SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
(Mark One)

     (X)  Annual  Report  Pursuant  to  Section  13 or 15(d)  of the  Securities
Exchange  Act of  1934  For the  fiscal  year  ended  December  31,  1996 or ( )
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the  transition  period from  ________ to ________  Commission  File
Number 1-13586

                             THE MORGAN GROUP, INC.
             (Exact name of registrant as specified in its charter)
        Delaware                                          22-2902315
 (State or other Jurisdiction                  (I.R.S. Employer Identification
 of Incorporation or Organization)               Number)

           2746 Old U.S. 20 West
             Elkhart, Indiana                             46515-1168

Registrants telephone number include area code:  (219) 295-2200

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

Class A Common Stock, without par value
(Title of Class)

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 (or for such  shorter  period that the  Registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days.
                YES        X              NO ______

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 Registrants  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 ( X ) The aggregate  market value of the issuer's voting stock held by
non-affiliates,  as of March 27, 1997 was _______________.  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 27 1997,  was _________  shares,
and _______ shares, respectively.

                      DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 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  leading  provider  of
outsourcing  transportation  services to the manufactured housing,  motor homes,
and  commercial  truck  industries  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   1,720  independent  owner  operators  and
approximately  1,300 driveaway drivers.  The Company dispatches its drivers from
115  offices  located in 35 states.  The  Company's  largest  customers  include
Fleetwood  Enterprises,  Inc., Oakwood Homes Corporation,  Winnebago Industries,
Inc., Champion  Enterprises,  Cavalier Homes, Inc., Clayton Homes, Schult Homes,
Ryder  Systems,  and Skyline  Corporation.  The Company's  services also include
transporting other products,  including commercial vehicles and office trailers,
and 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
driver  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 1943. The Morgan Group,  Inc. is a Delaware
corporation   formed  by  Lynch  Corporation  in  1988  to  acquire  Morgan  and
Interstate,  a wholly owned  captive  insurance  company.  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 driver outsourcing company.  TDI, with revenue in excess
of $8.5 million and more than 265 drivers,  is a market leader in the fragmented
outsourcing  service  business  focusing on relocation  of rental  equipment for
customers such as Ryder Systems,  Budget Rentals,  and Penske Leasing,  and also
delivering  new equipment  from  manufacturers  including  Utilimaster,  Grumman
Olson, and Bluebird Bus.

     On  December  30,  1996,  Morgan  acquired  the assets of Transit  Homes of
America, Inc., a national outsourcing company of manufactured housing located in
Boise,  Idaho.  Transit,  with revenue in excess of $25 million and 358 drivers,
provides outsourcing transportation services to Fleetwood Enterprises,  Champion
Enterprises, Palm Harbor, Schult Homes, and Cavalier Homes.

         The Company  decided in the fourth quarter of 1996 to  discontinue  the
truckaway operation of the Specialized  Transport Division.  Truckaway is a line
of business that transported van conversions, tent campers, and other automotive
products on company-owned  equipment. The equipment being held for sale includes
6

<PAGE>

tractors,  74 drop  deck  trailers,  15 car  carrier  trailers,  22 tent  camper
trailers, and 112 lowboy and miscellaneous  trailers. In addition,  there are 13
tractors and 9 tent camper trailers  currently  financed under operating leases.
As of December 31, 1996, there were  approximately  110 independent  contractors
and 19 company  drivers  assigned  to the  truckaway  operation.  The  truckaway
operation  had  revenues  of  $12,900,000,   $14,400,000,  and  $20,600,000  and
estimated losses of $1,800,000,  $1,200,000, and estimated profits of $1,200,000
for the years ending December 31, 1996, 1995, and 1994, respectively.

         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

         The Company's business is substantially dependent upon the manufactured
housing industry which  experienced its fifth successive year of growth in 1996.
The recent decision to discontinue the truckaway  operation,  which  transported
van  conversions  and tent  campers,  has  resulted  in the  Company  being less
dependent on the recreational vehicle industry.

Manufactured Housing.

         The largest portion of the Company's  carrier 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 9% to 553,000 in 1996 from
506,000 in 1995,  after 12% and 21%  increases  in 1995 and 1994,  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,  and truck and van  conversions)  declined  1% in 1996 to 376,000  from
380,000  shipments in 1995 after  declines of 11% in 1995,  and a 5% increase in
1996. This data is obtained from the Recreational  Vehicle Industry  Association
(RVIA).  RVs are discretionary  purchases,  sales of which are cyclical and tied
closely with overall  consumer  confidence in the economy,  and, in  particular,
consumers  expectations as to the availability and price of motor fuel. Consumer
interest  rates remain  relatively  low which make RVs 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 believes that it is the largest  transporter of both manufactured  homes
and  provider of driver  outsourcing  services to the motor home  markets in the
United  States.  In addition to new  manufactured  housing and RVs,  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 (Housing Group)
     which includes  Transamerican  Carriers  acquired in 1993 and Transit Homes
     acquired in 1996,  provides  specialized  transportation to companies which
     produce new manufactured  homes,  modular homes,  and office  trailers.  In
     addition,  the Housing Group transports used manufactured homes and offices
     for individuals,  businesses,  and the U.S.  Government.  The Housing Group
     ships product through  approximately  1,300 independent owner operators who
     drive compact  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 28
     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.

     Driver Outsourcing Group. The Driver Outsourcing Group (Outsourcing  Group)
     engages the services of approximately 1,300 drivers which are outsourced to
     customers to drive motor homes (RVs), new commercial  vehicles,  and rental
     units. The TDI  acquisition,  which occurred in May of 1995, added over 265
     drivers  to  Morgans  existing  driver   outsourcing  base.  In  1996,  the
     Outsourcing Group delivered  approximately  58,000 units through the use of
     these drivers.

     Specialized  Transport Group. In 1996, the Specialized  Transport  Division
     moved  a  variety   of   specialized   vehicles,   including   automobiles,
     semi-trailers,  military vehicles, travel trailers and other commodities by
     utilizing specialized  equipment. A decision was made in the fourth quarter
     to discontinue the truckaway sector of the Specialized  Transport Division,
     which moved van  conversions,  automobiles,  and tent  campers by utilizing
     company-owned trailers.  Subsequent to the discontinuation of the truckaway
     business, the Company will have 70 owner operators who own tractors and 185
     pick-up truck owner  operators  assigned to  Specialized  Transport.  These
     independent owner operator dispatches are coordinated through ten offices.

     Other Services.  Other services  provided include permit ordering  services
     principally  for  manufactured  housing  customers and, to a lesser degree,
     installation  services  related  to the  set up of  relocated  manufactured
     homes.  The Company also currently  provides  physical damage insurance and
     certain other  insurance  protection to the owners of equipment under lease
     to the Company through a captive  insurance  subsidiary.  Since the primary
     risk for the most part

<PAGE>

is then  re-insured,  the  Company  service is  primarily  that of a broker.  In
addition,  the Company  provides  financing and certain  guarantees of equipment
loans through its finance subsidiary.

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,
1996.

<TABLE>
<CAPTION>
                                             Years Ended December 31,
                                 1992       1993       1994       1995       1996
<S>                           <C>        <C>        <C>        <C>        <C>
Manufactured Housing Group:
Shipments                       80,587     95,184    121,604    135,750    144,601
Revenues (in thousands)       $ 32,324   $ 39,930   $ 53,520   $ 63,353   $ 72,616

Driver Outsourcing:
Shipments                       23,636     30,978     32,060     49,885     58,368
Revenues (in thousands)       $  8,055   $ 13,416   $ 15,197   $ 19,842   $ 23,090

Specialized Transport:
Shipments                       39,706     38,618     41,934     44,406     41,255
Revenues (in thousands)       $ 24,016   $ 25,835   $ 28,246   $ 29,494   $ 26,169

Other service revenues        $  2,721   $  3,612   $  4,917   $  9,614   $ 10,333
Total operating revenues
(in thousands)                $ 67,116   $ 82,793   $101,880   $122,303   $132,208
</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             1992       1993       1994       1995       1996
<S>                          <C>        <C>        <C>        <C>        <C>
Industry production (1)       309,457    374,126    451,646    505,819    553,133
Shipments                      60,381     76,188     98,181    114,890    121,136
Shares of units shipped          19.5%      20.4%      21.7%      22.7%      21.9%

Recreational Vehicles
Industry production (2)       369,200    406,300    426,100    380,300    376,400
Units moved (3                 62,012     71,792     67,502     64,303     57,703
Shares of units shipped (3)      16.8%      17.7%      15.8%      16.9%      15.3%
</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 homes.

(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,  1995,  and 1996.  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
         move.

<PAGE>

Growth Strategy

         The   Company's   strategy   is  to  focus  on  the   profitable   core
transportation  services  (manufactured  housing and driver outsourcing) so that
revenues and profitability can grow in its area of substantial  market position.
The  Company  will also look for  opportunities  to  capitalize  and/or grow its
strong market position in manufactured  housing and driver  outsourcing  through
acquisitions  if  suitable  opportunities  arise.  In  addition,  to enhance the
Company's profitability, it plans to reconstruct the corporate organization with
the  purpose  of giving  higher  focus to the two  major  operating  groups  and
reducing costs.

