UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

         Annual  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1997



                             THE MORGAN GROUP, INC.
                              2746 Old U.S. 20 West
                             Elkhart, Indiana 46514
                                 (219) 295-2200
                         Commission File Number 1-13586


        Delaware                                       22-2902315
(State of Incorporation)                 (I.R.S. Employer Identification Number)



           Securities Registered Pursuant to Section 12(b) of the Act:

                             American Stock Exchange
                     Class A Common Stock, without par value

           Securities Registered Pursuant to Section 12(g) of the Act:
                                      None

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.

                  YES X                   NO  ______

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [  ]

The aggregate market value of the issuer's voting stock held by  non-affiliates,
as of March 25, 1998 was  $9,834,999.  The number of shares of the  Registrant's
Class A Common  Stock $.015 par value and Class B Common  Stock $.015 par value,
outstanding as of March 25 1998,  was 1,434,810  shares,  and 1,200,000  shares,
respectively.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders  are
incorporated into Part III of this report.

                         Exhibit Index on Pages ________
                                 Page 1 of Pages

<PAGE>



                                     Part I

                                Item 1. BUSINESS

                                    Overview

         The Morgan Group, Inc. ("the Company") is the nation's largest publicly
owned service  company in managing the delivery of manufactured  homes,  trucks,
specialized vehicles,  and trailers in the United States, and through its wholly
owned  subsidiary,  Morgan Drive Away, Inc.  ("Morgan") has been operating since
1936.  The  Company  provides  outsourcing  transportation  services  through  a
national  network  of  approximately   1,560  independent  owner  operators  and
approximately  1,350 other drivers.  The Company dispatches its drivers from 123
locations  in 35 states.  The  Company's  largest  customers  include  Fleetwood
Enterprises,  Inc.,  Oakwood  Homes  Corporation,  Champion  Enterprises,  Inc.,
Winnebago  Industries,  Inc., Clayton Homes, Inc.,  Cavalier Homes, Inc., Schult
Homes  Corporation,  Four Seasons  Housing,  Inc., Palm Harbor Homes,  Inc., and
United Parcel Service.  The Company's  services also include  providing  certain
insurance and financing services to its owner operators.

         As further  described below, the Company's  strategy is to grow through
expansion in the niche businesses  already being serviced with heavy emphasis on
outsourcing,  along with pursuing acquisitions of niche transportation  carriers
who are servicing their customer base with unique service and/or  equipment.  In
addition, the Company will look to expand insurance product offerings to drivers
through  its  subsidiary  Interstate  Indemnity  Company  ("Interstate")  and to
broaden its financing activities through Morgan Finance, Inc. ("Finance").

         Morgan,  the  Company's  principal  subsidiary,  was founded in 1936 in
Elkhart,  Indiana and incorporated in 1942. The Morgan Group, Inc. is a Delaware
corporation  formed by Lynch  Corporation to acquire Morgan and  Interstate.  In
1994, the Company formed Finance for the purpose of offering  financing to owner
operators.  In 1995, the Company acquired the assets of Transfer  Drivers,  Inc.
("TDI"), a Northern Indiana-based outsourcing company. TDI is a market leader in
the fragmented  truck delivery  business  focusing on relocation of consumer and
commercial  vehicles for  customers,  including  United  Parcel  Service,  Ryder
System, Inc., Automotive Rentals, Inc., Budget One-Way Rental, and Grumman Corp.

         In December 1996,  the Company  acquired the assets of Transit Homes of
America,  Inc.  ("Transit"),  a national  outsourcing  company located in Boise,
Idaho.  Transit,  with  1997  operating  revenues  of  $21.2  million,  provides
outsourcing  transportation  services to Fleetwood  Enterprises,  Inc., Champion
Enterprises, Inc., Palm Harbor, and Cavalier Homes, Inc.

         The Company  decided in the fourth quarter of 1996 to  discontinue  the
"truckaway" operation of the Specialized  Transport Group.  Truckaway was a line
of business that transported van conversions, tent campers, and other automotive
products on company-owned equipment. The Company, in the fourth quarter of 1996,
recorded  a special  charge  of  $2,675,000  ($1,605,000  after  tax)  comprised
principally of the anticipated loss on the sale of the company-owned  equipment,
projected losses through April 30, 1997, and write-downs of accounts  receivable
and other assets. The equipment was principally sold by May 1997.

         The  Company's  principal  office is located at 2746 Old U.S.  20 West,
Elkhart, Indiana 46514; the telephone number is (219) 295-2200.


<PAGE>

Industry Information

Manufactured Housing.

         The largest  portion of the  Company's  operating  revenues are derived
from transportation of manufactured  housing,  primarily new manufactured homes.
Unit shipments by the  manufactured  housing industry  (considering  double-wide
homes as two shipments) in the U.S.  increased by approximately 6% to 558,000 in
1997  from  553,000  in 1996,  after  9% and 12%  increases  in 1996  and  1995,
respectively, according to data from the Manufactured Housing Institute ("MHI").
A manufactured home is an affordable housing  alternative.  The Company believes
the manufactured  housing industry production should continue to grow along with
the  general  economy,  especially  while  employment  statistics  and  consumer
confidence  remain  strong.  The Company  believes that the  principal  economic
consideration  of the typical  manufactured  home buyer is the  monthly  payment
required to purchase a manufactured  home and that purchasers are generally less
affected by  incremental  increases in interest  rates than those  purchasers of
site built homes.  There is no assurance,  however,  that  manufactured  housing
production will continue to increase.

Recreational Vehicles.

         Recreational  Vehicles  (defined as travel trailers,  motor homes, tent
campers, truck and van conversions) ("RV's") declined 4% in 1997 to 363,000 from
376,000  shipments in 1996 after declines of 1% in 1996,  and 11% in 1995.  This
data is obtained from the Recreational  Vehicle Industry  Association  ("RVIA").
RV's are discretionary purchases, sales of which are cyclical. Consumer interest
rates remain  relatively  low which make RV's easier for  purchasers to finance.
There is no  assurance,  however,  that the current  economic  environment  will
continue to support RV production.

Company Services

         Based on industry  shipment data  available  from the MHI and RVIA, and
the  Company's  knowledge  of the industry and its  principal  competitors,  the
Company is the largest  publicly  owned  transporter of  manufactured  homes and
provider  of  outsourcing  services  to the motor  home and  commercial  vehicle
markets in the United States. In addition to new manufactured  housing and motor
homes, the Company  transports used  manufactured  homes,  commercial  vehicles,
rental  trucks,   office  trailers,   new  and  used   semi-trailers  and  other
miscellaneous  commodities.  The Company provides its specialized transportation
services as follows:

<PAGE>
               Manufactured   Housing  Group.  The  Manufactured  Housing  Group
              ("Manufactured Housing"), which includes Transit Homes acquired in
              1996,  provides  specialized  transportation  to  companies  which
              produce  new  manufactured   homes,   modular  homes,  and  office
              trailers.  In  addition,   Manufactured  Housing  transports  used
              manufactured  homes and offices for individuals,  businesses,  and
              the U.S.  Government.  Manufactured Housing ships products through
              approximately   1,250   independent   owner  operators  who  drive
              specially modified semi-tractors, referred to as "toters," used in
              manufactured  housing  transportation  to reduce combined  vehicle
              length.  Makers  of  manufactured  housing  generally  ship  their
              products  no more than a few hundred  miles from their  production
              facilities.  Therefore,  to serve the  regional  structure of this
              industry,  the Company positions its dispatch offices close to the
              production  facilities  it is  serving.  Approximately  19 of  the
              Company's  dispatch  offices are located in such a manner to serve
              the  needs  of  a  single  manufactured  housing  producer.   Most
              manufactured  housing units, when transported by a toter require a
              special  permit  prescribing  the time and manner of transport for
              over-dimensional  loads.  See  "Business-Regulation."  The Company
              obtains  for its owner  operators  the permits  required  for each
              shipment  from each state through which the shipment will pass. In
              1997, Manufactured Housing delivered approximately 179,000 units.

               Driver   Outsourcing   Group.   The  Driver   Outsourcing   Group
              ("Outsourcing"),  which includes TDI acquired in May 1995, engages
              the services of  approximately  1,350 drivers which are outsourced
              to customers to drive  commercial and  recreational  vehicles.  In
              1997, Outsourcing delivered approximately 46,000 units through the
              use of these drivers.

               Specialized  Transport Group. In 1997, the Specialized  Transport
              Group  ("Specialized  Transport")  moved a variety of  specialized
              vehicles,  including  semi-trailers,   military  vehicles,  travel
              trailers and other commodities by utilizing specialized equipment.
              A decision was made in 1996 to discontinue the truckaway sector of
              Specialized Transport,  which moved van conversions,  automobiles,
              and tent campers by  utilizing  company-owned  trailers.  In 1997,
              Specialized Transport delivered approximately 34,000 units.

               Other Services.  Other services  provided include permit ordering
              services  principally for manufactured housing customers and, to a
              lessor  degree,  installation  services  related  to the set up of
              manufactured  homes. The Company also currently  provides physical
              damage  insurance  to the owners of  equipment  under lease to the
              Company through a captive insurance subsidiary.  In addition,  the
              Company  provides  financing  and certain  guarantees of equipment
              loans through its finance subsidiary.



<PAGE>



Selected Operating Information

         The following  tables set forth operating  information  with respect to
the  aforementioned  Company  services for each of the five years ended December
31, 1997.

<TABLE>
<CAPTION>
                                                               Years Ended December 31,
                                                    1993         1994        1995         1996         1997
                                                    ----         ----        ----         ----         ----
Manufactured Housing Group:
<S>                                               <C>         <C>         <C>          <C>          <C>
Shipments                                         95,184      121,604     135,750      144,601      178,533
Operating revenues (in thousands)                $39,930      $53,520     $63,353      $72,616      $93,092

Driver Outsourcing:
Shipments                                         30,978       32,060      49,885       58,368       45,857
Operating revenues (in thousands)                $13,416      $15,197     $19,842      $23,090      $20,163

Specialized Transport:
Shipments                                         38,618       41,934      44,406       41,255       34,457
Operating revenues (in thousands)                $25,835      $28,246     $29,494      $26,169      $19,173

Other service revenues                            $3,612       $4,917      $9,614      $10,333      $13,726
                                                  ------       ------      ------      -------      -------
Total operating revenues (in thousands)          $82,793     $101,880    $122,303     $132,208     $146,154
                                                 =======     ========    ========     ========     ========
</TABLE>

Industry Participation.  The following tables set forth participation in the two
principal  markets  the  Company  operates  in  where  industry  information  is
available:

<TABLE>
<CAPTION>
Manufactured Homes                               1993          1994         1995          1996         1997
                                                 ----          ----         ----          ----         ----
<S>                                         <C>           <C>          <C>           <C>          <C>
Industry production (1)                       374,126       451,646      505,819       553,133      558,435
Shipments                                      76,188        98,181      114,890       121,136      154,389
Shares of units shipped                         20.4%         21.7%        22.7%         21.9%        27.6%

Recreational Vehicles
Industry production (2)                       406,300       426,100      380,300       376,400      362,700
Units moved (3)                                71,792        67,502       64,303        57,703       39,102
Shares of units shipped (3)                     17.7%         15.8%        16.9%         15.3%        10.8%
</TABLE>

(1)      Based  on  reports  of  Manufactured   Housing  Institute  ("MHI").  To
         calculate  shares  of  homes  shipped,  the  company  assumes  two unit
         shipments for each multi-section home.

(2)      Based on reports of Recreational Vehicle Industry Association ("RVIA"),
         excluding van campers,  truck campers,  pick-up truck conversions,  and
         sport utility vehicle conversion.  RVIA began reporting truck and sport
         utility vehicle conversions in their industry shipment data in 1994.

(3)      Shares of units shipped calculation includes travel trailers, two types
         of motor homes, van conversions, and tent campers and truck conversions
         in 1994 - 1997.  The  Company's  shares of units  shipped  are based on
         units  moved  compared  to industry  production  rather than  shipments
         because certain RV shipments include more than one unit per shipment.



<PAGE>

Growth Strategy

         The   Company's   strategy   is  to  focus  on  the   profitable   core
transportation services (Manufactured Housing and Outsourcing) so that operating
revenues and profitability can grow in its area of dominant market position. The
Company will also look for opportunities to capitalize and/or grow its market in
manufactured   housing  and   outsourcing   through   acquisitions  if  suitable
opportunities arise. To enhance its profitability, the Company is continuing the
process of reconstructing  its organization to reduce  centralized  overhead and
redundant field expense.

         Manufactured  Housing Growth.  The Company  believes it can take better
         advantage of its position in the manufactured  housing industry and its
         relationship  with  manufacturers,  retailers,  and  independent  owner
         operators,  by expanding the service it offers  within its  specialized
         business.  The Company  proposes to pursue  opportunities  to offer new
         services,  which  may  include  financial,  insurance,  and to a lessor
         degree,  manufactured  housing set up  services.  The Company will also
         consider  acquisition  opportunities.  The  Company may also pursue the
         purchase of certain  manufacturers' private transport fleets. In such a
         case, the Company would  typically  purchase the  customer's  tractors,
         sell the equipment to interested drivers, and then engage these drivers
         as independent owner operators.

         Outsourcing.  The  Company  believes it can  capitalize  on the growing
         trend in the  outsourcing of  specialized  vehicle  transportation  and
         delivery by manufacturers.  It is estimated that approximately  750,000
         vehicles are delivered each year through driveaway services, a delivery
         market  estimated at $500 million or more. The number of vehicles to be
         outsourced is expected to increase substantially as companies calculate
         the cost benefits of not  maintaining  their own driver  corps,  paying
         salaries and benefits,  running  dispatch  points,  and  maintaining an
         equipment  base.  Unlike  companies  with  drivers  on  their  payroll,
         Morgan's  drivers  are paid only  when  deliveries  are made.  Morgan's
         growth  strategy within this market is to expand its market position in
         this  highly  fragmented  delivery  transportation  market.  The future
         growth rate of the  Company's  outsourcing  business is dependent  upon
         continuing to add major  vehicle  customers and expanding the Company's
         driver force.

