UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/ X /        SECURITIES EXCHANGE ACT OF 1934

             For the fiscal year ended December 28, 1997

             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/   /        SECURITIES EXCHANGE ACT OF 1934

             For the transition period from         to

                           Commission File No. 0-26270

                      INTERNATIONAL FRANCHISE SYSTEMS, INC.
              (Exact name of Small Business Issuer in its charter)

           DELAWARE                                 52-1853204
(State or Other Jurisdiction of            (I.R.S. Employer Identification
Incorporation or Organization)                          No.)

                            6701 Democracy Boulevard
                                    Suite 300
                               Bethesda, MD 20817
               (Address of principal executive offices) (Zip Code)

                                 (301) 897-4870
                (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, $.01 par value
                                (Title of Class)

<PAGE>

        Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the  Securities  Exchange Act of 1934 during the
past 12 months (or for such shorter  period that the issuer 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 disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained, to the best of issuer'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.
             Yes  X    No

            State issuer's revenues for its most recent fiscal year.
                                   $28,360,981

             As of April 1, 1998,  the  aggregate  market  value of the Issuer's
Common Stock held by non-affiliates of the Issuer was $5,380,731.

             As of April 1, 1998, there were 7,034,324 shares outstanding of the
Issuer's Common Stock.

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<PAGE>
                                TABLE OF CONTENTS

ITEM                                                                     PAGE
                                     PART I

1.       Description of Business......................................... 4
2.       Description of Properties.......................................13
3.       Legal Proceedings...............................................13
4.       Submission of Matters to a Vote of
         Security Holders................................................14

                                     PART II

5.       Market for the Issuer's Common
         Equity and Related Stockholder
         Matters.........................................................15
6.       Management's Discussion and Analysis
         of Financial Condition and Results
         of Operations...................................................17
7.       Financial Statements and Supplementary
         Data............................................................21
8.       Changes in and Disagreements with
         Accountants on Accounting and Financial
         Disclosure......................................................21

                                    PART III

9.       Directors, Executive Officers, Promoters and Control Persons
         compliance with Section 16a of the Exchange Act.................23
10.      Executive Compensation..........................................24
11.      Security Ownership of Certain Beneficial
         Owners and Management...........................................26
12.      Certain Relationships and Related
         Transactions....................................................27
13.      Exhibits and Reports on Form 8-K................................28
         Signatures......................................................30

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<PAGE>
                                     PART I

Item 1.  Description of Business

Introduction

International  Franchise Systems, Inc. and its subsidiaries  (collectively,  the
"Company"  or "IFS") have the  exclusive  right to own,  operate  and  franchise
Domino's  Pizza  stores  ("Domino's  Stores")  in the  United  Kingdom,  and the
Republic of Ireland ("the Territory")  pursuant to a master franchise  agreement
(the "Master  Agreement") with Domino's Pizza  International,  Inc.  ("DPII),  a
wholly owned subsidiary of Domino's Pizza,  Inc.  ("Domino's).  The Company also
has the right to operate a fresh pizza dough  production  facility and wholesale
supply  business  (the  "Commissary")  for all Domino's  Stores in the Territory
pursuant to an agreement with Domino's (the "Commissary Agreement").

IFS is a Delaware corporation,  incorporated on October 22, 1993. As of December
28, 1997, IFS had 154 Domino's Stores opened as well as two distribution centers
and a commissary.  At year end 1997, it was the largest  Domino's  franchisee in
Europe and the fourth largest Domino's franchisee outside the United States.

Business Objectives and Strategy

IFS's mission is to maintain its status as the leading pizza  delivery  brand in
the marketplace and to continue to build stockholder  value. To accomplish this,
IFS has  developed  a strategy  designed  to  achieve  high  levels of  customer
satisfaction  and  repeat  business,  as well as to enhance  recognition  of the
Domino's name and concept in the  Territory.  The key elements of IFS's strategy
include:

New Store Locations

IFS believes  that the location of a Domino's  Store is an essential  element of
success. IFS's development of the Territory is based on store locations that are
strategically  located in areas that satisfy  IFS's  demographic  criteria.  The
stores are  positioned  in high  visibility  areas with  prominent  signage  and
brightly lit interiors to attract attention.

Franchise System

IFS  is  committed  to  developing  a  strong  franchise  system  by  attracting
experienced  operators and business  people who adhere to IFS's high  standards.
IFS devotes  significant  resources to providing its franchisees with assistance
in marketing, site selection, store design and employee training.

High Quality Menu

Domino's Stores offer a menu of high quality  pizzas.  Pizzas are prepared using
fresh dough, real mozzarella  cheese, a propriety mix of tomato sauce and spices
and other high quality ingredients and toppings. Other menu items include garlic
bread, cole slaw, chicken wings, ice cream and soft drinks. IFS has expanded its
menu in limited ways to increase market penetration and average spend per order.

Efficient Operating System

IFS believes that its operating  systems,  store layout and designated  delivery
areas result in lower in-store cost,  improved food quality and higher  customer
service.  IFS's  Commissary  and  distribution  system provide  consistency  and
efficiencies  of scale in dough  production.  This  eliminates the need for each
store to order food from third party  vendors and commit  substantial  labor and
other resources to dough 



                                       4
<PAGE>

production. To ensure consistent food quality, each franchisee must purchase all
food and supplies from IFS or its approved suppliers.

Training and Development

IFS  operates a training  program for store  personnel  and new  franchisees  to
improve store operations and the management of each franchisee's  business.  IFS
has revised the standard  Domino's  training program to make it more appropriate
and relevant to operations in the Territory.

Targeted Marketing

IFS's  marketing  programs  target  the  delivery  area  of each  store,  making
extensive  use of coupons,  leaflets and direct mail  promotions.  IFS also uses
radio to advertise its product and name.  The local  marketing  efforts  include
more effective involvement with community oriented activities with sports teams,
schools and other organizations. IFS is implementing an in-store computer system
that enables better  tracking of customer  preferences and targets its marketing
based  on  these  preferences.  IFS  works  closely  with  franchisees  on local
marketing  efforts.  IFS promoted both the brand and selected new pizza products
on television in 1997.

The Domino's Store System

Domino's opened its first store in 1960 and today is the world's leader in pizza
delivery, with over 5,952 company-owned and franchised stores as of December 31,
1997. It had system-wide  revenues of approximately $3.2 billion for fiscal year
1997.

Domino's has developed a pizza store format and operating  system which includes
a recognized  design,  decor and color scheme for store buildings;  uniforms for
store personnel; signage; service format; quality and uniformity of products and
services offered;  procedures for inventory and management  control;  a delivery
system;  and Domino's  trademarks  (collectively,  the "Domino's  System").  All
Domino's  Stores are  required to be operated in  accordance  with the  Domino's
System.

Domino's  Stores feature  carryout  services and delivery  services to customers
located  within a prescribed  service  area.  The service area for each Domino's
Store is established to enable the store to deliver a pizza within 30 minutes of
the customer's  order.  Domino's Stores offer a substantially  similar core menu
including various types of pizza and soft drinks.  In the Territory,  other menu
items include cole slaw, garlic bread and ice cream. Pizza accounts for the most
significant  amount of  system-wide  sales.  Prices for Domino's  menu items are
determined by the various  operators of Domino's  Stores and,  accordingly,  may
vary throughout the Territory.

Relationship With Domino's Pizza, Inc.

Master Franchise Agreement

IFS acquired the rights to the Territory from DPII in December 1993.  Since that
time, the relationship between IFS and Domino's has been governed principally by
the Master  Agreement.  The initial term of the agreement runs from December 31,
1995 through December 31, 2006. According to the terms of the initial agreement,
IFS shall have  opened and  operating  a minimum  number of  Domino's  Stores in
accordance with the following yearly schedule:

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<PAGE>
                    Year                                             Minimum(1)
                   Ended                                              Total
                 December 31                                         Stores

                    1998                                               168
                    1999                                               192
                    2000                                               217
                    2001                                               227
                    2002                                               252
                    2003                                               277
                    2004                                               297
                    2005                                               317
                    2006                                               337

(1)      Does not include non-traditional Domino's Pizza stores.

If IFS does not meet the development  schedule,  within one hundred-eighty (180)
days  after  written  notice  of such  failure  is  provided  by DPII,  DPII may
terminate  IFS's exclusive  right to operate and franchise  additional  Domino's
Stores  in the  Territory.  To date,  the  Company  has  exceeded  the  required
schedule.

If IFS is in  compliance  with the Master  Agreement  at the  expiration  of the
Initial  Term,  IFS will have the  option to extend  its  exclusive  development
rights  for an  additional  10-year  period,  provided  IFS and DPII  agree to a
minimum  development  schedule for the renewal term. If after  expiration of the
Initial  Term (or any renewal  term),  IFS fails to exercise its option to renew
its  exclusive  development  rights,  or the  parties  are  unable to agree to a
minimum  development  schedule for the renewal term,  then IFS would continue to
have the right to operate its then-existing Company-owned Domino's Stores and to
maintain and continue its rights and obligations, and act as subfranchisor, with
respect to all then existing  franchised  Domino's  Stores.  In such event,  IFS
would  generally  have no  further  right to  operate  or grant  franchises  for
additional  Domino's  Stores and DPII  would  have the right to proceed  (or the
right to grant a third party the right to proceed) with further  development  of
the  Territory,  subject to  territorial  rights  granted  under then-  existing
franchise agreements.

IFS is required to pay DPII a one-time  store  opening fee for each new Domino's
Store, whether Company-owned or franchised.  IFS has passed and will continue to
pass the cost through to the  franchisees in the case of franchised  stores.  In
addition,  IFS  must  pay to DPII a  monthly  royalty  fee  equal  to a  certain
percentage of each Domino's Store's gross sales.  This royalty fee is payable to
DPII  irrespective  of the  profitability  of IFS or  the  Domino's  Store,  and
irrespective  of IFS's  ability  to collect  royalties  from  franchisees.  This
royalty fee as reduced in accordance with the Stock Purchase Agreement discussed
below,  escalates  each year  until it  reaches a maximum  of 3% in 2003.  IFS's
payments to DPII are to be made in U.S.
dollars.

DPII and IFS entered into a Stock Purchase Agreement as of May 26, 1997, ("SPA")
whereby  IFS  agreed  to sell to DPII  300,000  shares  of its  common  stock in
consideration  for  royalty  concessions  under the  Master  Agreement.  The SPA
provides  that DPII may not sell,  transfer or  otherwise  dispose of its shares
before May 26, 2001 and any  transferee  receiving  stock in  violation  of this
prohibition  will have no rights  with  respect to the  shares.  The SPA further
provides  for put and call  options on the common  shares at an agreed upon base
purchase  price of $1,200,000  adjusted to reflect  changes in the common stock,
such as, stock splits and dividends.

The Master  Agreement  cannot be  assigned  by IFS without  DPII's  consent.  In
addition, the agreement prohibits Domino's Pizza Group Limited, a majority-owned
subsidiary  of IFS,  ("DP  Group")  and  Colin  and Gail  Halpern  (as  indirect
controlling  shareholders of DP Group) from transferring  control of IFS without
DPII's prior written consent. For the term of the Master Franchise Agreement, DP
Group and Colin and 

                                       6
<PAGE>

Gail  Halpern are  restricted  from having an interest  in,  being  employed by,
advising or assisting  another  business in the pizza or pizza store business in
the Territory.

Under certain  circumstances of default by IFS under the Master Agreement,  DPII
has the right to  terminate  the Master  Agreement.  If the Master  Agreement is
terminated,  IFS would be subject to a one-year  non-competition covenant in the
delivery  or carryout  pizza  business.  Should this occur,  DPII would have the
right (but not the  obligation)  to purchase,  at the  then-current  fair market
value, all of IFS's rights and interests as the subfranchisor of Domino's Stores
and all of the assets of each Domino's Store owned by IFS. The fair market value
would be  determined  by mutual  agreement of IFS and DPII, or in the absence of
such  agreement,  by an  appraiser.  Under certain  circumstances  of default by
Domino's  under  the  Master  Agreement,  IFS has the  right  to  terminate  the
agreement  and  continue  as  an  independent  pizza  operation,  including  the
operation of the Commissary.

Commissary Agreement

Pursuant to the  agreement  with DPII  relating to the  Commissary  ("Commissary
Agreement"),  DPII  has  agreed  to  provide  IFS,  on  an  ongoing  basis,  all
information  and materials  necessary to make IFS familiar with the methods used
to  operate  and  manage  a  Domino's   Commissary.   IFS  must   maintain   the
confidentiality of such information and, subject to limited  exceptions,  cannot
use it in any other business.  The Commissary  Agreement has a term co-extensive
with  the  Master  Agreement,   with  termination  and  default  provisions  and
restrictions on transfers substantially similar to those contained in the Master
Agreement.

Geographic Concentration/Expansion

As of  December  31,  1997,  IFS  had  154  Domino's  Stores  in the  Territory.
Thirty-five were located in greater London,  two were in Northern  Ireland,  two
were in the Republic of Ireland,  three were in Scotland,  and one was in Wales,
with the remainder of the stores located throughout England.

The Company currently has two distribution  centers. The original center, opened
in 1985, is located in the Company's  Milton  Keynes  headquarters.  In November
1996, the Company opened a second distribution center in the north of England to
service the franchisees in Ireland, Scotland and Wales. As of December 1997 this
second distribution center was servicing 25 stores.

In February  1998, the Company began  construction  on a new facility to replace
the Company's  current  administrative  offices and Commissary in Milton Keynes.
The new facility,  also in Milton Keynes,  is scheduled for completion in August
1998.  National  Westminster  Bank has agreed to finance 65% of the construction
costs with a loan of  (pound)1.9  million  bearing a base plus 1 3/4% rate and a
15-year   term.   The  Company  has  a  commitment   to  finance  an  additional
(pound)500,000  for a five year period as a capital lease and corresponds to the
cost of the equipment  for the  Commissary.  The Company  expects to finance the
remainder of the building  costs out of cash flow from  operations  and from the
proceeds from the sale of 15% of the UK subsidiary,  DP Group,  to Nigel Wray in
June 1997.

In 1995, the Company signed an exclusive agreement with Total Oil Great Britain,
a subsidiary of the multinational Total Oil, to open non-traditional stores with
the opening of the first  Domino's  franchise  within a gas station  convenience
store.  Currently there are six Domino's  franchises  operating in these service
stations.  The Company has also  entered into an  arrangement  with  Alldays,  a
British  convenience store company, to establish Domino's delivery stores on the
premises of Alldays Stores.  The Company currently has nine Domino's  franchises
operating in Allday's Stores.  The Company  believes that these  non-traditional
stores   have   generated   additional   product   awareness   by   providing  a
phone-in/pick-up service to customers in areas where delivery is not available.

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<PAGE>

Expansion

IFS believes  that the location of a Domino's  Store is an essential  element of
success.  The site  selection  process  involves an  evaluation  of a variety of
factors,  including  demographics  (such as population  density);  specific site
characteristics   (such  as  visibility,   accessibility  and  traffic  volume);
proximity to activity  centers (such as office or retail shopping  districts and
apartment, hotel and office complexes); competition in the area; construction or
renovation  costs, and lease terms and conditions.  IFS will inspect and approve
proposed  sites for each  Domino's  Store prior to the  execution of a franchise
agreement  or lease.  All sites are subject to the  approval of Domino's and the
store must  generally be approved by the local  planning  board.  Planning board
approval can take approximately six months.

To promote  restaurant  growth and  increase  the  presence  of  Domino's in the
Territory,  the Company has  established a very  successful  Dealer  Development
Program whereby  experienced and talented  restaurant managers in the IFS system
who lack  start-up  capital can enter into the  Domino's  system with  financial
support from the Company.  Those who qualify make a good faith payment of $7,500
while  the  Company  invests  the  remaining  capital  to build  and  equip  the
restaurant. The individual then operates the restaurant with full responsibility
for  operations,  marketing and financial  management.  There are currently five
Dealer Development units in the system.

Store Operations

Menu

Domino's Stores offer a substantially  similar core menu including  high-quality
pizza, garlic bread and soft drinks.  Other menu items include cole slaw and ice
cream. IFS also  continuously  test-markets  pizzas with specialty  toppings and
adds those items to the regular menu if they prove  popular.  Pizza accounts for
approximately  85% of  Domino's  Stores'  sales  in the  Territory.  Prices  for
Domino's menu items are determined by  franchisees  and,  accordingly,  may vary
throughout the Territory.

Store Design

A typical  Domino's Store in the Territory  ranges from 800 to 1,200 square feet
and is designed to  facilitate  a smooth flow of food orders  through the store.
The layout includes specific areas for order taking and pizza preparation.  This
results in simplified operations, increased efficiency, and improved consistency
and  quality of food  products.  The  interior  of each store has a red and blue
color scheme and includes a bright menu board and carryout  customer  area.  The
exterior  typically  includes a Domino's sign with the Domino's logo. The design
for  a  Domino's  Store  must  comply  with  specified  Domino's  standards  and
specifications. However, these requirements are flexible enough to allow a store
to be  configured  to fit a wide variety of building  shapes and sizes,  thereby
increasing the number of suitable locations.