         Manufactured  Housing Growth.  The Company  believes it can take better
         advantage of its position in the  manufactured  housing industry in its
         relationship with manufacturers,  retailers,  dealers,  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  recent
         Morgan/Transit  combination expands opportunities to increase revenues,
         improve margins and further strengthen customer  relationships.  Morgan
         and Transit now combined  can serve the market  better and operate more
         efficiently.  The  acquisition  of  Transit  could  lead to  additional
         operating  efficiencies and economies of scale from Morgan's ability to
         apply  information  technology,  administrative  processes,  driver and
         staff training,  safety and other programs  across a larger  operation.
         These expanded capabilities should also enable the Company to make more
         efficient use of our operating  equipment.  The Company may also pursue
         the purchase of certain  manufacturers'  private  transport  fleets. In
         such a case,  the  Company  would  typically  purchase  the  customers'
         tractors,  sell the  equipment to interested  drivers,  and then engage
         these drivers as independent owner operators.

         Driver Outsourcing. 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  are  expected  to  increase   substantially   as  companies
         calculate the cost benefits in 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  leading  market
         position in this highly fragmented delivery  transportation market. The
         future growth rate of the Company's driver outsourcing business,  which
         has a 36% average  growth rate over the last five years,  is  dependent
         upon  continuing  to  add  major  vehicle  manufacturer  customers  and
         utilization of the Company's 1,300 driveaway drivers.

         Reconstruct for Margin Improvement.  In the fourth quarter of 1996, the
         Company  made  a  decision  to  exit  the  truckaway   division   which
         transported  van  conversions,   tent  campers,  and  other  automotive
         products utilizing  company-owned  equipment.  The decision to sell the
         truckaway division was in

<PAGE>

     line with the Company's growth  strategy to focus on profitable  operations
     where the Company  has a dominant  market  position.  The Company is in the
     process of  reconstructing  its  organization to change the emphasis from a
     centralized  operation to a profit driven  divisional  and field  operation
     focused  on bottom  line  management.  This  reconstruction  could  lead to
     reduced   overhead,   especially  in  centralized   corporate   operations,
     management  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 actively considering acquisition opportunities
     within the manufactured  housing and driver  outsourcing lines of business.
     Thus, the Company may consider  acquiring  regional or national firms which
     service the manufactured  housing and/or the driver  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 RV  industries,
     and  its  relationships  with  manufacturers,   retailers,   dealers,   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,  and in return,
     Morgan has entered  into a limited  guarantee  agreement.  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 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.

<PAGE>

Forward-Looking Discussion

     In 1997,  the Company  could  benefit from (i) the  acquisition  of Transit
Homes of America which  consolidates our long-standing  position as the absolute
leader  in  the  delivery  of   outsourcing   transportation   services  to  the
manufactured housing industry, (ii) the closing of the Truckaway Division, which
cost the Company  approximately  $1,800,000 in 1996, (iii) reduction of overhead
through  corporate  restructuring,  and (iv)  improvement  of our 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  and growth  stragey  paragraph.  From time to
time,  the  Company  may make other oral or written  forward-looking  statements
regarding its anticipated sales, costs, expenses,  earnings and matter 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:

     Dependent 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 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
     insurance  and cargo  damage  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  revenues have been derived under contracts with customers.  Such
     contracts  generally  have one to 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
     revenues.  The loss of one or more of  these  significant  customers  could
     adversely affect the Company's results of operations.


<PAGE>

     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 revenue 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 and Diversification.  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 or as
     to the  terms  of any such  acquisition.  There  is no  assurance  that the
     Company's  recent or 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 revenues generated in the
     second and third quarters than in the first and fourth quarters.  A smaller
     percentage of the Company's  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.


<PAGE>

     Regulation.  The Company's insurance subsidiary is regulated by the Vermont
     Department of Banking, Insurance and Securities.  There can be no assurance
     that changes in state or federal  regulations will not adversely affect the
     Company.

Customers and Marketing

     The  Company's   customers  for  transport  of  new   manufactured   homes,
recreational  vehicles,  and commercial vehicles are located in various parts of
the United States. The Company's largest  manufactured housing customers include
Fleetwood  Enterprises,  Inc., Oakwood Homes Corporation,  Cavalier Homes, Inc.,
Skyline Corporation,  Clayton Homes, Champion Enterprises,  Inc., Patriot Homes,
and Schult Homes. The Company's  largest driver  outsourcing  customers  include
Fleetwood  Enterprises,  Winnebago  Industries,  Inc., Thor Industries,  Holiday
Rambler, and Ryder Systems. The specialized transport division customers,  after
the discontinuance of the truckaway  operation,  include Utility Trailer,  Great
Dane, Strick Corporation,  Hale Trailer, Fleetwood Enterprises, Thor Industries,
Skyline  Corporation,  and Coachmen  Industries.  While most  manufacturers rely
solely on carriers such as the Company,  other  manufacturers  operate their own
equipment and may employ outside carriers only for that portion of their needs.

     A substantial  portion of the Company's  revenues are generated under one -
five year  contracts  with  producers  of  manufactured  homes,  RVs,  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. Revenues generated under customer contracts in
1994, 1995, and 1996 were 57%, 58%, and 62% of total revenues, respectively.

     The Company's ten largest customers all have been served for at least three
years and account for approximately 68% of its revenues. Revenues under contract
with one such customer, Fleetwood Enterprises,  Inc. (Fleetwood),  accounted for
27%,  24%,  and 20% of  revenues  in 1994,  1995,  and 1996,  respectively.  The
Fleetwood RV contracts are  re-negotiated  on a regional  basis when they expire
and the Fleetwood  manufactured housing contracts are continuous until canceled.
The Company has been servicing Fleetwood for over 25 years.

     The Company markets and sells its services  through 11 regional offices and
127  dispatch  offices  located in 35 states,  concentrated  where  manufactured
housing and RV 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 34 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  and  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

<PAGE>

develop  relationships  with  manufactured  home park  owners,  retail  dealers,
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 the  Manufactured  Housing  Group and
Specialized  Transport  Group 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,    possess   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  referrals,
local newspaper  advertising,  trade  magazines,  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 days  notice by either  party.  The  average  length of  service of the
Company's  current owner operators is  approximately  3.2 years. At December 31,
1996, 1,720 owner operators were under contract to the Company,  including 1,307
operating toters, 228 operating semi-tractors, and 185 operating pick-up trucks.
Upon  completion of the sale or  disposition  of the truckaway line of business,
the  number  of   semi-tractor   owner   operators  is  expected  to  reduce  to
approximately 75.

        In the Manufactured Housing Group, 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 and the average tenure with the Company of its toter independent
owner  operators  is 3.3 years,  which is longer than the average  tenure of its
other independent owner operators.

         In the Specialized  Transport Group,  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  2.7  years.  Pick-up  truck  owner  operators  are
difficult to retain  because of the  seasonality  of business does not guarantee
consistent loads. Accordingly, the average length of service among this group of
drivers is 3.0 years.


<PAGE>

        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  operating  licenses  and  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.

Driveaway Drivers

         The  Company   outsources  its  over  1,300  driveaway   drivers  on  a
trip-by-trip basis for delivery to retailers and rental truck agencies,  certain
vehicles such as recreational  vehicles,  buses,  tractors,  rental trucks,  and
commercial  vans  that are too  large or the  distance  of the trip too short to
transport  economically on a trailer.  These  individuals are recruited  through
local  newspaper  advertising,   trade  magazines,   brochures,  and  referrals.
Prospective  drivers are required to possess at least a  chauffeurs  license and
are encouraged to obtain a commercial  drivers license.  They must also meet and
maintain  compliance with requirements of the U.S.  Department of Transportation
and  standards  established  by the Company.  Driveaway  drivers are utilized as
needed,   depending   on  the   Company's   transportation   volume  and  driver
availability.  Driveaway  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.  In addition to the 1,300
driveaway  drivers,  the Company  employees 35 full time drivers  using  company
owned or leased  tractors to deliver tent campers and  manufactured  homes.  The
impending  sale or disposition of the truckaway line of business will reduce the
full time drivers to 16 delivering manufactured homes.

Agents and Employees

        The Company has 198 dispatchers and dispatch assistants who are involved
directly with the management of equipment and drivers. Of these 198 dispatchers,
approximately 164 are full-time  employees,  12 are part-time  employees and the
remainder  are  independent  contractors  who  earn  commissions.  The  dispatch

<PAGE>

personnel are  responsible  for the  Company's  dispatch  operations,  including
safety, customer relations, equipment assignment,  invoicing, and other matters.
Because  dispatch  personnel  develop  close  relationships  with the  Company's
customers and drivers,  from time to time the Company has suffered a dispatching
personnel defection, following which the former dispatcher has sought to exploit
such relationships in competition with the Company.  The Company does not expect
that  any  future  defection,  if  any,  would  have a  material  effect  on its
operations.  Excluding these dispatching  personnel and drivers, the Company has
approximately 175 full-time employees and 35 full time employee drivers.

Seasonality

        Shipments of manufactured  homes tend to decline in the winter months in
areas where poor weather  conditions  inhibit  transport.  This usually  reduces
revenues  in the  first  and  fourth  quarters  of the year.  RV  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 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 $20 million per occurrence with a deductible of up to $250,000
per occurrence for personal injury and property damage.  The Company maintains a
cargo damage  insurance  policy of $1,000,000  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 $20 million or below its $250,000 deductible,  its results could be
materially  adversely  affected.  The Company does have an  aggregate  stop loss
insurance  policy for the period  July 1, 1996  through  June 30,  1997  whereby
personal injury,  property  damage,  and workers  compensation  losses below its
$250,000  deductible cannot exceed $4,000,000 (could be adjusted up dependent on
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.


