<PAGE>   1
                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                 Annual Report Pursuant to Section 13 or 15 (d)
                     of the Securities Exchange Act of 1934


For the fiscal year ended  March 1, 1998 Commission file number  0-3833
                          --------------                        --------

                              MORGAN'S FOODS, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

             Ohio                                       34-0562210
-------------------------------                    ---------------------
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                     Identification Number)

             24200 Chagrin Boulevard, Suite 126, Beachwood, OH 44122
--------------------------------------------------------------------------------
              (Address of principal executive officers) (Zip Code)

Registrant's telephone number, including area code:      (216) 360-7500
                                                    ----------------------------

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

                                                     Name of each exchange on
     Title of each class                                 which registered
----------------------------------                   ------------------------
  Common Shares, Without Par Value                   American Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act:      None

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes  X    No
                                       ---      ---

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

         As of May 7, 1998, the aggregate market value of the common stock held
by nonaffiliates of the Registrant was $5,152,129.

         As of May 7, 1998, the Registrant had 2,910,839 shares of common stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part III incorporates by reference certain information from the
definitive Proxy Statement to security holders for the 1998 annual meeting, to
be filed with the Securities and Exchange Commission on or before June 25, 1998.


<PAGE>   2


                              MORGAN'S FOODS, INC.

                                     PART I


ITEM 1.  BUSINESS.

         GENERAL. The Registrant operates, through wholly-owned subsidiaries,
Kentucky Fried Chicken ("KFC") restaurants under franchises from KFC
Corporation. The Company also operates East Side Mario's restaurants in the
Cleveland/Akron and Columbus, Ohio areas under franchises from East Side
Mario's, Inc. As of May 28, 1998, the Company operated 39 KFC restaurants, three
of which also offer Taco Bell products, as well as six East Side Mario's
restaurants. The headquarters of the Registrant are located in the Cleveland,
Ohio metropolitan area. Throughout this Report, the Registrant together with its
subsidiaries is referred to as the "Company."

         RESTAURANT OPERATIONS. The Company's KFC restaurants prepare and sell
the distinctive "Kentucky Fried Chicken" and Tender Roast(R) chicken along with
related food items. All containers and packages bear KFC trademarks. The
KFC/Taco Bell "2 in 1" restaurants prepare and sell a limited menu of Taco Bell
items using the appropriate Taco Bell containers and packages as well as the
full KFC menu. The East Side Mario's restaurants are full service, mid-priced,
informal family restaurants inspired by New York City's famous "Little Italy"
district of the 1950's. The menu features a variety of All-American grill
favorites and authentic Italian specialties.

         Of the 39 KFC restaurants operated by the Company as of May 28, 1998,
12 are located in Ohio, 16 in Pennsylvania, 9 in Missouri, 1 in Illinois and 1
in West Virginia. The Company was one of the first KFC Corporation franchisees
and has operated in excess of 20 KFC franchises for more than 25 years.
Operations relating to these KFC units are seasonal to a certain extent, with
higher sales generally occurring in the summer months. Five East Side Mario's
restaurants operated by the Company are located in the Cleveland/Akron area and
one in Columbus, Ohio.

         FRANCHISE AGREEMENTS. All of the Company's KFC restaurants are operated
under franchise agreements with KFC Corporation. The Company considers retention
of these agreements to be important to the success of its restaurant business
and believes that its relationship with KFC Corporation is satisfactory. The KFC
Corporation franchise agreements require the Company to pay royalties of 4% on
gross revenues and to expend an additional 5% of gross revenues for national and
local advertising and marketing. In May 1997, the Company renewed substantially
all of its franchise agreements for twenty years. Subject to satisfying KFC
requirements for restaurant image and other matters, franchise agreements are
renewable at the Company's option for successive ten year periods. The franchise
agreements provide that each KFC unit is to be inspected by KFC Corporation
approximately three or four times per year. These inspections cover product
preparation and quality, customer service, and restaurant appearance and
operation. Taco Bell products are offered in the Company's KFC/Taco Bell "2 in
1" restaurants under five year license agreements which require the Company to
pay royalties at 10% and advertising fund contributions at 1/2% of gross
revenue. Both KFC Corporation and Taco Bell Corporation are wholly owned by
Tricon Global Restaurants, Inc. The East Side Mario's restaurants are operated
under franchise agreements with East Side Mario's, Inc., for remaining terms of
16 to 18 years and are renewable by the Company for one additional term of 10
years. The East Side Mario's franchise agreements require the Company to pay
royalties of 4% on gross revenue and


                                       2
<PAGE>   3




                              MORGAN'S FOODS, INC.