IFS currently  estimates that once the site has the appropriate council planning
approval,  approximately  30-60 days is required to open a Domino's  Store.  IFS
currently  estimates  the  cost  of  opening  a  Domino's  Store  to be  between
(pound)90,000  ($148,000) and  (pound)120,000  ($198,000),  including  leasehold
improvements,  furniture,  fixtures,  equipment  and  opening  inventories,  but
excluding lease payments and the franchise fee. Such estimates vary depending on
the  size  of  the  proposed   store  and  the  extent  of  required   leasehold
improvements.

Delivery Service

Approximately 85% of the sales made by stores in the Territory are delivered.  A
delivery area is designed for each store to deliver a pizza within approximately
30 minutes  of the time an order is placed.  In  defining a delivery  area,  IFS
takes  into  consideration  the  least  favorable  driving  conditions,   strict
compliance  with all laws,  regulations  and rules of the road, and due care and
caution  in the  operation  of 



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<PAGE>

delivery  vehicles.  Deliveries  throughout  the Territory are generally made on
mopeds  owned by the  franchisee  and driven by store  employees.  IFS  provides
training to franchisees on safe driving and moped safety.

Store Personnel

A typical  Domino's  Store  employs a store  manager,  an assistant  manager and
approximately 14 hourly employees,  most of whom work part-time.  The manager is
responsible for the day-to-day operation of the store and for the maintenance of
operating standards. IFS and franchisees seek to hire experienced store managers
and  staff  and  motivate  and  retain  them  by  providing   opportunities  for
advancement and performance-based financial incentives.

Reporting and Oversight

Franchisees  provide  IFS with weekly  reports  containing  certain  information
including  the amount of royalty  sales,  the number of pizzas of various  sizes
sold and the number of pizzas that were late.  Pizzas are  considered to be late
if they are removed from the oven more than 21 minutes after an order is taken.

IFS maintains  financial,  accounting  and  management  controls for its company
owned  Domino's  Stores  through  the  use of  centralized  accounting  systems,
detailed budgets and computerized  management information systems. This includes
an accounting  system that provides each Domino's Store's daily sales,  expenses
and cash position.

IFS has selected and continues to install  computer  systems in Domino's Stores.
The  system  begins  with the  taking  of  orders  and  follows  through  to the
management of  deliveries.  The system  generates  all of the daily,  weekly and
monthly  reports and maintains a customer  database that aids in the achievement
of  significant  sales  through  target  marketing.  The systems are  installed,
maintained,  and supported by Domino's  Pizza Group Ltd. ("DP Group").  To date,
the Company has installed  the system in 130 stores.  The Company has a computer
staff  that  trains  franchisees  in the use of these  in-store  computers.  The
Company has also formed a user group of franchisees  to facilitate  feedback and
to discuss new developments.

Franchise Program

General

IFS  believes  that  the  success  of the  Domino's  System,  together  with the
relatively  low initial  capital  investment per Domino's  Store,  allows IFS to
attract  franchisees with  significant  business  experience.  IFS considers its
franchisees  to be a  vital  part  of  its  continued  growth.  There  can be no
assurance  that IFS will be able to  attract a  sufficient  number of  qualified
franchisees to meet the development schedule in the Master Agreement.

Approval

Franchisees  are approved on the basis of the applicant's  business  background,
restaurant operating experience and financial resources.

Franchise Agreements

Each franchisee must comply strictly with the Domino's System and its standards,
specifications  and  procedures.  The  franchise  agreement  sets forth  various
requirements  regarding signage,  equipment,  menu, service,  hygiene,  hours of
operation and communications.

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<PAGE>

Under IFS's current standard franchise agreement,  the franchisee is required to
pay, at the time of signing the franchise  agreement,  a  non-refundable  fee of
either (pound)8,000 ($13,163) or (pound)18,000 ($29,172), depending upon whether
the franchisee is an existing franchisee or a new franchisee of Domino's Stores.
Generally,  a  franchise  agreement  is  executed  when a  franchisee  secures a
location.  IFS's current standard franchise  agreement provides for a term of 10
years (with one ten-year  renewal option) and payment to IFS of a royalty fee of
5.5% of sales.  The  franchise  agreement  gives IFS the  right to  terminate  a
franchisee for a variety of reasons,  including a  franchisee's  failure to make
payments when due or failure to adhere to IFS's policies and standards.

Franchise Store Development

IFS furnishes each  franchisee with assistance in selecting sites and developing
stores.  IFS  provides its  franchisees  with the  physical  specifications  for
typical  stores.  IFS will generally  present store locations to franchisees for
their  approval  and  franchisees  must obtain  Company  approval of their store
design.  Each location is selected on the basis of accessibility  and visibility
of the site and targeted demographic  factors,  including  population,  density,
income, age and traffic pattern. While IFS assists in the design and planning of
each store and assists the franchisee in acquiring the equipment needed for each
location at competitive  prices,  the  franchisee is  responsible  for all costs
associated with the purchase of equipment.

Franchise Training and Support

Every  franchisee is required to have a principal  operator  approved by IFS who
satisfactorily  completes IFS's training  program.  Each manager of a franchised
store is required to complete IFS's training program. Multi-unit franchisees are
encouraged to hire a full-time  training  coordinator to train new employees for
their  stores.  IFS  maintains  constant  communication  with  its  franchisees,
relaying operating and marketing  information through quarterly  newsletters and
posters for products and recruitment.  IFS also conducts a quarterly  operations
advisory meeting.  Every eight weeks, Company  representatives  visit all stores
and prepare a standards report detailing each store's operations.

Franchise Operations

All franchisees are required to operate their Domino's Stores in compliance with
IFS's policies,  standards and  specifications,  including matters such as menu,
ingredients,  materials,  supplies, services, fixtures,  furnishings,  decor and
signs. Each franchisee has full discretion to determine the prices to be charged
to its customers.

Franchisee Advisory Group

IFS has instituted a Franchisee  Advisory Group for the purpose of assisting IFS
with the development of new ideas. The Franchisee  Advisory Group is composed of
up to eight  members,  all of whom are  franchisees of IFS. The members serve at
the  discretion  of IFS and advise IFS on matters such as store design and menu,
operation, marketing, safety and competition in local markets.

Purchasing; Commissary and Distribution Operations

Domino's and IFS set quality  standards for all products used in Domino's Stores
in the Territory.  IFS provides fresh dough and  substantially  all of the other
food  products  and  supplies  to   franchisees   through  its   Commissary  and
distribution facilities. In order to ensure product quality and consistency, all
stores  are  required  to make all  purchases  through  the  Commissary  or from
suppliers approved by Domino's and IFS.

IFS has begun construction on a new Commissary and distribution center in Milton
Keynes which is scheduled  for  completion  in August 1998.  This  facility will
replace  IFS's  existing  Commissary.  IFS believes  that the new facility  will
provide  adequate room for expansion.  IFS operates the Commissary as a separate
profit center. The Commissary negotiates purchase contracts for virtually all of
the ingredients


                                       10
<PAGE>
and supplies used in Domino's Stores.  When possible,  IFS enters into one-year,
fixed-price  contracts  for  products  purchased  for  the  Commissary.  Certain
products, such as mushrooms,  are purchased at market prices due to the volatile
nature of the prices of those products. The Commissary produces pizza dough that
it delivers fresh to the stores.

Virtually every store orders products  through the Commissary on a regular basis
and is billed by IFS for the purchases. The Commissary employs an individual who
is responsible for quality control and quality  assurance and an employee who is
responsible for distribution.  Products are delivered to stores on a daily basis
in refrigerated trucks that are owned or leased by IFS.

All of the  equipment,  counters  and  smallwares  needed to open and  operate a
Domino's  Store can be purchased  from IFS. IFS also provides  layout and design
services and recommends contractors, signage installers and telephone systems to
its  franchisees.  Although  not required to do so,  substantially  all of IFS's
franchisees purchase most of their equipment from IFS or specified suppliers.

Advertising and Promotion

The franchise  agreement provides that each franchisee must contribute a monthly
advertising and promotion fee of 4% of its royalty sales to a fund  administered
by IFS to be used for advertising,  sales promotion and public relations. IFS is
responsible  for using the  proceeds  of the  advertising  fund to  develop  and
implement advertising and promotional plans,  materials and activities on behalf
of the Domino's Stores in the Territory.  All  advertising,  promotional  plans,
materials and activities are subject to Domino's approval.

IFS's principal method of promotion is through leaflets which are distributed to
the homes and  places of  business  within  each  store's  service  area.  These
leaflets  generally  announce  promotional  prices,  new menu  items or  include
special  coupons.  The  leaflets  are  generally  designed  by  IFS  and  can be
customized by each store.  The  customizing is facilitated  through the use of a
single print shop that provides  printing  services to IFS and the  franchisees.
IFS also uses local radio  advertising  and cable  television  for  advertising.
During 1997,  the Company began  advertising on national  television  throughout
Great Britain to further  develop  brand  recognition.  In 1998,  IFS intends to
expand  its  marketing  to include  not only  television  advertising,  but also
promotions with Hollywood video rentals and new movie releases.

IFS is installing an in-store  computer system in many franchisee  stores.  This
system provides data that enables  franchisees to better track  information such
as location of customers,  the frequency with which each customer orders and the
response to a particular coupon or other promotion. IFS believes the system will
enable IFS to do better  target  marketing,  improve  the  effectiveness  of its
marketing and reduce the cost of its marketing effort.

Trademarks

IFS is authorized to use such trademarks,  service marks and such other marks as
Domino's may  authorize  from time to time for use in  connection  with Domino's
Stores (collectively,  the "Domino's  Trademarks").  Domino's has represented to
IFS that, to the best of its knowledge,  Domino's owns all of the rights,  title
and interests to the Domino's  Trademarks  used by IFS. Any events or conditions
that negatively  affect the Domino's  Trademarks  could have a material  adverse
effect on IFS.

Foreign Currency and Exchange

IFS converts United States dollars,  as needed, into British pounds sterling for
use in  the  Territory.  Revenues  from  operations  in the  Territory  will  be
maintained in pound-denominated  accounts, although they may be freely converted
into foreign currencies,  at then-current  official exchange rates, for purposes
of paying for  foreign  goods,  payment of  royalties  and for  repatriation  of
profits. IFS anticipates that it will continue to leave a substantial portion of
the profits of its operation,  if any, in the Territory for use in its 

                                       11
<PAGE>

business.  There are  presently no  limitations  on IFS's  ability to repatriate
profits.  The exact amount of profits,  if any, that IFS  repatriates at a given
time will depend on, among other factors, IFS's financial condition,  results of
operations and capital requirements.  IFS will be subject to risks from exchange
rate  fluctuations.  IFS may seek to limit its  exposure to the risk of currency
fluctuations by engaging in hedging or other transactions.

United States and United Kingdom Income Taxes

Pursuant to United States tax laws, if IFS's  subsidiaries  organized  under the
laws of the United  Kingdom are not  engaged in  business in the United  States,
such subsidiaries will not be subject to United States taxation. Any earnings of
these  United  Kingdom  subsidiaries,  when paid to IFS (or,  in certain  cases,
deemed paid, even though not distributed,  under certain technical provisions of
the Internal  Revenue Code),  would be included by IFS for United States Federal
income tax purposes.  However, IFS would receive a credit against Federal income
tax  liability   that   otherwise   would  result  from  any  deemed  or  actual
distributions  from its United  Kingdom  subsidiaries,  for any  United  Kingdom
corporate taxes paid by such United Kingdom subsidiaries on these distributions,
as well as for any United Kingdom dividend and royalty withholding taxes imposed
directly on IFS.  Because the United Kingdom  corporation tax rate (presently 31
percent of taxable  income) is lower than the United States  corporate tax rate,
IFS does not  anticipate  being subject to  significant  United  States  Federal
income tax on either distributed or undistributed earnings of its United Kingdom
subsidiaries.

Under United Kingdom tax law, when a United Kingdom  corporation pays a dividend
to a shareholder,  it must also pay Advance Corporate Tax (referred to herein as
"ACT") with respect to that dividend. The ACT is presently set at 25% of the net
amount  of the  dividends  paid  (which is  equivalent  to 20% of the sum of the
dividend plus the ACT).  The paying  corporation  can normally  apply the ACT it
pays with respect to dividends paid by it in any  accounting  period as a credit
against its corporation tax liability for the accounting  period.  To the extent
that the ACT cannot be fully applied as such a credit,  any unapplied amount may
be carried back six years or carried forward indefinitely.

Under the  combined  effect of current  United  Kingdom  tax law and the current
United  States-United  Kingdom Tax Treaty  relating to income and capital  gains
taxes, if IFS's United Kingdom  subsidiary pays it a dividend,  IFS will receive
in  addition to the  dividend a tax credit  equal to one-half of the ACT paid by
the  subsidiary  with  respect to that  dividend.  Subject  to a United  Kingdom
withholding  tax  calculated  as a percentage  of the  aggregate of the dividend
received and such tax credit, which the treaty limits, in the case of a dividend
paid  to  a  United  States  corporation  holding  not  less  than  10%  of  the
subsidiary's  voting stock, to no more than 5%. On November 25, 1997, the United
Kingdom government pronounced proposals which abolish the requirement to account
for ACT in respect of dividends paid on or after April 6, 1999.

Competition in the U.K. Pizza Business

Pizza has proven to be a  particular  success in the  United  Kingdom.  Although
there are several  large pizza  operators in the U.K.,  the market is fragmented
with well over 2,000  small  units.  The Company  believes  that the two largest
operators  in the  Territory  are Pizza Hut with  approximately  104  stores and
Perfect Pizza with approximately 148 stores dedicated to home delivery.

IFS also competes for qualified  franchisees with many other business  concepts,
including  international,  national  and  regional  restaurant  chains  such  as
McDonalds,  Kentucky  Fried  Chicken and Burger King.  There can be no assurance
that IFS will be able to attract a sufficient number of qualified franchisees to
satisfy its obligations under the Master Agreement.


                                       12
<PAGE>

Employees

As of  December  31,  1997,  IFS  employed  212  persons  of whom 117 were store
employees,  51 were corporate personnel and 44 were employed in IFS's Commissary
and distribution  center. Most store employees work part-time and are paid on an
hourly basis.  None of IFS's  employees  are covered by a collective  bargaining
agreement.

Government Regulation

IFS is  subject to  various  British,  European  and local  laws  affecting  its
business.  Each of IFS's  stores is subject to  licensing  and  regulation  by a
number of governmental  authorities,  which include health, safety,  sanitation,
building and fire  agencies in the  municipality  in which the store is located.
Difficulties  in obtaining or failure to obtain  required  licenses or approvals
could  delay or prevent  the opening of a new store in a  particular  area.  The
Commissary and  distribution  facility are licensed and subject to regulation by
national  and local  health and fire codes,  and the  operation of its trucks is
subject  to  certain   regulations.   IFS  is  also  subject  to   environmental
regulations, though these have not had a material effect on IFS's operations.

IFS  is  subject  to  British   and   European   Union   regulations   over  the
franchiser-franchisee relationship. These regulations limit, among other things,
the duration and scope of non-competition provisions,  exclusive territories and
restrictions on sources of supply.

IFS's store  operations  are also subject to British,  European  Union and local
laws  governing  such  matters  as  wages,   working   conditions,   citizenship
requirements and overtime. IFS's hourly personnel are paid at rates ranging from
(pound)3 to (pound)8 and,  accordingly,  further  increases could increase IFS's
labor costs. New European Community  regulations could materially increase IFS's
and franchisees' cost of operations.

Item 2.  Description of Properties

In the Territory,  DP Group maintains its place of business at Unit 10, Maryland
Road, Tongwell, Milton Keynes, England. There are three leased spaces associated
with DP Group's  administrative  offices and the  Commissary.  The leases (for a
total of approximately  20,000 square feet) cover a period of two to five years,
with options that allow for early  release  from the  commitments,  at a rate of
$194,889 per year.

IFS is  constructing a new site on which it is building a larger  Commissary and
distribution center. The Company anticipates completion of the project in August
1998. DP Realty Limited,  a wholly owned  subsidiary of DP Group, has a total of
115 leases. DP Realty Limited enters the lease on new properties as a service to
franchisees,  enabling them to secure longer rent obligations.  The Company then
subleases the store space to each  franchisee.  This practice allows the Company
to ensure the  franchisee  maintains the image of the brand.  DP Realty  Limited
obtains a markup on the sublease to cover the administrative  costs. The Company
currently  subleases 108 of the 115  properties  to  franchisees.  In 1997,  the
margin  generated from the subleases less the cost of the leased  properties was
approximately $83,000.

The Company  has a one year lease for its U.S.  office  that is  renewable.  The
total rent payable by the Company is approximately $1,000 per month.

Item 3.  Legal Proceedings

The Company is not a party to any litigation or  governmental  proceedings  that
management  believes  would  result in  judgments  or fines  that  would  have a
material adverse effect on IFS.

                                       13
<PAGE>

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

No matters were submitted to a vote of the holders of the Company's Common Stock
during the fourth quarter of the Company's fiscal year ended December 28, 1997.



                                       14
<PAGE>

                                     PART II

Item 5.  Market for the Issuer's Common Equity and Related Stockholder Matters

Market Information

The Company's Common Stock is traded separately and as part of a unit (a "Unit")
which includes one share of Common Stock,  and one warrant to purchase one share
of stock through December 9, 1999 at $10.00 per share (a "Class B Warrant"). The
Company's  Units,  Common  Stock,  and B Warrants are listed on the OTC Bulletin
Board, an inter-dealer,  over-the-counter market, under the symbols DOMSU, DOMS,
and DOMSZ.  Quotes for stock traded on the OTC Bulletin  Board are not listed in
newspapers.