         Reconstruct for Margin Improvement.  In the fourth quarter of 1996, the
         Company  made  a  decision  to  exit  the  Truckaway   operation  which
         transported  van  conversions,   tent  campers,  and  other  automotive
         products utilizing company-owned  equipment.  This decision was in line
         with the Company's  growth  strategy to focus on profitable  operations
         where the Company has a market position.  The Company is continuing the
         process  of  reconstructing  its  organization  to  reduce  centralized
         overhead and redundant  field  expense.  It will continue to scrutinize
         every facet of operations  as the Company  searches for ways to run the
         business with greater efficiency,  both to enhance management processes
         and customer  relationships,  and to reduce or eliminate costs wherever
         possible.

         Acquisitions.  The  Company is  considering  acquisition  opportunities
         within the  manufactured  housing and  outsourcing  lines of  business.
         Thus,  the Company may consider  acquiring  regional or national  firms
         which service the manufactured housing and/or the outsourcing industry.
         The Company is continuously  reviewing  potential  acquisitions  and is
         engaged in  negotiations  from time to time.  There can be no assurance
         that any future acquisitions will be effected,  or, if effected, can be
         successfully integrated with the Company's business.

         Expansion of Related Services.  The Company believes it can take better
         advantage  of its position in the  manufactured  housing and motor home
         industries,  and its relationships with manufacturers,  retailers,  and
         independent owner operators, by expanding the services it offers within
         its specialized business.  The Company proposes to pursue opportunities
         to offer new financial, insurance or other services.

         The Company is currently offering  financing  opportunities to selected
         existing and new owner operators,  through Morgan Finance,  a financial
         subsidiary created in 1994 to support these activities. In 1995, Morgan
         formed an alliance  with a  financial  institution  which is  providing
         financing  to Morgan  owner  operators  for  tractor  purchases.  These
         equipment  financing  programs are  expected to solidify the  Company's
         relationships with independent owner operators, increase its fleet, and
         further expand the Company's  transportation capacity. The Company also
         offers insurance services to independent owner operators.

         The Company may begin  offering  new  insurance  products as a managing
         general  agent.  The Company's  insurance  subsidiary  may determine to
         accept  a  limited  portion  of the  underwriting  risk,  retaining  an
         appropriate proportion of the premiums.

         The  Company  will  carefully  consider  the  feasibility  of these and
similar  opportunities  over the next  year.  If the  Company is  successful  in
offering new services  such as these,  it expects to enhance and  diversify  its
operating  revenues and may reduce its  vulnerability to broad production cycles
in the  industries it serves.  The Company  cannot give any  assurance  that new
services,  if any,  will be  profitable  and such new  services  may  result  in
operating losses.

Forward-Looking Discussion

         In 1998,  the Company could benefit from better  pricing,  reduction of
overhead  through  corporate  restructuring,   elimination  of  redundant  field
expense,  and improvement of its safety record.  Business  expansion,  including
possible acquisitions,  could augment operating revenue gains. While the Company
remains  optimistic over the long term, near term results could be affected by a
number of internal and external economic conditions.

         This report contains a number of forward-looking statements,  including
those contained in the preceding paragraph and the discussion of growth strategy
above.  From  time  to  time,  the  Company  may  make  other  oral  or  written
forward-looking  statements  regarding its anticipated sales,  costs,  expenses,
earnings   and  matters   affecting   its   condition   and   operations.   Such
forward-looking  statements  are subject to a number of material  factors  which
could cause the  statements or  projections  contained  therein to be materially
inaccurate. Such factors include, without limitation, the following:

               Dependence on  Manufactured  Housing.  Shipments of  manufactured
               housing have historically accounted for a substantial majority of
               the  Company's  operating  revenues.   Therefore,  the  Company's
               prospects are substantially dependent upon this industry which is
               subject to broad production cycles. Shipments by the manufactured
               housing   industry  could  decline  in  the  future  relative  to
               historical   levels  which  could  have  adverse  impact  on  the
               Company's operating revenues.

               Costs of Accident Claims and Insurance.  Traffic  accidents occur
               in the ordinary course of the Company's business.  Claims arising
               from such  accidents  can be  significant.  Although  the Company
               maintains liability and cargo insurance,  the number and severity
               of the  accidents  involving the  Company's  owner  operators and
               drivers can have significant  adverse effect on the profitability
               of the  Company  through  premium  increases  and amounts of loss
               retained  by the  Company  below  deductible  limits or above its
               total  coverage.  There can be no assurance  that the Company can
               continue to maintain its present insurance coverage on acceptable
               terms  nor  that  the cost of such  coverage  will  not  increase
               significantly.

               Customer Contracts and Concentration. Historically, a majority of
               the  Company's   operating   revenues  have  been  derived  under
               contracts with customers. Such contracts generally have one, two,
               or three year terms.  There is no assurance  that  customers will
               agree to renew their contracts on acceptable terms or on terms as
               favorable as these  currently  in force.  The  Company's  top ten
               customers  have  historically  accounted  for a  majority  of the
               Company's  operating  revenues.  The loss of one or more of these
               significant   customers  could  adversely  affect  the  Company's
               results of operations.

               Competition for Qualified  Drivers.  Recruitment and retention of
               qualified drivers and owner operators is highly competitive.  The
               Company's contracts with owner operators are terminable by either
               party  on ten  days'  notice.  There  is no  assurance  that  the
               Company's  drivers will continue to maintain  their  contracts in
               force or that the  Company  will be able to recruit a  sufficient
               number of new  drivers  on terms  similar to those  presently  in
               force. The Company may not be able to engage a sufficient  number
               of new drivers to meet  customer  shipment  demands  from time to
               time,   resulting  in  loss  of  operating  revenues  that  might
               otherwise be available to the Company.

               Independent  Contractors,  Labor Matters.  From time to time, tax
              authorities have sought to assert that independent  contractors in
              the  transportation  service  industry are employees,  rather than
              independent contractors. Under existing interpretations of federal
              and state tax laws,  the Company  maintains  that its  independent
              contractors are not employees.  There can be no assurance that tax
              authorities  will not challenge  this  position,  or that such tax
              laws  or   interpretations   thereof  will  not  change.   If  the
              independent  contractors  were  determined to be  employees,  such
              determination  could  materially  increase the  Company's  tax and
              workers' compensation exposure.

               Risks of  Acquisitions.  The Company has sought and will continue
              to seek favorable acquisition  opportunities.  Its strategic plans
              may also  include the  initiation  of new  services  or  products,
              either  directly  or  through  acquisition,  within  its  existing
              business  lines  or which  complement  its  business.  There is no
              assurance  that the  Company  will be able to  identify  favorable
              acquisition  opportunities  in the future.  There is no  assurance
              that  the  Company's  future  acquisitions  will  be  successfully
              integrated  into its  operations  or that  they  will  prove to be
              profitable for the Company.  Similarly, there is no assurance that
              any new products or services,  individually  or in the  aggregate,
              could  materially  change the  Company's  results  of  operations,
              financial condition and capital  requirements.  Such changes could
              have a material adverse effect on the Company.

               Seasonality  and  General  Economic  Conditions.   The  Company's
              operations have historically been seasonal,  with generally higher
              operating revenues generated in the second and third quarters than
              in the first and  fourth  quarters.  A smaller  percentage  of the
              Company's operating revenues are generated in the winter months in
              areas where weather  conditions limit highway use. The seasonality
              of the Company's business may cause a significant variation in its
              quarterly   operating   results.   Additionally,   the   Company's
              operations are affected by  fluctuations in interest rates and the
              availability  of credit to  purchasers of  manufactured  homes and
              motor homes, general economic conditions, and the availability and
              price of motor fuels.

Customers and Marketing

         The Company's  customers  requiring  transportation of new manufactured
homes, motor homes, commercial vehicles, and specialized vehicles are located in
various parts of the United States. The Company's largest  manufactured  housing
customers  include  Fleetwood  Enterprises,  Inc.,  Oakwood  Homes  Corporation,
Champion  Enterprises,  Inc., Clayton Homes, Inc.,  Cavalier Homes, Inc., Schult
Homes  Corporation,  Four Seasons Housing,  Inc., and Palm Harbor. The Company's
largest outsourcing customers include Winnebago Industries,  Inc., United Parcel
Service,   Ryder  System,   Inc.,   Automotive  Rentals,   Inc.,  and  Fleetwood
Enterprises,  Inc. Specialized  Transport customers include Utility Trailer Mfg.
Co., United Parcel Service,  Thor Industries,  Inc., Great Dane, and Xtra Lease,
Inc. While most manufacturers rely solely on carriers such as the Company, other
manufacturers  operate their own equipment and may employ outside  carriers on a
limited basis.

         A substantial portion of the Company's operating revenues are generated
under one, two, or three year contracts with  producers of  manufactured  homes,
motor homes, and other products.  In these contracts,  the  manufacturers  agree
that a  specific  percentage  (up  to  100%)  of  their  transportation  service
requirements from a particular  location will be performed by the Company on the
basis  of  a  prescribed  rate  schedule,  subject  to  certain  adjustments  to
accommodate increases in the Company's  transportation costs. Operating revenues
generated under customer contracts in 1995, 1996, and 1997 were 58%, 62%, 68% of
total operating revenues, respectively.

         The Company's  ten largest  customers all have been served for at least
three years and accounted for  approximately  59%, 59%, and 66% of its operating
revenues  in 1995,  1996,  and  1997,  respectively.  Operating  revenues  under
contract with Fleetwood Enterprises, Inc. ("Fleetwood"), accounted for 24%, 20%,
and 21% of operating revenues in 1995, 1996, and 1997,  respectively.  Operating
revenues with Oakwood Homes Corporation  ("Oakwood")  accounted for 9%, 11%, and
16% of operating revenues in 1995, 1996, and 1997,  respectively.  The Fleetwood
motor home contracts are  re-negotiated on a regional basis when they expire and
the Fleetwood and Oakwood  manufactured  housing  contracts are continuous until
canceled.  The Company has been  servicing  Oakwood for nine years and Fleetwood
for over 25 years.

         The Company markets and sells its services  through 13 regional offices
and 123  locations in 35 states,  concentrated  where  manufactured  housing and
motor home production  facilities are located.  Marketing  support personnel are
located both at the  Company's  Elkhart,  Indiana  headquarters  and at regional
offices. Dispatch offices are supervised by regional offices.

         The Company  has 26  dispatch  offices  devoted  primarily  to a single
customer  facility.  This allows the  dispatching  agent and local  personnel to
focus on the needs of each individual  customer while remaining supported by the
Company's nationwide  operating  structure.  Sales personnel at regional offices
and at the corporate headquarters meet periodically with manufacturers to review
production schedules, requirements and maintain contact with customers' shipping
personnel.  Senior management maintains personal contact with corporate officers
of the Company's largest customers. Regional and terminal personnel also develop
relationships   with   manufactured  home  park  owners,   retailers,   military
installation  officials  and others to promote the  Company's  shipments of used
manufactured  homes.  The Company  also  participates  in  industry  trade shows
throughout  the country  and  advertises  in trade  magazines,  newspapers,  and
telephone directories.

Independent Owner Operators

         The shipment of product by both  Manufactured  Housing and  Specialized
Transport  is  conducted  by  contracting  for  the  use  of  the  equipment  of
independent owner operators.

         Owner operators are independent contractors who own toters, tractors or
pick-up  trucks  which they  contract  to, and  operate  for,  the  Company on a
long-term  basis.  Independent  owner  operators are not  generally  approved to
transport  commodities  on their own in interstate or intrastate  commerce.  The
Company,   however,   possesses   such   approvals   and/or   authorities   (see
"Business-Regulation"),   and  provides  marketing,  insurance,   communication,
administrative, and other support required for such transportation.

         The Company attracts owner operators mainly through driver  recruiters,
trade  magazines,  referrals,  and truck stop brochures.  The Company has in the
past  been  able  to  attract  new  owner  operators  primarily  because  of its
competitive  compensation  structure,  its  ability  to  provide  loads  and its
reputation in the industry.  Recruitment  and retention of qualified  drivers is
highly  competitive  and there can be no assurance that the Company will be able
to attract a sufficient number of qualified owner operators in the future.

         The  contract  between  the  Company  and each  owner  operator  can be
canceled upon ten day's notice by either party. The average length of service of
the Company's  current owner operators is approximately  2.5 years,  compared to
3.2 years in 1996.  At  December  31,  1997,  1,560 owner  operators  were under
contract  to the  Company,  including  1,250  operating  toters,  132  operating
semi-tractors, and 178 operating pick-up trucks.

         In Manufactured  Housing,  independent owner operators  utilizing toter
equipment  tend  to  exclusively   transport   manufactured   housing,   modular
structures,  or office trailers. Once modified from a semi-tractor,  a toter has
limited applications for hauling general freight.  Toter drivers are, therefore,
unlikely to be engaged by transport firms that do not specialize in manufactured
housing.  This gives the Company an  advantage in  retaining  toter  independent
owner  operators.  The average tenure with the Company of its toter  independent
owner  operators  is 2.8  years,  compared  to 3.3 years in 1996.  The change in
tenure is due in part to the addition of drivers from the Transit Acquisition.

         In Specialized  Transport,  Morgan is competing with national  carriers
for the  recruitment  and  retention  of  independent  owner  operators  who own
tractors. The average length of service of the Company's tractor owner operators
is approximately 1.8 years, compared to 2.7 years in 1996. The average length of
service among the Pickup owner operators is 2.9 years,  compared to 3.0 years in
1996.

         The change in the tenure of owner  operators  is due,  in part,  to the
discontinuance  of the  truckaway  operation  and was  offset  by the  effective
recruiting efforts by the Company.

         Independent owner operators are generally  compensated for each trip on
a per mile basis.  Owner  operators  are  responsible  for  operating  expenses,
including fuel,  maintenance,  lodging,  meals, and certain insurance coverages.
The Company provides required permits,  cargo and liability  insurance (coverage
while  transporting  goods  for the  Company),  and  communications,  sales  and
administrative  services.  Independent  owner  operators,  except  for owners of
certain pick-up trucks, are required to possess a commercial drivers license and
to meet and maintain  compliance  with  requirements  of the U.S.  Department of
Transportation and standards established by the Company.