<PAGE>

         The  following  table sets  forth  information  with  respect to bodily
injury  and  property  damage  and cargo  claims  reserves  for the years  ended
December 31, 1994, 1995, and 1996, respectively.

Bodily Injury/Property Damage and Cargo

                                          Claims Reserve History
                                          Years Ended December 31,
                                              (In Thousands)
                                    1994           1995           1996
Beginning Reserve Balance         $ 2,830        $ 3,326        $ 3,623
Provision for Claims                4,761          4,849          6,080
Payments, net                      (4,265)        (4,552)        (5.139)
Ending Reserve Balance            $ 3,326        $ 3,623        $ 4,654

         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 1996,  over 1,350 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 $315,000 in
1996 to owner  operators).  The Company has a Senior Vice  President  of Safety,
Director of Training,  four Safety Directors, a Driver Trainer, and a Compliance
Manager dedicated to assist the operating groups in training and highway safety.
The Company has incentives for  dispatchers  based upon accident free miles.  In
1996, over $100,000 was paid out under this program and it is expected that over
$100,000 will be paid in 1997 for 1996 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 Drive Away, Inc. 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 a large national
carrier and numerous small regional or local carriers.  The Company's  principal
competitors  in the housing and driver  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,  insurance coverage and the geographic
scope of the carriers authority and operational  structure.  The availability of
tractor  equipment and the  possession  of  appropriate  registration  approvals
permitting  shipments  between  points  required  by the  customer  may  also be
influential.
<PAGE>

Regulation

         The Company's  interstate  operations (Morgan Drive Away, Inc. and TDI)
are subject to  regulation  by the Federal  Highway  Administration  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 I.C.C.  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.

         The Company was regulated by the Interstate  Commerce  Commission  (the
"ICC") until passage of the ICC Termination Act of 1995, which abolished the ICC
on December 31, 1995. The Surface  Transportation  Board, an independent  entity
within the D.O.T.,  assumed many of the responsibilities of the ICC. The Company
is also regulated by various state agencies.  These regulatory  authorities have
broad powers,  generally  governing matters such as authority to engage in motor
carrier operations, rates, certain mergers, consolidations and acquisitions, and
periodic financial reporting. The trucking industry is subject to regulatory and
legislative  changes that can affect the  economics of the industry by requiring
changes in operating  practices or influencing  the demand for, and the costs of
providing  services to,  shippers.  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 customers 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
insurance; requires carriers to enforce limitations on drivers hours of service;
prescribes parts,  accessories and maintenance  procedures for safe operation of
freight  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.  Recently,  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

<PAGE>

all required extraprovincial authority to provide transborder  transportation of
manufactured homes and RVs 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  Indemnity  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.

         Morgan Finance, Inc., the Company's finance subsidiary, is incorporated
under  Indiana  law.   Morgan  Finance  is  subject  to  Indianas  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
used as the  Company's  principal  office,  a 7,000 square foot leased  building
containing additional offices leased to one of the Company's customers,  a 9,000
square  foot  building  used  for  the  Company's   safety  and  driver  service
departments  and also for storage,  and an 8,000 square foot  building used as a
garage to service company-owned  vehicles.  Most of the Company's 8 regional and
108 dispatch offices 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 three years,  at monthly  rentals ranging from $100
to $8,950.  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

<PAGE>

Woodburn, Oregon              Region and storage                  1
Fort Worth, Texas             Region and storage                  6
Waco, Texas                   Storage                             4
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

        In  February  of 1996,  the  Company  adopted a Special  Employee  Stock
Purchase  Plan  (Plan)  under  which  Morgan  Drive  Away's President  and Chief
Executive  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. The Plan allows for repayment of the note using shares at $8.00 per
share.  The  Company  has the right to  repurchase,  at $8.00 per share,  56,000
shares during the first year of the agreement and 28,000 during the second year.
Such issuance was exempt from  Registration under Section 4(2) of the Securities
Act of 1983, as amended.

Price Range of Common Stock

The Company's  Common Stock is traded on the American  Stock  Exchange under the
symbol MG.

                          1996                1995
                     ---------------------------------
Quarter Ended         High    Low         High    Low

March 31             $9.38   $7.56       $9.25  $7.00
June 30               9.75    8.00        9.00   7.87
September 30          9.19    7.25       10.62   7.69
December 31           7.75    7.13        9.62   7.69

As of March 25, 1997, the  approximate  number of  shareholders of record of the
Company's   Class  A  Common  Stock  was  174.  These  figures  do  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.

Dividend Information

                          Class A                     Class B
                       Cash Dividends             Cash Dividends
--------------------------------------------------------------------------------
Quarter Ended         1996        1995          1996            1995
--------------------------------------------------------------------------------
March 31              .02         .02           .01             .01
June 30               .02         .02           .01             .01
September 30          .02         .02           .01             .01
December 31           .02         .02           .01             .01

<PAGE>


Item 6.  SELECTED CONSOLIDATED FINANCIAL DATA

FINANCIAL HIGHLIGHTS

(Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>


                                                        1996           1995          1994          1993          1992
------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>           <C>           <C>           <C>
Operations
        Operating Revenues                          $   132,208    $   122,303   $   101,880   $    82,793   $    67,116
        Operating Income (Loss)                          (3,263)(1)      3,371         3,435         2,267         1,774
        Pre-tax Income (Loss)                            (3,615)         3,284         3,367         1,714           709
        Net Income (Loss) before
                Extraordinary Item                       (2,070)         2,269         2,212         1,595           275
        Net Income (Loss)                                (2,070)         2,269         2,212         1,595           645
Per Share
        Primary Net Income (Loss)                   $      (.77)   $       .80   $       .75   $       .71   $       .40
        Fully Diluted Net Income (Loss)                    (.77)           .80           .73           .67           .37
        Cash Dividends Declared
                Class A Common Stock                        .08            .08           .08           .02           ---
                Class B Common Stock                        .04            .04           .04           .01           ---
Financial Position
        Total Assets                                $    33,066    $    30,795   $    28,978   $    24,399   $    15,605
        Working Capital                                   2,095          8,293        11,045         9,600         2,771
        Long-term Debt                                    4,206          3,275         1,925         2,347         4,917
        Redeemable Preferred Stock                          ---            ---         3,104         3,089         3,801
        Common Shareholders Equity                       13,104         15,578        12,980        11,170           339
        Common Shares Outstanding at Year-end         2,685,520      2,649,554     2,566,665     2,566,665     1,333,333
        Average Common Shares or
          Equivalents Outstanding During the Year     2,684,242      2,557,516     2,626,926     1,970,343     1,466,665
Other Information
Company Unit Moves
        New Manufactured Homes                          121,136        114,821        98,181        76,188        60,381
        Driver Outsourcing                               58,368         49,885        32,060        30,978        23,636
</TABLE>

(1) Operating Loss in 1996 is after special charges of $3,500,000.
<PAGE>

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

ANALYSIS OF OPERATIONS AND FINANCIAL CONDITIONS

Year 1996 Compared to 1995

Operating revenues rose by 8% to $132,208,000 in 1996 from $122,303,000 in 1995.
Prior to giving effect to the TDI  acquisition,  which,  closed on May 22, 1995,
comparable  operating revenues  increased 5.5%.  Morgan's  manufactured  housing
outsourcing   operating  revenues  increased  15%  out-pacingthe  1996  national
production growth of 9%. The growth in manufactured housing was partially offset
by an 11% decline in the Company's Specialized Transport Division. The Company's
Specialized  Transport Division was impacted by weakened demand which drove down
the Company's utilization of equipment and rates. The truckaway operation of the
Specialized  Transport  Division will be sold in 1997.  The truckaway  operation
transports  automotive  products on  company-owned  trailers for van conversion,
tent  camper and  automotive  customers.  The  acquisition  of Transit  Homes of
America,  Inc. on December  30, 1996 should more than offset the lost  operating
revenues from the closing of the truckaway line of business.

     During 1996, the Company reported an operating loss, after special charges,
of $3,263,000 and a net loss of $2,070,000  ($.77 loss per share).  In 1995, the
Company  reported  operating  income of $3,371,000  and net income of $2,269,000
($.80  income per share).  The special  charge for 1996  amounted to  $3,500,000
before taxes ($2,100,000 after tax or $.78 per share) and resulted from the sale
of the truckaway  operation and the write-down of four properties,  two of which
are associated with the creating of the truckaway operation.  The carrying value
of assets being held for sale was reduced in accordance with SFAS No. 121.

     While the truckaway operation generated  approximately 10% of the Company's
1996 total revenue,  the operating  loss from this  operation was  approximately
$1,800,000  in  1996.  Thus   management   expects  the  withdrawal  from  these
unprofitable  activities  should  have  a  positive  impact  on the  results  of
operations  in 1997 (see Note 16,  Consolidated  Financial  Statements).  During
1996,  the  Company  also  initiated  a plan to  dispose  of  certain  land  and
buildings,  two of which  are  associated  with  the  exiting  of the  truckaway
operation,  that were  recorded  on the books at values  higher than fair market
value.