The high and low bid  prices of the Units  and  Common  Stock,  as  reported  by
Nasdaq, were as follows:

                                                 1998
                                    Common                 Units
                                  High      Low         High        Low

        First Quarter           $2.625     $2.00       $3.50       $1.75

                                                 1997
                                     Common                 Units
                                  High      Low         High        Low

        First Quarter           $1.3125    $0.50       $1.25       $0.50
        Second Quarter           2.25       1.125       2.125       1.1875
        Third Quarter            2.375      1.125       2.3125      1.25
        Fourth Quarter           2.875      1.75        2.375       1.5625

                                                 1996
                                    Common                 Units
                                  High      Low         High        Low

        First Quarter           $1.87      $0.50       $2.00       $0.62
        Second Quarter           1.50       0.62        1.50        0.62
        Third Quarter            1.75       0.62        1.75        0.62
        Fourth Quarter           1.25       0.50        1.25        0.50

                                                 1995
                                    Common                 Units
                                  High      Low         High        Low

       First Quarter            $ ---       $ ---      $6.25       $5.75
       (beginning January 11, 1995)
       Second Quarter            5.00        5.00       6.375       5.50
       (beginning June 23, 1995)
       Third Quarter             6.125       5.00       7.00        5.125
       Fourth Quarter            8.00        0.75       8.25        0.875

                                       15
<PAGE>

These quotations reflect inter-dealer prices, without retail mark-up,  mark-down
or commission and may not represent  actual  transactions.  Quotations have been
obtained through Standard & Poor's Comstock.

Dividends

The Company  has not paid any cash  dividends  on its Common  Stock and does not
intend to pay cash dividends on its Common Stock for the foreseeable future. The
Company intends to retain future earnings to finance future developments.

Number of Stockholders

As of April 1, 1998,  there were 87 record holders of the Company's Common Stock
and 38 record  holders  of Class B  Warrants.  The  Company  believes  there are
approximately 4,320 beneficial owners of the Company's Common Stock.


                                       16
<PAGE>

Item 6. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

Introduction

The Company's  principal  business  consists of franchise and royalty fees,  the
sale and  support of Company  owned  Domino's  Pizza  stores,  the sale of food,
non-food  products  and in-store  computer  systems to  franchisees,  and rental
income from the sublease of delivery stores.  These sources of revenue represent
the total revenue earned by the Company.

The Company  had 154  Domino's  stores  opened by December  28,  1997.  New unit
openings of traditional delivery stores increased from 21 in 1996 to 27 in 1997.
The increase in store  openings is the result of: (i) enhanced  awareness of the
Domino's  brand  through  trade  exhibitions  and  industry  publications;  (ii)
additional store openings by existing  franchisees;  and (iii)  partnership with
Allday's (a British  convenience  store chain).  The Company continues to select
"high street" locations that provide enhanced  visibility,  adequate parking and
late night operating hours.

In June, 1997 the Company agreed to sell up to a 20% interest in its Domino's UK
operation for approximately $4.5 million to British  businessman Nigel Wray. Mr.
Wray  paid  IFS  approximately  $3  million  for  15%  of its  shares  in the UK
subsidiary and holds an option to invest in DP Group for an additional 5% of new
shares for a price of $1.5  million.  The Company plans to use the proceeds from
the sale to fund expansion of IFS and Domino's UK.

The Company  purchased  three Haagen Dazs ice cream parlors in 1995. The Company
decided  in June 1996 that  operating  and  accumulating  more  parlors  was not
consistent with its primary mission. As a result, one store was sold back to the
master  franchiser  in  September  1996.  The Company  disposed of the other two
stores in December 1997. The revenue and costs from these stores are reported in
discontinued operations.

The Company opened a sit down restaurant,  Pizzazz, in December 1995 to increase
further  awareness of the Domino's brand. The restaurant was closed in June 1996
after the Company determined that it wished to discontinue this line of business
as the success of the concept would require too much management  attention to be
redirected  from the  Company's  primary  business.  The Company  subleased  the
property  commencing  April 1997 and terminating at the expiration of the lease,
in December 2010.

Results of Operations

The Company  realized  income of $2,346,084  for the fifty-two week period ended
December 28, 1997 primarily due to the  nonrecurring  income from the sale of DP
Group shares to Nigel Wray ($2,163,038), increased systemwide sales of 35% which
resulted in higher  royalty  and  commissary  income,  and the opening of 27 new
units.  This  compared to a net loss of $139,808  for the same period last year.
Gross  margins  increased  from  the  prior  year  by  $2,120,116.  Income  from
continuing  operations,  before  tax,  was  $1,087,893  in 1997 as  compared  to
$514,029 in 1996 or an increase of 112%.


                                       17
<PAGE>

The following  tables set forth the percentage  relationships  to total revenue,
unless  otherwise  indicated,  of  certain  income  statement  data and  certain
restaurant data for the years 1997 and 1996.

                                      December 28, 1997  December 29, 1996
INCOME STATEMENT DATA
Revenues:
Company Owned Stores                          11.6%           15.6%
Franchise Royalties                           14.0%           13.9%
Franchise Fees                                 1.8%            2.4%
Commissary Sales                              59.7%           57.6%
Property Rentals                               7.9%            6.4%
Other Income                                   5.0%            4.1%
                                             -----           -----
Total Revenues                               100.0%          100.0%

Costs and Expenses:
Company Owned Stores(1)                       94.6%           92.1%
Commissary Expenses(1)                        86.5%           90.0%
Franchise Support, G&A(2)                     18.2%           15.5%
Depreciation/Amortization(2)                   2.7%            3.3%
                                             -----           -----
Total Costs and Expenses                      97.1%           97.9%

Operating Income                               2.9%            2.1%
Other Income(2)                                5.9%            0.3%
                                             -----           -----
Income from Continuing Operations              8.8%            2.4%
                                             =====           =====

Notes:
(1)     As a percentage of respective revenues
(2)     As a percentage of total revenues

RESTAURANT DATA
Percentage Increase in Comparable
Restaurant Sales                                       11%                  14%
Average Annual Sales for Company Owned
Stores Open for Full Year                        $820,000             $655,000

Number of Company Owned Stores:
Beginning of Year                                      11                   10
Opened                                                 --                    2
Acquired                                                2                    2
Sold                                                   (2)                  (3)
                                                    -----                -----
End of Year                                            11                   11
                                                    -----                -----

Number of Franchised Stores:
Beginning of Year                                     116                   93
Opened                                                 27                   22
Acquired from Company                                   2                    3
Sold to Company                                        (2)                  (2)
                                                    -----                -----
End of Year                                           143                  116
                                                    -----                -----
Total Stores End of Year                              154                  127
                                                    =====                =====

                                       18
<PAGE>

Comparison of Fiscal 1997 to Fiscal 1996

Revenues
Total  revenue for the fiscal  year ended  December  28, 1997 was $28.4  million
versus $21.2 million for the fiscal year 1996. This represents a 34% increase in
total revenue.  System-wide  sales increased from $55.0 million in 1996 to $72.1
million in 1997 or an increase of 31%.

Sales by company owned stores remained constant at $3.3 million. The consistency
in  revenues  was  primarily  the  result of the timing of the  acquisition  and
disposal of units and different trading levels of the stores acquired/disposed.

Royalty fees increased  37.9% to $4.0 million in 1997 from $2.9 million in 1996.
The increase was primarily due to a same store  comparable sales increase of 11%
versus 1996 and the opening of 27 new delivery stores.

Franchise and other fees  decreased to $507,000 in 1997 or a decrease of 2% over
1996 when fee revenues were $517,000.  The Company  increased fees attributed to
new stores  openings but  experienced a decrease in fees because more new stores
were opened by existing  franchisees which reduced  franchise  training fees and
support.

Commissary sales increased 38.5% net of intercompany sales to $16.9 million from
$12.2 million in 1996.  This increase of 38.5% is primarily due to new stores in
the system and the increase in comparable store sales.

The  increase in other  sales to $1.4  million  from  $831,000 is related to the
Company's expansion of computer sales to franchisees.

Cost and Expense

For the fifty-two week period ended December 28, 1997,  gross margins  increased
from $5.5 million in 1996 to $7.6 million in 1997,  or an increase from 25.8% to
26.8% of total  revenues.  This increase was  principally  related to consistent
margins throughout the year on the sale of commissary  products and better gross
margins on computer sales and franchise and other fees.

The  Company-operated  pizza  delivery  stores are either  staffed  with Company
personnel or are operated under a Dealer Development  Program.  Under the Dealer
Development  Program,  the  store is  operated  under a third  party  management
contract where the Company receives a fixed percentage of sales. In those cases,
the  Company  records  revenue  but does not  record  cost of food,  labor,  and
delivery expense  associated with the store. In the Company operated stores, the
Company was able to maintain  food costs as a  percentage  of sales at 25.5% for
both 1997 and 1996.  In total,  cost and expense at the  Company-operated  pizza
delivery stores increased as a percentage of revenue from 92.1% in 1996 to 94.6%
in 1997.  The increase is attributed to new corporate  owned store  openings and
acquiring two under performing stores from franchisees.

The Commissary  expenses  include the cost of sales,  warehousing and packaging,
and  distribution  expenses  associated  with food sales,  non-food  sales,  and
equipment sales.  These expenses decreased as a percentage of revenue from 90.0%
in 1996 to 86.5% in 1997. This decrease is primarily due to improved controls to
ensure that Commissary pricing was adjusted for raw material price fluctuations.

Franchise support, general and administrative expenses increased as a percentage
of revenues from 15.5% to 18.2% as the Company increased franchise support staff
to serve  existing  stores and to prepare for  continuing  new store  growth and
expanding  market share. The Company's market share has increased from 5% to 12%
in the last four years.

                                       19
<PAGE>

Depreciation and  amortization  decreased as a percentage of revenues to 2.7% in
1997 from 3.3% in 1996. The expense decreased primarily as a result of increased
revenues and lower capital expenditures in 1997 versus 1996.

Net Other Income  increased to $2,377,031 from $63,000 in 1996. This increase is
primarily  related  to the  interest  earned on the  lending of funds to related
parties  ($180,576)  and  the  gain  (2,163,038)  on sale  of a  portion  of the
investment in subsidiaries.

Liquidity and Capital Resource

The  Company's  net working  capital at December 28, 1997 was $3.7  million,  an
increase from $1.7 million on December 29, 1996.  Total current assets were $9.6
million at December 28, 1997 versus $7.5  million on December 28, 1996.  Current
liabilities  increased by $0.1 million in 1997 to $5.9 on December 28, 1997 from
$5.8 million in 1996.

The primary  increases in current  assets  related to cash which  increased as a
result of the  expanding  business  and the sale of shares  to Nigel  Wray.  The
increase in current  liabilities relates to decreases in accounts payable offset
by increases in value-added taxes payable, and accrued expenses.

The following table  represents the net funds provided and/or used in operating,
financing, and investment activities for both periods:
<TABLE>
<CAPTION>
<S>                                                 <C>                             <C>   
                                                              (Thousands)
                                            December 30-December 28,         January 1-December 29,
                                                      1997                            1996
Net Cash Provided/(used) from
Continuing Operations                               $2,561                          $1,193
Net Cash (used) for Discontinued Operations           (224)                           (654)
Net Cash (used) from Investing                       (1047)                           (464)
Net Cash provided/(used) by Financing                  820                            (307)
</TABLE>

The  Company  generated  approximately   $2.6million  in  cash  from  continuing
operations and utilized cash of $224,000 in discontinued operations. The Company
had a net profit of  approximately  $2.3 million for the year ended December 28,
1997.  Trade  accounts  receivable and  franchisee  loans and other  receivables
increased from the prior year by $532,000,  prepaid and accrued income decreased
by $599,745,  and inventories increased $150,000.  Accounts payables and accrued
and other payables decreased by $296,000, and value added taxes and income taxes
payable increased by $627,000.  The Company anticipates that it will continue to
generate  positive  cash flow from  operations  in 1998 as a result of improving
profits of the  Company,  the opening of  additional  stores,  and  reduction of
administrative expenses as a percentage of sales.

The Company utilized $1 million and $464,000 in investing  activities for fiscal
years  1997 and 1996,  respectively.  The  Company  requires  capital to open or
acquire stores, the acquisition of new commissary equipment and delivery trucks,
or the enhancement of corporate  systems and facilities.  The Company spent $3.2
million in 1997 versus $1.3 million in 1996 in property and  equipment  and land
for the new Commissary.  The Company  anticipates that it will need $6.2 million
to open three new corporate  stores and invest in  Commissary  equipment and the
new facility in 1998.  The Company also  believes it will collect  approximately
$2.4 million of the receivable from its parent,  Crescent Capital, in 1998. Cash
utilized for financing  activities  during the year ended  December 28, 1997 was
$0.8  million.  Proceeds of a loan to DP Group from  National  Westminster  Bank
totaled $1.5  million.  Repayments  of debt totaled  $550,860 and capital  lease
payments totaled $97,000.

                                       20
<PAGE>

The Company has a commitment on office space at its Corporate office until June,
1998.  The Company's UK subsidiary  has its principle  office in Milton  Keynes,
England,  and leases 115 Domino's store  properties.  Estimated annual operating
lease payments for the next five years range each year between $2.52 million and
$2.86  million  and  approximately  $21  million  for all of the years  combined
subsequent to 2002 for a total of $34.8  million.  The Company  collects  rental
income from the sublease of the Domino store properties that total approximately
$32.1  million.  The  Company  does not  believe  that the net  exposure is $2.6
million because the total minimum future rental income as calculated assumes the
subleases are for the initial ten year period of the franchise  agreement  only.
The Company  believes that the  franchisees  will exercise the renewal option of
the franchise agreement.

The Company has lease obligations under capital leases for commissary  equipment
and motor vehicles. As of December 28, 1997, and the next two years, the Company
has decreasing annual  obligations which range from $108,000 down to $25,000 per
year. The net present value of these obligations total approximately $188,000.

The  Company's  anticipated  debt  payment  through  December  27,  1998 will be
approximately  $200,000. In the following three years, annual principal payments
are expected to be approximately $218,000, $200,000, and $138,000.

The  Company  believes  it can  meet its  short-term  liquidity  needs  from the
projected cash to be generated from  operations and collection of its receivable
from the parent company of approximately $2.4 million.  The Company's  long-term
liquidity  needs  will also be met by cash  generated  from  operations,  and if
necessary,  supplemented  by debt financing or additional  equity  funding.  The
Company currently has a commitment from National Westminster Bank to finance the
commissary.  The loan  commitment is  approximately  $4.0  million.  The Company
anticipates it will spend $6.2 million to open additional  corporate  stores and
acquire  commissary  equipment in 1998. The Company is not obligated to open any
additional  Company  owned  stores by December  1998 under the Master  Franchise
Agreement.  If the company's plans change, or its assumptions or estimates prove
to be inaccurate,  the Company may require additional funds to achieve increased
sales.  If such  funds are  unavailable,  the  Company  will have to reduce  its
operations to a level more consistent with its available funding.

Inflation

         The primary  inflationary factor affecting the Company's  operations is
the  cost  of  food.  As the  cost  of  food  has  increased,  the  Company  has
historically  been able to offset these increases through economies of scale and
improved operating procedures,  although there is no assurance that such offsets
will continue. To date, inflation has not had a material effect on the Company's
operations.

Item 7.  Financial Statements and Supplementary Data

         See the  Financial  Statements  and  Supplementary  Data  listed in the
accompanying  Index to Financial  Statements  and  Schedules on Page F-1 herein.
Information  required  by other  schedules  called for under  Regulation  S-X is
either not  applicable  or is  included  in the  financial  statements  or notes
thereto.

Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosures

         Moore  Stephens,  P.C. was  preciously  the principal  accountants  for
International   Franchise  Systems,  Inc.  On  December  10,  1997,  that  firms
appointment as principal  accountants was terminated.  The decision to terminate
was approved by the board of directors. In connection with the audits of the two
fiscal years ended December 29, 1996, and the subsequent  interim period through
December 10, 1997, there were no disagreements with Moore Stephens,  P.C. on any
matter of accounting principles or practices, financial statement disclosure, or
auditing  scope or  procedures,  which  disagreements  if not

                                       21
<PAGE>

resolved  to their  satisfaction  would have caused  them to make  reference  in
connection with their opinion to the subject of the disagreement.

The  audit  reports  of  Moore  Stephens,  P.C.  on the  consolidated  financial
statements of IFS and  subsidiaries  as of and for the years ended  December 29,
1996 and December 31, 1995, did not contain any adverse opinion or disclaimer of
opinion, not were they qualified or modified as to uncertainty,  audit scope, or
accounting principles.

On March 9, 1998, the Company appointed Ernst & Young to replace Moore Stephens,
P.C. as their independent  auditors for the fiscal year ended December 28, 1997.
The decision to engage Ernst and Young as the Company's independent auditors was
approved by the Company's board of directors.

The Company has agreed to provide  indemnification to Moore Stephens,  P.C., for
the  payment of any legal costs or expenses  reasonably  incurred in  connection
with a successful  defense of any action or claim  relating to the reissuance of
the 1996 audit report.