         From  time  to  time,  tax  authorities  have  sought  to  assert  that
independent owner operators in the trucking industry are employees,  rather than
independent  contractors.  No such tax claims have been  successfully  made with
respect to owner operators of the Company.  Under existing industry practice and
interpretations  of federal and state tax laws, as well as the Company's current
method of  operation,  the Company  believes  that its owner  operators  are not
employees.  Whether an owner operator is an  independent  contractor or employee
is, however,  generally a  fact-sensitive  determination  and the laws and their
interpretations can vary from state to state. There can be no assurance that tax
authorities will not successfully challenge this position, or that such tax laws
or  interpretations  thereof  will  not  change.  If the  owner  operators  were
determined to be employees,  such  determination  could materially  increase the
Company's employment tax and workers' compensation exposure.

Outsourcing

         The Company utilizes both independent  contractors and employees in its
outsourcing  operations.  The  Company  outsources  its over 1,350  drivers on a
trip-by-trip  basis  for  delivery  to  retailers  and  rental  truck  agencies,
commercial  and  recreational  vehicles  such as motor homes,  buses,  tractors,
rental trucks,  and commercial  vans.  These  individuals are recruited  through
driver  recruiters,  trade  magazines,  brochures,  and  referrals.  Prospective
drivers  are  required  to  possess  at  least  a  chauffeur's  license  and are
encouraged  to obtain a  commercial  driver's  license.  They must also meet and
maintain  compliance with requirements of the U.S.  Department of Transportation
and standards  established by the Company.  Outsourcing  drivers are utilized as
needed,   depending   on  the   Company's   transportation   volume  and  driver
availability.  Outsourcing  drivers are paid on a per mile basis.  The driver is
responsible for most operating expenses, including fuel, return travel, lodging,
and  meals.  The  Company  provides  licenses,  cargo and  liability  insurance,
communications, sales, and administrative services.

Agents and Employees

         The Company has 140 terminal  managers and assistant  terminal managers
who are involved directly with the management of equipment and drivers. Of these
140 staff,  approximately  120 are  full-time  employees  and the  remainder are
independent  contractors  who  earn  commissions.  The  terminal  personnel  are
responsible for the Company's  terminal  operations  including safety,  customer
relations, equipment assignment,  invoicing, and other matters. Because terminal
personnel develop close  relationships with the Company's customers and drivers,
from time to time the  Company  has  suffered  a terminal  personnel  defection,
following  which the former  staff has sought to exploit such  relationships  in
competition  with  the  Company.   The  Company  does  not  expect  that  future
defections,  if any, would have a material affect on its operations. In addition
to the 140 terminal personnel,  the Company employs  approximately 232 full-time
employees.  The Company also has 17 employee drivers in Manufactured housing and
six in Outsourcing.

Seasonality

         Shipments of manufactured homes tend to decline in the winter months in
areas where poor weather  conditions  inhibit  transport.  This usually  reduces
operating  revenues in the first and fourth quarters of the year. Motor home and
travel  trailer  movements  are generally  stronger in the spring,  when dealers
build stock in anticipation of the summer vacation  season,  and late summer and
early fall when new  vehicle  models are  introduced.  The  Company's  operating
revenues, therefore, tend to be stronger in the second and third quarters.

Risk Management, Safety and Insurance

         The risk of  substantial  losses  arising  from  traffic  accidents  is
inherent in any transportation  business. The Company carries insurance to cover
such losses up to $25 million per occurrence with a deductible of up to $250,000
per  occurrence for personal  injury and property  damage.  The Company  carries
cargo  insurance of $1 million per occurrence  with a $250,000  deductible.  The
frequency and severity of claims under the Company's liability insurance affects
the cost and potentially the  availability of such insurance.  If the Company is
required to pay substantially  greater insurance premiums, or incurs substantial
losses above $25 million or below its $250,000 deductibles, its results could be
materially  adversely  affected.  The Company does have an "aggregate stop loss"
insurance  policy for the period  July 1, 1997  through  June 30,  1998  whereby
personal injury,  property damage,  and worker's  compensation  losses below its
$250,000  deductible  cannot exceed $4.3 million (could be adjusted up dependent
on  operating  revenues).  The  Company  has been  approved  for  self-insurance
authority of up to $1 million.  There are no immediate  plans to institute  this
self-insurance.  The  granting  of  self-insurance  would  provide  the  Company
alternatives if insurance pricing levels do not meet the Company's expectations.
There can be no assurance  that the Company can continue to maintain its present
insurance coverage on acceptable terms.

         The  following  table sets  forth  information  with  respect to bodily
injury  and  property  damage  and cargo  claims  reserves  for the years  ended
December 31, 1995, 1996, and 1997, respectively.

                    Bodily Injury/Property Damage and Cargo
                             Claims Reserve History
                            Years Ended December 31,
                                 (in thousands)

                               1995               1996                1997
                             -------            -------             -------
Beginning Reserve Balance    $3,326             $3,623              $4,564
Provision for Claims          4,849              6,080               6,591
Payments, net                (4,552)            (5,139)             (5,938)
                             -------            -------             -------
Ending Reserve Balance       $3,623             $4,564              $5,217
                             ======             ======              ======

         The Company has  implemented  and is  enhancing  driver  screening  and
training procedures to promote safe driver practices and enhance compliance with
Department  of  Transportation  regulations.  The Company's  driver  recognition
programs  emphasize  safety and provide for  equipment  maintenance,  helping to
enhance the Company's  overall safety record.  In 1997,  over 1,340 drivers were
honored and obtained  recognition  for  accident  free  driving.  In addition to
periodic recognition for safe operations and regulatory compliance,  the Company
has implemented  several award programs  associated  with particular  customers.
These  programs are intended to provide  incentives for drivers to drive safely,
perform well and maintain their  equipment.  One such program  provides  certain
toter  drivers with a credit for miles  traveled  while  meeting  standards  for
safety and professional  performance.  The owner operator is entitled to use the
amount  credited  to  obtain   reimbursement  from  the  Company  for  equipment
purchases,  maintenance, or upgrade expenses. (This program paid out $213,000 in
1997 to owner  operators).  The  Company  has a Senior  Vice  President  of Risk
Management  and Safety,  Director of Compliance  and  Legalization,  four Safety
Directors,  and a Driver  Trainer  dedicated to assist the  operating  groups in
training and highway safety.  The Company has incentives for  dispatchers  based
upon accident free miles.  In 1997, over $77,000 was paid out under this program
and it is expected that over $80,000 will be paid in 1998 for 1997 performance.

         Interstate,  a wholly-owned  insurance subsidiary of the Company, makes
available  physical damage insurance coverage for the Company's owner operators.
Interstate also writes performance surety bonds for Morgan. The Company may also
utilize its wholly-owned  insurance  subsidiary to secure business insurance for
Morgan through re-insurance contracts.

         Interstate  may begin  offering  new  insurance  products as a managing
general  agent.  Interstate  may  determine  to accept a limited  portion of the
underwriting risk, retaining an appropriate proportion of the premiums.

Competition

         All of the Company's activities are highly competitive.  In addition to
fleets  operated by  manufacturers,  the Company  competes  with large  national
carriers and numerous small regional or local carriers.  The Company's principal
competitors  in  the  Manufactured  Housing  and  Outsourcing  marketplaces  are
privately owned. In the specialized  transport market, the Company competes with
large national  interstate  carriers,  many of whom have  substantially  greater
resources  than the Company.  No assurance can be given that the Company will be
able to maintain its competitive position in the future.

         Competition  among  carriers is based on the rate charged for services,
quality of service, financial strength, and insurance coverage. The availability
of tractor  equipment and the possession of appropriate  registration  approvals
permitting  shipments  between  points  required  by the  customer  may  also be
influential.

Regulation

         The  Company's  interstate  operations  (Morgan and TDI) are subject to
regulation by the Federal Highway Administration  ("FHWA") which is an agency of
the United States Department of Transportation ("D.O.T.").  Effective August 26,
1994,  essentially  all motor common  carriers  were no longer  required to file
individually  determined  rates,  classifications,  rules or practices  with the
former Interstate Commerce  Commission.  Effective January 1, 1995, the economic
regulation  of certain  intrastate  operations  by various  state  agencies  was
preempted  by  federal  law.  The  states  will  continue  to have  jurisdiction
primarily to insure that carriers providing intrastate  transportation  services
maintain  required  insurance  coverage,   comply  with  all  applicable  safety
regulations,  and conform to regulations  governing size and weight of shipments
on state  highways.  Most states have  adopted  D.O.T.  safety  regulations  and
actively enforce them in conjunction with D.O.T. personnel.

         Carriers normally are required to obtain approval and/or authority from
the FHWA as well as various  state  agencies.  Morgan is approved  and/or  holds
authority to provide transportation services from, to, and between all points in
the continental United States.

         The Company  provides  services  to certain  specific  customers  under
contract and non-contract  services to the shipping public pursuant to governing
rates and charges maintained at its corporate and various  dispatching  offices.
Transportation  services provided pursuant to a written contract are designed to
meet a customer's specific shipping needs or by dedicating equipment exclusively
to a given customer for the movement of a series of shipments during a specified
period of time.

         Federal   regulations   govern  not  only   operating   authority   and
registration,  but also such  matters as the  content of  agreements  with owner
operators,  required  procedures for processing of cargo loss and damage claims,
and  financial  reporting.  The  Company  believes  that  it is  in  substantial
compliance with all material regulations applicable to its operations.

         The D.O.T.  regulates  safety  matters with  respect to the  interstate
operations of the Company.  Among other things, the D.O.T.  regulates commercial
driver  qualifications  and licensing;  sets minimum levels of carrier liability
and cargo insurance;  requires carriers to enforce limitations on drivers' hours
of service;  prescribes parts,  accessories and maintenance  procedures for safe
operation of commercial/motor vehicles;  establishes noise emission and employee
health and safety standards for commercial motor vehicle operators; and utilizes
audits,  roadside  inspections  and  other  enforcement  procedures  to  monitor
compliance with all such  regulations.  The D.O.T.  has established  regulations
which mandate random,  periodic,  pre-employment,  post-accident  and reasonable
cause drug  testing for  commercial  drivers.  The D.O.T.  has also  established
similar  regulations  for alcohol  testing.  The Company  believes that it is in
substantial compliance with all material D.O.T.  requirements  applicable to its
operations.

         In  Canada,   provincial   agencies  grant  both   intraprovincial  and
extraprovincial authority; the latter permits transborder operations to and from
the United States.  The Company has obtained from Canadian  provincial  agencies
all required extraprovincial authority to provide transborder  transportation of
manufactured homes and motor homes throughout most of Canada.

         Most manufactured  homes, when being transported by a toter, exceed the
maximum  dimensions  allowed on state  highways  without a special  permit.  The
Company  obtains  these  permits for its owner  operators  from each state which
allows the Company to transport their manufactured homes on state highways.  The
states and Canadian  provinces have special  requirements  for  over-dimensional
loads detailing permitted routes,  timing required,  signage,  escorts,  warning
lights and similar matters.

         Most states and  provinces  also  require  operators to pay fuel taxes,
comply with a variety of other tax and/or  registration  requirements,  and keep
evidence of such  compliance  in their  vehicles  while in transit.  The Company
coordinates  compliance  with  these  requirements  by  its  drivers  and  owner
operators, and monitors their compliance with all applicable safety regulations.

         Interstate,  the Company's insurance subsidiary, is a captive insurance
company incorporated under Vermont law. It is required to report annually to the
Vermont  Department  of Banking  Insurance  &  Securities  and must submit to an
examination by this Department on a triennial basis. Vermont regulations require
Interstate to be audited annually and to have its loss reserves  certified by an
approved actuary.  The Company believes Interstate is in substantial  compliance
with Vermont insurance regulations.

         Finance,  the  Company's  finance  subsidiary,  is  incorporated  under
Indiana law.  Finance is subject to Indiana's Equal Credit  Opportunity Laws and
other state and federal laws relating generally to fair financing practices.

Item 2.  PROPERTIES

         The Company owns  approximately  24 acres of land with  improvements in
Elkhart,  Indiana. The improvements include a 23,000 square foot office building
housing the Company's principal office and Manufactured  Housing; a 7,000 square
foot  building  housing  Outsourcing;  a 9,000 square foot building used for the
Company's  safety and  driver  service  departments;  and an 8,000  square  foot
building partially used for driver training and licensing. Most of the Company's
13 regional and 123 locations are situated on leased property.  The Company also
owns and  leases  property  for  parking  and  storage of  equipment  at various
locations throughout the United States, usually in proximity to manufacturers of
products moved by the Company.  The property  leases have term  commitments of a
minimum of thirty days and a maximum of five years,  at monthly  rentals ranging
from $100 to $11,048.  The Elkhart facility is currently mortgaged to one of the
Company's  lenders.  The following  table  summarizes  the Company's  owned real
property.

Property Location            Property Description     Approximate Acreage
-----------------            --------------------     -------------------
Elkhart, Indiana             Corporate and region              24
Wakarusa, Indiana            Terminal and storage              4
Middlebury, Indiana          Terminal and storage              13
Mocksville, North Carolina   Terminal and storage              8
Edgerton, Ohio               Terminal and storage              2
Woodburn, Oregon             Storage                           4
Woodburn, Oregon             Region and storage                1
Fort Worth, Texas            Region and storage                6
Ocala, Florida               Terminal and storage              4
Montevideo, Minnesota        Terminal and storage              3

Item 3.  LEGAL PROCEEDINGS

         The  Company  and its  subsidiaries  are  party  to  litigation  in the
ordinary course of business,  generally involving liability claims in connection
with traffic accidents  incidental to its transport business.  From time to time
the Company may become party to litigation  arising  outside the ordinary course
of business.  The Company does not expect such pending  suits to have a material
adverse effect on the Company or its results of operations.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         Not applicable.

