Non-current deferred tax asset:
               Net operating loss carryforwards                               $      5,576,000   $      4,500,000
               Prepaid interest                                                              -            218,000
               Stock and stock options issued for services                             577,750            530,000
               Investment securities                                                    59,000            328,000
           ---------------------------------------------------------------------------------------------------------
                                                                                     6,212,750          5,576,000
           Less, valuation allowance                                                (6,212,750)        (5,576,000)
           ---------------------------------------------------------------------------------------------------------
           Net non-current deferred tax asset                                 $              -   $              -
           ---------------------------------------------------------------------------------------------------------
           Net deferred tax asset                                             $              -   $              -
           =========================================================================================================

<CAPTION>
         The following summary reconciles differences from taxes at the federal
         statutory rate with the effective rate:

                                                                                          2004               2003
           ---------------------------------------------------------------------------------------------------------
           <S>                                                                           <C>                <C>
           Income taxes at federal statutory rates                                       34.0%              34.0%
           Operating loss with no tax benefit                                           (34.0)             (34.0)
           ---------------------------------------------------------------------------------------------------------
           Income tax at effective rates                                                  0.0%               0.0%
           =========================================================================================================
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-31
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


16.      Income Taxes (continued)

         At September 30, 2004, we had net operating loss carryforwards of
         approximately $15,200,000 for federal income tax purposes that expire
         as follows:


                    2012                                     $   3,400,000
                    2018                                         1,700,000
                    2019                                           700,000
                    2020                                         2,800,000
                    2021                                         3,100,000
                    2022                                         3,500,000
                    --------------------------------------------------------
                                                             $  15,200,000
                    ========================================================

17.      Operating Segments

         We define segments as each separate franchising concept we operate. We
         clearly view each business as a separate segment and makes decisions
         based on the activity and profitability of that particular segment.

         The reportable segments are defined as follows:

         o        The franchise operations segment is engaged in the franchising
                  of various quick-service restaurants located throughout the
                  United States. These restaurants feature submarine sandwiches,
                  hamburgers, soups and hot and cold side order items. We assist
                  the franchisees with selecting suitable locations, assist on
                  the negotiation of lease terms and store design, and assist
                  with securing of food product supply and purchase of furniture
                  and fixtures.

         o        The restaurant operations segment is comprised of franchise
                  concept stores that we operate on a temporary basis until a
                  new franchise is located.

         o        The management services segment is comprised of equity
                  securities from other restaurant concepts. These securities
                  are issued to our company in exchange for franchise services
                  such as: purchasing, marketing, and general franchise
                  management.

Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-32
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


17.      Operating Segments (continued)

         The table below shows certain financial information by business segment
         for the years ended September 30, 2004 and 2003:
<TABLE>
<CAPTION>
           Segment Reporting                                 Franchise         Restaurant         Management        Consolidated
           September 30, 2004                               Operations         Operations           Services               Total
           -----------------------------------------------------------------------------------------------------------------------
           <S>                                            <C>                 <C>                 <C>              <C>
           Revenue from external customers                $  1,929,462        $   668,471         $  538,444       $   3,136,377
           Interest- net                                       366,464                  -                  -             394,094
           Permanent impairment of long-lived assets
                                                             2,265,800            149,797                  -           2,415,597
           Depreciation and amortization                         2,138              6,457                  -               8,595
           Segment income / (loss)                          (3,227,698)           (78,103)           538,444          (2,767,357)
           Segment assets                                       93,797                983                  -              94,780
           -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
           Segment Reporting                                 Franchise         Restaurant         Management        Consolidated
           September 30, 2003                               Operations         Operations           Services               Total
           -----------------------------------------------------------------------------------------------------------------------
           <S>                                            <C>                 <C>                 <C>              <C>
           Revenue from external customers                $  1,335,858        $   756,213            367,614       $   2,419,058
           Interest- net                                       344,574                  -                  -             344,574
           Permanent impairment of long-lived assets
                                                               184,412                  -                  -             350,000
           Depreciation and amortization                         8,867              6,457                  -              15,324
           Segment income / (loss)                          (1,834,966)           (46,808)           367,614          (1,514,160)
           Segment assets                                    7,907,211            167,072                  -           8,074,283
           -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-33
<PAGE>

                Ultimate Franchise Systems, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                 For the Years Ended September 30, 2004 and 2003


18.      Subsequent Events

         Acquisition of Juicy Lucy Restaurant Concept

         In November 2004, we acquired the Juicy Lucy Hamburger concept and real
         property for $890,000 in cash. Juicy Lucy is an eight unit double
         drive-thru hamburger concept based in Ft. Myers Florida. The purchase
         price consisted of two parcels of real property valued at $540,000 with
         the remaining portion of the purchase price allocated to the business.

         In connection with this acquisition, we entered into long-term debt
         agreements with private investors to raise the capital necessary to
         fund this purchase. This debt requires us to pay monthly principal and
         interest payments of $24,769 until November 2008. The interest rate on
         this note is 15% and the note is secured through UCC-1 filings on the
         assets of Juicy Lucy. Additionally, we are required to pay ongoing
         semi-annual interest payments equal to $13,350 to these note holders in
         perpetuity.

         Sale of Central Park Company Owned Restaurant

         In November 2004, we refranchised our one company owned Central Park
         restaurant located in Selma, Alabama. The new owner is a current
         franchisee with four restaurant locations in Tennessee. The sale will
         allow us to earn ongoing royalties from this location while eleminating
         losses we experienced while operating this location. The transaction
         resulted in one-time charges of $149,797 from the write down of assets
         in the fourth quarter of 2004.

         Spin Off of Obee's Franchise Systems, Inc.

         In October 2004, we entered into an agreement to spin off our Obee's
         Franchise Systems, Inc. subsidiary into it's own public company. As a
         result, of this transaction our ownership interest in this new public
         entity represents approximately 79% of the issued and outstanding
         shares of this new company. This will allow Obee's the ability to raise
         capital and restructure certain debt obligations that would not be
         possible as a wholly owned subsidiary of Ultimate Franchise Systems,
         Inc.


Read independent auditors' report. The accompanying notes
are an integral part of the consolidated financial statements               F-34