                                       22
<PAGE>

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act

                  The  Directors  and  Executive  Officers,  their  ages,  their
principal  occupations  during the past five years or more, and directorships of
each in public companies in addition to the Company, are as follows:

                  Colin  Halpern,  age 60, has served as  Chairman  of the Board
since  December  1993, and served as President of the Company from December 1993
until May 1996. He also currently serves as President,  Secretary, Treasurer and
Director of Crescent Capital,  Director of Celebrated Group Plc., and President,
Chief  Executive  Officer  and  Chairman  of  the  Board  of  Directors  of  NPS
Technologies  Group, Inc., all of which are public companies.  He has held these
positions  since July 1994,  January  1998 and August  1983,  respectively.  Mr.
Halpern  serves as Chairman of the Board for Red Hot Concepts,  a public company
that  operates  Chili's  restaurants  in the United  Kingdom,  from June 1994 to
present.  He also  served as  President  from June 1994 to August  1996,  and is
serving again as President  since May 1997. Mr. Halpern also served as Executive
Vice President of Lafayette  Industries from January 1992 to December 1996. From
1985 to the  present,  Mr.  Colin  Halpern  has also  served as the  Chairman of
Universal  Services Group,  Inc. Mr. Colin Halpern was formerly the Chairman and
Chief Executive Officer of DRC Industries,  Inc., a company which, from November
1975 through October 1985, had a Budget  Rent-A-Car master license agreement for
the New  York  metropolitan  area,  including  LaGuardia  and  John  F.  Kennedy
Airports.

                  In  June  1991,   the  SEC  sought  and   received,   and  NPS
Technologies  Group, Inc. ("NPS") consented to the entering of, an order against
NPS and its officers and employees  that  required NPS to file certain  periodic
reports with the SEC that had not been timely filed and  permanently  restrained
and enjoined NPS and such officers and employees  from failing to file in proper
form with the SEC  accurate  and  complete  reports  required to be filed by NPS
pursuant  to the rules and  regulations  of the SEC.  Mr.  Colin  Halpern is the
President  and Director of NPS,  which is currently  inactive.  Since June 1991,
certain of NPS' reports have not been timely filed by NPS and other reports have
not been filed in proper form.  The SEC has taken no further  action against NPS
or any of its officers and employees.

                  H. Michael Bush, age 43, has served as Chief Financial Officer
and Secretary  since joining the Company in November  1995.  Since May 1996, Mr.
Bush has also served as Acting  President.  From November  1995 to present,  Mr.
Bush has also served as Chief Financial  Officer/Secretary for Red Hot Concepts,
Inc., the UK licensee of Chili's Bar & Grill restaurant.  In addition,  Mr. Bush
is currently serving as Chief Executive Officer of the Celebrated Group Plc, the
company  that merged with Red Hot  Concepts,  Inc.  in December  1997.  Prior to
joining the  Company,  Mr. Bush  worked at Mobil Oil  Corporation.  He served at
Mobil in various financial capacities from 1980 through November 1995, including
Manager of  Financial  Analysis,  Accounting  Manager  and  Senior Tax  Planning
Advisor.  From 1976  through  1980,  Mr.  Bush  worked at Unisys.  Mr. Bush is a
certified public accountant.

                  Gerald Halpern, age 65, has served as Executive Vice President
and  Director  of the  Company  since  December  1993.  From April 1991  through
December 1993, he has served as Treasurer of Chinese Pompano,  Inc., a fast food
restaurant and delivery company,  and is responsible for financial  planning and
development.  He remains a director of Chinese Pompano,  Inc. Mr. Gerald Halpern
served as Executive  Vice  President of Courter & Co., a mechanical  contracting
firm from 1988 to 1990. Mr. Gerald Halpern also served for 11 years as President
of DRC  Industries.  Gerald  Halpern and Colin Halpern are brothers.  Mr. Gerald
Halpern is also a director of Live Bait.

                  David Coffer,  age 50, has served as a Director of the Company
since February 9, 1998. From 1972 to present,  Mr. Coffer has served as Chairman
of Davis Coffer Lyons, a company  specializing in all property  aspects relating
to  restaurants,  public  houses,  wine  bars,  music and  dancing  and  leisure


                                       23
<PAGE>
premises.  Mr. Coffer is a Fellow of the Royal Institute of Chartered Surveyors,
an Associate of the  Chartered  Institute of  Arbitrators,  and President of the
Restaurant Property Advisors Society.

                  Bernard  Goldman,  age 77,  has  served as a  Director  of the
Company since  February 9, 1998.  From 1957 to 1979,  Mr.  Goldman was the Chief
Executive  Officer of Goldman's  Discount  Department  Stores,  a 14-store chain
located throughout western Ohio. Presently,  in addition to owning and operating
a variety of real estate investment  properties,  Mr. Goldman is involved with a
variety of philanthropic organizations.


Item 10. Executive and Director Compensation

Summary Compensation Table

      The following table sets forth the aggregate cash compensation paid by the
Company for the  fifty-two  weeks  ended  December  28, 1997 to those  executive
officers  whose  salary  and bonus  exceeded  $100,000  and the Chief  Executive
Officer.
<TABLE>
<CAPTION>
                                                                              Long-Term Compensation
                               Annual Compensation                   Awards
                                                                Other    Restricted Securities
Name and                              Salary                    Annual      Stock   Underlying   All Other
Principal                         Compensation    Bonus      Compensation   Award(s) Options   Compensation
Position                  Year          ($)       ($)(1)         ($)(2)       ($)      (#)         ($)     
<S>                       <C>          <C>             <C>        <C>          <C>         <C>       <C>
Colin Halpern             1997(3)     152,000    100,000          27,238       0      25,000         0
Chairman(4)               1996         96,000          0          23,283       0      10,000         0
                          1995         96,000          0          56,043       0           0         0

H. Michael Bush           1997         70,000     60,000          5,000        0      75,000         0
Acting President,         1996         50,000     10,000           ---         0      15,000         0
Chief Financial Officer,
Secretary

Gerald Halpern            1997         93,000     60,000         31,568        0      75,000         0
Executive Vice            1996         72,000          0         30,860        0           0         0
President                 1995         72,000          0         34,814        0           0         0
<FN>
(1) Represents amounts paid under the Company bonus plan.

(2) For 1997,  Colin Halpern's  compensation  includes $18,322 car allowance and
$8916 for insurance  and for 1996 includes  $15,840 car allowance and $7,443 for
insurance and for 1995 includes $15,840 car allowance,  $7443 for insurance, and
$32,760 for housing  allowance.  For Gerald  Halpern,  the 1997 figure  includes
$25,668  housing  allowance and $5900 for  insurance,  the 1996 figure  includes
$24,960  housing  allowance and $5,900 for  insurance and 1995 includes  $28,914
housing allowance and $5,900 for insurance. Where no amount is given, the dollar
value of  perquisites  paid to the named  executive  officer does not exceed the
lesser of $50,000 or 10% of the total of annual  salary and bonus  reported  for
the named executive officer.

(3) For 1997,  Colin Halpern's  compensation  reflects  $120,000 of compensation
paid to Englewood Consulting Group, Inc.  ("Englewood") for consulting services.
Englewood is owned by Gail Halpern, Colin Halpern's spouse. Colin Halpern is the
sole employee of Englewood.

(4) Colin Halpern served as President from December 1993 through May 1996.
</FN>
</TABLE>

                                       24
<PAGE>

      The  following  tables set forth,  as to the executive  officers,  certain
information  relating to options for the  purchase of Common  Stock  granted and
exercised during fiscal year 1997 and held at the end of fiscal year 1997.
<TABLE>
<CAPTION>
                                               Option Grants in Last Fiscal Year

                                                       Individual Grants

            Name                Options      % of Total Options Granted    Exercise or     Expiration Date
                                Granted      to Employees in Fiscal Year    Base Price
                                  (#)
<S>                              <C>                    <C>                  <C>               <C>
Colin Halpern                   5,000(1)                 4.14%                $ 0.5625          1/2/07
                                5,000                    4.14%                 $1.15625         4/1/07
                                5,000                    4.14%                 $2.25            7/1/07
                                5,000                    4.14%                 $2.00           10/1/07
H. Michael Bush                75,000(2)                27.6%                  $0.50           8/12/06
Gerald Halpern                 75,000(2)                27.6%                  $0.50           8/12/06
</TABLE>

(1) Represents  options granted under the Company's 1997  Non-Employee  Director
Plan. Mr. Colin Halpern was not an executive  officer of the Company at the time
of grant.  Such options are exercisable after the first anniversary of the grant
until ten years from the date of grant.

(2) One-third of such options were exercisable on August 18, 1997, one-third are
exercisable on August 18, 1998, and the remaining  one-third are  exercisable on
August 18, 1999. No option is exercisable after August 18, 2006.

                       Aggregated Option Exercises in Last
                      Fiscal Year and FY-End Option Values
<TABLE>
<CAPTION>
                                              # of securities     # of securities       Value of           Value of
                                                 underlying          underlying        unexercised       unexercised
                                                unexercised         unexercised       in-the-money       in-the-money
                  Shares          Value          options at         options at          option at         option at
                acquired on      Realized          FY-End             FY-End           FY-End (1)         FY-End (1)
    Name        exercise (#)        ($)          Exercisable       Unexercisable       Exercisable       Unexercisable
    ----        ------------        ---          -----------       -------------       -----------       -------------
<S>                  <C>             <C>           <C>                 <C>               <C>                <C>    
Colin Halpern        0               0             10,000              25,000            $22,500            $34,570
H. Michael           0               0             35,000              55,000            $78,750           $135,300
Bush                 0               0             25,000              50,000            $59,500           $119,000
Gerald
Halpern
</TABLE>


(1) Represents the difference  between the option exercise price and the closing
market price for the Company's Common Stock on December 31, 1997 ($2.875).

Director Compensation

Directors  who are officers or employees  of the Company  receive no  additional
compensation  for  service as members of the Board of  Directors  or  committees
thereof. Directors who are not officers or employees of the Company receive such
compensation  for their services as the Board of Directors may from time to time
determine.  Non-employee  directors receive an annual fee of $5,000 and a fee of
$1,000 for each board,  committee,  and  shareholder  meeting  attended.  During
fiscal year 1997,  non-employee  directors participated in


                                       25
<PAGE>

the 1997  Non-Employee  Directors  Stock  Option  Plan (See Note 16A of Notes to
Financial  Statements),  which plan was adopted by the  shareholders at the 1997
annual meeting of shareholders. During fiscal year 1997, Messrs. Abelman, Lazar,
Franklin  and Halpern  each were  granted  options to acquire  20,000  shares of
common stock at an exercise  price of $.5625,  $1.15625,  $2.00 and $2.25 (5,000
shares at each price) under the plan.  Mr. Flack was granted  options to acquire
10,000 shares of common stock at an exercise price of $.5625 and $1.15625 (5,000
shares at each price).  The exercise periods for the shares belonging to Messrs.
Abelman, Lazar, Flack and Franklin have expired.

Item 11. Security Ownership of Certain Beneficial Owners and Management

         The table  below sets  forth  certain  information  as of April 1, 1998
regarding the beneficial ownership,  as defined in regulations of the Securities
and Exchange Commission,  of Common Stock of (i) each person who is known to the
Company to be the beneficial owner of more than 5% of the outstanding  shares of
the  Company's  Common Stock,  (ii) each director of the Company,  and (iii) all
directors  and  executive  officers  as a group.  On April 1,  1998,  there were
7,034,324 shares of the Company's Common Stock and options  outstanding.  Unless
otherwise  specified,  the named beneficial owner has sole voting and investment
power.  The  information in the table below was furnished by the persons listed.
"Beneficial Ownership" as used herein has been determined in accordance with the
rules and regulations of the Securities and Exchange Commission and is not to be
construed as a representation  that any of such shares are in fact  beneficially
owned by any person.
<TABLE>
<CAPTION>
Names and Address of                         Amount and Nature of                Percentage of
  Beneficial Owner                           Beneficial Ownership                     Class
<S>                                                    <C>                              <C>
Crescent Capital, Inc.(1)(2)                      4,700,000                              67%
6701 Democracy Boulevard
Suite 300
Bethesda, MD  20817

Colin Halpern                                        10,000                                *

H. Michael Bush                                      35,000(3)                             *

Gerald Halpern                                       25,000                                *

Bernard Goldman                                       0                                    *

David Coffer                                         6,250(4)                              *

All directors and officers
as a group (4 persons)                              76,250                                 *
</TABLE>

*   Less than 1%

(1) From December 1993, Woodland Limited  Partnership,  a limited partnership of
which  Woodland  Group  is  the  General  Partner,  owns  approximately  92%  of
Crescent's  issued and  outstanding  shares of Common Stock.  Woodland  Group is
owned one-third by Mr. Jay Halpern,  one-third by Ms. Nancy Gillon and one-third
by Mrs. Gail Halpern. Gail Halpern is the wife of Colin Halpern. Jay Halpern and
Nancy  Gillon are the  children  of Gail and Colin  Halpern.  By reason of their
indirect  ownership of approximately  92% of the outstanding  stock of Crescent,
Mr. Jay Halpern,  Ms. Gillon and Mrs. Halpern may be deemed to have a beneficial
interest in the shares owned by Crescent.  Messrs.  Halpern, Ms. Gillon and Mrs.
Halpern disclaim beneficial ownership of such securities.

                                       26
<PAGE>

(2) On December 18, 1992,  the SEC  directed by Order that an  investigation  be
made into  possible  violations  of  certain  of the  federal  securities  laws,
including laws dealing with  manipulation and false  disclosure,  by a number of
named individuals and entities, with respect to the securities of seven issuers,
including Crescent, and other unnamed issuers. The investigation of Crescent was
initiated prior to the time current  management became affiliated with Crescent.
To date, no actions have been brought against  Crescent and, insofar as Crescent
is aware, no actions have been brought  against anyone  involving the Company or
its securities.

(3) Represents  options to purchase shares of Common Stock exercisable within 60
days of April 1, 1998.

(4) Represents  options  granted under the 1995  Consultants  and Advisors Stock
Incentive  Plan (See  Note 15A in Notes to  Financial  Statements)  prior to Mr.
Coffer becoming a director.

Item 12. Certain Relationships and Related Transactions

         The Company has entered into several transactions with affiliates.  The
Company believes that the terms of the transactions with affiliates are on terms
at least as  favorable  as could  have been  obtained  from  unaffiliated  third
parties.  The  Company  will  require  that  in the  future,  transactions  with
affiliates  will continue to be made on terms the Company  believes are at least
as favorable as those obtainable from unaffiliated third parties.

Englewood Consulting

In May 1997,  the Company  entered into a consulting  agreement  with  Englewood
Consulting Group, Inc. Englewood is a Florida corporation owned by Gail Halpern,
Colin  Halpern's  spouse.  Colin  Halpern  is an  employee  of  Englewood.  This
agreement  continues until December 31, 1999 and is renewable for successive one
(1) year periods  until  terminated  by either party by giving  thirty (30) days
prior written notice. Colin Halpern is the sole employee of Englewood Consulting
Group, Inc. During fiscal year 1997, the Company paid $120,000 to Englewood (see
Executive Compensation).

Woodland Limited Partnership

         Woodland Limited Partnership  ("Woodland") is a partnership  controlled
by members of Mr. Colin Halpern's family. Woodland owns approximately 92% of the
outstanding voting stock of Crescent Capital, Inc.  ("Crescent"),  the holder of
approximately  67% of the voting stock of the Company.  Mr. Colin Halpern is the
President and sole  director of Crescent.  Through its ownership of the stock of
Crescent,  Woodland is able to control the election of  directors  and any other
matter submitted for shareholder approval.

Crescent Capital, Inc.

         The Company has  advanced  funds from time to time to  Crescent.  As of
December 28, 1997 the total  amount due to the Company  from  Crescent for funds
advanced was $2,347,765.  The funds were advanced on a short-term  basis and are
not interest  bearing.  As of December 31, 1996, the amount due the Company from
Crescent was $1,839,325.

Advances to Colin Halpern

         The Company has advanced  funds from time to time to Mr. Colin Halpern.
At December 28, 1997, the total amount due to the Company from Mr. Colin Halpern
was $148,573 reflecting an increase of $23,557 from December 31, 1996.

                                       27
<PAGE>


Item 13. Exhibits and Reports on Form 8-K

         (a)  Exhibits

         3(A)(1)(2)          Amended and Restated  Certificate of  Incorporation
                             of  Issuer  dated  October  22,  1993,  as  amended
                             December 21, 1993 and July 25, 1994.

          (B)(1)             Bylaws  of  Issuer  dated  December  29,  1993  and
                             amended on June 30, 1994.

         4(A)(2)             Form of Common Stock Certificate

          (B)(2)             Class B Common Stock Purchase Warrant Specimens

          (C)(2)             Warrant Subscription Form

         10(A)(1)            Master Franchise  Agreement dated December 29, 1993
                             between  Domino's  Pizza  International,  Inc.  and
                             Domino's Pizza Group Limited

          (B)(1)             Know-How  and  Technical  Knowledge,   License  and
                             Management   Agreement   dated  December  29,  1993
                             between  Domino's  Pizza  International,  Inc.  and
                             Domino's Pizza Group Limited

          (E)(1)             Loan and Exchange of Stock Agreement dated December
                             23, 1993 between the Company and Crescent  Capital,
                             Inc.