PART II

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

         The  Company's  Common Stock is traded on the American  Stock  Exchange
under  the  symbol  MG.  As  of  March  25,  1998,  the  approximate  number  of
shareholders  of  record of the  Company's  Class A Common  Stock was 161.  This
figure does not include shareholders with shares held under beneficial ownership
in nominee name or within  clearinghouse  position of brokerage firms and banks.
The Class B Common Stock is held of record by Lynch Corporation.

Market Price of Class A Common Stock:
<TABLE>
<CAPTION>

                                             1997                                          1996
Quarter Ended                    High                    Low                    High                    Low
<S>                            <C>                    <C>                    <C>                     <C>
March 31                        $ 8.38                  $7.00                  $9.38                   $7.56
June 30                          10.25                   8.25                   9.75                    8.00
September 30                     10.25                   8.38                   9.19                    7.25
December 31                      10.38                   8.88                   7.75                    7.13
</TABLE>


Dividends Declared:
<TABLE>
<CAPTION>
                                           Class A                                        Class B
                                        Cash Dividends                                Cash Dividends
Quarter Ended                    1997                   1996                    1997                   1996
<S>                             <C>                    <C>                    <C>                     <C>
March 31                          $.02                   $.02                   $.01                    $.01
June 30                            .02                    .02                    .01                     .01
September 30                       .02                    .02                    .01                     .01
December 31                        .02                    .02                    .01                     .01
</TABLE>


<PAGE>

Item 6.  SELECTED CONSOLIDATED FINANCIAL DATA

THE MORGAN GROUP, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS

(Dollars in thousands, except per share amounts)


<TABLE>
<CAPTION>

                                                         1997            1996           1995            1994              1993
Operations
<S>                                                 <C>              <C>            <C>             <C>               <C>
       Operating Revenues                           $  146,154       $ 132,208      $ 122,303       $ 101,880         $  82,793
       Operating Income (Loss)(1)                        1,015          (3,263)         3,371           3,435             2,267
       Pre-tax Income (Loss)                               296          (3,615)         3,284           3,367             1,714
       Net Income (Loss) before
            Extraordinary Item                             196          (2,070)         2,269           2,212             1,595
       Net Income (Loss)                                   196          (2,070)         2,269           2,212             1,595

Per Share
       Basic Net Income (Loss)
              Class A Common Stock                  $     0.09       $   (0.76)     $    0.81       $    0.79         $    0.75
              Class B Common Stock                        0.05           (0.80)          0.77            0.75              0.72
       Diluted Net Income (Loss)
              Class A Common Stock                        0.09           (0.76)          0.79            0.76              0.70
              Class B Common Stock                        0.05           (0.80)          0.77            0.72              0.68
       Cash Dividends Declared
              Class A Common Stock                        0.08            0.08           0.08            0.08              0.02
              Class B Common Stock                        0.04            0.04           0.04            0.04              0.01

Financial Position
       Total Assets                                 $   32,746       $  33,066      $  30,795       $  28,978         $  24,399
       Working Capital                                   2,129           1,635          8,293          11,045             9,600
       Long-term Debt                                    2,513           4,206          3,275           1,925             2,347
       Redeemable Preferred Stock                           --              --             --           3,104             3,089
       Common Shareholders' Equity                      12,724          13,104         15,578          12,980            11,170
       Common Shares Outstanding at Year End
              Class A Common Stock                   1,437,910       1,485,520      1,449,554       1,366,665         1,366,665
              Class B Common Stock                   1,200,000       1,200,000      1,200,000       1,200,000         1,200,000
       Weighted Average Shares Outstanding:
              Class A Common Stock
                       Basic                         1,456,690       1,484,242      1,382,548       1,366,665           680,730
                       Diluted                       1,463,184       1,486,272      1,422,445       1,447,179           834,816

              Class B Common Stock
                       Basic and Diluted             1,200,000       1,200,000      1,200,000       1,200,000         1,200,000

Other Information
Company Unit Moves
       New Manufactured Homes                          154,389         121,136        114,821          98,181            76,188
       Driver Outsourcing                               45,857          58,368         49,885          32,060            30,978
--------------
</TABLE>
(1)  Operating Income (Loss) in 1997 and 1996 is after special charges of
     $624,000 and $3,500,000, respectively.

Item 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Year 1997 Compared to 1996

         Operating  results for the year ended  December 31,  1997,  compared to
1996 were significantly  impacted by the acquisition of Transit Homes of America
("Transit")  in  December  of  1996  and  the  discontinuance  of the  Truckaway
operation  in May  of  1997.  Transit  is a  provider  of  outsourcing  services
primarily to the Manufactured housing and Specialized transport industries.

         Operating  revenues increased 11% from $132.2 million in 1996 to $146.2
million  in 1997.  Transit  contributed  $21.2  million  of the  1997  operating
revenues.  Revenues from continued  operations,  including Transit and excluding
the Truckaway  operating  revenues of $3.3  million,  increased 19% in 1997 over
1996.

         Manufactured  housing  operating  revenues are generated from arranging
delivery services for new manufactured homes, modular homes and office trailers.
The increase in Manufactured housing operating revenues of 28% was primarily due
to the Transit acquisition.

         Driver  outsourcing  operating  revenues  consist of the  relocation of
consumer rental trucks,  delivery of motor homes, and delivery of new commercial
vehicles.   Decreases  in  relocation  of  rental  trucks,  principally  due  to
management's  decision to de-emphasize  participation in this cyclical  industry
segment and competitive pressures,  was a significant factor contributing to the
13% decline in Driver outsourcing operating revenues.  Additionally,  motor home
operating  revenues decreased through a combination of reduced production from a
major  customer  and  other  competitive  issues.  Operating  revenues  from the
delivery of new commercial  vehicles  declined slightly in 1997 primarily due to
the  realignment  of our customer base in order to better  position this product
line for greater profitability.

         The  discontinuance of the Truckaway  operation in May of 1997 resulted
in a  decline  in  comparable  Specialized  transport  operating  revenues.  The
Specialized  transport  operating  revenues  increased $2.6 million after giving
effect to the  discontinuance  of the  Truckaway  operation.  This  increase was
attributed  to  a  renewed  focus  on  the  Towaway  business  and  the  Transit
acquisition which brought new travel trailer operating revenues.

         The  increase in other  service  revenues of 32% relates  primarily  to
highway permits and labor billings added through the Transit acquisition.

         Operating  income  increased  from a loss  of $3.3  million  in 1996 to
operating  income of $1.0 million in 1997. The operating loss in 1996 included a
special  charge  of $3.5  million  taken  in  connection  with  the  closing  of
unprofitable  operations.  1996  operating  income before the special charge was
$0.2 million.  The 1997 operating  income included two special items,  for a net
charge to income of $0.6 million.  The first item was for a change in accounting
of $1.0  million;  the second  item was a special  credit of $0.4  million.  The
change in accounting  was to account for certain  components of driver pay on an
accrual rather than a cash basis.  The special  credit related  primarily to the
gain on the sale of Truckaway  assets in excess of reserves  established  in the
prior  year.  1997  operating  income  before  the net  special  charge was $1.6
million.

         Operating  income in 1997 was aided by the Transit  acquisition and the
discontinuance of the Truckaway  operation,  which had an operating loss of $1.8
million in 1996. The discontinuance of the Truckaway  operation was in line with
the Company's  plan to exit lines of business which are  unrewarding.  Operating
income was  negatively  impacted by reduced  profits from the  Company's  Driver
outsourcing business.  Additionally,  operating costs and expenses increased due
to terminal  manager  training,  safety training for all Morgan's  employees and
drivers, and an increase in employee-related health benefit cost. The investment
in safety  training was in line with the  Company's  objective of improving  its
safety  performance.  Claims costs in 1997, as a percent of operating  revenues,
increased slightly from 4.6% in 1996 to 4.7% in 1997.

         Selling,  general  and  administrative  expenses  increased  from  $8.2
million in 1996 to $9.7  million  in 1997 of which  approximately  $0.6  million
related  to  costs  associated  with  the  addition  of the  Transit  operation.
Additionally,  expenses  increased  because of higher  computer  lease costs and
higher employee related benefit costs.  These increased  expenses were partially
offset  by  lower  corporate  compensation  costs  as  a  result  of  a  partial
restructuring of the corporate office.

         The decrease in depreciation and amortization  expenses in 1997 related
to the discontinuance of the Truckaway  operation  partially offset by increased
amortization from the Transit acquisition.

         Net  interest  expense  increased  from $0.4  million  to $0.7  million
primarily  due to  increases  in  debt  related  to the  Transit  operation  and
increased borrowing on the credit facility.

         In 1997,  the income  tax  provision  of $0.1  million  resulted  in an
effective  tax rate of 34%, a more  normalized  rate than the 43%  effective tax
benefit in 1996.

         Net income for the Company in 1997 was $0.2 million  (Class A $0.09 and
Class B $0.05 per basic share).  The net loss in 1996 was $2.1 million  (Class A
$0.76 loss and Class B $0.80 loss per basic share).

Year 1996 Compared to 1995

         Operating  revenues  rose by 8% to $132.2  million in 1996 from  $122.3
million in 1995. Prior to giving effect to the TDI acquisition,  which closed on
May 22, 1995,  comparable operating revenues increased 6%. Morgan's Manufactured
housing operating revenues increased 15%, outpacing the 1996 national production
growth of 9%. The growth in Manufactured  housing was partially offset by an 11%
decline in the Company's Specialized transport operations. Specialized transport
was impacted by weakened  demand which drove down the Company's  utilization  of
equipment  and rates.  The  Truckaway  operation of  Specialized  transport  was
discontinued in 1997.

         During 1996,  the Company  reported an operating  loss,  after  special
charges of $3.3  million and a net loss of $2.1  million.  In 1995,  the Company
reported  operating income of $3.4 million and net income of $2.3 million (Class
A $0.81 and Class B $0.77 per basic share). The special charge for 1996 amounted
to $3.5 million before taxes ($2.1 million after tax or $0.78 per share of Class
A and Class B) and resulted from the  discontinuance of the Truckaway  operation
and the write down of four properties.

         The Truckaway  operation  generated  approximately 10% of the Company's
1996 total revenue.  The operating  loss from this  operation was  approximately
$1.8 million in 1996.  During 1996, the Company also initiated a plan to dispose
of certain land and buildings,  two of which were  associated with the Truckaway
operation, that were carried at values which prove to be higher than fair market
value.


<PAGE>

         Excluding  the  special  charges  of  $3.5  million,  operating  income
declined  from $3.4  million  in 1995 to $0.2  million in 1996.  The  decline in
operating  income in 1996 was  attributed to (i) weakened  freight demand in the
Specialized  transport,   (ii)  increases  of  $1.3  million  in  claims  costs,
especially in the Driver  outsourcing  and Specialized  transport,  and (iii) an
increase in operating costs  specifically to build  infrastructure and to invest
in the operating structure.

         The investment in operating  costs  included,  but were not limited to,
dispatch personnel,  regional personnel, and driver retention programs. Selling,
general and  administrative  costs  increased  from $7.3 million in 1995 to $8.2
million  in 1996.  Investments  in 1996  were  made in  automation  of  dispatch
facilities and personnel.  In addition,  the Company had a full year of selling,
general and administrative expenses for the TDI organization.

         Net  interest  expense  increased  from $0.1  million  to $0.4  million
primarily  due to increases in debt related to the TDI  acquisition  and reduced
cash on hand during the year.

         In 1996, the income tax benefit of $1.5 million,  including federal and
state tax  benefits,  resulted in an effective tax benefit of 43% compared to an
effective tax rate of 31 % in 1995.

Liquidity and Capital Resources

         Operating activities used $0.3 million of cash in 1997. Net income plus
the non-cash special charge and  depreciation  and  amortization  were more than
offset by  increases  primarily in trade  accounts  receivable.  Trade  accounts
receivables  increased  $2.1 million due to the increase in 1997 fourth  quarter
operating revenues of 17% and an increase in days sales outstanding to 37 days.

         The Company is focused on reducing overhead, including selling, general
and administration  expense, and redundant operating costs.  Management has also
initiated  processes to expedite  customer  billings and  collections to improve
cash flow.

         Investing  activities  provided cash of $0.7 million in 1997.  Proceeds
from the sale of property and equipment principally from the Truckaway operation
were greater than  capital  expenditures  and  acquisitions  expenditures.  1997
capital expenditures were $0.9 million.  Presently, the 1998 capital expenditure
plan  approximates $1.0 million which will be primarily funded through revolving
credit notes.



<PAGE>

         Net cash used in  financing  activities  increased  to $1.3  million in
1997.  An  increase  of $1.0  million  in  revolving  credit  notes,  additional
financing  of $0.7  million,  and  cash  were  used  for  payments  on term  and
promissory  notes,  purchases of 47,600 shares of Class A common stock,  and the
regular  dividend  payments.  Payments  on term and  promissory  notes were $2.4
million in 1997. Payments on term and promissory notes for 1998 will approximate
$1.2 million.

         Outstanding  revolving  credit  notes  increased  to  $2.5  million  at
December 31,  1997.  The Company,  at December  31, 1997,  had total  borrowings
available for revolving credit notes and letters of credit of $10.0 million,  of
which there was $3.3 million available.  On March 25, 1998, the Company replaced
this facility with a $15.0  million  revolving  line of credit with a bank which
matures on April 30, 2001. Additionally, the Company also obtained from the same
bank an $8.0 million  facility for letters of credit which  expires on April 30,
1999. Revolving credit borrowings are limited to 80% of qualified trade accounts
receivable.  These  facilities  provide  financing  for working  capital  needs,
letters of credit, and general corporate needs.

         It is the current  policy of the  Company to pay annual  Class A common
stock  dividends  totaling  $.08 per share and  Class B common  stock  dividends
totaling  $.04 per share.  Payment of any future  dividends  will be  dependent,
among other things, upon earnings,  capital expenditure requirements,  financing
agreement covenants, future growth plans, legal restrictions,  and the financial
condition of the Company.

         It  is  management's  opinion  that  the  Company's   foreseeable  cash
requirement will be met through a combination of improved  internally  generated
funds and the credit available from the new facility.