     Excluding the special charges of $3,500,000, operating income declined from
$3,371,000 in 1995 to $237,000 in 1996. The decline in operating  income in 1996
was  attributed  to (i) weakened  freight  demand in the  Specialized  Transport
Division,  (ii) increases of $1,250,000 in claims costs especially in the driver
outsourcing  and  specialized  transport  divisions,  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 $7,260,000 in 1995 to $8,235,000
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 $87,000 to $352,000  primarily due to
increases in debt related to the TDI acquisition and reduced cash on hand during
the year. The Company expects  interest  expenses will increase  slightly during
1997 as interest charges will be incurred on the Transit  acquisition debt added
in late 1996.

     In 1996, the income tax benefit of $1,545,000,  including federal and state
tax  benefits,  resulted in an  effective  tax  benefit of 42.7%  compared to an
effective tax rate of 30.9% in 1995.  The Company  anticipates a decrease in the
1997 effective tax rate to approximately 34%.

Year 1995 Compared to 1994

Operating  revenues rose by 20% to  $122,303,000  in 1995 from  $101,880,000  in
1994.  Prior to giving  effect to the TDI  acquisition,  which closed on May 22,
1995,  comparable  operating  revenues  increased  14.9%.  Morgan benefited from
growth of its primary market,  manufactured  housing,  where national production
was up 12%  compared  to 1994,  and from seven  months of  revenue  from the TDI
acquisition.  The 1995 growth in sales was partially stunted by an industry-wide
decline in recreational  vehicle  production of 11%.

     Operating  income  declined from  $3,435,000 in 1994 to $3,371,000 in 1995.
The decline in  operating  income at Morgan  Drive Away,  Inc. of  approximately
$500,000 was partially offset by operating income from TDI, Inc. of $350,000 and
increased profits from the Company's wholly-owned insurance company,  Interstate
Indemnity.  The decrease in Morgan Drive Away,  Inc.'s  operating income in 1995
was attributed to a slow-down in certain  segments of the  recreational  vehicle
market which affected margins, and an increase in operating costs including, but
not limited to,  increased  fuel taxes,  road taxes,  recruiting  costs,  driver
retention,  and safety  programs.  The  Company's  continued  emphasis on safety
produced  over  $650,000 of claim cost savings  calculated  as a  percentage  of
revenue  during the year.  These  savings  were  offset to some degree by higher
trucking liability  premiums,  in part due to one major claim which was resolved
during the year.

     Selling,  general and administrative  expenses increased from $6,290,000 in
1994 to $7,260,000 in 1995.  The higher  general and  administrative  costs were
attributed to investment in personnel,  increased lease costs for the automation
of  dispatch  facilities,  and TDI,  Inc.  general and  administrative  costs of
$330,000.

     Net interest expense  increased from $68,000 to $87,000 primarily due to an
increase in debt related to the TDI acquisition.

     The 1995 income tax provision of  $1,015,000,  including  federal and state
taxes, resulted in an effective tax rate of 30.9% compared to 34.3% in 1994.

     Net income  increased  from  $2,212,000 in 1994 to $2,269,000 in 1995. As a
result  of the  earnings  growth  and the buy back of  shares  of Class A Common
stock,  fully diluted  earnings per share reached $.80 in 1995, up from $.73 per
share in 1994.

Liquidity and Capital Resources

     Cash  generated  from  operations   decreased  to  $217,000  in  1996  from
$2,503,000 in 1995. The net loss during 1996 of $2,070,000 was in large part due
to the  non-cash  special  charge net of tax of  $2,100,000  (special  charge of
$3,500,000 net of deferred tax effect of $1,400,000).  The sale of the truckaway
operation along with the related operating  equipment,  land and buildings,  and
collection of outstanding  truckaway  receivables,  all net of cost, and related
tax  benefits  will  produce  additional  cash  estimated  to  be in  excess  of
$3,000,000.  The increase in prepaid  expenses in 1996 stems from an increase in
prepaid drivers pay. The decline in other accrued liabilities in 1996 is related
to  decreases  in  accrued  wages,  fuel  taxes,   operating  permits,  and  tax
liabilities.  The accounts  payable  decline  during 1996 is a result of reduced
cash overdrafts.

     Cash used in investing  activities  decreased  from  $2,945,000  in 1995 to
$1,581,000  in 1996.  In 1996,  the  Company  invested  $686,000  in net capital
expenditures and had initial acquisition  payments to Transit of $895,000.  This
compares  to  $1,927,000  of  net  capital  expenditures  in  1995  and  initial
acquisition payments on TDI of $1,018,000.  In 1996,  approximately  $200,000 of
the Company's capital expenditures were spent on Company-owned  equipment in the
truckaway  division.  The decision to close the  truckaway  division will reduce
future needs for capital expenditures for Company-owned trailers.

     Net cash used in financing  activities decreased from $3,401,000 in 1995 to
$179,000 in 1996.  In 1995,  the Company  bought over 156,000  shares of Class A
Common stock for $1,274,000.  In addition,  the Company  expended  $1,300,000 in
cash related to early  redemption of preferred  stock.  During 1996, the Company
bought over 34,000 shares of Class A Common stock for $286,000.

     Outstanding  borrowings  under the  revolver  increased  to  $1,250,000  at
December  31,  1996,  as  compared  to no  borrowings  under the  revolver as of
December  31,  1995.  The  Company has total  borrowing  facility  available  of
$10,000,000, of which there was $5,842,000 outstanding as of December 31, 1996.

     The Company paid to the previous owner of Transit  $895,000 on December 30,
1996, which was the closing date of the acquisition. In addition, $1,987,000 was
financed  through a note due on January 2, 1997 of $697,000 and a five year note
for $1,300,000  (present value of $1,158,000)  which requires annual payments of
$475,000,  $375,000,  $175,000, $175,000 and $100,000 in 1997, 1998, 1999, 2000,
and 2001, respectively.

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

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
revenues  in the  first  and  fourth  quarters  of the year.  RV  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 revenues,  therefore,  tend to be stronger in the
second and third quarters.

Impact of Inflation

Inflation  can be expected to have an impact on the Company's  operating  costs.
While the effect of inflation has been moderate  since 1990, a prolonged  period
of inflation would adversely  affect the Company's  results unless rates charged
to customers could be increased accordingly.

Forward-Looking Discussion

In 1997, the Company could benefit from (i) the  acquisition of Transit Homes of
America which consolidates Morgan's  long-standing position as the leader in the
delivery of  outsourcing  transportation  services to the  manufactured  housing
industry,  (ii) the closing of the  Truckaway  Division,  which cost the Company
approximately  $1,800,000 in 1996, (iii) reduction of overhead through corporate
restructuring,  and (iv) improvement of our 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.  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 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 1996
under Part I, Item 1, Business.



<PAGE>

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Morgan Group, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                    December 31
----------------------------------------------------------------------------------------------------
                                                                                1996         1995
<S>                                                                           <C>           <C>
Assets
Current assets:
        Cash and cash equivalents                                             $  1,308      $  2,851
        Trade accounts receivable, less allowance for doubtful
                accounts of $59,000 in 1996 and $102,000 in 1995                11,312        11,285
        Accounts receivable, other                                                 274           514
        Refundable taxes                                                           584           ---
        Prepaid expenses and other current assets                                3,445         2,875
        Deferred income taxes                                                      ---           586
----------------------------------------------------------------------------------------------------
Total current assets                                                            16,923        18,111
Property and equipment, net                                                      2,763         6,902
Assets held for sale                                                             2,375            --
Intangible  assets,  net                                                         8,911         5,285
Deferred income taxes                                                            1,683            --
Other assets                                                                       411           497
----------------------------------------------------------------------------------------------------
 Total assets                                                                 $ 33,066      $ 30,795
====================================================================================================
Liabilities  and shareholders' equity
Current liabilities:
        Note payable to bank                                                    $1,250       $    --
        Trade accounts payable                                                   3,226         3,845
        Accrued liabilities                                                      4,808         2,245
        Accrued claims payable                                                   1,744         1,337
        Refundable deposits                                                      1,908         1,607
        Current portion of long-term debt                                        1,892           784
----------------------------------------------------------------------------------------------------
Total current liabilities                                                       14,828         9,818
Long-term debt, less current portion                                             2,314         2,491
Deferred income taxes                                                               --           622
Long term accrued claims payable                                                 2,820         2,286
Commitments and contingencies                                                      ---           ---
Shareholders' equity
        Common stock, $.015 par value
        Class A:
        Authorized shares 7,500,000;                                                23            23
        Issued and outstanding shares  1,485,520 and 1,449,554
        Class B:
        Authorized shares 2,500,000;                                                18            18
        Issued and outstanding shares 1,200,000
        Additional paid-in capital                                              12,441        12,441
        Retained earnings                                                        2,126         4,370
----------------------------------------------------------------------------------------------------
Total capital and retained earnings                                             14,608        16,852
Less  treasury stock, 120,043 and 156,009 shares, at cost                       (1,000)       (1,274)
     loan to officer for stock purchase                                           (504)           --
----------------------------------------------------------------------------------------------------
Total shareholders' equity                                                      13,104        15,578
----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                                    $ 33,066      $ 30,795
====================================================================================================
</TABLE>