          (F)(1)             Store  Trust  Agreement  dated  December  30,  1993
                             between Domino's Pizza  International  (UK) Limited
                             and DP Realty Limited

          (H)(3)             Stock Option and Incentive Plan

          (I)(2)             Unit Purchase Option

         (L)(*)(**)          International    Franchise   Systems,   Inc.   1996
                             Consultant and Advisor Stock Incentive Plan

         (M)(*)(**)          International    Franchise   Systems,   Inc.   1996
                             Non-Employee Director Stock Option Plan

         22(1)               Subsidiaries of the Issuer
---------------------

(1) Filed as an exhibit to the  Company's  Form SB-2 (File No.  33-78950)  filed
with the Commission on May 13, 1994.

(2) Filed as an exhibit to Amendment No. 1 of the Company's  Form SB-2 (File No.
33-78950) filed with the Commission on July 28, 1994.

                                       28
<PAGE>

(3) Filed as an exhibit to Amendment No. 2 to the Company's  Form SB-2 (File No.
33-78950) filed with the Commission on August 9, 1994.

(*)   Denotes Compensatory Plans
(**)   Filed herewith

(b)   Reports on Form 8-K

         December 10, 1997    Termination of Auditors

                                       29
<PAGE>

                                   SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the issuer has duly  caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.


                                     INTERNATIONAL FRANCHISE SYSTEMS, INC.



                                     By:/s/H. Michael Bush
                                              H. Michael Bush, Acting President


                                     Date:  May 7, 1998


In accordance with the requirements of the Securities Exchange Act of 1934, this
report has been signed  below by the  following  persons on behalf of the issuer
and in the capacities and on the dates indicated.

/s/H. Michael Bush                   Acting President,               May 7, 1998
H. Michael Bush                      Chief Financial Officer
                                     and Secretary (Principal
                                     Financial and Accounting
                                     Officer)


/s/Colin Halpern                     Chairman of the Board           May 7, 1998
Colin Halpern


/s/Gerald Halpern                    Executive Vice President        May 7, 1998
Gerald Halpern                       and Director

/s/Bernard Goldman                   Director                        May 7, 1998
Bernard Goldman

/s/David Coffer                      Director                        May 7, 1998
David Coffer


                                       30
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.

INDEX TO FINANCIAL STATEMENTS

Reports of Independent Auditors...........................................  F-1

Consolidated Balance Sheets at December 28, 1997 and December 29,1996.....  F-3

Consolidated Statements of Operations for the fifty-two weeks ended
December 28, 1997 and December 29, 1996...................................  F-5

Consolidated Statements of Stockholders' Equity for the
period December 31, 1995 to December 28, 1997.............................  F-6

Consolidated Statements of Cash Flows for the fifty-two weeks ended
December 28, 1997 and December 29, 1996...................................  F-7

Notes to Consolidated Financial Statements................................  F-9

                                . . . . . . . . .
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS


To the Stockholders and Board of Directors of
   International Franchise Systems, Inc.


                  We have audited the accompanying consolidated balance sheet of
International  Franchise  Systems,  Inc. and its subsidiaries as of December 28,
1997,  and the related  consolidated  statements  of  operations,  stockholders'
equity and cash flows for the  fifty-two  week period  ended  December 28, 1997.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audit.

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

                  In our opinion, the consolidated financial statements referred
to above present fairly, in all material  respects,  the consolidated  financial
position of  International  Franchise  Systems,  Inc. and its subsidiaries as of
December 28, 1997, and the  consolidated  results of their  operations and their
consolidated  cash flows for the fifty-two  week period ended December 28, 1997,
in conformity with United States generally accepted accounting principles.


                                                          ERNST & YOUNG
                                                          Chartered Accountants

Luton, England
May 7, 1998

                                      F-1

<PAGE>
                         REPORT OF INDEPENDENT AUDITOR'S


To the Stockholders and Board of Directors of
   International Franchise Systems, Inc.


                  We have audited the accompanying consolidated balance sheet of
International  Franchise  Systems,  Inc. and its subsidiaries as of December 29,
1996,  and the related  consolidated  statements  of  operations,  stockholders'
equity and cash flows for the  fifty-two  week period  ended  December 29, 1996.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audit.

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

                  In our opinion, the consolidated financial statements referred
to above present fairly, in all material  respects,  the consolidated  financial
position of  International  Franchise  Systems,  Inc. and its subsidiaries as of
December 29, 1996, and the  consolidated  results of their  operations and their
consolidated  cash flows for the fifty-two  week period ended December 29, 1996,
in conformity with generally accepted accounting principles.

                                                   MOORE STEPHENS, P.C.
                                                   Certified Public Accountants

Cranford, New Jersey
March 3, 1997


                                      F-2
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 28, 1997 AND DECEMBER 29, 1996.
<TABLE>
<CAPTION>
<S>                                                                              <C>                      <C>            
                                                                                     DECEMBER 28,             DECEMBER 29,
                                                                                          1997                    1996
Assets:
Current Assets:
   Cash and Cash Equivalents                                                     $      2,610,227         $       664,123
   Trade Accounts Receivable (Net of Allowances)                                        2,050,094               2,278,638
   Franchisee Loans                                                                       707,009               1,008,990
   Inventories                                                                          1,015,651                 865,131
   Prepaid Expenses and Other Current Assets                                               65,776                 665,521
   Due from Parent Company                                                              2,347,765               1,839,325
   Due from Officer                                                                       148,573                 125,016
   Other Receivables                                                                      611,690                  51,475
                                                                                 ----------------         ---------------

   Total Current Assets                                                                 9,556,785               7,498,219
                                                                                 ----------------         ---------------

   Property and Equipment - At Cost                                                     7,132,961               4,517,819
   Less: Accumulated Depreciation                                                       1,697,143               1,067,528
                                                                                 ----------------         ---------------

   Property and Equipment - Net                                                         5,435,818               3,450,291
                                                                                 ----------------         ---------------

Other Assets:
   Deposits                                                                               308,318                 637,562
   Intangible Assets - Net                                                              1,079,741               1,107,953
   Investment in Marketable Securities of Parent Company                                  388,072                 776,145
                                                                                 ----------------         ---------------
   Total Other Assets                                                                   1,776,131               2,521,660

   Total Assets                                                                  $     16,768,734         $    13,470,170
                                                                                 ================         ===============
</TABLE>

The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.

                                      F-3
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 28, 1997 AND DECEMBER 29, 1996.
<TABLE>
<CAPTION>
                                                                                      DECEMBER 28,           DECEMBER 29,
                                                                                          1997                   1996
<S>                                                                             <C>                       <C>            
Liabilities and Stockholders' Equity:
Current Liabilities:
   Trade Accounts Payable                                                       $       2,691,247         $     3,731,272
   Accrued Expenses and Other Payables                                                  1,858,441               1,114,416
   Taxes Payable                                                                        1,042,354                 415,771
   Obligations Under Capital Leases                                                       111,604                 217,691
   Current Portion of Long-Term Debt                                                      200,629                 321,621
   Related Party Payable                                                                       --                  29,785
                                                                                -----------------         ---------------

   Total Liabilities                                                                    5,904,275               5,830,556
                                                                                -----------------         ---------------

Long-Term Liabilities:
   Long-Term Debt                                                                       1,438,409                 392,363
   Obligations Under Capital Leases                                                        76,843                  67,877
                                                                                -----------------         ---------------

   Total Long-Term Debt                                                                 1,515,252                 460,240
                                                                                -----------------         ---------------

Minority Interest                                                                         751,087                      --

Stockholders' Equity:
   $.01 Par Value, Preferred Stock, 1,000,000 Shares Authorized,
     No Shares Issued and Outstanding                                                          --                      --

   $.01 Par Value, Common Stock - 19,000,000 Shares
     Authorized and 7,034,324 Shares Issued and Outstanding
     in 1997 and 6,727,324 in 1996                                                         70,343                  67,273

   Additional Paid-In Capital                                                           6,493,041               6,489,611

   Unrealized (Loss) on For-Sale Securities                                              (388,073)                     --
   Retained Earnings                                                                    2,148,616                 372,090

   Shares Held in Company Treasury (7,000)                                                (14,000)                     --

   Cumulative Foreign Currency Translation Adjustment                                     288,193                 250,400
                                                                                -----------------         ---------------

   Total Stockholders' Equity                                                           8,598,120               7,179,374
                                                                                -----------------         ---------------

   Total Liabilities and Stockholders' Equity                                   $      16,768,734             $13,470,170
                                                                                =================         ===============
</TABLE>
The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.

                                      F-4
<PAGE>
         INTERNATIONAL FRANCHISE SYSTEMS, INC.
         CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S>                                                                                   <C>                 <C>            
                                                                                              Fifty-two weeks ended
                                                                                        December 28,         December 29,
                                                                                           1 9 9 7              1 9 9 6
Revenue:
   Sales by Company-Owned Stores                                                      $     3,297,210     $     3,319,001
   Commissary Sales                                                                        16,943,678          12,241,320
   Royalty Fees                                                                             3,960,780           2,941,971
   Rental Income                                                                            2,227,129           1,364,434
   Franchise Fees                                                                             506,974             516,780
   Computer Sales and Other Income                                                          1,375,494             831,328
   Management Fees from Related Party                                                          49,716              25,000
                                                                                      ---------------     ---------------
Total Revenue                                                                              28,360,981          21,239,834
                                                                                      ---------------     ---------------

Cost of Sales:
   Company-Owned Stores                                                                     2,116,317           2,067,477
   Food, Packaging and Distribution                                                        14,649,036          10,796,422
   Other Operating Expenses                                                                 4,000,654           2,901,077
                                                                                      ---------------     ---------------
Total Cost of Sales                                                                        20,766,007          15,764,976
                                                                                      ---------------     ---------------

Gross Margin                                                                                7,594,974           5,474,858
                                                                                      ---------------     ---------------

General Administrative and Operating Expenses                                               5,898,080           4,330,783
Loss on Sale of Assets                                                                         67,078                  --
Depreciation and Amortization                                                                 755,916             693,201
                                                                                      ---------------     ---------------
Operating Income                                                                              873,900             450,874
                                                                                      ---------------     ---------------
Other Income (Expense):
   Interest Income from Parent Company                                                        180,576             112,776
   Interest Income                                                                            142,394              68,833
   Interest Expense                                                                          (108,977)           (118,454)
   Sale of Investment in Subsidiary                                                         2,163,038                  --
                                                                                      ---------------     ---------------
Total Other Income                                                                          2,377,031              63,155
                                                                                      ---------------     ---------------

Income Before Taxes                                                                         3,250,931             514,029
Income Taxes                                                                                  656,362                  --

Minority Interest                                                                              85,886                  --
                                                                                      ---------------     ---------------

Income from Continuing Operations                                                           2,508,683             514,029

Discontinued Operations:
   Loss from Operations and Closing Costs (Note 8)                                            162,599             653,837
                                                                                      ---------------     ---------------
Net Income (Loss)                                                                     $     2,346,084     $      (139,808)
                                                                                      ===============     ================
Earnings Per Share:
   Income from Continuing Operations After Tax and Minority Interest                              .36     $           .08
   Loss on Discontinued Operations                                                               (.02)               (.10)
                                                                                      ---------------     ---------------
   Net Income (Loss) Per Share                                                        $           .34     $          (.02)
   Weighted Average Number of Shares Outstanding                                            6,877,324           6,727,324
                                                                                      ===============     ===============

Earning Per Share Assumed Dilution:
Fully Diluted Earnings Per Share                                                                  .33                (.02)
Weighted Average Number of Shares Outstanding                                               7,056,449           6,727,324
                                                                                      ===============     ===============
</TABLE>
The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.

                                      F-5
<PAGE>
     INTERNATIONAL FRANCHISE SYSTEMS, INC.
     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                   Cumulative
                                                                                       Unrealized   Foreign
                                             Common Stock      Additional               (Loss)      Currency                   Total
                                        Number of               Paid-in     Retained  on For Sale  Translation Treasury Stockholders
                                         Shares      Amount     Capital      Earnings  Securities  Adjustments  Stock        Equity
<S>                                   <C>         <C>         <C>           <C>            <C>      <C>         <C>     <C>    
  Balance - December 31, 1995           6,727,324   $67,273     6,489,611     $511,898       --     $31,622       --     $7,100,404

Foreign Currency Translation
  Adjustment                                   --        --            --           --       --     218,778       --        218,778

Net [Loss] for the fifty-two weeks
  ended December 29, 1996                      --        --            --     (139,808)      --          --       --       (139,808)
                                        ---------  --------    ---------- ----------- ---------    --------  -------     ----------

  Balance - December 29, 1996           6,727,324   $67,273     6,489,611     $372,090             $250,400       --     $7,179,374

Issue of Shares to Domino's Pizza
International, Inc.                       300,000     3,000            --           --       --          --       --          3,000

Redeemed Employee Options                   7,000        70          3430           --       --          --       --          3,500

Unrealized gain/(loss)
On Available-for-Sale Securities               --        --            --           -- (388,073)         --       --       (388,073)

Foreign Currency Translation
  Adjustment                                   --        --            --           --               37,793       --         37,793

Minority Share of Reserves                     --        --            --     (569,558)      --          --       --       (569,558)

Purchase Shares for Treasury                   --        --            --           --       --          --  (14,000)       (14,000)

Net Income for the fifty-two weeks
  ended December 28, 1997                      --        --            --    2,346,084       --                   --      2,346,084
                                        ---------  --------    ---------- ----------- ---------    --------  -------     ----------

  Balance - December 28, 1997           7,034,324  $ 70,343    $6,493,041 $ 2,148,616 $(388,073)   $288,193  (14,000)    $8,598,120
                                        =========  ========    ========== =========== =========    ========  =======     ==========
</TABLE>

The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.
                                      F-6
<PAGE>
         INTERNATIONAL FRANCHISE SYSTEMS, INC.
         CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                              Fifty-two weeks ended
                                                                                        December 28,         December 29,
                                                                                           1 9 9 7              1 9 9 6
Operating Activities:
<S>                                                                                   <C>                 <C>            
   Net Income (Loss) Before Minority Interest After Tax                               $     2,655,935     $       514,029
                                                                                      ---------------     ---------------
   Adjustments to Reconcile Net Income (Loss) to Net Cash (Used for) Provided by
     Operating Activities:
     Depreciation and Amortization                                                            921,342             917,546
     Gain on Sale of Subsidiary Stock                                                      (2,163,038)                 --
     Recovery of Bad Debts                                                                         --             (46,230)
     (Loss) on Disposal of Property and Equipment                                              67,078            (306,057)
   Changes in Assets and Liabilities:
     (Increase)/Decrease in:
       Trade Accounts and Other Receivables                                                   530,525             (61,787)
       Inventories                                                                           (150,520)           (174,788)
       Prepaid Expenses and Accrued Income                                                    599,745            (327,587)
       Other Assets                                                                          (230,971)           (206,176)
     Increase (Decrease) in:
       Trade Accounts Payable                                                              (1,040,025)            320,797
       Accrued Expenses                                                                       744,025             355,198
       Other Payables and Accrued Interest                                                         --             129,026
       Taxes Payable                                                                          626,583              79,244
                                                                                      ---------------     ---------------

     Net Cash Provided by Continuing Operations                                             2,560,679           1,193,215
                                                                                      ---------------           ---------
     Net Cash (Used) by Discontinued Operations                                              (223,965)           (653,837)
                                                                                      ----------------           ---------
   Net Cash - Operating Activities - Forward                                                2,336,714             539,378
                                                                                      ---------------     ---------------

Investing Activities:
   Proceeds from Sale of Subsidiary Stock                                                   3,125,063                  --
   Purchase of Property and Equipment and Capitalized Costs                                (3,253,569)         (1,294,141)
   Cost of Disposal of Subsidiary Stock                                                      (664,873)                 --
   Proceeds on Disposal of Property and Equipment                                             390,542             700,855
   Advances to Officer                                                                       (125,557)                 --
   Payments by Officer                                                                        102,000               9,135
   Advances to Parent Company                                                              (1,329,815)         (1,025,040)
   Payments by Parent Company                                                                 821,385             801,000
   Payments/Advances to Related Parties                                                       (29,785)            (20,000)
   Payments by Related Parties                                                                     --             228,520
   (Increase) Decrease in Restricted Cash                                                          --             200,000
   Purchase of Intangible Assets                                                              (82,708)            (64,223)
                                                                                      ----------------    ----------------
   Net Cash - Investing Activities - Forward                                               (1,047,317)           (463,894)
                                                                                      ----------------    ---------------

Financing Activities:
   Proceeds from Sale of Common Stock                                                           6,500                  --
   Purchase Shares for Treasury Stock                                                         (14,000)                 --
   New Bank Loans                                                                           1,475,914             187,920
   Repayment of Debt                                                                         (550,860)           (281,504)
   Capital Lease Payments                                                                     (97,121)           (213,178)
                                                                                      ----------------    ---------------
   Net Cash - Financing Activities - Forward                                          $       820,433     $      (306,762)
</TABLE>

The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.