Impact of Seasonality

         Shipments of manufactured homes tend to decline in the winter months in
areas where poor weather  conditions  inhibit sales and transport.  This usually
reduces  operating  revenues in the first and fourth quarters of the year. Motor
home and travel  trailer  movements  are  generally  strong in the spring,  when
dealers build stock in  anticipation  of the summer  vacation  season,  and late
summer and early fall when new  vehicle  models are  introduced.  The  Company's
operating  revenues,  therefore,  tend to be  stronger  in the  second and third
quarters.

Impact of Year 2000

         Some  of the  Company's  older  purchased  software  applications  were
written using two digits rather than four digits to define the applicable  year.
As a result,  that  software  may  interpret  a date using "00" as the year 1900
rather  than the year  2000.  This  could  possibly  cause a system  failure  or
miscalculations,  causing  disruptions  of  operations,  including,  among other
things,  a  temporary  inability  to process  transactions,  or engage in normal
business activities.

         The Company is in the process of completing an assessment and will have
to modify or  replace  portions  of its  software  to ensure  that its  computer
systems  will  function  properly  with  respect  to dates in the year  2000 and
thereafter.  The  total  cost of this  year  2000  project  has not  been  fully
quantified,  but  preliminary  assessments  are that  conversion  costs  will be
immaterial  to the  Company.  The  Company  believes  that  with  the  necessary
modifications  to  existing  software  and  any  necessary  conversions  to  new
software, the year 2000 issue does not pose significant operational problems for
its computer systems.

         The cost of the project  and the date on which the Company  believes it
will  complete  the year  2000  modifications  are  based on  management's  best
estimates,  which were derived utilizing numerous  assumptions of future events,
including the continued  availability  of certain  resources and other  factors.
However,  there can be no guarantee  that these  estimates  will be achieved and
actual results could differ materially from those anticipated.  Specific factors
that might cause such material  differences include, but are not limited to, the
availability  and cost of personnel  trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.

         The Company has not completed an evaluation of its major  customers and
suppliers  to  determine  if they have taken  adequate  measures  to ensure that
necessary modifications are made to their software prior to the year 2000. While
the Company is not  dependent on any one  customer or supplier,  failure to make
necessary year 2000  modifications  by any large group of customers or suppliers
could result in a material adverse impact on the Company.


<PAGE>

Forward-Looking Discussion

         This report contains a number of forward-looking  statements. From time
to time, the Company may make other oral or written  forward-looking  statements
regarding its anticipated  operating revenues,  costs and expenses,  earning and
other matters  affecting its  operations  and  condition.  Such  forward-looking
statements  are  subject to a number of material  factors  which could cause the
statements or projections  contained therein to be materially  inaccurate.  Such
factors include,  without  limitation,  the risk of declining  production in the
Manufactured housing industry; the risk of losses or insurance premium increases
from  traffic  accidents;  the  risk  of  loss  of  major  customers;  risks  of
competition  in the  recruitment  and retention of qualified  drivers and in the
transportation  industry generally;  risks of acquisitions or expansion into new
business  lines that may not be  profitable;  risks of changes in regulation and
seasonality  of the  Company's  business.  Such factors are discussed in greater
detail in the  Company's  Annual Report on Form 10-K for 1997 under Part I, Item
1, Business.7

<PAGE>


Item 8.  Financial Statements and Supplementary Data

                     The Morgan Group, Inc. and Subsidiaries
                           Consolidated Balance Sheets
                  (Dollars in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                   December 31
                                                                1997          1996
ASSETS
Current assets:
<S>                                                           <C>           <C>
   Cash and cash equivalents                                  $    380      $  1,308
   Trade accounts receivable, less allowance for doubtful       13,362        11,312
      accounts of $183 in 1997 and $59 in 1996
   Accounts receivable, other                                      126           274
   Refundable taxes                                                263           584
   Prepaid expenses and other current assets                     2,523         2,985
   Deferred income taxes                                         1,095            --
                                                              --------      --------
Total current assets                                            17,749        16,463

Property and equipment, net                                      4,315         2,763
Assets held for sale                                                --         2,375
Intangible assets, net                                           8,451         8,911
Deferred income taxes                                              767         1,683
Other assets                                                     1,464           871
                                                              --------      --------
Total assets                                                  $ 32,746      $ 33,066

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Note payable to bank                                       $  2,250      $  1,250
   Trade accounts payable                                        3,410         3,226
   Accrued liabilities                                           4,966         4,808
   Accrued claims payable                                        2,175         1,744
   Refundable deposits                                           1,666         1,908
   Current portion of long-term debt                             1,153         1,892
                                                              --------      --------
Total current liabilities                                       15,620        14,828


Long-term debt, less current portion                             1,360         2,314
Long-term accrued claims payable                                 3,042         2,820
Commitments and contingencies                                       --            --

Shareholders' equity:
   Common stock, $.015 par value
   Class A:  Authorized shares - 7,500,000                          23            23
   Issued shares - 1,605,553

   Class B: Authorized shares - 2,500,000                           18            18
   Issued and outstanding shares - 1,200,000
   Additional paid-in capital                                   12,453        12,441
   Retained earnings                                             2,160         2,126
                                                              --------      --------
Total capital and retained earnings                             14,654        14,608

Less - treasury stock at cost; 167,643 and                      (1,426)       (1,000)
      120,043 Class A shares
         - loan to officer for stock purchase                     (504)         (504)
                                                              --------      --------
Total shareholders' equity                                      12,724        13,104
                                                              --------      --------

Total liabilities and shareholders' equity                    $ 32,746      $ 33,066
                                                              ========      ========
</TABLE>

See accompanying notes.

<PAGE>

                     The Morgan Group, Inc. and Subsidiaries
                      Consolidated Statements of Operations
                  (Dollars in thousands, except share amounts)


<TABLE>
<CAPTION>
                                                       For the twelve months ended
                                                                December 31

                                                     1997           1996           1995
                                                  ---------      ---------      ---------
Operating revenues:
<S>                                               <C>            <C>            <C>
        Manufactured housing                      $  93,092      $  72,616      $  63,353
        Driver outsourcing                           20,163         23,090         19,842
        Specialized transport                        19,173         26,169         29,494
        Other service revenues                       13,726         10,333          9,614
                                                  ---------      ---------      ---------
                                                    146,154        132,208        122,303

Costs and expenses:
        Operating costs                             133,732        122,238        110,408
        Special charges                                 624          3,500             --
        Selling, general and administration           9,708          8,235          7,260
        Depreciation and amortization                 1,075          1,498          1,264
                                                  ---------      ---------      ---------
                                                    145,139        135,471        118,932
                                                  ---------      ---------      ---------
Operating income (loss)                               1,015         (3,263)         3,371
Net interest expense                                    719            352             87
                                                  ---------      ---------      ---------
Income (loss) before income taxes                       296         (3,615)         3,284

Total Income tax expense (benefit):
        Current                                         279            268            859
        Deferred                                       (179)        (1,813)           156
                                                  ---------      ---------      ---------
Total income tax expense (benefit)                      100         (1,545)         1,015
                                                  ---------      ---------      ---------
Net income (loss)                                       196         (2,070)         2,269
Less preferred dividends                                 --             --            221
                                                  ---------      ---------      ---------
Net income (loss) applicable to common stocks     $     196      ($  2,070)     $   2,048
                                                  =========      =========      =========

Net income (loss) per common share:
      Basic:
        Class A common stock                      $    0.09      ($   0.76)     $    0.81
        Class B common stock                      $    0.05      ($   0.80)     $    0.77
      Diluted:
        Class A common stock                      $    0.09      ($   0.76)     $    0.79
        Class B common stock                      $    0.05      ($   0.80)     $    0.77
</TABLE>
See accompanying notes.


<PAGE>


                     The Morgan Group, Inc. and Subsidiaries
           Consolidated Statements of Changes in Redeemable Preferred
              Stock, Common Stocks, and Other Shareholders' Equity
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                      Redeemable
                                       Series A    Class A     Class B  Additional
                                       Preferred   Common      Common     Paid-in     Officer    Treasury    Retained
                                         Stock      Stock       Stock     Capital      Loan        Stock     Earnings       Total
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>              <C>         <C>    <C>                                  <C>         <C>
Balance at December 31, 1994         $  3,104         $20         $18    $ 10,459                             $  2,483    $ 16,084
   Net income                                                                                                    2,269       2,269
   Redeemable preferred
      Stock dividends:
         Accrued                          221                                                                     (221)         --
         Paid                            (337)                                                                                (337)
   Redemption of Series A
      Preferred stock                  (2,988)          2                   1,686                                           (1,300)
   Conversion of warrants,
      including tax benefit                             1                     296                                              297
   Purchase of treasury stock                                                                      (1,274)                  (1,274)
   Common stock dividends:
      Class A ($.08 per share)                                                                                    (113)       (113)
      Class B ($.04 per share)                                                                                     (48)        (48)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995                           23          18      12,441                  (1,274)       4,370      15,578
   Net (loss)                                                                                                   (2,070)     (2,070)
   Sale of treasury stock, net                                                           (504)        274                     (230)
   Common stock dividends:
      Class A ($.08 per share)                                                                                    (126)       (126)
      Class B ($.04 per share)                                                                                     (48)        (48)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996                           23          18      12,441        (504)     (1,000)       2,126      13,104
   Net income                                                                                                      196         196
   Purchase of treasury stock                                                                        (426)                    (426)
   Common stock dividends:
      Class A ($.08 per share)                                                                                    (114)       (114)
      Class B ($.04 per share)                                                                                     (48)        (48)
    Issuance of a director's
      stock options                                                            12                                               12
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997                     $     23    $     18    $ 12,453    ($   504)   ($ 1,426)    $  2,160    $ 12,724
===================================================================================================================================
</TABLE>

See accompanying notes.


<PAGE>

                     The Morgan Group, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                      For the twelve months ended
                                                                             December 31
                                                                     1997        1996        1995
                                                                    -------     -------     -------
Operating activities:
<S>                                                                 <C>         <C>         <C>
Net income (loss)                                                   $   196     ($2,070)    $ 2,269
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
          Depreciation and amortization                               1,108       1,533       1,304
          Deferred income taxes                                        (179)     (1,719)        156
          Special charges                                               624       3,500          --
          Non-cash compensation expense for stock options                12
          (Gain) loss on disposal of property and equipment             (37)         37         (19)

Changes in operating assets and liabilities:
          Trade accounts receivable                                  (2,050)        (27)     (1,743)
          Other accounts receivable                                     148         240         (92)
          Refundable taxes                                              321        (584)         --
          Prepaid expenses and other current assets                     429        (431)       (372)
          Other assets                                                 (593)       (374)        (44)
          Trade accounts payable                                        184        (779)         45
          Accrued liabilities                                          (890)         86         433
          Accrued claims payable                                        653         341         297
          Refundable deposits                                          (242)        363         157
                                                                    -------     -------     -------
          Net cash (used in) provided by operating activities          (316)        116       2,391

Investing activities:
          Purchases of property and equipment                          (919)       (780)     (1,955)
          Proceeds from sale of property and equipment                  159          94          28
          Proceeds from disposal of assets held                       1,656          --          --
          Business acquisitions                                        (227)       (895)     (1,018)
                                                                    -------     -------     -------
          Net cash provided by (used in) investing activities           669      (1,581)     (2,945)

Financing activities:
          Net proceeds from notes payable to bank                     1,000       1,250          --
          Principle payments on long-term debt                       (2,366)       (924)       (514)
          Proceeds from long-term debt                                  673          --          --
          Conversion of warrants                                         --          --         297
          Purchase of treasury stock                                   (426)       (286)     (1,274)
          Proceeds from sale of treasury stock                           --          56          --
          Redemption of series A preferred stock                         --          --      (1,300)
          Common stock dividends paid                                  (162)       (174)       (161)
          Redeemable preferred stock dividends paid                      --          --        (337)
                                                                    -------     -------     -------
          Net cash used in financing activities                      (1,281)        (78)     (3,289)
                                                                    -------     -------     -------

          Net decrease in cash and cash equivalents                    (928)     (1,543)     (3,843)

          Cash and cash equivalents at beginning of period            1,308       2,851       6,694
                                                                    -------     -------     -------

          Cash and cash equivalents at end of period                $   380     $ 1,308     $ 2,851
===================================================================================================
</TABLE>
See accompanying notes.


<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

         The  Morgan  Group,   Inc.   ("Company"),   through  its  wholly  owned
subsidiaries, Morgan Drive Away, Inc. ("Morgan") and TDI, Inc. ("TDI"), provides
outsourced  transportation and logistical  services to the manufactured  housing
and motor home industries and is a leading provider of delivery  services to the
commercial truck and trailer industries in the United States.  Lynch Corporation
("Lynch") owns all of the 1,200,000 shares of the Company's Class B Common stock
and 155,000 shares of the Company's Class A Common stock, which in the aggregate
represents  67% of the  combined  voting  power of the  combined  classes of the
Company's Common Stock.

         The  Company's  services also include  certain  insurance and financing
services  to  its  owner  operators   through   Interstate   Indemnity   Company
("Interstate")  and  Morgan  Finance,  Inc.   ("Finance"),   both  wholly  owned
subsidiaries.  Operating  revenues,  operating profits,  or identified assets of
these  subsidiaries  do not  account  for  over 10% of the  Company's  operating
revenues, operating profits, or identifiable assets, and accordingly, no
segment information is required.

         A majority of the Company's accounts  receivable are due from companies
in the  manufactured  housing,  motor  home,  and  commercial  truck and trailer
industries  located  throughout  the United  States.  While the Company does not
consider its business to be dependent upon any one customer,  services  provided
to Fleetwood Enterprises,  Inc. accounted for approximately 21%, 20%, and 24% of
operating  revenues in 1997,  1996,  and 1995 and 15% and 12% of gross  accounts
receivables at December 31, 1997 and 1996,  respectively.  In addition,  Oakwood
Homes Corporation accounted for approximately 16% of operating revenues in 1997,
and 10% of gross accounts receivables at December 31, 1997.