                                 PART I (CONT'D)


1/2% of gross revenue to an advertising fund. The franchise agreements also
require the Company to expend an additional 2 1/2% of gross revenue for
advertising and promotion. The East Side Mario's franchise agreements also grant
the right to East Side Mario's, Inc. to perform quality and franchise compliance
inspections without prior notice to the Company. The Company is engaged in legal
proceedings against the franchisor of East Side Mario's which are described in
Item 3 below.

                 COMPETITION. The restaurant business is highly competitive.
Each of the Company's KFC restaurants competes directly or indirectly with a
large number of national and regional restaurant operations, as well as with
locally owned restaurants, drive-ins, diners and numerous other establishments
which offer low- and medium-priced chicken, steak, pizza and other food to the
public. The East Side Mario's restaurants compete with other mid-priced, casual,
full service restaurants.

                 The Company's KFC restaurants and KFC/Taco Bell "2 in 1"
restaurants rely on innovative marketing techniques and promotions to compete
with other restaurants in the areas in which they are located. The Company's
competitive position is also enhanced by the national advertising program
sponsored by KFC Corporation, Taco Bell Corporation and their franchisees. The
East Side Mario's restaurants rely on a distinctive themed decor and a variety
of Italian and American menu items at moderate prices. Emphasis is placed by the
Company on its control systems and the training of personnel to maintain high
food quality and good service. The Company believes that its KFC restaurants are
competitive with other quick service restaurants on the basis of the important
competitive factors in the restaurant business which include primarily
restaurant location, product price, quality and differentiation; and restaurant
and employee appearance. The Company considers the East Side Mario's restaurants
to be less competitive against other casual mid-priced restaurants due to
inadequate menus, food systems and marketing and operational support provided by
the franchisor.

                 SUPPLIERS. The Company has been able to obtain sufficient
supplies to carry on its business and believes it will be able to do so in the
future.

                 GROWTH. During fiscal 1998, the Company completed construction
of a new KFC restaurant on leased land in Greensburg, PA and completed the
rebuilding of a KFC restaurant in the St. Louis market area. Also, the Company
signed a definitive agreement to purchase six KFC restaurants in May, 1998 and
expects to close the transactions in July, 1998. During fiscal 1997, the Company
purchased the land and building of a previously leased KFC restaurant in the St.
Louis market area, closed two unprofitable KFC restaurants in the St. Louis
market and purchased two existing KFC restaurants in Pennsylvania from another
franchisee.

                 EMPLOYEES. As of May 28, 1998, the Company employs
approximately 1,121 persons, including 27 administrative and 101 managerial
employees. The balance are hourly employees, most of whom are part-time. None of
the restaurant employees are represented by a labor union. The Company considers
its employee relations to be satisfactory.




                                       3
<PAGE>   4


                              MORGAN'S FOODS, INC.

                                 PART I (CONT'D)


ITEM 2.  PROPERTIES.

         The Company leases approximately 4,300 square feet of space for its
headquarters in Cleveland, Ohio. The lease expires in 2001 and the rent under
the current term is $4,823 per month. The lease also contains a renewal option
of five years which may be exercised by the Company. The Company also leases
space for a regional office in Youngstown which is used to assist in the
operation of the KFC restaurants.

         Of the 39 KFC restaurants, the Company owns the land and building for
16 locations, owns the building and leases the land for 4 locations and leases
the land and building for 19 locations. Thirteen of the owned properties are
subject to mortgages. Remaining lease terms (including renewal options) range
from 3 to 28 years and average approximately 15 years. These leases generally
require the Company to pay taxes and utilities, to maintain casualty and
liability insurance, and to keep the property in good repair. The Company pays
annual rental for each leased KFC restaurant in amounts ranging from $7,502 to
$78,750. In addition, 18 of these leases require payment of additional rentals
based on a percentage of gross sales in excess of certain base amounts. Sales
for six KFC restaurants exceeded the respective base amounts in fiscal 1998. Of
the six East Side Mario's restaurants, the Company owns the building and leases
the land on one location and leases the land and the building for four
locations. At the sixth location, the building is subject to a short-term lease
which transfers ownership to the Company and the land is under a long-term
lease. In addition, four of the East Side Mario's restaurant leases require
payment of additional rentals based on a percentage of gross sales in excess of
certain base amounts. Sales for these East Side Mario's restaurants did not
exceed their base amounts for fiscal 1998.