                                      F-7
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                              Fifty-two weeks ended
                                                                                        December 28,         December 29,
                                                                                           1 9 9 7              1 9 9 6
<S>                                                                                   <C>                 <C>            
   Net Cash - Operating Activities - Forwarded                                        $     2,336,714     $       539,378

   Net Cash - Investing Activities - Forwarded                                             (1,047,317)           (463,894)

   Net Cash - Financing Activities - Forwarded                                                820,433            (306,762)

   Effect of Exchange Rate Changes on Cash                                                   (163,726)             55,486
                                                                                      ----------------    ---------------

   Net Increase (Decrease) in Cash and Cash Equivalents                                     1,946,104            (175,792)

   Cash and Cash Equivalents - Beginning of Periods                                           664,123             839,915
                                                                                      ---------------     ---------------

   Cash and Cash Equivalents - End of Periods                                         $     2,610,227     $       664,123
                                                                                      ===============     ===============

Supplemental Disclosures of Cash Flow Information:
   Cash paid during the periods for:
     Interest                                                                         $       108,977     $        50,904
     Income Taxes                                                                     $            --     $            --

Supplemental Disclosures of Non-Cash Investing and Financing Activities:
   Acquisition of Equipment Under Capital Lease                                       $        84,696     $        81,719
   Receipt of Parent Company Stock in Payment of Related Party
     Note for Assignment of Consulting Agreements                                     $            --     $       776,145
   Write Down of Parent Company Stock to Market                                       $       388,073     $            --
</TABLE>

The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.

                                      F-8
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Organization and Business

Corporate  Structure  -  International   Franchise  Systems,  Inc.  ("IFS")  was
incorporated  in  Delaware  on October  22,  1993.  IFS owns 85% of the stock of
Domino's Pizza Group Limited ("DP Group"),  a United Kingdom ("UK")  corporation
headquartered in Milton Keynes,  England.  DP Group owns 100% of the stock of DP
Realty  Limited  ("DP  Realty"),   DPGS  Limited   ("DPGS"),   Livebait  Limited
("Livebait"),  and  DP  Group  Developments  Ltd.,  each a UK  corporation  with
headquarters at Milton Keynes, England.

Since  December  1993,  IFS has been a  subsidiary  of  Crescent  Capital,  Inc.
("Crescent"),  a Delaware  corporation.  Crescent  trades  publicly  on the NASD
Electronic  Bulletin Board under the symbol CRCI. At December 28, 1997, Crescent
owned 67% of the  Company's  common  stock while the  remaining  33% is publicly
traded.

Crescent was  incorporated  in January 1991 for the purpose of seeking  business
ventures,   either  through  the  acquisition  of  existing  businesses  or  the
acquisition of assets to establish subsidiary businesses.  Since its acquisition
of IFS,  Crescent's  operations  have consisted  substantially  of the Company's
operations.

Description  and  Nature of  Business  - The  principal  purpose  of IFS and its
wholly-owned subsidiaries (collectively referred to as the "Company") is to be a
holding company for the exclusive right to own,  operate and franchise  Domino's
Pizza Stores in the U.K., and the Republic of Ireland (the "Territory") pursuant
to  a  Master  Franchise   Agreement  ("MFA")  (See  Note  17A).  The  Company's
multi-national  operations include the ownership and operation of Domino's Pizza
Stores,  the  sale of  commissary  food  products,  supplies  and  equipment  to
franchisees  and the  development  of new  franchises.  As of December 28, 1997,
there  were 154  stores  operating,  143 of which  were  franchised  and 11 were
Company-owned.  As of December 29, 1996, there were 127 stores operating, 116 of
which were franchised and 11 were Company-owned.

(2) Summary of Significant Accounting Policies

Cash and Cash  Equivalents - Cash  equivalents  are comprised of certain  highly
liquid investments with a maturity of three months or less when purchased.

Accounts  Receivable  -  Substantially  all  accounts  receivable  are due  from
franchisees  for commissary and small wares  equipment  purchases and royalties.
Credit  is  extended  based  on an  evaluation  of  the  franchisee's  financial
condition. The Company has a security interest in the franchise stores and their
assets as collateral.  The Company considers its accounts receivable to be fully
secured.

Franchisee  Loans -  Franchisee  loans  consist  of  loans  issued  for in store
computer purchases,  new loans for equipment  purchases,  or loans acquired from
Dominos Pizza International, Inc. which were issued to the original franchisees.
The Company has a security  interest in the franchise stores and their assets as
collateral. The Company considers their franchisee loans to be fully secured.

Inventories  -  Inventories,  which  consist  primarily  of  food  products  and
equipment for resale to franchises,  are stated at the lower of cost, determined
by the first-in, first-out basis or market value.

Property and Equipment and  Depreciation  - Property and equipment are stated at
cost. Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the assets,  which range from 3 to 7 years.  Leasehold
improvements are amortized using the straight-line method over the lesser of the
term of the related lease or the estimated useful lives of the improvements.

Master Franchise  Agreement - The MFA is stated at cost that includes associated
professional  costs.  One-third of the cost of the MFA has been allocated to the
exclusive development rights under the MFA

                                      F-9
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2

(2) Summary of Significant Accounting Policies (Continued)

and is being  amortized  over a  ten-year  period and the  expiring  date of the
agreement is the year 2003. The remaining  two-thirds of the cost of the MFA has
been allocated to the right to operate as sub-franchisor in the Territory and is
being  amortized  over  a  twenty-year  period.  Amortization  expense  for  the
fifty-two  weeks ended  December  28, 1997 and December 29, 1996 was $79,559 and
$72,000, respectively (See Note 17A).

Consulting  Agreements  -  The  Company  had  entered  into  various  consulting
agreements  which  were being  amortized  over the life of the  agreements.  The
Company assigned these assets to Woodland Limited  Partnership  ("Woodland"),  a
related  party,  at their  net book  value on April  1,  1996  (See  Note  17C).
Amortization  expense  for the  fifty-two  weeks  ended  December  28,  1997 and
December 29, 1996 was $-0- and $51,563, respectively.

Rights to Store  Leases - The rights to store  leases are stated at cost and are
being amortized over a ten-year period (the average length of the remaining term
under the leases) under the straight-line  method.  Amortization expense for the
fifty-two  weeks ended  December  28, 1997 and  December 29, 1996 is $14,419 and
$13,439, respectively.

Store Franchise Agreement - The Store Franchise Agreement represents the cost of
the franchise fees paid for  corporate-owned  stores.  The cost of the franchise
fees range from $4,650 to $12,400 per store.  These costs are amortized over the
term of the franchise agreements,  which is ten years.  Amortization expense for
the fifty-two  weeks ended December 28, 1997 and December 29, 1996 is $8,306 and
$7,210, respectively.

Store  Development  Costs - Store development  costs,  which represent  expenses
incurred before a new store opens,  including design and construction costs, are
amortized on a straight-line  basis over three years.  Amortization  expense for
the fifty-two  weeks ended December 28, 1997 and December 29, 1996 is $7,345 and
$30,075, respectively.

Goodwill -  Goodwill  represents  the  excess of the price paid for a  corporate
store  over the fair  value  attributed  to the  assets  acquired,  and is being
amortized using the straight-line  method over ten years.  Amortization  expense
for the fifty-two  weeks ended December 28, 1997 and December 29, 1996 is $1,293
and $1,253, respectively.

Marketable Securities - Statement of Financial Accounting Standards ("SFAS") No.
115 addresses the accounting and reporting for investments in equity  securities
that have  readily  determinable  fair  values and for all  investments  in debt
securities.   Those   investments   are  classified  into  the  following  three
categories:   held-to-maturity   debt  securities;   trading   securities;   and
available-for-sale securities.

Management determines the appropriate  classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date.  Debt securities for which the Company does not have
the intent or ability to hold to maturity are  classified as available for sale,
along with the Company's  investment in equity securities.  Securities available
for sale are  carried  at fair  value,  with any  unrealized  holding  gains and
losses,  net of tax,  reported in a separate  component of shareholders'  equity
until realized.  Trading  securities are securities  bought and held principally
for the purpose of selling them in the near term and are reported at fair value,
with  unrealized  gains and losses  included in operations for the current year.
Held-to-maturity  debt  securities are reported at amortized cost. The Company's
investments  at December  28, 1997  consisted of equity  securities  in Crescent
which are  classified  as available  for sale and were stated at estimated  fair
value (See Note 11).

                                      F-10
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3

(2) Summary of Significant Accounting Policies (Continued)

Revenue  Recognition - Revenue from commissary sales is recognized upon shipment
of  products  and  company-owned  store sales are  recognized  at point of sale.
Franchise fees consist of initial  franchise fees which are recognized in income
when the Company has substantially completed its obligations under the franchise
agreement.  This  generally  occurs upon the opening of a franchise  location at
which time the Company has completed its  obligation to assist with the location
and design of the new store and the  training of staff.  Royalty fees are earned
on sales by franchisees  and is recognized as revenue when the related sales are
made. Rental income, which consists of rent paid under subleases (See Note 7) is
recognized  ratably  over the lease  period.  Other  operating  income  consists
primarily of computer system sales which is recognized at point of installation.

Advertising Costs - Advertising costs are expensed as incurred and are offset by
a fee of 4% of royalty sales by  franchisees,  which amount must be spent on the
franchise's behalf for various advertising programs. If advertising costs exceed
the fees received at a given point,  a receivable to the  franchisor is recorded
from the franchisee on the Company books for the amounts still due. Similarly if
at a given point,  more fees are received than have been expended,  a payable to
the  franchisee  is recorded.  This amount is included in other  receivables  or
other payables.

Principles of Consolidation - The consolidated  financial statements include the
accounts of the  Company  and its  wholly-owned  subsidiaries.  All  significant
intercompany accounts and transactions have been eliminated.

Earnings  (Loss) Per Share - Earnings  (loss) per share of common stock is based
on the  weighted  average  number of common  shares  outstanding  for the period
presented.  Common stock  equivalents are included in the computation when their
effect  is  considered  dilutive.  Fully  diluted  earnings/(loss)  per share is
calculated  in  accordance  with  FAS128,  taking into account the impact of any
additional  common  stock  that  would  have been  outstanding  if the  dilutive
potential common stock had been issued.

Foreign Currency Translation - The functional currency for the Company's foreign
operations is the British pound  sterling.  The  translation  from British pound
sterling into U.S. dollars is performed for balance sheet accounts using current
exchange  rates in effect at the balance  sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period.  The gains or
losses  resulting from such  translation are included in  stockholders'  equity.
Equity  transactions  denominated in British pound sterling have been translated
into U.S. dollars using the effective rate of exchange at date of issuance.

Impairment  - Certain  long-term  assets of the  Company  are  reviewed at least
annually as to whether their  carrying  value has become  impaired,  pursuant to
guidance  established  in  SFAS  No.  121,  "Accounting  for the  Impairment  of
Long-Lived Assets."  Management  considers assets to be impaired if the carrying
value  exceeds  the  future   projected  cash  flows  from  related   operations
(undiscounted and without interest  charges).  If impairment is deemed to exist,
the assets will be written down to fair value or projected discounted cash flows
from  related   operations.   Management  also   re-evaluates   the  periods  of
amortization to determine whether  subsequent  events and circumstances  warrant
revised estimates of useful lives. As of December 28, 1997,  management  expects
these assets to be fully recoverable.

Stock Options Issued to Employees - The Company  adopted SFAS No. 123 on January
1, 1996 for financial  note  disclosure  purposes and will continue to apply the
intrinsic value method of Accounting Principles Board ("APB") Opinion No. 25 for
financial reporting purposes.

Use of Estimates - The  preparation of financial  statements in conformity  with
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

                                      F-11
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4

(2) Summary of Significant Accounting Policies (Continued)

financial  statements and the reported  amounts of revenues and expenses  during
the reporting period. Actual results could differ from those estimates.

Reclassification  - Certain items in the prior year's financial  statements have
been reclassified to conform with the current year's presentation.

(3) Significant Risks and Uncertainties

(A)  Concentrations of Credit Risk - Cash - The Company had  approximately  $1.9
million on deposit at National  Westminster  Bank,  Plc, a U.K. bank at December
28, 1997.  Neither the bank nor the UK government  insures the deposits  under a
program similar to the Federal  Deposit  Insurance  Corporation.  Thus, the $1.9
million is subject to loss due to credit  risk.  The  Company  does not  require
collateral in relation to cash credit risk.

(B) Concentrations of Credit Risk - Receivables - The Company routinely assesses
the financial  strength of its franchisees  and, based upon factors  surrounding
the credit risk of its franchisees,  establishes an allowance for  uncollectible
accounts and, as a  consequence,  believes that its accounts  receivable  credit
risk  exposure  beyond such  allowances  is limited.  The Company has a security
interest  in  franchised   stores  and  their  assets  are  collateral  for  the
receivable.

(C) DPII  Relationship  - Due to the  nature of  franchising  and the  Company's
agreements  with DPII,  the success of the Company is in part dependent upon the
overall success of DPII,  including DPII's financial  condition,  management and
marketing  success,  and the  successful  operation  of  stores  opened by other
franchisees.

(D) Potential Loss of Exclusive Development Rights - The Company's business plan
is dependent on its exclusive development rights under the MFA. The MFA requires
that the Company have opened and operating a minimum  number of Domino's  stores
in accordance with a specified  yearly  schedule.  The Company was obligated for
the year ended December 28, 1997 to have a total of 146 delivery  stores opened.
As of that date, the Company had 154 stores  opened,  of which 148 were delivery
stores, including 11 of which were Company owned. There can be no assurance that
the  Company  will be  successful  in  opening  the  number of  Domino's  Stores
required,  or that new Domino's  stores opened by the Company or its franchisees
will be operated  profitably.  Furthermore,  there can be no assurance  that the
Company will be able to renew the MFA beyond  December  31, 2006.  If the MFA is
not renewed, the Company would lose its exclusive development rights.

(E) Operations in a Foreign Country - The Company is subject to numerous factors
relating  to  conducting  business  in a  foreign  country  (including,  without
limitation,  economic,  political and currency risks), any of which could have a
significant impact on the Company's operation.

The  Company's  U.K.  operating  subsidiary,   DP  Group,  is  subject  to  U.K.
corporation tax on its profits.  The Company has used and expects DP Group to be
able to  continue  to use  the tax  loss  carryforwards  previously  held by its
predecessor  and  carried  over to DP Group to  offset  some of its  future  tax
payments. However, there can be no guarantee that DP Group will be profitable to
be able to continue to use the carryforward tax losses.

Currently,  DP Group's operations are subject to the laws and regulations of the
Territory and the European Union,  including such laws and regulations  relating
to antitrust and trade regulation.  The failure by DP Group to comply with these
laws may cause the Company to be unable to enforce its franchise agreements with
franchisees. The Company and its franchisees are also subject to U.K. government
and local  laws and  regulations  generally.  Store  operations  are  subject to
health,  sanitation,  employment and safety  standards  imposed by the European,
national and local authorities. These

                                      F-12
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5

regulations and any new laws and regulations could have a significant  financial
impact on the operation of the Company owned and franchised stores.

(4) Property and Equipment

The following details the composition of property and equipment:
<TABLE>
<CAPTION>
                                                                Cost           Depreciation            Net
<S>                                                        <C>               <C>                <C>           
Land and Buildings                                         $    2,079,183    $         1,522    $    2,077,661
Equipment, Fixtures and Furnishings                             2,473,404          1,074,573         1,398,831
Capital Leases                                                    710,479            298,520           411,959
Leasehold Improvements                                          1,745,603            265,793         1,479,810
Motor Vehicles                                                    124,292             56,735            67,557
                                                           --------------    ---------------    --------------
   Totals                                                  $    7,132,961    $     1,697,143    $    5,435,818
                                                           ==============    ===============    ==============
</TABLE>

Depreciation  expense  for the  fifty-two  weeks  ended  December  28,  1997 and
December 29, 1996 was $810,422 and $533,195, respectively.

(5) Intangible Assets

Intangible assets, at December 28, 1997, consists of the following:
<TABLE>
<CAPTION>
                                                                                Write-offs
                                                             Accumulated            and
                                           Cost             Amortization        Assignments            Net
<S>                                    <C>                 <C>               <C>                <C>           
Master Franchise Agreement             $    1,200,698      $      320,183    $            --    $      880,515
Rights to Store Leases                        144,188              41,509                 --           102,679
Store Franchise Agreement                      49,362               6,754                 --            42,608
Store Development                              79,675              31,871              3,535            44,269
Goodwill                                       13,163               3,493                 --             9,670
                                       --------------      --------------    ---------------    --------------

   Totals                              $    1,487,086      $      403,810    $         3,535    $    1,079,741
                                       ==============      ==============    ===============    ==============
</TABLE>

(6) Long-Term Debt

Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                                                    December 28,
                                                                                       1 9 9 7
<S>                                                                               <C>      
Note Payable to Domino's Pizza International, Inc. for the
   Master Franchise Agreement                                                     $            --
Loans Payable to National Westminster Bank                                              1,639,038
                                                                                  ---------------

Total                                                                                   1,639,038
Less:  Current Portion                                                                    200,629

   Long-Term                                                                      $     1,438,409
                                                                                  ===============
</TABLE>

                                      F-13
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6

(6) Long-Term Debt (Continued)

The  note  payable  to  Domino's  Pizza  International,  Inc.  for  the  MFA was
originally  for  $650,000  of which  $300,000  was paid on January  17, 1995 and
$350,000  is  payable  in  installments  of  approximately  $29,000  for  twelve
consecutive  quarters beginning on January 1, 1995, with interest at the rate of
8% per annum payable on the installment  dates.  Total  installment  payments of
$116,667 were made as of December 28, 1997.  The note has been  completely  paid
off.