Principles of Consolidation

         The  consolidated  financial  statements  include  the  accounts of the
Company and its subsidiaries,  Morgan, TDI, Interstate, and Finance. Significant
inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect (i) the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements;  and (ii) the reported  amounts of  operating  revenues and expenses
during the reporting  period.  Actual results could materially differ from those
estimates.



<PAGE>
Recognition of Operating Revenues

         Operating  revenues and related driver pay are recognized when movement
of the product is  completed.  Other  operating  expenses  are  recognized  when
incurred.

Cash Equivalents

         All highly liquid  investments  with a maturity of three months or less
when purchased are considered to be cash equivalents.

Property and Equipment

         Property  and  equipment  is stated at cost.  Depreciation  is computed
using the  straight-line  method over the estimated useful lives of the property
and equipment.

Intangible Assets

         Intangible  assets,  including  goodwill,  are being  amortized  by the
straight-line method over their estimated useful lives.

Impairment of Assets

         The  Company  periodically  assesses  the net  realizable  value of its
long-lived  assets and evaluates such assets for impairment  whenever  events or
changes in  circumstances  indicate the  carrying  amount of an asset may not be
recoverable.  For  assets  to be  held,  impairment  is  determined  to exist if
estimated  undiscounted future cash flows are less than the carrying amount. For
assets to be disposed of, impairment is determined to exist if the estimated net
realizable value is less than the carrying amount.  As discussed in Note 17, the
Company recognized an adjustment during 1996 for write-downs of certain assets.

Insurance and Claim Reserves

         The Company maintains liability insurance coverage of up to $25,000,000
per occurrence, with a deductible of $250,000 per occurrence for personal injury
and property damage.  The Company currently  maintains cargo damage insurance of
$1,000,000 per  occurrence  with a deductible of $250,000.  The Company  carries
statutory  insurance  limits  on  workers'  compensation  with a  deductible  of
$50,000.  Claims and insurance  accruals reflect the estimated  ultimate cost of
claims for cargo  loss and  damage,  personal  injury  and  property  damage not
covered by insurance.  The Company accrues its self-insurance  liability using a
case reserve  method based upon claims  incurred and estimates of unasserted and
unsettled claims and these reserves have not been discounted.

Stock Based Compensation

         The Company  accounts  for stock based  compensation  under  Accounting
Principles  Board  Opinion No. 25  "Accounting  for Stock Issued to  Employees".
Because the exercise  price of the Company's  employee  stock options equals the
market  price of the  underlying  stock on the date of  grant,  no  compensation
expense is recognized.  Pro forma information  regarding net income and earnings
per share as if the Company had accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value  method,  which is required
by Statement of Financial  Accounting  Standards No. 123,  "Accounting for Stock
Based Compensation," is immaterial.

Net Income (Loss) Per Common Share

         Effective for the Company's  consolidated  financial statements for the
year ended  December  31,  1997,  the Company  adopted  Statement  of  Financial
Accounting  Standards  (SFAS) No. 128,  "Earnings per Share," which replaces the
presentation of primary  earnings per share ("EPS") and fully diluted EPS with a
presentation  of basic EPS and diluted  EPS,  respectively.  Basic EPS  excludes
dilution and is computed by dividing earnings  available to each class of common
stock by the  weighted  average  number of  common  shares  outstanding  for the
period. Similar to fully diluted EPS, diluted EPS assumes the issuance of common
stock  for  all  potentially   dilutive  equivalent  shares   outstanding.   All
prior-period  EPS data have been  restated.  The adoption of this new accounting
standard did not have a material  effect on the  Company's  reported EPS amounts
other than disclosing EPS for each class of common stock.

         Earnings  available  to each  class of  common  stock are  computed  by
reducing  net income by the amount of dividends  declared in the current  period
for each  class of stock  and by the  contractual  amounts  that must be paid to
preferred  stockholders,  if  any.  The  remaining  undistributed  earnings  are
allocated  to each  class of  common  stock  equally  per  share.  The  earnings
available to each class of common stock are  determined  by adding  together the
amount  allocated  for  dividends  and  the  amount  of  undistributed  earnings
allocated.

         The net income  (loss)  applicable to common stocks is the same for the
basic and diluted EPS  computations  for 1997 and 1996. For 1995, the difference
between the net income  applicable to common stocks used in the EPS calculations
is the reallocation of undistributed  earnings of $13,000 between Class A common
stock and Class B common stock.  The following table  reconciles the differences
between basic and diluted weighted average shares outstanding.

<TABLE>
<CAPTION>

                                          For the twelve months ended December 31
                                            1997            1996           1995
                                          ---------       ---------      ---------
Weighted average shares outstanding
Class A stock:
<S>                                       <C>             <C>            <C>
   Basic                                  1,456,690       1,484,242      1,382,548
   Dilutive effect of stock options           6,494           2,030          4,742
   Dilutive effect of warrants                   --              --         35,155
                                          ---------       ---------      ---------
   Diluted                                1,463,184       1,486,272      1,422,445
                                          =========       =========      =========

Class B stock - basic and diluted         1,200,000       1,200,000      1,200,000
                                          =========       =========      =========
</TABLE>


Recent Accounting Pronouncements

         In June 1997, the Financial  Accounting  Standards  Board (FASB) issued
SFAS No. 130, "Reporting  Comprehensive Income," which is effective beginning in
1998.  SFAS  No.  130  establishes  standards  for  reporting  and  display  for
comprehensive  income  and  its  components  in a full  set of  general  purpose
financial  statements.  Comparative  periods are required to be  reclassified to
reflect the  provisions  of the  statement.  The  adoption of this SFAS will not
affect earnings as previously reported.

         In June 1997,  the FASB also issued SFAS No.  131,  "Disclosures  About
Segments  of  an  Enterprise  and  Related   Information."  This  SFAS  requires
disclosure of selected financial and descriptive  information for each operating
segment based on management's internal organizational decision-making structure.
Additional  information  is  required  on a  company-wide  basis  for  operating
revenues by product or service,  operating  revenues and identifiable  assets by
geographic  location and information  about significant  customers.  The Company
will begin presenting any additional  information as required by SFAS No. 131 in
its financial statements for the year ending December 31, 1998.

2.  PROPERTY AND EQUIPMENT

         Property and equipment consisted of the following (in thousands):

                                          Estimated        December 31
                                          Useful Life      1997         1996
--------------------------------------------------------------------------------
                                           (Years)

Land                                          --            $925         $487
Buildings                                 25               1,763          524
Transportation equipment                  3 to 5             620        1,470
Office and service equipment              5 to 8           3,293        3,145
--------------------------------------------------------------------------------
                                                           6,601        5,626
Less accumulated depreciation                              2,286        2,863
--------------------------------------------------------------------------------
Property and equipment, net                               $4,315       $2,763
--------------------------------------------------------------------------------

3.  INTANGIBLE ASSETS

         The components of intangible  assets and their  estimated  useful lives
are as follows (in thousands):
                                        Estimated       December 31
                                       Useful Life        1997          1996
--------------------------------------------------------------------------------
                      (Years)

Trained work force                         3 to 12       $  880        $  880
Covenants not to compete                   5 to 15        1,206         1,170
Trade name and goodwill - original         40             1,660         1,660
Trade name and goodwill - purchased        20             6,894         6,812
--------------------------------------------------------------------------------
                                                         10,640        10,522
Less accumulated amortization                             2,189         1,611
--------------------------------------------------------------------------------
Intangible assets, net                                   $8,451        $8,911
--------------------------------------------------------------------------------
<PAGE>


4.  INDEBTEDNESS

         The Company at December 31, 1997 had credit  facilities of $10,000,000,
of which  $2,250,00 of  revolving  credit  notes  (bearing  interest at 8.5% per
annum),  and  $4,490,000  of letters of credit were  outstanding.  The remaining
$3,260,000 was available for borrowing.  On March 25, 1998, the Company replaced
this facility with a $15,000,000  revolving line of credit that matures on April
30, 2001.  Additionally,  the Company  obtained from the same bank an $8,000,000
facility for letters of credit which expires on April 30, 1999. Revolving credit
borrowings  are limited to 80% of qualified  trade  accounts  receivable.  These
facilities  provide financing for working capital needs,  letters of credit, and
general corporate needs.

         Interest on the line of credit is determined at the Company's option at
the time of the borrowing,  based on the bank's prime rate or until December 31,
1998 at the London Interbank Offering Rate ("LIBOR"), plus 165 basis points. The
LIBOR rate will be adjusted  after  December 31, 1998. The letter of credit rate
is the applicable LIBOR margin rate.

         The  agreement  requires  payment  of a closing  fee of  $25,000  and a
facility fee of 25 basis points payable  quarterly on the $15,000,000  revolving
line of credit.  The Company,  beginning in 1998, is to maintain certain minimum
levels  of net  worth  and a debt to net  worth  and  interest  coverage  ratio.
Borrowings  are  secured  by  the  trade  accounts  receivable,   transportation
equipment, office and service equipment, and general intangible assets.

<PAGE>


         As of  December  31, 1997 and 1996,  long-term  debt  consisted  of the
following (in thousands):

                                                                December 31
                                                             1997          1996
                                                            ------        ------

Promissory note, principal due on January 2, 1997               --        $  697
Real estate note with principal and interest
     payable monthly through November 1, 1997                   --           330
Term note with imputed interest at 6.509%,
     principal and interest payments due
     monthly through April 25, 1998                         $  303            --
Promissory note with imputed interest at 8.0%,
     principal and interest payments due
     annually through September 1, 1998                        112           270
Term note with principal and interest payable
     monthly at 8.25% through July 31, 2000                    232           341
Promissory note with imputed interest at 7.81%,
     principal and interest payments due
     annually through August 11, 2000                          914         1,154
Promissory note with imputed interest at 7.0%,
     principal and interest payments due
     monthly through October 31, 2001                          205           256
Promissory note with imputed interest at 6.31%,
     principal and interest payments due
     quarterly  through December 31, 2001                      747         1,158
                                                            ------        ------
                                                             2,513         4,206
Less current portion                                         1,153         1,892
                                                            ------        ------
Long-term debt, net                                         $1,360        $2,314
                                                            ======        ======



Maturities on long-term debt for the five succeeding
years are as follows:

                      1998                           $1,153
                      1999                              627
                      2000                              545
                      2001                              140
                      2002                               48
                                                     ------
                                                     $2,513
                                                     ======

Cash payments for interest were $717,000 in 1997, $482,000 in 1996, and $308,000
in 1995.



<PAGE>

5.  INCOME TAXES

         Deferred tax assets and liabilities are determined based on differences
between  financial  reporting  and tax bases of assets and  liabilities  and are
measured  using the  enacted  tax rates and laws that will be in effect when the
differences are expected to reverse.


         The income tax  provisions  (benefits)  are  summarized  as follows (in
thousands):

                                      1997           1996        1995
                                      ----           ----        ----
            Current:
              State                      --      $     28       $   180
              Federal                  $279           240           679
                                     ------       -------        ------
                                        279           268           859
            Deferred
              State                      45          (267)           --
              Federal                  (224)       (1,546)          156
                                     ------       -------        ------
                                       (179)       (1,813)          156
                                     ------       -------        ------
                                     $  100       $(1,545)       $1,015
                                     ======       =======        ======

         Deferred tax assets  (liabilities)  are  comprised of the  following at
December 31 (in thousands):

                                      1997          1996
                                    -------       -------
Deferred tax assets:
   Accrued insurance claims         $ 2,080       $ 1,595
   Special charges                      734         1,260
   Minimum tax carryforward              42            96
                                    -------       -------
                                      2,856         2,951
Deferred tax liabilities:
   Depreciation                        (684)         (709)
   Prepaid expenses                    (290)         (482)
   Other                                (20)          (77)
                                    -------       -------
                                       (994)       (1,268)
                                    -------       -------
                                    $ 1,862       $ 1,683
                                    =======       =======

         A reconciliation  of the income tax provisions and the amounts computed
by applying the statutory  federal income tax rate to income before income taxes
follows (in thousands):

                                     1997          1996          1995
                                    -------       -------       -------
Income tax provision (benefit)
  at federal statutory rate         $   101       $(1,229)      $ 1,117
Increases (decreases):
  State income tax, net of
    federal tax benefit                   3          (155)          118
  Reduction attributable to
  special election by captive
   insurance company                   (155)         (216)         (223)
Permanent differences                    94            50            --
Other                                    57             5             3
                                    -------       -------       -------
                                    $   100       $(1,545)      $ 1,015
                                    =======       =======       =======

         Cash payments for income taxes were $54,000 in 1997,  $934,000 in 1996,
and $736,000 in 1995.


<PAGE>

6.    COMMON STOCKS

         The Company has two classes of common  stock  outstanding,  Class A and
Class B. Under the bylaws of the Company:  (i) each share of Class A is entitled
to one vote and each share of Class B is  entitled  to two  votes;  (ii) Class A
stockholders  are  entitled  to a  dividend  ranging  from one to two  times the
dividend declared on Class B stock; (iii) any stock  distributions will maintain
the same  relative  percentages  outstanding  of Class A and  Class B;  (iv) any
liquidation  of the  Company  will  be  ratably  made  to  Class  A and  Class B
stockholders  after  satisfaction  of the Company's other  obligations;  and (v)
Class B stock is convertible into Class A stock at the discretion of the holder;
Class A stock is not convertible into Class B stock.

7.   REDEEMABLE PREFERRED STOCK

         The  Company  redeemed  the Series A  Redeemable  Preferred  Stock in a
transaction  approved by a special meeting of the Board of Directors on November
22, 1995. The  transaction  involved the  redemption of the 1,493,942  preferred
shares owned by Lynch Corporation in exchange for $1,300,000 in cash and 150,000
shares of Class A Common stock. The  consideration  received in exchange for the
shares  of  Class A Common  stock  exceeded  the  book  value at the date of the
exchange by $450,000.  The resulting  premium was recorded as an increase to the
paid-in capital account in the Company's shareholders' equity.