         The Company believes that its restaurants are generally efficient, well
equipped and maintained and in good condition.


ITEM 3.  LEGAL PROCEEDINGS.

         On April 20, 1998 the Company and its wholly owned subsidiary Morgan's
Creative Restaurant Concepts, Inc. filed a lawsuit against East Side Mario's,
Inc. and other related parties in Federal District Court in Cleveland, Ohio. The
suit alleges fraud, deceptive trade practices and failure to support the East
Side Mario's franchisees among other things and sets forth a demand for $20
million in damages. The complaint covers complex business and trade issues and
contains 29 counts. The defendants have not yet filed an answer to the
complaint. Certain royalty and advertising fund payments are in dispute and the
franchisor has issued a notice of default to the Company on March 19, 1998
alleging non-payment of royalties and advertising fund contributions.





                                       4
<PAGE>   5


                              MORGAN'S FOODS, INC.

                                 PART I (CONT'D)


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         There were no matters submitted to security holders for a vote during
the last quarter of the Company's fiscal year ended March 1, 1998.


EXECUTIVE OFFICERS OF THE COMPANY


         The Executive Officers and other Officers of the Company are as
follows:

<TABLE>
<CAPTION>

                                                   POSITION WITH
       NAME                      AGE                 REGISTRANT                 OFFICER SINCE
       ----                      ---               -------------                -------------

EXECUTIVE OFFICERS:

<S>                              <C>             <C>                            <C>
Leonard Stein-Sapir              59              Chairman of the Board          April 1989
                                                 and Chief Executive
                                                 Officer

James J. Liguori                 49              President and Chief            June 1979
                                                 Operating Officer

Kenneth L. Hignett               51              Senior Vice President-         May 1989
                                                 Chief Financial Officer
                                                 & Secretary

OTHER OFFICERS:

Barton J. Craig                  49              Senior Vice President -        January 1994
                                                 General Counsel

Vincent J. Oddi                  55              Vice President-                September 1979
                                                 Restaurant Development

Ramesh J. Gursahaney             49              Vice President-                January 1991
                                                 Operations Services
</TABLE>


         Until 1988, Mr. Craig was Senior Vice President, General Counsel of
Record Data, Inc. and subsequently served as a Law Professor at Albertus Magnus
College.

         Executive officers of the Company serve for a term of one year and
until their successors are elected and qualified, unless otherwise specified by
the Board of Directors. Any officer is subject to removal with or without cause,
at any time, by a vote of a majority of the Board of Directors.



                                       5
<PAGE>   6


                              MORGAN'S FOODS, INC.

                                     PART II


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

         The Company's Common Shares are traded on the American Stock Exchange
under the symbol "MR". The following table sets forth, for the periods
indicated, the high and low sales prices of the Common Shares as reported on the
American Stock Exchange. All prices are adjusted for the 1 for 6 reverse stock
split which was effective July 14, 1997.

<TABLE>
<CAPTION>

                                                            PRICE RANGE
                                                         HIGH          LOW
                                                         ------------------
<S>                                                       <C>        <C> 
YEAR ENDED MARCH 1, 1998:
                    1st Quarter ......................    $3         $2 1/4
                    2nd Quarter ......................     3          1 11/16
                    3rd Quarter ......................     3          1 15/16
                    4th Quarter ......................     2 3/4      1 7/8

YEAR ENDED MARCH 2, 1997:
                    1st Quarter ......................    $4 1/2     $3 3/8
                    2nd Quarter ......................     4 1/2      3
                    3rd Quarter ......................     4 1/8      2 5/8
                    4th Quarter ......................     3 3/8      2 1/4
</TABLE>


         As of May 7, 1998, the Company had approximately 1,112 shareholders of
record. The Company has paid no dividends since fiscal 1975.



                                       6
<PAGE>   7


                              MORGAN'S FOODS, INC.

                                PART II (CONT'D)


ITEM 6.  SELECTED FINANCIAL DATA.

         The following selected financial information for each of the five
fiscal years in the period ended March 1, 1998, is derived from, and qualified
in its entirety by, the consolidated financial statements of the Company. The
following selected financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
included elsewhere in this Report.

                 Dollars in thousands except per share amounts.