See accompanying notes


<PAGE>

The Morgan Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                               December 31
                                                                   1996           1995          1994
------------------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>           <C>
Operating revenues:
        Manufactured housing                                  $    72,616    $    63,353   $    53,520
        Specialized transport                                      26,169         29,494        28,246
        Driver outsourcing                                         23,090         19,842        15,197
        Other service revenue                                      10,333          9,614         4,917
------------------------------------------------------------------------------------------------------
Total operating revenues:                                         132,208        122,303       101,880
Cost and expenses:
        Operating costs                                           122,238        110,408        91,241
        Special charges                                             3,500            ---           ---
        Selling, general and administration                         8,235          7,260         6,290
        Depreciation and amortization                               1,498          1,264           914
------------------------------------------------------------------------------------------------------
Total costs and expenses                                          135,471        118,932        98,445
------------------------------------------------------------------------------------------------------
Operating (loss) income                                            (3,263)         3,371         3,435
Interest expense, net                                                 352             87            68
------------------------------------------------------------------------------------------------------
(Loss) income before taxes                                         (3,615)         3,284         3,367
Total income tax (benefit) expense
        Current                                                       268            859         1,031
        Deferred                                                   (1,813)           156           124
------------------------------------------------------------------------------------------------------
Total income tax (benefit) expense                                 (1,545)         1,015         1,155
------------------------------------------------------------------------------------------------------
Net (loss) income                                                  (2,070)         2,269         2,212
Less preferred dividend                                                --            221           244
------------------------------------------------------------------------------------------------------
Net (loss) income applicable to Common stock                  $    (2,070)   $     2,048   $     1,968
======================================================================================================
Net (loss) income per share:
        Primary                                               $     (0.77)   $      0.80   $      0.75
======================================================================================================
        Fully diluted                                         $     (0.77)   $      0.80   $      0.73
======================================================================================================
Average number of common shares and common stock equivalents    2,684,242      2,557,516     2,626,926
======================================================================================================
</TABLE>


See accompanying notes

<PAGE>
The Morgan Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)
<TABLE>
<CAPTION>

                                                                                   December 31
                                                                      1996             1995            1994
------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>              <C>             <C>
Net income (loss)                                                   $(2,070)         $ 2,269         $ 2,212
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
      Depreciation                                                    1,101              901             630
      Amortization                                                      396              363             284
      Deferred income taxes                                          (1,719)             156             124
      Special charges                                                 3,500               --              --
      Imputed non-cash interest on acquisition debt                     101              112              71
      Amortization of debt issuance costs                                36               40              40
      Gain (loss) on sale of equipment                                   37              (19)              8
      Changes in operating assets and liabilities:
                Accounts receivable                                     213           (1,835)         (1,976)
                Refundable taxes                                       (584)              --              --
                Prepaid expenses and other current assets              (891)            (372)           (939)
                Other assets                                             86              (44)              9
                Accounts payable                                       (779)              45           1,324
                Accrued liabilities                                      86              433             806
                Accrued claims payable                                  341              297             496
                Refundable deposits                                     363              157             409
------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                               217            2,503           3,498
Investing Activities
      Purchases of property and equipment                              (780)          (1,955)         (1,433)
      Proceeds from disposal of property and equipment                   94               28             183
      Acquisition of businesses                                        (895)          (1,018)             --
------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                (1,581)          (2,945)         (1,250)
Financing Activities
      Net proceeds from (payments on)
          bank and seller-financed
          notes and credit lines                                    $   225             (626)           (493)
      Conversion of warrants                                             --              297              --
      Purchase of treasury stock                                       (286)          (1,274)             --
      Proceeds from sale of treasury stock                               56               --              --
      Redemption of Series A preferred stock                             --           (1,300)             --
      Common stock dividends paid                                      (174)            (161)           (158)
      Redeemable preferred stock dividends paid                          --             (337)           (229)
------------------------------------------------------------------------------------------------------------
Net cash used in financing activities                                  (179)          (3,401)           (880)
------------------------------------------------------------------------------------------------------------
Net increase in (decrease in) cash and cash equivalents              (1,543)          (3,843)          1,368
Cash and cash equivalents at beginning of year                        2,851            6,694           5,326
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                            $ 1,308          $ 2,851         $ 6,694
============================================================================================================
</TABLE>


See accompanying notes

<PAGE>
The Morgan Group, Inc. and Subsidiaries

CONSOLIDATED  STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK, COMMON STOCK,
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
<S>                                            <C>         <C>        <C>        <C>         <C>         <C>         <C>
Balance December 31, 1993                       $  3,089    $     20   $     18   $ 10,459        $---        $---    $    673
        Net income                                   ---         ---        ---        ---         ---         ---       2,212
        Redeemable Preferred
                Stock dividends:
                        Accrued                      244         ---        ---        ---         ---         ---        (244)
                        Paid                        (229)        ---        ---        ---         ---         ---         ---
        Common stock dividends:
                Class A ($.08 per share)             ---         ---        ---        ---         ---         ---        (110)
                Class B ($.04 per share)             ---         ---        ---        ---         ---         ---         (48)
                                                -------------------------------------------------------------------------------
Balance, December 31, 1994                         3,104          20         18     10,459         ---         ---       2,483
        Net income                                   ---         ---        ---        ---         ---         ---       2,269
        Redeemable Preferred
                Stock dividends:
                        Accrued                      221         ---        ---        ---         ---         ---        (221)
                        Paid                        (337)        ---        ---        ---         ---         ---         ---
        Redemption of Series A
                Preferred Stock                   (2,988)          2        ---      1,686         ---         ---         ---
        Conversion of Warrants,
                        including tax benefit        ---           1        ---        296         ---         ---         ---
        Purchase of Treasury Stock                   ---         ---        ---        ---         ---      (1,274)        ---
        Common stock dividends:
                Class A ($.08 per share)             ---         ---        ---        ---         ---         ---        (113)
                Class B ($.04 per share)             ---         ---        ---        ---         ---         ---         (48)
                                                -------------------------------------------------------------------------------
Balance, December 31, 1995                           ---          23         18     12,441         ---      (1,274)      4,370
        Net  (loss)                                  ---         ---        ---        ---         ---         ---      (2,070)
        Sale of Treasury Stock, net                  ---         ---        ---        ---        (504)        274         ---
        Common stock dividends:
                Class A ($.08 per share)             ---         ---        ---        ---         ---         ---        (126)
                Class B ($.04 per share)             ---         ---        ---        ---         ---         ---         (48)
                                                -------------------------------------------------------------------------------
Balance, December 31, 1996                      $      0    $     23   $     18   $ 12,441    $   (504)   $ (1,000)   $  2,126
                                                ===============================================================================
</TABLE>


See accompanying notes

<PAGE>
NOTES TO CONSOLIDATED STATEMENTS

1.   Summary of Significant Accounting Policies

Description of Business

The Morgan Group,  Inc.  (Company),  formerly  Lynch Services  Corporation,  was
incorporated  in 1988 for the  purpose of  acquiring  Morgan  Drive  Away,  Inc.
(Morgan),  and Interstate  Indemnity Company  (Interstate).  In 1994 the Company
formed Morgan Finance,  Inc. (Finance),  in 1995 acquired the assets of Transfer
Drivers,  Inc. (TDI), and on December 30, 1996,  purchased the assets of Transit
Homes of America,  Inc.  (Transit).  Lynch  Corporation  (Lynch) owns all of the
1,200,000 shares of the Company's Class B Common stock and 150,000 shares of the
Company's  Class A Common  stock,  which in the  aggregate  represent 66% of the
combined voting power of both classes of the Company's Common stock.

The Company is the nation's leader in arranging for transportation  services for
the  manufactured  housing  and motor home  industries  and is building a strong
market  presence in providing  outsourcing  services for a wide range of vehicle
manufacturers and fleet users. The Company provides  outsourcing  transportation
services  through a national  network of drivers.  A majority  of the  Company's
accounts  receivable are due from companies in the manufactured  housing,  motor
home,  and commercial  truck  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  20%, 24%, and 27% of operating  revenues in 1996, 1995, and 1994,
and 12% and 17% of gross  accounts  receivables  at December  31, 1996 and 1995,
respectively.


<PAGE>

     The Company's  services also include  delivering other products,  including
office trailers,  and providing certain insurance and financing  services to its
owner operators through Interstate and Finance. Revenues,  operating profits, or
identified  assets  of these  subsidiaries  do not  account  for over 10% of the
Company's revenues,  operating profits, or identifiable assets, and accordingly,
no segment information is required.

Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its subsidiaries,  Morgan, Interstate, TDI, and Finance, all of which are wholly
owned.  Significant  intercompany accounts and transactions have been eliminated
in  consolidation.

Recognition  of  Revenues

Operating  revenues and related estimated costs of movements are recognized when
movement of the manufactured housing,  recreational  vehicles, or other products
is completed.

Property and Equipment

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

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 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 16, the Company
recognized an adjustment  during 1996 for  write-downs  of assets to be disposed
of.

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.


<PAGE>

Cash  Equivalents

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

Intangible Assets

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

The Company continually evaluates the performance of acquired companies by using
the undiscounted  cash flow method to identify whether events and  circumstances
have occurred that indicate the value of recorded goodwill may be impaired.

Insurance and Claim Reserves

The Company  maintains  liability  insurance  coverage of up to $20,000,000  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
$250,000. Claims and insurance accruals reflect the estimated cost of claims for
cargo  loss and  damage,  bodily  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 no portion of these reserves have been discounted.