         On December 7, 1994,  June 22, 1995 and November 22, 1995, the Board of
Directors  declared Series A Redeemable  Preferred Stock cash dividends pursuant
to its terms. Accordingly,  $337,000 of cash dividends were paid to Lynch during
1995.

8.  STOCK WARRANTS

         In June 1995, an officer  exercised  warrants to purchase 88,888 shares
of Class A Common  stock at an option  price of $.75 per  share.  This  exercise
represented two-thirds of the total outstanding warrants. The final third of the
warrants, representing 44,445 shares, were cancelled.

         The Company accepted 22,660 shares of stock from the officer to satisfy
the federal  income tax  withholding  resulting from the warrant  exercise.  The
stock price on the warrant exercise date was $8.375 per share.

9.  STOCK OPTION PLAN

         On June 4, 1993,  the Board of  Directors  approved  the  adoption of a
stock option plan which provides for the granting of incentive or  non-qualified
stock  options  to  purchase  up to  200,000  shares of Class A Common  stock to
officers,  including members of the Board of Directors, and other key employees.
No options may be granted under this plan for less than the fair market value of
the Common  stock at the date of the  grant,  except  for  certain  non-employee
directors.  Although the exercise period is determined when options are actually
granted, an option shall not be exercised later than ten years and one day after
it is granted.  Stock options granted will terminate if the grantee's employment
terminates  prior to  exercise  for reasons  other than  retirement,  death,  or
disability.  Stock options vest over a four year period pursuant to the terms of
the plan, except for stock options granted to a non-employee director, which are
immediately vested.

         Employees  have been granted  non-qualified  stock  options to purchase
118,000 shares of Class A Common stock, net of cancellations  and exercises,  at
prices ranging from $7.38 to $9.38 per share.  Non-employee  directors have been
granted  non-qualified stock options to purchase 49,000 shares of Class A Common
stock, net of cancellations and exercises, at prices ranging from $6.20 to $9.00
per share.  As of December  31,  1997,  there were  110,625  options to purchase
shares granted to employees and  non-employee  directors which were  exercisable
based upon the vesting  terms,  of which all shares had option  prices less than
the December 31, 1997 closing  price of $9.25.  The following  table  summarizes
activity under the option plan:

                                                Shares          Option Price
--------------------------------------------------------------------------------
   Outstanding at December 31, 1994            160,500
                   Grants                       15,000          $7.88 - $8.38
                   Exercises                    (1,250)
                   Cancellations               (35,250)
--------------------------------------------------------------------------------
   Outstanding at December 31, 1995            139,000
                   Grants                       48,500          $7.38 - $8.69
                   Exercises                    ------
                   Cancellations               (12,000)
--------------------------------------------------------------------------------
   Outstanding at December 31, 1996            175,500
                   Grants                       25,500          $6.20 - $9.38
                   Exercises                    ------
                   Cancellations               (34,000)
--------------------------------------------------------------------------------
   Outstanding at December 31, 1997            167,000


<PAGE>
10.  SPECIAL EMPLOYEE STOCK PURCHASE PLAN

         In  February  of 1996,  the Company  adopted a Special  Employee  Stock
Purchase Plan ("Plan") under which an officer purchased 70,000 shares of Class A
Common  stock from  treasury  stock at the then  current  market  value price of
$560,000.  Under the terms of the Plan, $56,000 was delivered to the Company and
a  promissory  note was  executed in the amount of $504,000  bearing an interest
rate of five (5%) percent per annum due in 2003. Interest for 1997 was forgiven.
The Plan allows for repayment of the note using shares at $8.00 per share.

11.  TREASURY STOCK

         The  Company's  Board of  Directors  has approved the purchase of up to
250,000  shares of Class A Common  stock for its  Treasury at various  dates and
market prices.  As of December 31, 1997,  149,255 shares had been repurchased at
prices between $7.25 and $10.25 per share for a total of $1,266,000. In addition
to these purchases, the 22,660 shares tendered to the Company as a result of the
exercise  of  warrants  (see Note 8) were  placed in the  Treasury at a value of
$190,000.  On December 15, 1995, the Company's  Board of Directors  approved the
repurchase  of 66,228  shares  from a prior  officer of the  Company at a market
price of $8.00 per share totaling $530,000.

12.  BENEFIT PLAN

         The  Company  has a 401(k)  Savings  Plan  covering  substantially  all
employees,  which matches 25% of the employee  contributions  up to a designated
amount. The Company's contributions to the Plan were $38,000 in 1997, $27,000 in
1996, and $23,000 in 1995.

13.  TRANSACTIONS WITH LYNCH

         The Company pays Lynch an annual service fee of $100,000 for executive,
financial  and  accounting,  planning,  budgeting,  tax,  legal,  and  insurance
services.  Additionally,  Lynch charged the Company for officers' and directors'
liability  insurance  $16,000 in 1997,  $15,000 in 1996, and $15,000 in 1995. As
discussed in Note 7, the Redeemable  Preferred Stock owned by Lynch  Corporation
was redeemed during 1995 at a discount.

         The  Company's  Class A and  Class B  Common  Stock  owned  by Lynch is
pledged to secure a Lynch Corporation line of credit.

14.  LEASES

         The  Company  leases  certain  land,  buildings,   computer  equipment,
computer  software,  and motor equipment under  non-cancelable  operating leases
that expire in various  years  through  2002.  Several land and building  leases
contain monthly renewal options.  Total rental expenses were $2,531,000 in 1997,
$2,087,000 in 1996, and $1,804,000 in 1995.

         Future  payments  under  non-cancelable  operating  leases with initial
terms of one year or more  consisted  of the  following at December 31, 1997 (in
thousands):

                   1998                                  $1,732
                   1999                                     813
                   2000                                     260
                   2001                                       6
                   2002                                       1
                   --------------------------------------------
                   Total lease payments                  $2,812
                   ============================================

15.  ACQUISITIONS

         Effective  May 22,  1995,  the Company  purchased  the assets of TDI, a
market leader in the driver outsourcing services business focusing on relocating
rental  equipment for a total purchase price of $2,750,000.  The acquisition was
financed  through a payment of $1,000,000  on May 11, 1995,  with the balance of
$1,725,000  financed  with the seller over five years.  The present value of the
acquisition  was  $2,462,000;  $75,000 of which related to the operating  assets
purchased and $2,387,000 to the purchase of intangible assets. In addition,  the
Company entered into a consulting  agreement with two of the principals from the
seller,  pursuant to which the principals agreed to provide consulting  services
to the Company  for  sixty-three  months for  consideration  totaling  $202,500,
payable over the consulting  period.  The book value of the  promissory  note in
this transaction was $914,000 at December 31, 1997.


<PAGE>

         Effective  December  30,  1996,  the  Company  purchased  the assets of
Transit  Homes of  America,  Inc.,  a provider  of  outsourcing  services to the
manufactured  housing  and  specialized  transport  industries.   The  aggregate
purchase price was $4,417,000  which  includes the cost of the  acquisition  and
certain limited liabilities assumed as part of the acquisition.  The acquisition
was financed through available cash resources and issuance of a promissory note.
In addition,  the Company  entered into an employment  agreement with the seller
which provides for incentive  payments up to $300,000 and $200,000 in years 1998
and 1999,  respectively,  and  $100,000 in each of the years 2000 and 2001.  The
incentive  payments  are  based  upon  achieving  certain  profit  levels in the
Company's Manufactured Housing Group and will be treated as compensation expense
if earned.  The excess  purchase  price over assets  acquired was  approximately
$4,091,000  and is being  amortized  over twenty years.  In connection  with the
acquisition, liabilities assumed were as follows (in thousands):


         Fair value of assets acquired                         $326
         Goodwill acquired                                    4,091
         Cash paid                                             (940)
         Note issued due January 2, 1997                       (697)
         Note issued at acquisition date                     (1,158)
                                                            -------
         Liabilities assumed                                $ 1,622
                                                            =======

16.   CONTINGENCIES

         The Company has general  liabilities  claims  pending,  incurred in the
normal course of business for which the Company  maintains  liability  insurance
covering amounts in excess of its self-insured  retention.  Management  believes
that adequate reserves have been established on its self-insured claims and that
their  ultimate  resolution  will  not have a  material  adverse  effect  on the
consolidated financial position, liquidity, or operating results of the Company.

17.  SPECIAL CHARGES

         In the fourth quarter of 1996, the Company  recorded special charges of
$2,675,000   ($1,605,000  after  tax)  associated  with  exiting  the  truckaway
operation.  The special  charges were comprised  principally of the  anticipated
loss on sales of revenue equipment, projected losses through April 30, 1997, and
write-downs of accounts receivable and other assets.  Additionally,  the Company
recognized an adjustment  to the carrying  value of four  properties of $825,000
($495,000 after tax).

         A pretax  special  charge for 1997 of $624,000  ($412,000  after tax or
$0.16  per Class A and  Class B share)  is  comprised  of gains in excess of the
estimated net realizable value  associated with exiting the truckaway  operation
discussed  above of $361,000,  offset by charges  related to driver pay.  During
1997,  management  concluded  that certain  components  of driver pay were being
accounted for on a cash basis.  Accordingly,  the Company recorded total charges
of $1.2 million ($985,000 in special charges and $215,000 as operating costs) in
the fourth  quarter of 1997 to account  for all  components  of driver pay on an
accrual basis.  It is the opinion of management  that the effects of this change
in accounting  are immaterial to the results of operations of the previous years
presented.


<PAGE>

18.  OPERATING COSTS AND EXPENSES (in thousands)

<TABLE>
<CAPTION>
                                                        1997             1996              1995
------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>                <C>
Purchased transportation costs                       $100,453         $ 92,037           $84,315
Operating taxes and licenses                            7,284            6,460             6,052
Insurance                                               3,524            3,502             4,000
Claims                                                  6,913            6,080             4,797
Dispatch costs                                          9,492            8,204             6,997
Regional costs                                          4,917            3,733             2,900
Repairs and maintenance                                   350              918               770
Other                                                     799            1,304               577
------------------------------------------------------------------------------------------------
                                                     $133,732         $122,238          $110,408
================================================================================================
</TABLE>


19.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         The following is a summary of unaudited quarterly results of operations
for the years ended  December  31,  1997 and 1996 (in  thousands,  except  share
data):

<TABLE>
<CAPTION>
                                           1997  -----  Three Months Ended
                                          March 31      June 30      Sept. 30      Dec. 31
                                          --------      -------      --------      -------
<S>                                        <C>           <C>           <C>         <C>
Operating revenues                         $33,633       $39,211       $38,290     $35,020
Operating income (loss)                        431         1,286         1,251      (1,953)
Net income (loss)                              266           699           705      (1,474)
Net income (loss) per common share:

Class A common stock
   Basic                                      0.10          0.27          0.27       (0.55)
   Diluted                                    0.10          0.27          0.26       (0.55)

Class B common stock
   Basic                                      0.09          0.26          0.26       (0.56)
   Diluted                                    0.09          0.26          0.25       (0.56)
</TABLE>

<TABLE>
<CAPTION>
                                          1996  -----  Three Months Ended
                                          March 31      June 30       Sept. 30      Dec. 31
                                          --------      -------       --------      -------
<S>                                        <C>           <C>           <C>          <C>
Operating revenues                         $30,506       $36,698       $35,305      $29,699
Operating income (loss)                        (48)          678           788       (4,681)
Net income (loss)                                9           417           495       (2,991)
Net income (loss) per common share:

Class A common stock
   Basic                                      0.01          0.16          0.19       (1.11)
   Diluted                                    0.01          0.16          0.19       (1.11)

Class B common stock
   Basic                                      0.00          0.15          0.18       (1.12)
   Diluted                                    0.00          0.15          0.18       (1.12)
</TABLE>

         In the fourth quarter of 1997, the Company  recorded special charges of
$624,000  ($412,000  after tax, or $0.16 per Class A and Class B share).  In the
fourth  quarter of 1996,  the Company  recorded  special  charges of  $3,500,000
($2,100,000 after taxes, or $0.78 per Class A and Class B share). See Note 17.

<PAGE>



                         Report of Independent Auditors

The Board of Directors
The Morgan Group, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets of The Morgan
Group,  Inc. and  subsidiaries as of December 31, 1997 and 1996, and the related
consolidated  statements of operations,  changes in redeemable  preferred stock,
common stocks and other shareholders'  equity and cash flows for each of the two
years in the period  ended  December  31,  1997.  Our audits also  included  the
financial  statement schedule listed in Item 14(a).  These financial  statements
and  schedule  are  the   responsibility  of  the  Company's   management.   Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of The Morgan Group,
Inc.  and  subsidiaries  at  December  31, 1997 and 1996,  and the  consolidated
results  of their  operations  and their cash flows for each of the two years in
the period ended  December 31,  1997,  in  conformity  with  generally  accepted
accounting  principles.  Also, in our opinion,  the related financial  statement
schedule, when considered in relation to the basic financial statements taken as
a whole,  presents  fairly in all material  respects the  information  set forth
therein.



Greensboro, North Carolina
March 4, 1998, except for Note 4,
  as to which the date is
  March 25, 1998

<PAGE>

To the Shareholders and Board of Directors of
The Morgan Group, Inc.:

         We have audited the accompanying consolidated statements of operations,
changes in redeemable  preferred  stock,  common stocks and other  shareholders'
equity and cash flows of The Morgan  Group,  Inc. (a Delaware  Corporation)  and
Subsidiaries  for the year ended December 31, 1995.  These financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audit.

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

         In our opinion,  the  financial  statements  referred to above  present
fairly,  in all material  respects,  the results of operations and cash flows of
The Morgan Group,  Inc. and Subsidiaries for the year ended December 31, 1995 in
conformity with generally accepted accounting principles.

                                                    /s/ ARTHUR ANDERSEN LLP

Chicago, Illinois
February 5, 1996

<PAGE>




Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURE
         None.

PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  required by this item is incorporated by reference to
the section  entitled  "Proposal  One - Election of  Directors" of the Company's
Proxy Statement for its 1998 Annual Meeting of Stockholders expected to be filed
with the Commission on or about April 30, 1998 (the "1998 Proxy Statement").