<TABLE>
<CAPTION>

                                                                   YEARS ENDED
                                        ------------------------------------------------------------------
                                          MARCH 1,     MARCH 2,      MARCH 3,    FEBRUARY 26,  FEBRUARY 27,
                                           1998          1997          1996          1995          1994
                                        --------      --------      --------      --------      ----------

<S>                                     <C>           <C>           <C>           <C>           <C>     
Revenues ..........................     $ 38,868      $ 38,252      $ 42,510      $ 53,295      $ 46,860
Cost of sales:
  Food, paper and beverage ........       12,259        12,141        13,662        17,282        15,020
  Labor and benefits ..............       10,456         9,951        11,122        13,807        11,967
Restaurant operating expenses .....       11,001        11,047        12,256        14,632        13,448
Depreciation and amortization .....        1,840         1,888         1,988         2,536         2,215
Asset impairments .................          -           2,939           -             -             -
General and administrative
 expenses .........................        2,799         2,876         2,947         3,759         3,516
                                        --------      --------      --------      --------      --------
Operating income (loss) ...........          513        (2,590)          535         1,279           694
Gain (loss) on sale of restaurants           (98)         (248)        1,681           -             -
Income (loss) before
 accounting change ................         (928)       (4,055)        1,126          (425)         (692)
Cumulative effect of
 accounting change (2) ............          -             -             -             -             600
                                        --------      --------      --------      --------      --------
Net income (loss) .................         (928)       (4,055)        1,126          (425)          (92)
Income (loss) per common share (1):
  Income (loss) before
    accounting change (1) .........         (.31)        (1.37)          .38          (.14)         (.23)
  Cumulative effect of
    accounting change .............          -             -             -             -             .20
                                        --------      --------      --------      --------      --------
  Net income (loss) ...............         (.31)        (1.37)          .38          (.14)         (.03)
Working capital (deficiency) ......       (2,046)         (884)         (562)       (3,728)       (1,637)
Total assets ......................       20,110        19,312        22,034        29,432        31,708
Long-term debt ....................        7,815         6,474         5,448         4,151        16,754
Long-term capital lease
 obligations ......................        5,019         4,847         5,062         3,896         2,573

Shareholders' equity ..............        2,256         3,300         7,378         6,249         6,652

<FN>
         (1) Computed based upon the weighted average number of common and
common equivalent shares outstanding during each year, which were 2,936,877 in
1998, 2,967,574 in 1997, 2,969,355 in 1996, 2,967,806 in 1995, and 2,966,053 in
1994

         (2) Pertains to adoption of SFAS No. 109, "Accounting for Income Taxes"
</TABLE>


                                       7
<PAGE>   8


                              MORGAN'S FOODS, INC.

                                PART II (CONT'D)


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

         RESULTS OF OPERATIONS. During fiscal 1996 through 1998 the Company
operated Kentucky Fried Chicken ("KFC") franchised restaurants in Illinois,
Missouri, New Jersey, Ohio, Pennsylvania and West Virginia and East Side Mario's
franchised restaurants in Ohio. The average number of KFC restaurants in
operation during fiscal 1998 was 39 compared to 40 during fiscal 1997 and 46
during fiscal 1996. During fiscal 1998, the Company opened one new KFC
restaurant and added Taco Bell products to three existing KFC's. The Company
opened one East Side Mario's during fiscal 1996 and currently operates six of
the restaurants.

         REVENUES. Revenue was $38,868,000 in fiscal 1998 an increase of
$616,000 or 1.6% compared to a decrease of 10.0% in fiscal 1997 and a decrease
of 20.2% in fiscal 1996. Fiscal 1996 had 53 weeks compared to 52 weeks in both
fiscal 1998 and 1997.