Net Income Per Common Share

In 1995,  primary net income per common share has been  computed by dividing net
income,  after  reduction  for (the now retired)  Series A Redeemable  Preferred
Stock dividends,  by the average number of shares  outstanding during each year,
as adjusted  for stock  splits.  For periods  prior to 1995,  fully  diluted net
income per common share includes the dilutive  effect of the warrants  issued in
1992 as computed by application of the treasury stock method. In 1995 net income
per common share  reflects the conversion of the warrants into shares of Class A
Common stock. Because each share of the Company's Class B Common stock is freely
convertible  into one share of Class A Common  stock,  the total of the  average
number of common  shares  and  Common  stock  equivalents  outstanding  for both
classes of Common stock are considered in the computation of income per share.


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 revenues and expenses during the reporting  period.
Actual results could differ from those estimates.

Reclsssifications

Certain amounts in the financial statements have been reclassified to conform to
the 1996 presentation.  Such  reclassifications had no effect on total assets or
net income.


<PAGE>

2.   Property and Equipment

Property and equipment consisted of the following:
                                  Estimated             December 31
                                 Useful Life        1996          1995
-----------------------------------------------------------------------
                                   (Years)           (In thousands)
Land                                     --       $   487       $ 1,263
Buildings                                25           524         2,368
Transportation equipment             3 to 5         1,470         5,022
Office and service equipment         5 to 8         3,145         3,058
-----------------------------------------------------------------------
                                                    5,626        11,711
Less accumulated depreciation                       2,863         4,809
-----------------------------------------------------------------------
Property and equipment, net                       $ 2,763       $ 6,902
=======================================================================

3.  Intangible Assets

The  components of  intangible  assets and their  estimated  useful lives are as
follows:

                                  Estimated             December 31
                                 Useful Life        1996          1995
-----------------------------------------------------------------------
                                   (Years)           (In thousands)
Contractor network                        3        $1,210       $1,210
Trained work force                  3 to 12         1,030        1,030
Covenants not to compete            5 to 15         1,152        1,152
Trade name and goodwill--original        40         1,660        1,660
Trade name and goodwill--purchased       20         6,828        2,806
Other                                3 to 5           800          800
-----------------------------------------------------------------------
                                                   12,680        8,658
Less accumulated amortization                       3,769        3,373
-----------------------------------------------------------------------
Intangible assets, net                             $8,911       $5,285
=======================================================================

4. Indebtedness

On March 27, 1997, the Company  entered into a credit  facility with a bank. The
credit facility,  which replaced a similar facility with the same bank, provides
financing for working capital needs,  equipment leasing,  letters of credit, and
general  corporate  needs. The Company pays a fee of .125% on the unused line of
credit facilities, and may fix interest rates over the short term LIBOR plus 150
basis points. All letters of credit expire at various dates throughout 1997. The
Company has total available credit  facilities of $10,000,000 of which there are
available  borrowings of  $4,158,000  as of December 31, 1996. In addition,  the
Company has available  borrowing of $400,000 under its mortgage debt agreements.
The key  provisions of the credit  arrangements  are summarized in the following
table:

<TABLE>
<CAPTION>

Key Provisions                                      Credit          Interest
of Credit                         Expiration      Arrangements        Rate               Interest
Arrangements                        Dates         Outstanding         Basis                Rate
------------------------------------------------------------------------------------------------------
<S>                                 <C>            <C>              <C>               <C>
Working capital line of credit      4-30-99        $1,250,000         Prime             8.25%
Lease line of credit                4-30-99           833,000         Various           6.27% to 7.48%
Letter of credit facility           4-30-99         3,418,000         Fixed             1.00%
Term note                           7-31-00           341,000         Fixed             8.25%
------------------------------------------------------------------------------------------------------
Bank borrowing
     (non-mortgage)                                 5,842,000
Revolving real
     estate note                    10-1-98           330,000         Prime +.75%       9.00%
------------------------------------------------------------------------------------------------------
Total bank credit arrangements                     $6,172,000
======================================================================================================
</TABLE>

<PAGE>

     The lines of credit, notes, and letters of credit are collateralized by the
assets of Interstate,  Morgan,  Finance,  and TDI, and the accounts  receivable,
inventory, and motor equipment of Morgan and TDI. The revolving real estate note
is  collateralized  by  approximately  24 acres of property  and  structures  in
Elkhart,  Indiana. The Company's Class B Common stock has been collateralized to
secure a Lynch Corporation line of credit.

As of December 31, 1996, long-term debt consisted of the following:

                                                            December 31
                                                        1996            1995
--------------------------------------------------------------------------------
                                                           (In thousands)
Real estate note with principal and interest
     payable monthly through October 1, 1998           $ 330           $ 690
Promissory note with imputed interest at 8%,
     principal and interest payments due
     monthly through September 1, 1998                   270             426
Promissory note with imputed interest at 7%,
     principal and interest payments due
     annually through October 31, 2001                   256             295
Promissory note with imputed interest at 7.81%,
     principal and interest payments due annually
     through August 11, 2000                           1,154           1,414
Term note with principal and interest payable
        monthly through July 31, 2000                    341             450
Promissory note with imputed interest at 6.31%,
     principal and interest payments due
     quarterly through December 31, 2001               1,158             ---
Promissory note principal due on January 2, 1997         697             ---
--------------------------------------------------------------------------------
                                                       4,206           3,275
Less current portion                                   1,892             784
--------------------------------------------------------------------------------
Long-term debt, net                                   $2,314           $2,491
================================================================================
<PAGE>

     Maturities on long-term debt for the five  succeeding  years are as follows
(in thousands):

                      1997                                $1,892
                      1998                                   977
                      1999                                   686
                      2000                                   448
                      2001                                   153
                      Thereafter                              50
                      ------------------------------------------
                                                          $4,206
                      ==========================================

     The Company, pursuant to a loan agreement with a bank, has agreed to comply
with certain covenants including minimum net worth, maximum ratio of funded debt
to net worth,  minimum of interest ratio coverage,  and incurrence of additional
debt.

     Cash  payments for interest were  $381,000 in 1996,  $278,000 in 1995,  and
$202,000 in 1994.

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):

                                        1996             1995            1994
--------------------------------------------------------------------------------
Current:
        State                         $    28          $   180         $   219
        Federal                           240              679             812
--------------------------------------------------------------------------------
                                          268              859           1,031
Deferred:
        State                            (267)             ---             ---
        Federal                        (1,546)             156             124
--------------------------------------------------------------------------------
                                       (1,813)             156             124
--------------------------------------------------------------------------------
                                      $(1,545)         $ 1,015         $ 1,155
================================================================================

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

                                                 1996          1995
--------------------------------------------------------------------
                                                   (In thousands)
Deferred tax assets:
        Accrued insurance claims                $ 1,595      $ 1,016
        Special charges                           1,260           --
        Minimum tax carryforward                     96           --
--------------------------------------------------------------------
                                                  2,951        1,016
Deferred tax liabilities:
        Depreciation                               (709)        (507)
        Prepaid expenses                           (482)        (465)
        Other                                       (77)         (80)
--------------------------------------------------------------------
                                                 (1,268)      (1,052)
--------------------------------------------------------------------
                                                $ 1,683      $   (36)
====================================================================


<PAGE>

     A  reconciliation  of the income tax provisions and the amount  computed by
applying the  statutory  federal  income tax rate to income  before income taxes
follows:

                                               1996         1995         1994
--------------------------------------------------------------------------------
                                                        (In thousands)
Income tax provision (benefit) at
     federal statutory rate                   $(1,229)     $ 1,117      $ 1,145
Increases (decreases):
        State income tax, net of
           federal tax benefit                   (155)         118          144
Reduction attributable to special
     election by captive insurance company       (216)        (223)        (202)
Other                                              55            3           68
--------------------------------------------------------------------------------
                                              $(1,545)     $ 1,015      $ 1,155
================================================================================

     Cash payments for income taxes were $934,000 in 1996, $736,000 in 1995, and
$685,000 in 1994.

6.  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 a Series A Redeemable  Preferred Stock cash dividend pursuant
to its terms.  Accordingly,  $120,498,  $118,533,  and $97,577 of cash dividends
were paid to Lynch during 1995.

7.  Stock Warrants

In November 1992, the Company  granted an officer  warrants to purchase  133,333
shares  of  Class A Common  stock at an  option  price  of $.75 per  share.  The
warrants were  exercisable over a three year vesting period beginning in August,
1993. In June 1995, the officer exercised the 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 canceled.

     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.


<PAGE>

8.  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.  Three
non-employee  directors were granted  non-qualified  stock options to purchase a
total of 24,000  shares of Class A Common stock at prices  ranging from $6.80 to
$9.00 per shares.  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 grantees
employment  terminates  prior to  exercise  for reasons  other than  retirement,
death, or disability.