The Company has various loans payable to National  Westminster  Bank ("NatWest")
of $1,639,038 at December 28, 1997.  The loans are payable over terms of 3 to 15
years in aggregate monthly  installments of approximately  $25,950.  Interest on
one loan is 9.75% per annum and the second loan  carries  interest at 9.875% per
annum while the other  loans bear  interest at the bank's base rate plus 3%. The
Company  has  secured a 15-year  mortgage  on the  purchase  of land for the new
commissary. This loan carries an interest rate of 8.75%. The bank's base rate at
December 28, 1997 was 5.5%. The obligations to NatWest are secured by all of the
assets  of  DP  Group,  DP  Realty,   DPGS,  and  DP  Group   Developments  Ltd.
Additionally,  the  Chairman  of the  Company has  personally  guaranteed  these
obligations to a maximum of approximately $42,000.

The following are maturities of long-term debt for the next fourteen years:

  December
   1998                                                              $   200,629
   1999                                                                  218,183
   2000                                                                  200,087
   2001                                                                  138,214
   2002                                                                   85,540
   Over 2002                                                             796,385
                                                                      ----------
   Total                                                              $1,639,038
                                                                      ==========

(7) Leases

The Company is the lessee of motor  vehicles and equipment  under capital leases
expiring in various years through 1999. The assets and liabilities under capital
leases are  recorded at the present  value of the minimum  lease  payments.  The
assets are  depreciated  over the shorter of their  related lease terms or their
estimated productive lives.

Depreciation  of assets held under  capital  leases is included in  depreciation
expense.

Following  is a summary of property  held under  capital  leases at December 28,
1997:

Equipment and Motor Vehicles                         $        710,479
Less:  Accumulated Depreciation                               298,520
                                                     ----------------

   Net                                               $        411,959
                                                     ================

                                      F-14
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7

 (7) Leases (Continued)

Minimum  future lease  payments under capital leases as of December 28, 1997 for
each of the next five years and in the aggregate are:
<TABLE>
<CAPTION>
Year Ended
December                                                                  Amount
<S>                                                                       <C>    
    1998                                                                       111,604
    1999                                                                        79,692
    2000                                                                        21,460
    2001                                                                            --
    2002                                                                            --
    Subsequent to 2002                                                              --
                                                                       ---------------
    Total Minimum Lease Payments                                           $   212,756
    Less:  Amount Representing Interest                                         24,308
                                                                       ---------------

    Present Value of Net Minimum Lease Payment                         $       188,448
                                                                       ===============
</TABLE>

Interest rates on capitalized leases vary from 3% to 8% and are imputed based on
the lower of the Company's  incremental  borrowing rate at the inception of each
lease or the lessor's implicit rate of return.

The Company has a one-year  operating  lease for its U.S. office that expires on
June 30, 1998 and is renewable year-to-year.

The Company leases land and buildings, office equipment and motor vehicles under
operating leases expiring in various years through 2022.

The Company leases store properties directly,  through a subsidiary,  DP Realty,
and then  subleases the  properties to  franchisees.  At December 28, 1997,  the
Company had operating leases for  approximately  115 stores with periods ranging
from 10 to 25  years,  of which  108  were  also  subject  to  subleases  to the
franchisees and the balance are used for Company-owned stores. The subleases are
for an initial ten year period,  consistent with the franchisee  period,  with a
subsequent ten year renewal period. Total minimum future rental income, as shown
below,  from  subleases  to be  received  in  the  future  under  non-cancelable
subleases  assumes the  subleases  are for the  initial  ten year  period  only,
although the Company  believes  that the  franchisees  will exercise the renewal
option on substantially all subleases. Also included below is the minimum future
rental  payments and sublease  rental income for the building  where the Pizzazz
restaurant was located (See Notes 8 and 17D).

Minimum future rental payments and sublease  rental income under  non-cancelable
operating leases and subleases,  respectively,  having remaining terms in excess
of one year as of  December  28, 1997 for each of the next five years and in the
aggregate are as follows:
<TABLE>
<CAPTION>
                                                                            Operating
Year ending                                                                  Leases         Subleases
December
<S>                                                                      <C>               <C>      
    1998                                                                     2,857,008         2,518,138
    1999                                                                     2,823,414         2,510,323
    2000                                                                     2,781,389         2,481,186
    2001                                                                     2,682,864         2,467,131
    2002                                                                     2,654,706         2,467,131
    Subsequent to 2002                                                      21,056,121        19,657,529
                                                                       ---------------  ----------------
    Total Minimum Future Rentals                                       $    34,855,502  $     32,101,438
                                                                       ===============  ================
</TABLE>

                                      F-15
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8

(7) Leases (Continued)

Rent expense for the  fifty-two  weeks ended  December 28, 1997 and December 29,
1996 was $2,354,765 and $1,889,624,  respectively. The rental income received on
subleases for the fifty-two  weeks ended December 28, 1997 and December 29, 1996
was $2,227,129 and $1,639,953, respectively.

(8) (A) Discontinued Operations - Pizzazz Concept

On May 31,  1996,  the  Company's  Board of  Directors  approved  the  Company's
recommendation  to discontinue  the  development of the Pizzazz  concept and the
operation of the Pizzazz restaurant.  The primary purpose for the closure of the
restaurant  and the  cessation  of the  concept  development  was to ensure that
management's  time was not  redirected  from the primary focus of developing the
Domino's  brand and  delivery  store  franchise  network.  On June 3, 1996,  the
Company closed the restaurant.  The Company  continues to have an obligation for
the property under the lease that expires in fifteen years. The Company has been
able to  secure a  subtenant  for the  property  beginning  in April  1997.  The
sublease runs concurrent with the Company's  lease. The income from the sublease
is  approximately  $130,000.  The  annual  cost of the  lease  is  approximately
$87,000.

The results of operations of Pizzazz were treated as discontinued  operations in
the  accompanying  financial  statements  and are  presented  net of any related
income tax expense.  The prior year results of operations  and statement of cash
flows have been  reclassified  to conform to this  method of  presentation.  The
discontinued  Pizzazz  concept had net property and  equipment of $575,671 as of
December 28, 1997. These assets have been reclassified as rental assets from the
start of the sublease agreement.  The loss from discontinued operations consists
of:
<TABLE>
<CAPTION>
                                                                               1997                 1996
                                                                       ------------------    -----------
<S>                                                                    <C>              <C>             
Revenues                                                               $        96,250  $        103,874
Cost of Sales                                                                       80           170,583
Operating Expenses                                                             248,919           429,362
Estimated Closing Costs                                                             --           135,270
                                                                       ---------------  ----------------
Net Before Taxation Effects                                            $      (152,749) $       (631,341)
The taxation benefit from the losses was:                                       41,853                --
                                                                       ---------------  ----------------

Total                                                                         (110,896)         (631,341)
                                                                       ================ =================
</TABLE>

The  Company  is  obligated  under a  15-year  lease on the  building  where the
restaurant was located.  However it is  anticipated  that a sublease will offset
these expenses (See Note 17D).

(8) (B) Discontinued Operations -Haagen Dazs

In August 1995, the Company  entered into an agreement with an unrelated  entity
to  purchase  all of the assets and  operating  rights of three  Haagen Dazs ice
cream parlors for approximately $140,000. The Company,  however, sold one Haagen
Dazs parlor back to the master  franchisor in the UK because the Company  feels,
at this time, that  management's  attention and resources must be focused on the
core business of delivery  pizza  stores.  The Company sold the other two Haagen
Dazs units in December 1997. The results of operations for the Haagen Dazs units
have been  treated as  discontinued  operations  for the  fifty-two  weeks ended
December 28, 1997:

                                      F-16
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9

<TABLE>
<CAPTION>
                                                                             1997              1996
                                                                       ---------------  ----------------
<S>                                                                    <C>              <C>             
Revenues                                                               $       816,158  $      1,532,361
Cost of Sales                                                                  551,732           967,653
Operating Expenses                                                             335,642           587,204
                                                                       ---------------  ----------------
Net Before Taxation Effects                                            $       (71,216)  $       (22,496)
---------------------------
The taxation benefit from the losses was:                                       19,513                --
                                                                       ---------------  ----------------

Total                                                                          (51,703)          (22,496)
                                                                       ================ =================
</TABLE>

The Statements of Operations and Cash Flows for the year ended December 29, 1996
has been  reclassified  to reflect  the  treatment  of the Haagen Dazs income as
discontinued operations.

 (9) Fair Value of Financial Instruments

Generally  accepted  accounting  principles require disclosing the fair value of
financial  instruments to the extent practicable for financial instruments which
are  recognized  or  unrecognized  in the balance  sheet.  The fair value of the
financial instruments disclosed herein is not necessarily  representative of the
amount  that  could be  realized  or  settled,  nor does the fair  value  amount
consider the tax consequences of realization or settlement.

In assessing the fair value of these financial  instruments,  the Company used a
variety of methods  and  assumptions,  which were based on  estimates  of market
conditions and risks existing at that time. For certain  instruments,  including
cash and cash  equivalents,  trade  receivables  and trade  payables and officer
advances,  it was estimated that the carrying amount approximated fair value for
the  majority  of these  instruments  because  of their  short  maturities.  For
long-term investment in marketable securities,  fair value is estimated based on
current quoted market price.

Management  estimates  that the carrying  value of its long-term  debt,  related
party debt and amounts due from parent  approximate  its fair value  because the
applicable interest rates approximates the current market rates.

(10) Related Party Transactions

Woodland Limited Partnership ("Woodland") is a partnership controlled by members
of Mr. Colin Halpern's  family.  Mr. Halpern is the Chairman of the Board of the
Company.

As of December 28, 1997, Woodland owns 92% of the shares of Crescent.

As  of  December  28,  1997,  Crescent  owns  4,700,000  restricted  shares,  or
approximately  67%,  of IFS's  outstanding  stock.  As a result  of the  capital
structures of the Company and Crescent,  Woodland has indirect voting control of
the  Company  and,  consequently,  can  elect  the  Company's  entire  Board  of
Directors,  determine the vote on any matter submitted for shareholder  approval
(including increasing the Company's authorized capital stock and authorizing any
merger, sale of assets or dissolution of the Company),  and,  generally,  direct
the affairs of the Company.

The  Company has  advanced  funds to  Crescent.  These funds are to be paid on a
short-term basis and are interest  bearing at 8% per annum beginning  January 1,
1996.  At December 28, 1997,  the total amount due to the Company from  Crescent
was $2,347,765 including accrued interest of $352,590. At December 29, 1996, the
balance due from Crescent was $1,839,325 including accrued interest of $172,014.
Interest income was $180,576 for the fifty-two weeks ended December 28, 1997 and
$112,776  for  December 31,  1996.  In December  1997,  the Company and Crescent
renegotiated  the payment terms for the short-term  advances.  A promissory note
was executed and collateralized with the 

                                      F-17
<PAGE>
INTERNATIONAL  FRANCHISE SYSTEMS,  INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10

(10) Related Party Transactions (Continued)

pledge of IFS shares to secure the monies  due.  For the  fifty-two  weeks ended
December 29, 1996, the Company  charged  Crescent a management fee of $5,000 for
administrative  services which was included in Other Operating Income. There was
no management fee paid in 1997.

Mr. Halpern is the President and Chairman of the Board of Red Hot Concepts, Inc.
("Red Hot"). The Chief Financial  Officer of International  Franchise Systems is
also the Chief  Financial  Officer of Red Hot.  The charge for his  services  is
allocated between the two companies.

The Company has advanced funds to Mr.  Halpern.  At December 28, 1997, the total
amount due to the Company is approximately $148,573. This amount is being offset
through reimbursements due to Mr. Halpern.

Mr. Halpern's son is an attorney with a law firm that provides legal services to
the Company. Legal expense incurred with this firm for the fifty-two weeks ended
December 28, 1997 was $135,108.

(11) Investment in Marketable Securities of Parent Company

In September 1996, the Company received from Woodland, 51,743 shares of Crescent
Class A Common  Stock in payment of  Woodland's  interest  bearing  note for the
assignment  of the three  consulting  agreements  (See Note  17C).  The  Company
classifies its investment in Crescent as available for sale securities  pursuant
to SFAS No. 115.  The number of shares to be received in payment of the Woodland
loan of $776,145,  was estimated using the market value of Crescent's  shares on
the open market. The Company's intention is to hold these securities for a least
a twelve  month  period.  The Company has written down the value of the Crescent
shares by $388,073 to the estimated market value as of December 28, 1997.

(12) Income Taxes and Provision for Income Taxes
<TABLE>
<CAPTION>
                                                                             1997            1996
                                                                                $               $
The current year taxation charge consists of the following:
<S>                                                                    <C>                     <C>
Continuing Operations
- United States                                                                182,000                 0
- United Kingdom                                                               474,362                 0
                                                                       ---------------  ----------------
                                                                              $656,362                $0

Discontinued Operations
- United States                                                                      0                 0
- United  Kingdom                                                              (61,366)                0
                                                                       ---------------- ----------------
                                                                              $(61,366)               $0

Total Income Tax Charge                                                       $594,996                $0
                                                                       ===============  ================
</TABLE>

Rate Reconciliation:

The following is an analysis of the differences  between United States statutory
income tax rate and the Company's effective tax rates on continuing operations.

                                      F-18
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11

(12) Income Taxes and Provision for Income Taxes (Continued)
<TABLE>
<CAPTION>
                                                                                 %
<S>                                                                       <C> 
United States statutory income tax rate                                             35.0
Permanent differences                                                                5.1
Utilization of net operating losses carried forward
of UK operations                                                                    (4.3)
Net US operating losses utilized against extraordinary income                       11.8
Other operating unprovided timing differences                                       (1.9)
Difference in effective tax rate of UK operations                                    1.9
                                                                       -----------------
Effective tax rate on continuing activities                                         20.2
                                                                       =================
</TABLE>

Pursuant to United  States tax laws,  if the  Company's  subsidiaries  organized
under the laws of the UK are not  engaged  in  business  in the  United  States,
profits of such  subsidiaries  will not be subject  to United  States  taxation,
until  distributed  as dividends.  The Company  however,  would receive a credit
against its UK federal income tax liability that would otherwise result from any
distributions  from its  subsidiaries  for any UK corporate taxes paid by its UK
subsidiaries on these distributions,  as well as for any UK dividend and royalty
withholding taxes imposed directly on the Company.

The Company through its UK subsidiary is a tax payer in the United Kingdom.  The
Company's  estimated tax liability for the 1997 tax year is $413,000.  There are
tax losses  available to  carryforward  indefinitely  against  future UK profits
amounting to $210,980.

(13) Gain on Sale of Portion of Investment in Subsidiary
<TABLE>
<CAPTION>
<S>                                                                          <C>                       <C>
                                                                             1997               1996
                                                                       ---------------- ----------------
Profit on Sale of 15% of the
investment in Domino's Pizza Group (UK)                                      2,163,038                 0
Taxation Thereof                                                              (182,000)                0
                                                                       ---------------- ----------------
Gain After Taxation                                                          1,981,038                 0
                                                                       ===============  ================
</TABLE>

$1.1 million of net  operating  losses  brought  forward in the US were utilized
against this income for taxation purposes.

(14) Stock Transactions

On December 30, 1994, the Company completed the first phase of an initial public
offering (the "Offering") of its common stock. The Company sold 1,017,681 units,
each unit  consisting of one share of common stock and two common stock purchase
warrants,  at an initial public offering price of $5 per unit. Net proceeds from
the first phase of the Offering (after deducting the  underwriting  discounts of
$585,167 and expenses of $883,673)  were  $3,619,565.  On January 17, 1995,  the
Company  completed the second phase of its initial  public  offering and sold an
additional  59,643  units.  Net  proceeds  from these  additional  units  (after
deducting  the  underwriting  discounts of $76,210 and expenses of $44,855) were
$177,150.  Additional  costs for both the first and second phase relating to the
offering of $244,831 were paid during 1995 reducing paid-in capital.

On May 12, 1995,  the Company  issued  237,500  shares of common stock valued at
$350,000 in connection with entering into a four year consulting agreement.

On June 5, 1995,  the Company  issued  237,500  shares of common stock valued at
$475,000 in  connection  with entering  into a five year  consulting  agreement.

                                      F-19
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12

(14) Stock Transactions (Continued)

During October 1995, the Company issued 475,000 shares of common stock valued at
$1,900,000  and received cash of  $1,781,250 in connection  with entering into a
five year consulting agreement (See Notes 11 and 17C).

During July 1997,  the Company issued 300,000 shares of common stock valued at a
market price of $300,000 to DPII with put/call  provisions that can be exercised
in May 2001 at a cost of $1.2 million.  This was in connection to a modification
of the franchise  agreement  that altered the royalty rate,  store opening costs
and development  schedule.  This was recorded on the Company's books and records
at a par value of $3,000 (See Note 17A).

In December 1997,  three  employees of the Company who were issued share options
under the 1997 Stock Plan,  exercised their options. The Company purchased these
shares (7,000) as Treasury Stock.

(15) Stock Options and Warrants

(A)  Stock  Options  - In  order  to  attract,  retain  and  motivate  employees
(including officers), directors and consultants who perform substantial services
for or on  behalf  of the  Company,  the  Company  adopted  the  1995  and  1996
Non-Employee Directors Stock Option Plans, the 1994 Stock Incentive Plan and the
1995  Consultants  and Advisors Stock Incentive Plan (the "Director  Plan",  the
"Stock Plan" and the "Consultants Plan", respectively).