Item 11.  EXECUTIVE COMPENSATION

         The  information  required  by this  item  with  respect  to  executive
compensation is incorporated  by reference to the section  entitled  "Management
Remuneration" of the 1998 Proxy Statement.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

         The  information  required by this item is incorporated by reference to
the sections  entitled  "Voting  Securities and Principal  Holders  Thereof" and
entitled "Proposal One - Election of Directors" of the 1998 Proxy
Statement.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  required by this item is incorporated by reference to
the section  entitled  "Certain  Transactions  with Related Persons" of the 1998
Proxy Statement.


<PAGE>



PART IV
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1)   Financial Statements

         The following consolidated financial statements are included in Item 8:

         Consolidated Balance Sheets

         Consolidated Statements of Operations

         Consolidated Statements of Change in Redeemable Preferred
              Stock, Common Stocks and Other Shareholders' Equity

         Consolidated Statements of Cash Flows

         Notes to Consolidated Financial Statements

         Reports of Independent Auditors

(a)(2)   Financial Statement Schedules
         Schedule II - Valuation and Qualifying Accounts

(a)(3)   Exhibits Filed.

         The exhibits filed herewith or incorporated by reference herein
         are set forth on the Exhibit Index. Included in those exhibits
         are management contracts and compensatory plans and arrangements
         which are identified as Exhibits 10.1 through 10.10.

(b)      Reports on Form 8-K
         Registrant filed no reports on Form 8-K during the
         quarter ending December 31, 1997.

(c)      The exhibits filed herewith or incorporated by reference
         herein are set forth on the Exhibit Index.



<PAGE>

                                   Schedule II


                     The Morgan Group Inc. and Subsidiaries
                        Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                                    Allowance for Doubtful Accounts
                                           -----------------------------------------------------------------------------------
                                                                   Additions               Amounts
                                               Beginning      Charged to Costs            Written Off            Ending
Description                                     Balance          and Expenses        Net of Recoveries          Balance
------------------------------------------------------------------------------------------------------------------------------

<S>                                             <C>                  <C>                   <C>                  <C>
Year ended December 31, 1997                    $59,000              $336,000              $212,000             $183,000

Year ended December 31, 1996                    $102,000             $244,000              $287,000             $59,000

Year ended December 31, 1995                    $171,000             $184,000              $253,000             $102,000
</TABLE>


<PAGE>



         SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.

                                               THE MORGAN GROUP, INC.


Date:  March 31, 1998                    BY:   /s/ Charles C. Baum
                                              --------------------------------
                                               Charles C. Baum, Chairman and
                                               Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 27th day of March, 1998.

1)       Chief Executive Officer:


         By:      /s/ Charles C. Baum
                  -------------------------------
                  Charles C. Baum

2)    Chief Financial Officer and
       Chief Accounting Officer

         By:      /s/ Dennis R. Duerksen
                  -------------------------------
                  Dennis R. Duerksen

3)    A Majority of the Board of Directors:

                  /s/ Charles C. Baum                             Director
                  -------------------------------
                  Charles C. Baum

                  /s/ Bradely J. Bell                             Director
                  -------------------------------
                  Bradley J. Bell

                                                                  Director
                  -------------------------------
                  Richard B. Black

                  /s/ Frank E. Grzelecki                          Director
                  -------------------------------
                  Frank E. Grzelecki

                  /s/ Robert S. Prather, Jr.                      Director
                  -------------------------------
                  Robert S. Prather, Jr.


<PAGE>


EXHIBIT INDEX

Exhibit No.               Description                                  Page
--------------------------------------------------------------------------------
3.1      Registrant's  Restated Certificate of Incorporation,  as
         amended,  is incorporated by reference to Exhibit 3.1 to
         the  Registrant's  Registration  Statement  on Form S-1,
         File No. 33-641-22, effective July 22, 1993.

3.2      Registrant's  Code of By-Laws,  as restated and amended,
         is  incorporated  by  reference  to  Exhibit  3.2 of the
         Registrant's  Registration  Statement on Form S-1,  File
         No. 33-641-22, effective July 22, 1993.

4.1      Form of Class A Stock  Certificate  is  incorporated  by
         reference   to   Exhibit   3.3   of   the   Registrant's
         Registration  Statement on Form S-1, File No. 33-641-22,
         effective July 22, 1993.

4.2      Fourth  Article  - "Common  Stock"  of the  Registrant's
         Certificate  of   Incorporation,   is   incorporated  by
         reference   to   the    Registrant's    Certificate   of
         Incorporation,  as amended,  filed as Exhibit 3.1 to the
         Registrant's  Registration  Statement on Form S-1,  File
         No. 33-641-22, effective July 22, 1993.

4.3      Article II -  "Meeting  of  Stockholders,"  Article VI -
         "Certificate  for  Shares"  and  Article  VII - "General
         Provisions"  of  the   Registrant's   Code  of  By-Laws,
         incorporated  by reference to the  Registrant's  Code of
         By-Laws,  as  amended,  filed  as  Exhibit  3.2  to  the
         Registrant's  Registration  Statement on Form S-1,  File
         No. 33-641-22, effective July 22, 1993.

4.4      Loan Agreements,  dated September 13, 1994,  between the
         Registrant and  Subsidiaries  and Society National Bank,
         are  incorporated  by  reference  to Exhibit  4.4 to the
         Registrant's  Quarterly  Report  on  Form  10-Q  for the
         period  ended  September  30, 1994,  filed  November 15,
         1994.

4.5      Amended  and  Restated  Credit and  Security  Agreement,
         effective March 25, 1998,  among the Registrant,  Morgan
         Drive  Away,  Inc.,  TDI,  Inc.,   Interstate  Indemnity
         Company and KeyBank National Association.                     _____

4.6      Revolving Credit Facility Agreement, effective March 27,
         1997,   among  Morgan  Drive  Away,   Inc.,  TDI,  Inc.,
         Interstate   Indemnity   Company  and  KeyBank  National
         Association  is  incorporated  by  reference  to Exhibit
         4.5(a) to the  Registrant's  Annual  Report on Form 10-K
         for the year ended  December 31,  1996,  filed March 31,
         1997.

4.7      Master  Revolving  Note,  dated  March 27,  1997,  among
         Morgan  Drive  Away, Inc.,  TDI,  Inc.,  and  Interstate
         Indemnity  Company to KeyBank  National  Association  is
         incorporated  by  reference  to  Exhibit  4.5(b)  to the
         Registrant's  Annual  Report  on Form  10-K for the year
         ended December 31, 1996, filed March 31, 1997.

4.8      Amended and Restated  Revolving Credit Note, dated March
         31,  1998,  among Morgan Drive Away,  Inc.,  TDI,  Inc.,
         Interstate   Indemnity   Company  to  KeyBank   National
         Association is incorporated by reference to Exhibit A to
         the Amended and Restated Credit and Security  Agreement,
         effective March 25, 1998,  among the Registrant,  Morgan
         Drive  Away,  Inc.,  TDI,  Inc.,   Interstate  Indemnity
         Company and KeyBank National Association, filed herewith
         as Exhibit 4.5.

4.9      Security  Agreement,  effective  as of March  27,  1997,
         between  Morgan Drive Away,  Inc.  and KeyBank  National
         Association  is  incorporated  by  reference  to Exhibit
         4.5(c) to the  Registrant's  Annual  Report on Form 10-K
         for the year ended  December 31,  1996,  filed March 31,
         1997.

4.10     Absolute,   Unconditional   and   Continuing   Guaranty,
         effective as of March 27, 1997, by the Registrant to Key
         Bank National  Association is  incorporated by reference
         to Exhibit 4.5(d) to the  Registrant's  Annual Report on
         Form 10-K for the year ended  December 31,  1996,  filed
         March 31, 1997.

4.11     Amended and Restated Continuing  Guaranty,  effective as
         of  March  31,  1998,  by the  Registrant  to  KeyBank
         National  Association  is  incorporated  by reference to
         Exhibit  D  to  the  Amended  and  Restated  Credit  and
         Security Agreement,  effective March 25, 1998, among the
         Registrant,   Morgan  Drive  Away,   Inc.,   TDI,  Inc.,
         Interstate   Indemnity   Company  and  KeyBank  National
         Association, filed herewith as Exhibit 4.5.                   _____


<PAGE>

10.1     The  Morgan  Group,   Inc.   Incentive   Stock  Plan  is
         incorporated   by  reference  to  Exhibit  10.1  to  the
         Registrant's  Registration  Statement on Form S-1,  File
         No. 33-641-22, effective July 22, 1993.

10.2     First  Amendment  to the Morgan  Group,  Inc.  Incentive
         Stock Plan is  incorporated by reference to Exhibit 10.1
         to the  Registrant's  Quarterly  Report on Form 10-Q for
         the period ended September 30, 1997,  filed November 14,
         1997.

10.3     Memorandum  to Charles  Baum and Philip Ringo from Lynch
         Corporation,  dated December 8, 1992,  respecting  Bonus
         Pool,  is  incorporated  by reference to Exhibit 10.2 to
         the  Registrant's  Registration  Statement  on Form S-1,
         File No. 33-641-22, effective July 22, 1993.

10.4     Term Life Policy from Northwestern Mutual Life Insurance
         Company  insuring  Paul D.  Borghesani,  dated August 1,
         1991,  is  incorporated  by reference to Exhibit 10.4 to
         the  Registrant's  Registration  Statement  on Form S-1,
         File No. 33-641-22, effective July 22, 1993.

10.5     Long Term Disability  Insurance Policy from Northwestern
         Mutual Life Insurance  Company,  dated March 1, 1990, is
         incorporated   by   reference   to   the    Registrant's
         Registration  Statement on Form S-1, File No. 33-641-22,
         effective July 22, 1993.

10.6     Long Term Disability Insurance Policy from CNA Insurance
         Companies, effective January 1, 1998.                         _____

10.7     The Morgan Group,  Inc. Employee Stock Purchase Plan, as
         amended,  is  incorporated by reference to Exhibit 10.16
         to the  Registrant's  Annual Report on Form 10-K for the
         year ended December 31, 1994, filed on March 30, 1995.

10.8     Consulting Agreement between Morgan Drive Away, Inc. and
         Paul D.  Borghesani,  effective as of April 1, 1996,  is
         incorporated   by   reference   to  Exhibit   10.19  the
         Registrant's  Annual  Report  on Form  10-K for the year
         ended December 31, 1995, filed on April 1, 1996.

10.9     Employment Agreement between Morgan Drive Away, Inc. and
         Terence  L.  Russell is  incorporated  by  reference  to
         Exhibit 10.20 to the Registrant's  Annual Report on Form
         10-K for the year  ended  December  31,  1995,  filed on
         April 1, 1996.

10.10    Stock Purchase Agreement between Morgan Drive Away, Inc.
         and Terence L. Russell is  incorporated  by reference to
         Exhibit 10.21 to the Registrant's  Annual Report on Form
         10-K for the year  ended  December  31,  1995,  filed on
         April 1, 1996.

10.11    Asset Purchase  Agreement,  dated May 21, 1993,  between
         Registrant, Transamerican Carriers, Inc., Ruby and Billy
         Davis and Morgan Drive Away,  Inc., is  incorporated  by
         reference   to   Exhibit   10.10  to  the   Registrant's
         Registration  Statement on Form S-1, File No. 33-641-22,
         effective July 22, 1993.

10.12    Management  Agreement between Skandia  International and
         Risk Management (Vermont), Inc. and Interstate Indemnity
         Company,  dated  December 15, 1992, is  incorporated  by
         reference   to   Exhibit   10.12  to  the   Registrant's
         Registration  Statement on Form S-1, File No. 33-641-22,
         effective July 22, 1993.

10.13    Agreement  for the  Allocation  of Income Tax  Liability
         between   Lynch   Corporation   and   its   Consolidated
         Subsidiaries,  including the Registrant  (formerly Lynch
         Services  Corporation),  dated  December  13,  1988,  as
         amended,  is  incorporated by reference to Exhibit 10.13
         the  Registrant's  Registration  Statement  on Form S-1,
         File No. 33-641-22, effective July 22, 1993.

10.14    MCI  Corporate  Service  Agreement,  dated  December 12,
         1994,  between MCI  Telecommunications  Corporation  and
         Morgan Drive Away, Inc., is incorporated by reference to
         Exhibit 10.17 to the Registrant's  Annual Report on Form
         10-K for the year  ended  December  31,  1994,  filed on
         March 30, 1995.

10.15    First Amendment to MCI Corporate  Service Plan and other
         service  agreements  dated May 7, 1996 and September 30,
         1997.                                                         _____


<PAGE>

10.16    Certain  Services  Agreement,  dated  January  1,  1995,
         between  Lynch   Corporation   and  the   Registrant  is
         incorporated  by  reference  to  Exhibit  10.18  to  the
         Registrant's  Annual  Report  on Form  10-K for the year
         ended December 31, 1994, filed on March 30, 1995.

10.17    Asset Purchase  Agreement for Transfer  Drivers Inc. and
         List  of  Schedules  is  incorporated  by  reference  to
         Exhibit 10.22 to the Registrant's  Annual Report on Form
         10-K for the year  ended  December  31,  1995,  filed on
         April 1, 1996.

10.18    Asset Purchase  Agreement between Registrant and Transit
         Homes of America,  Inc.,  dated as of November 19, 1996,
         as amended as of December 30, 1996, is  incorporated  by
         reference to Exhibit (2)-1 to the Registrant's  Form 8-K
         filed January 14, 1997.

10.19    Amendment to Asset Purchase Agreement between Registrant
         and  Transit,  Inc.,  dated as of  December  29, 1996 is
         incorporated  by  reference  to  Exhibit  (2)-2  to  the
         Registrant's Form 8-K filed January 14, 1997.

11       Statement Re: Computation of Per Share Earnings               _____

21       Subsidiaries of the Registrant                                _____

23.1     Consent of Arthur Andersen LLP                                _____

23.2     Consent of Ernst & Young LLP                                  _____

27.1     Financial Data Schedule (1997)                                _____

27.2     Restated Financial Data Schedule (1996)                       _____