     Employees have been granted non-qualified stock options to purchase 175,500
shares of Class A Common stock,  net of cancellations  and exercises,  at prices
ranging  from  $7.38 to $8.75 per  share.  Stock  options  vest over a four year
period  pursuant to the terms of the plan.  As of December 31, 1996,  there were
88,375  options  to  purchase  shares  granted  to  employees  and  non-employee
directors which were exercisable  based upon the vesting terms, and 4,000 shares
had option  prices less than the December 31, 1996 closing  price of $7.50.  The
following table summarizes activity under the option plan:

                                           Shares            Option Price
--------------------------------------------------------------------------------
Outstanding at December 31, 1993           152,000           $8.75 - $9.00
        Grants                              16,500           $6.80 - $7.75
        Exercises                              ---
        Cancellations                       (8,000)
--------------------------------------------------------------------------------
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

9.  Special Employee Stock Purchase Plan

In February of 1996, the Company adopted a Special  Employee Stock Purchase Plan
(Plan) under which Morgan Drive Away's  President  and Chief  Executive  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.
The Plan allows for  repayment of the note using shares at $8.00 per share.  The
Company has the right to  repurchase,  at $8.00 per share,  56,000 shares during
the first year of the agreement and 28,000 during the second year.


<PAGE>

10.  Benefit Plans

In 1994, the Company adopted a 401(k) Savings Plan which matches 25% of employee
contributions up to a designated amount. The Company's  contribution to the Plan
was $27,000 in 1996, $23,000 in 1995, and $19,000 in 1994.

     The Company has established a non-qualified Compensation Plan applicable to
highly  compensated  employees.  The Plan  provides  tax  deferred  savings  for
executives  unfavorably  impacted  by IRS  restrictions.  The rate of  return is
predicated on rates available from life insurance products.  For the years ended
December  31,  1996 and 1995,  $12,000 and $10,000  were  recognized  as premium
expense under this Plan.

11.  Transactions with Lynch

Lynch  provides  certain  services  to  the  Company  which  include  executive,
financial  and  accounting,  planning,  budgeting,  tax,  legal,  and  insurance
services.  As discussed in Note 6, the Redeemable Preferred Stock owned by Lynch
Corporation was redeemed during 1995 at a discount. The Company incurred service
fees of $100,000 in 1996, $100,000 in 1995, and $0 in 1994.

12.  Leases

The  Company  leases  certain  buildings  and  equipment  under   non-cancelable
operating leases that expire in various years through 2001. Rental expenses were
$830,000 in 1996,  $727,000 in 1995,  and  $564,000  in 1994.  Equipment  leases
totaled $1,259,000 in 1996, $1,077,000 in 1995, and 641,000 in 1994.

     Future payments under non-cancelable operating leases with initial terms of
one year or more consisted of the following at December 31, 1996 (in thousands):

                    1997                                 $1,518
                    1998                                    990
                    1999                                    268
                    2000                                    163
                    2001                                     65
                    -------------------------------------------
                    Total lease payments                 $3,004
                    ===========================================

13.  Treasury Stock

On March 9, 1995,  June 22, 1995,  and July 31,  1996,  the  Company's  Board of
Directors  approved the purchase of up to 150,000 shares of Class A Common stock
for its  Treasury  at  dates  and  market  prices  determined  by the  Company's
Chairman. As of December 31, 1996, 101,155 shares had been repurchased at prices
between $7.25 and $9.625 per share for a total of $843,215. In addition to these
purchases, the 22,660 shares tendered to the Company as a result of the exercise
of warrants (see Footnote 7) were placed in the Treasury at a value of $189,778.
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  $529,824.  In addition,  in February of 1996,  Morgan Drive
Away's  President and Chief Executive  Officer  purchased 70,000 shares of stock
from Treasury stock at the then current market value of $560,000.


<PAGE>

14.  Acquisitions

Effective May 22, 1995, the Company purchased the assets of TDI, a market leader
in the fragmented  outsourcing  services  business for a total purchase price of
$2,725,000.  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 with the  payments  beginning  August 10, 1996.  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 of 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 $1,154,000 at December 31, 1996.

Effective  December 30, 1996, the Company  purchased the assets of Transit Homes
of America,  Inc.,  a provider  of  outsourcing  transportation  services to the
manufactured housing industry. The aggregate purchase price was $4,372,000 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 $400,000,  $300,000,  and $200,000 in years 1997, 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
$3,988,000  and is being  amortized  over twenty years.  In connection  with the
acquisition, liabilities assumed were as follows:

        Fair value of assets acquired                $ 350,000
        Goodwill acquired                            4,022,000
        Cash paid December 30, 1996                   (895,000)
        Note issued due January 2, 1997               (697,000)
        Note issued at acquisition date             (1,158,000)
        ------------------------------------------------------
        Liabilities assumed                        $ 1,622,000
        ======================================================


<PAGE>

     The following  unaudited pro forma condensed combined results of operations
of Transit and the Company have been prepared as if the  acquisition  of Transit
had occurred at the beginning of 1995.  The  following  table  incorporates  the
special charges of $3,500,000  ($2,100,000  after tax or $.78 per share) related
to exiting the  truckaway  operation  and write down of properties in accordance
with SFAS No. 121 (See Note 16):

                                      Pro Forma Years Ended
                                  Dec. 31                Dec. 31
                                   1996                    1995
------------------------------------------------------------------
                                     (Dollars in thousands
                                     except per share data)
Net Sales                         $162,000               $154,000
Operating income (loss)             (2,510)                 3,600
Net income (loss)                   (1,625)                 2,200
Net income (loss) per share           (.61)                   .77

     The pro forma  consolidated  results  do not  purport to be  indicative  of
results  that would have  occurred  had the  acquisition  been in effect for the
periods presented, nor do they purport to be indicative of the results that will
be obtained in the future.

15.  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.

     On August  4,  1995,  Finance  entered  into a  Commercial  Paper  Purchase
Agreement with a lender  whereby the lender has provided an equipment  financing
facility for Morgans independent contractors. Under the Agreement, Finance has a
limited  guarantee of twenty five percent (25%) of the original  amount financed
on each loan  purchased.  As of  December  31,  1996,  the lender  had  extended
$238,000 of financing and Finance had limited guarantees outstanding of $59,500.

16.  Special Charges

In the  fourth  quarter  of  1996,  the  Company  recorded  special  charges  of
$2,675,000  ($1,605,000 after tax or $.60 per share) associated with exiting the
truckaway operation. The special charges comprise 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.

     In addition, the Company is in the process of selling four properties,  two
of which are associated with the exiting of the truckaway operation. The Company
has  recognized an  adjustment to the extent the carrying  value of the affected
assets (which was  $2,200,000  as of December 31,  1996),  exceeds the estimated
realizable  value (which was  estimated at  $1,375,000 as of December 31, 1996).
Accordingly, an adjustment of $825,000 ($495,000 net of taxes or $.18 per share)
is included as special  charges.  The truckaway  operation had revenues of $12.9
million and $14.4 million,  and operating losses of  approximately  $1.8 million
and $1.2 million for the years ended December 31, 1996, and 1995,  respectively.
In addition,  truckaway had revenues of $20.6  million and  operating  income of
$1.2 million in 1994.
<PAGE>

17.  Operating Costs and Expenses (in thousands)

                                         1996            1995            1994
--------------------------------------------------------------------------------
Purchased transportation costs        $ 92,037        $ 84,314        $ 70,137
Operating taxes and licenses             6,460           6,052           4,269
Insurance                                3,502           4,000           3,064
Claims                                   6,080           4,797           4,761
Dispatch costs                           7,676           6,637           5,896
Regional costs                           2,948           2,492           2,141
Repairs and maintenance                    918             770             799
TDI, Inc.                                1,356             823              --
Other                                    1,261             523             174
--------------------------------------------------------------------------------
                                      $122,238        $110,408        $ 91,241
================================================================================

The following is a summary of the unaudited  quarterly results of operations for
the years ended  December 31,  1996,  and 1995 (in  thousands,  except per share
data):
                                              1996--Three Months Ended
--------------------------------------------------------------------------------
                             March 31        June 30       Sept. 30     Dec. 31
--------------------------------------------------------------------------------
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)
Earnings (loss) per share
        Primary                   ---            .15           .18        (1.11)
        Fully diluted         $   ---           $.15          $.18      $ (1.11)

                                              1995--Three Months Ended
--------------------------------------------------------------------------------
                             March 31        June 30       Sept. 30     Dec. 31
--------------------------------------------------------------------------------
Operating revenues            $26,803       $31,554         $33,251     $30,695
Operating income (loss)           737         1,242           1,103         289
Net income                        463           764             814         228
Earnings per share
        Primary                   .15           .27             .29         .07
        Fully diluted         $   .15       $   .27         $   .29     $   .07

     In the fourth  quarter of 1996,  the Company  recorded  special  charges of
$3,500,000  ($2,100,000  after  taxes or $.78 per share)  related to exiting the
truckaway  operation and a write down of properties in accordance  with SFAS No.
121. In addition, in the fourth quarter, the Company recorded $750,000 ($.17 per
share) of increased  insurance reserves and insurance costs primarily related to
1996 accidents.

     In the fourth quarter of 1995,  the Company  recorded  $300,000  ($0.08 per
share) of  insurance  costs  after beng  notified  of a  significant  jury award
against the Company. This charge reflects the uninsured portion of the award.

<PAGE>

                         Report of Independent Auditors



Board of Directors
The Morgan Group, Inc.

We have audited the accompanying consolidated balance sheet of The Morgan Group,
Inc. and  subsidiaries  as of December 31,  1996,  and the related  consolidated
statements of operations,  changes in redeemable  preferred stock,  common stock
and other  shareholders'  equity,  and cash flows for the year then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our 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 consolidated financial position of The Morgan Group,
Inc. and  subsidiaries  at December 31, 1996,  and the  consolidated  results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

                                                           /s/ Ernst & Young LLP

Greensboro, North Carolina
March 27, 1997

<PAGE>

The Board of Directors, The Morgan Group, Inc.