The 1994 Stock Plan was terminated  effective  December 31, 1996 and replaced by
the 1997 Stock Plan. Pursuant to the 1997 Stock Plan, officers and key employees
of the Company are eligible to receive  awards of stock options (with or without
limited stock appreciation rights).  Options granted under the Stock Plan may be
"incentive  stock options"  ("ISO"),  or non-qualified  stock options  ("NQSO").
Limited Stock Appreciation  Rights ("LSARs") may be granted  simultaneously with
the grant of an option  or (in the case of NQSOs) at any time  during  its term.
The Company's  acting  president and chief financial  officer was granted an ISO
for 15,000  shares at $1.25 per share on March 8, 1996 and for 75,000  shares at
$.50 per share on January 28, 1997,  which  approximated the market value of the
shares on that date.  Both option grants become  exercisable  at the rate of 33%
per year and are generally exercisable over a ten-year period.

The 1995 Director Plan was terminated  effective  December 31, 1996. At the same
time, the 1996 Director Plan was declared void and replaced by the 1997 Director
Plan (See Note 15A).  Under the 1997 Directors  Plan, only NQSOs can be granted.
The  1995  Consultants  Plan  was  amended,  effective  April  29,  1997 to make
additional  shares available for grant under that plan. Under this Plan,  either
stock or NQSOs can be granted to eligible consultants and advisors.

The Company has  reserved  800,000  shares of the Common  Stock for  issuance of
awards  under the 1997 Stock  Plan,  300,000  shares of Common  Stock  under the
Director  Plan and 250,000  shares of Common  Stock under the  Consultants  Plan
(subject to anti-dilution and similar adjustments).

The 1997  Stock  Plan,  1997  Director  Plan and the 1995  Consultants  Plan (as
amended) are administered by a committee (the  "Committee"),  established by the
Company's  Board of Directors.  Subject to the provisions of the 1997 Stock Plan
and the 1995 Consultants Plan (as amended), the Committee determines the type of
award, when and to whom awards will be granted, and the number of shares covered
by each award, the terms, provisions and kind of consideration payable (if any),
with  respect to awards.  The  Committee  has sole  discretionary  authority  to
interpret each of the Plans and to adopt rules and regulations  related thereto.
Under the 1997 Director Plan, any nonemployee member of the

                                      F-20
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13

(15) Stock Options and Warrants (Continued)

the Board of Directors is  automatically  granted a NQSO for 5,000 shares on the
first business day of January, April, July and October of each year.

An option may be granted under the 1997 Stock Plan and the 1995 Consultants Plan
(as amended) on such terms and  conditions  as the  Committee  may approve,  and
generally  may be  exercised  for a period  of up to 10  years  from the date of
grant. Generally,  options will be granted under the Stock Plan with an exercise
price equal to the "Fair  Market  Value" (as defined in the Plan) on the date of
grant. The exercise price for options granted under the Consultants Plan may not
be less than 60% "Fair  Market  Value"  (as  defined in the Plan) on the date of
grant.  In the case of ISOs granted  under the Stock Plan,  certain  limitations
will apply with respect to the aggregate value of option shares which can become
exercisable  for the first  time  during  any one  calendar  year,  and  certain
additional  limitations will apply to "Ten Percent  Stockholders" (as defined in
the Stock Plan).  The Committee may provide for the payment  resulting  from the
exercise of the option in cash,  by delivery of other  common  stock having fair
market value equal to such option price or by a combination thereof.

An option  granted  under the 1997 Stock Plan or the 1995  Consultants  Plan (as
amended) shall be  exercisable  at such time or times as the  Committee,  in its
discretion,  shall  determine,  except that no stock option shall be exercisable
after the expiration of ten years (five years in the case of an incentive  stock
option granted to a "Ten Percent  Employee",  as defined in the Stock Plan) from
the date of the grant.  The Stock Plan contains special rules governing the time
of exercise in the case of death,  disability or other termination of employment
and also provides for acceleration of the exercisability of options upon certain
events  involving a change in control of the Company.  Options granted under the
1997 Director Plan are exercisable one year after the grant is made for a period
of nine years.  The Director Plan also contains  special  exercise  rules in the
event of death or other termination.

The Company's  Board of Directors may at any time and from time to time suspend,
amend,  modify or terminate the Plans.  However,  to the extent  required by the
Securities Exchange Act of 1934 or other applicable law, no such amendment shall
be  effective  unless  approved  by the  holders of a majority of the issued and
outstanding  securities of the Company  entitled to vote.  In addition,  no such
change may  adversely  affect any option  previously  granted,  except  with the
written  consent  of the  optionee  or be made to extent  inconsistent  with the
Securities laws or other applicable law.

Information  pertaining to options as of December 28, 1997 and for the year then
ended is as follows:
<TABLE>
<CAPTION>
<S>                                                      <C>       <C>         <C>            <C>
                                                                                                Remaining
                                                                                               Contractual
                                                                                Exercisable        Life
                                                      Common     Exercise Prices   Stock        of Options
                                                      Shares        Per Share     Options       Outstanding
Options Outstanding - January 1, 1996                    40,000     $5.94         40,000         8.5 years
Options Granted                                          65,000    0.63-1.25          --      9.25-9.5 years
                                                    -----------   ----------   ---------    -----------------
Options Outstanding - January 1, 1997                   105,000    0.63-5.94      40,000      8.25-8.5 years
Options Granted                                         514,000     .50-2.25      96,333         9.5 years
Options Exercised                                        (7,000)      .50             --                   --
Options Canceled                                       (135,000)        --            --                   --
                                                    -----------   ----------   ---------    -----------------
Options Outstanding - December 31, 1997                 477,000   $.50 -5.94     141,333     8.25 - 9.5 years
                                                    ===========   ==========   =========    =================
</TABLE>

At the 1997 grant dates,  the weighted  average fair value of the above  options
was $.80. No compensation  cost was recognized in income.  The weighted  average
exercise  price for  options  outstanding  at  December  28, 1997 was $0.893 per
share.

                                      F-21
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14

(15) Stock Options and Warrants  (Continued)

Had  compensation  cost been  determined on the basis of fair value  pursuant to
SFAS No. 123, net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
<S>                                                             <C>                      <C>     
                                                                      For the Fifty-Two Weeks Ended
                                                                 December 28,              December 29,
                                                                    1 9 9 7                  1 9 9 6
                                                                    -------                  -------
Net (Loss) Income:
   As Reported                                                  $    2,346,084           $      (139,808)
                                                                ==============           ================

   Pro Forma                                                    $    2,326,001           $      (183,008)
                                                                ==============           ================

(Loss) Earnings Per Share:
   As Reported                                                  $          .34           $           (.02)
                                                                ==============           ================

   Pro Forma                                                    $          .34           $           (.03)
                                                                ==============           ================
</TABLE>

The fair  value  used in the pro  forma  data was  estimated  by using an option
pricing model which took into account as of the grant date,  the exercise  price
and the expected life of the option,  the current price of the underlying  stock
and its expected  volatility,  expected dividends on the stock and the risk-free
interest rate for the expected term of the option.  The following is the average
of the data used for the following items.

          Risk-Free             Expected              Expected        Expected
        Interest Rate             Life               Volatility       Dividends
1997        6.63%                5 Years               139.4%            --
1996        6.63%               10 Years               81.99%            --

(B)  Common  Stock  Purchase  Warrants - As of  December  28,  1997,  there were
1,077,324 Class B warrants  outstanding,  which were issued on December 30, 1994
as part of a public  offering.  Holders of each Class B warrant are  entitled to
purchase one share of common  stock at $10.00 per share until  December 9, 1999.
No warrants were exercised  during the fifty-two week periods ended December 28,
1997 or December 29, 1996.

In connection with the public offering, the Company granted 107,732 unit options
to  Patterson  Travis,  Inc.,  the  Company's   Underwriter,   as  part  of  the
Underwriting  Agreement dated September 9, 1994. The exercisable  price of these
options is $8.25 per unit.

(16) Operations by Geographic Area

The summary of financial  information for the Company's operations by geographic
area is as follows:

For the fifty-two weeks ended December 28, 1997:
<TABLE>
<CAPTION>
                                                               United
                                            United States      Kingdom         Eliminations      Consolidated
<S>                                       <C>              <C>              <C>               <C>            
Revenue                                   $      441,804   $    28,360,981  $       (441,804) $    28,360,981
Operating Profit (Loss)                   $    1,076,828   $     1,732,299  $        441,804  $     3,250,931
Net Income                                $    1,250,745   $     1,095,339  $             --  $     2,346,084
Assets                                    $    6,637,173   $    11,179,130  $     (1,037,070) $    16,779,233
Liabilities                               $      345,620   $     6,691,379  $     (1,132,724) $     5,904,275
Company's Investment in
Foreign Subsidiaries                      $    1,683,863   $            --  $     (1,683,863) $            --
</TABLE>

                                      F-22
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15

(16) Operations by Geographic Area (Continued)

For the fifty-two weeks ended December 29, 1996:
<TABLE>
<CAPTION>
                                                               United
                                            United States      Kingdom         Eliminations      Consolidated
<S>                                       <C>              <C>              <C>               <C>            
Revenue                                   $      500,534   $    21,263,864  $       (524,564) $    21,239,834
Operating Profit (Loss)                   $     (669,428)  $       488,951  $             --  $      (180,477)
Net (Loss) Income                         $     (585,100)  $       445,292  $             --  $      (139,808)
Assets                                    $    5,501,197   $    10,460,791  $     (2,491,818) $    13,470,170
Liabilities                               $      161,192   $     6,841,905  $       (712,301) $     6,290,796
Company's Investment in
   Foreign Subsidiaries                   $    1,981,016   $            --  $     (1,981,016) $            --
</TABLE>

(17) Commitments and Contingencies

(A) Master  Franchise  Agreement  - The  relationship  between  the  Company and
Domino's Pizza  International,  Inc.("DPII") is governed principally by the MFA.
The MFA  requires  that during the 10-year  period  ending  December  2006,  the
Company  shall open and  operate a minimum  number of Domino's  pizza  stores in
accordance with a yearly schedule.  If the Company does not meet the development
schedule,  Domino's may terminate the Company's  exclusive  right to operate and
franchise additional Domino's Stores in the Territory. The Company was obligated
for the year ended  December  28,  1997 to have a total of 146  delivery  stores
opened.  As of that date,  the Company  had 154 stores  opened of which 148 were
delivery stores, including 11 that were Company owned.

If the Company is in  compliance  with the MFA at the  expiration of the initial
term,  the  Company  will have the  option to extend its  exclusive  development
rights for an additional 10-year period,  provided the Company and DPII agree to
a minimum  development  schedule for the renewal term. There can be no assurance
that the Company  will be  successful  in opening the number of Domino's  Stores
required.  If after  expiration of the initial term (or any renewal  term),  the
Company fails to exercise its option to renew its exclusive  development rights,
or the parties  are unable to agree to a minimum  development  schedule  for the
renewal term,  then the Company would  continue to have the right to operate its
then  existing  Company-owned  Domino's  Stores and to maintain and continue its
rights  and  obligations,  and act as  subfranchisor,  with  respect to all then
existing franchised Domino's Stores. The Company would generally have no further
right to operate or grant  franchises  for additional  Domino's  Stores and DPII
would have the right to proceed  (or the right to grant a third  party the right
to proceed) with further  development of the  Territory,  subject to territorial
rights granted under then-existing franchise agreements.

The Company is required  to pay DPII a one-time  store  opening fee for each new
Domino's Store, whether Company-owned or franchised. The Company expects to pass
this cost  through  to the  franchisees  in the case of  franchised  stores.  In
addition,  the  Company  must pay to  Domino's a monthly  royalty fee equal to a
certain  percentage  of each Domino's  Store's gross sales.  This royalty fee is
payable to  Domino's  irrespective  of the  profitability  of the Company or the
Domino's Store, and irrespective of the Company's  ability to collect  royalties
from franchisees. The Company's payments to DPII are to be made in United States
dollars.

Under  certain  circumstances  of default by the Company under the MFA, DPII has
the right to terminate the MFA. If the MFA is  terminated,  the Company would be
subject to a one-year non-  competition  covenant in the  delivery,  carryout or
sit-down pizza  business and DPII would have the right (but not the  obligation)
to purchase,  at the then-current fair market value, all of the Company's rights
and interests as the  subfranchisor  of Domino's Stores and all of the assets of
each  Domino's  Store  owned by the  Company.  The fair  market  value  would be
determined by mutual agreement of the Company and DPII,

                                      F-23
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16

(17) Commitments and Contingencies (Continued)

or in the absence of such agreement by an appraiser. Under certain circumstances
of default by DPII under the MFA,  the  Company has the right to  terminate  the
agreement  and  continue  as  an  independent  pizza  operation,  including  the
operation of the fresh pizza dough  production  facility and wholesale  business
(the "Commissary").

DPII and IFS entered into a Stock Purchase Agreement as of May 26, 1997, ("SPA")
whereby  IFS  agreed  to sell to DPII  300,000  shares  of its  common  stock in
consideration  for  royalty  concessions  under the  Master  Agreement.  The SPA
provides  that DPII may not sell,  transfer or  otherwise  dispose of its shares
before May 26, 2001 and any  transferee  receiving  stock in  violation  of this
prohibition  will have no rights  with  respect to the  shares.  The SPA further
provides  for put and call  options on the common  shares at an agreed upon base
purchase  price of $1,200,000  adjusted to reflect  changes in the common stock,
such as, stock splits and dividends.

The Master  Agreement  cannot be  assigned  by IFS without  DPII's  consent.  In
addition, the agreement prohibits Domino's Pizza Group Limited, a majority-owned
subsidiary  of IFS,  ("DP  Group")  and  Colin  and Gail  Halpern  (as  indirect
controlling  shareholders of DP Group) from transferring  control of IFS without
DPII's prior written consent. For the term of the Master Franchise Agreement, DP
Group and Colin and Gail  Halpern are  restricted  from  having an interest  in,
being employed by, advising or assisting  another business in the pizza or pizza
store business in the Territory.

(B)  Employment  Agreement  - In  August  1994,  the  Company  entered  into  an
employment agreement with its then President and now Chairman of the Board for a
salary of $96,000 per year. The initial term of the agreement expired on January
31, 1996.  The salary was adjusted at the  discretion of the Board of Director's
Compensation Committee to $180,000 per year.

(C) Consulting  Agreements - In May, June and October 1995, the Company  entered
into three  consulting  agreements with terms of 4, 5 and 5 years  respectively,
issuing 950,000 shares of common stock as compensation for these agreements (See
Note 17C).  Consulting expense of $943,750 was to be amortized over the terms of
these agreements.  The Company was also responsible for  out-of-pocket  expenses
incurred and a monthly  advisory fee.  During the years ended  December 28, 1997
and December 29, 1996, the Company recognized $0 and $51,563,  respectively,  of
consulting expense related to these agreements. These consulting agreements were
assigned to Woodland  in the form of an  interest  bearing  note at the net book
value of $776,145 on April 1, 1996 (See Note 11).

(D) Pizzazz Lease  Commitment - In connection with the Pizzazz  restaurant,  the
Company had entered into a 15-year  operating lease,  expiring December 24, 2010
(See Note 7).

(18) New Authoritative Accounting Pronouncements

The FASB has issued SFAS No. 125,  "Accounting  for  Transfers  and Servicing of
Financial Assets and  Extinguishment of Liabilities."  SFAS No. 125 is effective
for  transfers  and  servicing  of  financial  assets  and   extinguishment   of
liabilities  occurring  after  December 31,  1997.  Earlier  application  is not
allowed.

The  provisions  of SFAS No.  125  must be  applied  prospectively;  retroactive
application is prohibited. Adoption on January 1, 1998 is not expected to have a
material  impact on the Company.  The FASB deferred some  provisions of SFAS No.
125, which are not expected to be relevant to the Company.

The FASB issued Statement of Financial  Accounting  Standards  ("SFAS") No. 129,
"Disclosure of Information  about Capital  Structure" in February 1997. SFAS No.
129  does  not  change  any  previous   disclosure   requirements,   but  rather
consolidates existing disclosure requirements for ease of retrieval.

                                      F-24
<PAGE>
INTERNATIONAL FRANCHISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17

(18) New Authoritative Accounting Pronouncements (Continued)

SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosure About
Segments  of an  Enterprise  and  Related  Information"  both  clarify  existing
reporting  requirements  and in certain cases expand the disclosure.  Neither is
expected to have a material impact on the Company.

(19) Subsequent Events

On  March  11,  1998,  the  Company  received  an  offer  from  IFS  Acquisition
Corporation,  an affiliate of Crescent  Capital,  Inc.,  the  Company's  largest
shareholder,  to  participate  in a  merger  which  would  result  in all of the
shareholders  other than Crescent  Capital,  Inc.  receiving $2.80 per share for
each  share of the  Company's  stock.  The  Board of  Directors  named a Special
Committee  of  directors,  comprised  of Bernard  Goldman and David  Coffer,  to
consider the offer. The Special Committee hired legal and financial advisors and
is considering  the offer.  On April 17, 1998, the Special  Committee  announced
that an agreement had been reached on the financial terms of the merger and that
the public  shareholders  would  receive $3.60 per share if the  transaction  is
completed.  The proposed  merger is subject to, among other things (i) execution
of  a  definitive  merger  agreement   containing   customary   representations,
warranties, covenants and conditions (including a financial condition), and (ii)
compliance  with  all  applicable  regulatory  and  governmental   requirements.
Accordingly,  there  can be no  assurance  that  the  proposed  merger  will  be
consummated.


                                . . . . . . . . .


                                      F-25