We have audited the  accompanying  balance  sheets of The Morgan Group,  Inc. (A
Delaware Corporation) and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated  statements of operations,  changes in redeemable preferred
stock,  Common stock and other shareholders  equity and cash flows for the years
then ended.  These financial  statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

     We conducted  our 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 financial position of The Morgan Group, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of its operations
and cash flows for the years then ended in conformity  with  generally  accepted
accounting principles.


                                             /s/ Arthur Andersen LLP
Chicago, Illinois
February 5, 1996


<PAGE>


                SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
                             THE MORGAN GROUP, INC.


<TABLE>
<CAPTION>

       Col. A                   Col. B                               Col. C                       Col. D          Col. E
                                                                   Additions
Description                  Balance at              Charges to Costs     Charges to Other      Deductions-      Balance at End
                             Beginning of Period     and Expenses         Accounts-Describe     Describe (1)     of Period
Year ended December 31,
1996
<S>                          <C>                     <C>                    <C>                 <C>              <C>
Allowance for doubtbul       $102,000                $244,000                                   $287,000         $59,000
account
Year ended December 31,
1995
Allowance for doubtbul       $171,000                $184,000                                   $253,000         $102,000
account
Year ended December 31,
1994
Allowance for doubtbul       $137,000                $106,000                                   $72,000          $171,000
account

</TABLE>
(1) Uncollectible accounts written-off, net of recoveries.

<PAGE>


Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

        No information is required to be reported in this Form 10-K.

PART III
Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  required by this item with  respect to  directors  is
incorporated  by reference to pages 2 through 5 of the Company's Proxy Statement
for the 1997  Annual  Meeting  of  Shareholders  expected  to be filed  with the
Commission on or about April 12, 1997 (the 1997 Proxy Statement).

Item 11.  EXECUTIVE COMPENSATION

        The  information  required  by  this  item  with  respect  to  executive
compensation  is  incorporated  by  reference  to pages 6 through 12 of the 1997
Proxy Statement.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The  information  required by this item is  incorporated by reference to
pages 1 through 4 of the 1997 Proxy Statement.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The  information  required by this item is  incorporated by reference to
the information  under Certain  Transactions  with Related Persons on page 12 of
the 1997 Proxy Statement.


<PAGE>


PART IV
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a)      List the following documents filed as part of the report:

                                                             Included in Item 8.
        Financial Statements

        Consolidated Balance Sheets
        Consolidated Statements of Operations
        Consolidated Statements of Cash Flows
        Consolidated Statements of Change in
        Redeemable Preferred Stock, Common Stock
        and Other Shareholders Equity

        Notes to Consolidated Financial Statements
        Reports of Independent Auditors

        Schedule VIII

b)      Reports on Form 8-K
        Registrant filed no reports on Form 8-K
        during  the  quarter  ending
        December 31, 1996.

c)      The exhibits filed herewith or incorporated
        by reference herein are set forth on the
        Exhibit Index on page E-1.


<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 28, 1997             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 28th day of March, 1997.

1)      Principal Executive Officer:


        By:/s/ Charles C. Baum              Chairman, Chief Executive Officer
        ------------------------------
                Charles C. Baum

2)      Principal Financial Officer:

        By: /s/ Richard B. Deboer            Chief Financial Officer and
        -----------------------------        Treasurer
                Richard B. DeBoer

A Majority of the Board of Directors:

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

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

        /s/ Richard B. Black                 Director
        ------------------------------
                Richard B. Black

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

        /s/ Todd L. Parchman                 Director
        ------------------------------
                Todd L. Parchman

<PAGE>

                            EXHIBIT INDEX


Exhibit No.             Description                                       Page

3.1     Registrant's   Restated  Certificate  of  Incorporation,   as
        amended.                                                               *

3.2     Registrant's Code of By-Laws, as restated and amended.                 *

3.3     Form of Class A Common Stock Certificate.                              *

4.1     Fourth  Articles  -  "Common  Stock"  of the  Registrant's             *
        Certificate of  Incorporation,  incorporated  by reference to
        the Registrant's  Certificate of  Incorporation,  as amended,
        filed hereunder as Exhibit 3.1.

4.2     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 hereunder as Exhibit 3.2.

4.4     Loan  Agreements  dated September 13, 1994 between The Morgan        ***
        Group and Subsidiaries and Society National Bank.

4.5(a)  Revolving Credit Facility Agreement  effective March 27, 1997
        among Morgan Drive Away Inc., TDI, Inc., Interstate Indemnity
        Company and KeyBank National Association.

4.5(b)  Master  Revolving  Note  dated  March  27,  1997 by Morgan
        Drive Away,  Inc., TDI, Inc. and Interstate Indemnity Company
        to  KeyBank National  Association.

4.5(c)  Security  Agreement  effective  as of March 27, 1997  between
        Morgan Drive Away, Inc. and KeyBank National Association.

4.5(d)  Absolute,  Unconditional and Continuing Guaranty effective as
        of March  27,  1997 by the  Morgan  Group,  Inc.  to  KeyBank
        National Association.

10.1    The Morgan Group, Inc. Incentive Stock Plan.                           *

10.2    Memorandum  to  Charles  Baum  and  Philip  Ringo  from  Lynch         *
        Corporation, dated December 8, 1992, respecting Bonus Pool.

10.3    Employment  Agreement between Morgan Drive Away, Inc. and Paul         *
        D. Borghesani dated July 26, 1988.

10.4    Term Life  Policy  from  Northwestern  Mutual  Life  Insurance         *
        Company insuring Paul D. Borghesani dated August 1, 1991.

10.5    Long Term Disability Insurance Policy from Northwestern Mutual         *
        Life Insurance Company dated March 1, 1990.

10.6    Letter  Agreement  from  Philip J. Ringo to The Morgan  Group,
        Inc., (formerly * Lynch Services Corporation), dated August 3,
        1993.

10.7    Warrants to Purchase Class A Common Stock of The Morgan Group,
        Inc. * (formerly Lynch Services  Corporation),  dated November
        10, 1992, issued to Philip J. Ringo, and amended June 7, 1993.

10.10   Asset  Purchase  Agreement,  dated May 21,  1993,  between The
        Morgan Group,  Inc.,  Transamerican  Carriers,  Inc., Ruby and
        Billy Davis and Morgan Drive Away, Inc.

10.12   Management Agreement between Skandia  International and Risk           *
        Management  (Vermont),  Inc. and Interstate  Indemnity Company
        dated December 15, 1992.

10.13   Agreement for the  Allocation of Income Tax Liability  between         *
        Lynch  Corporation  and  its   Consolidated   Subsidiaries,
        Including  The Morgan Group,  Inc.  (formerly  Lynch  Services
        Corporation), dated December 13, 1988, as amended.

10.16   The  Morgan  Group,  Inc.  Employee  Stock  Purchase  Plan  as
        amended.                                                            ****



<PAGE>


  Exhibit No.                                    Description               Page
  -----------                                    -----------               ----

10.17   MCI  Corporate  Service  Agreement  dated  December  12,  1994      ****
        between  MCI  Telecommunications  Corporation  and Morgan
        Drive Away, Inc.

10.8    Certain Services Agreement dated January 1, 1995 between Lynch      ****
        Corporation and The Morgan Group, Inc.

10.9    Consulting  Agreement between Morgan Drive Away, Inc. and Paul    ******
        D. Borghesani effective as of April 1, 1996.

10.20   Employment  Agreement  between  Morgan  Drive Away,  Inc.  and
        Terence L. Russell                                                ******

10.21   Stock Purchase  Agreement  between Morgan Drive Away, Inc. and    ******
        Terence L.  Russell

10.22   Asset Purchase Agreement for Transfer Drivers Inc. and List of
        Schedules                                                         ******

10.21   Asset Purchase  Agreement between Registrant and Transit Homes   *******
        of America,  Inc. as of November 19, 1996, as amended
        as of December 30, 1996.

10.24   Amendment to Asset Purchase  Agreement between  Registrant and
        Transit,  Inc. as of December 29, 1996.                          *******

11      Statement Re: Computations of Per Share Earnings

16.1    Letter Re: Change in Accountants                                  *****

21      Subsidiaries of the Registrant                                    *

23.1    Consent of Ernst & Young LLP                                      ******

23.2    Consent of Arthur Andersen LLP

27      Financial Data Schedule


*       Incorporated  by  reference  to the  corresponding  Exhibit to
        Registrant's  registration  statement  on Form S-1,  Reg.  No.
        33-641-22.

**      Incorporated  by  reference to  Registrant's  Form 8-K/A filed
        March 29, 1984.

***     Incorporated  by  reference  to  Registrant's  Form 10-Q filed
        November 15, 1994.

****    Incorporated  by  reference  to  Registrant's  Form 10-K filed
        March 30, 1995.

*****   Incorporated by reference to Registrant's Form 8-K filed March
        19, 1996.

******  Incorporated by reference to  Registrant's  Form 10-K filed on
        April 1, 1996.

******* Incorporated  by  reference  to  Registrant's  Form 8-K  filed
        January 14, 1997.