         The 1.6% increase in revenue during fiscal 1998 was due to the
combination of several factors. First, comparable sales in the KFC restaurants
open two years or more increased 1.8% or $383,000 primarily due to the addition
of Taco Bell products. The two KFC restaurants which were acquired just prior to
the beginning of the fiscal year and the new KFC opened during the year
accounted for an increase of $1,735,000, which was partially offset by three
closed KFC restaurants in the St. Louis market which caused a decline of
$738,000 in sales. Finally, East Side Mario's restaurant sales declined $764,000
or 7.9% compared to the prior year. Revenues for the comparable KFC restaurants
were flat during fiscal 1998 compared to the prior year primarily because fiscal
1997 revenues were extremely strong and many of the Company's KFC restaurants
were closed for short periods of time during the fiscal 1998 year to facilitate
remodeling and image enhancements. As a result of image enhancements of most of
the Company's KFC restaurants over the past 2 years, Management believes that
its KFC restaurant portfolio is in excellent condition and that the improved
appearances will contribute to strong future revenues. The East Side Mario's
restaurants continue to perform poorly because of the lack of an effective food
system, lack of advertising support and complete failure of the franchisor to
make the concept competitive in the mid-priced casual restaurant market. The
10.0% decrease in revenue during fiscal 1997 was the combination of a decrease
of $2,242,000 in KFC sales and a decrease of $2,016,000 in East Side Mario's
sales. The decrease in KFC revenues was due to four factors. First, revenues for
the 24 sold KFC restaurants were $3,106,000 in fiscal 1996 through May 5, 1995
(date of sale). Second, the extra week in fiscal 1996 accounted for $526,000 in
additional revenue in that year. Third, revenues of the two St. Louis KFC's
which were closed in June and July, 1996 caused a reduction of $508,000 in
revenues for fiscal 1997 while the purchase of the two Pennsylvania KFC's in
December added $260,000. These net decreases were partially offset by a
$1,638,000 or 6.8% increase in comparable KFC revenues. The increase in KFC
revenues is primarily attributable to successful new product introductions and
more effective advertising by the franchisor and improved operations of the
Company's restaurants due to a restructuring of field management. The decline in
East Side Mario's revenue was caused by the extra week of sales in fiscal 1996
of $196,000 and a decline in comparable restaurant sales of $1,820,000 or 15.8%.
East Side Mario's comparable restaurant revenues continued to decline during
fiscal 1997 due to an ineffective new menu and food system introduction by the
franchisor which caused a decline in food quality and service as well as the
continued absence of marketing support in the face of intense competition from
other restaurants.




                                       8
<PAGE>   9



                              MORGAN'S FOODS, INC.

                                PART II (CONT'D)


         Revenues for the 16 weeks ended March 1, 1998 were $11,224,000, an
increase of $555,000 from the 16 weeks ended March 2, 1997. Comparable KFC
restaurant revenues increased 10.5% in the fiscal 1998 quarter compared to the
fiscal 1997 quarter while East Side Mario's comparable restaurant revenues
declined by 3.9% for the same period. The reasons for these changes are the same
as mentioned above in the full year comparisons.

         COST OF SALES - FOOD, PAPER AND BEVERAGE. Food, paper and beverage
costs were $12,259,000 or 31.5% of sales in fiscal 1998 compared to $12,141,000
or 31.7% of sales in fiscal 1997. Food, paper and beverage costs declined by
0.4% of sales in the KFC's due to efficiencies from higher average restaurant
volumes and the absence of high food cost promotions. Food, paper and beverage
costs remained constant as a percent of sales in the East Side Mario's despite
declining revenues as the result of effective operational controls. Food, paper
and beverage costs were $12,141,000 or 31.7% of sales in fiscal 1997 compared to
$13,662,000 or 32.1% of sales in fiscal 1996. Food, paper and beverage costs
declined by 0.5% of sales in the KFC's due to efficiencies from higher volumes
and the absence of high food cost promotions. Food, paper and beverage costs
declined by 0.4% of sales in the East Side Mario's due to more effective
operational controls.

         For the fourth quarter, food, paper and beverage costs in fiscal 1998
declined as a percentage of sales to 31.2% from 31.5% in fiscal 1997. This
decrease is from improvements in operating efficiency of the KFC restaurants and
the consistently strong operational controls in the East Side Mario's
restaurants.

         COST OF SALES - LABOR AND BENEFITS. Labor and benefits increased to
$10,456,000 or 26.9% of sales in fiscal 1998 from $9,951,000 or 26.1% of sales
in fiscal 1997. Labor costs in the KFC's increased by approximately 1.6% of
sales primarily due to the increase in the minimum wage and the inefficiencies
created by many short term restaurant closings during fiscal 1998 to facilitate
image enhancements and remodeling. The labor costs in the East Side Mario's
remained relatively consistent as a percentage of sales despite lower volumes
due to continuing strong management controls. Labor and benefits decreased to
$9,951,000 or 26.0% of sales in fiscal 1997 from $11,122,000 or 26.2% of sales
in fiscal 1996. Labor costs in the KFC's declined by approximately 1.0% of sales
due to increased efficiencies created by higher volumes and improved management
controls. The labor costs in the East Side Mario's, however, increased as a
percentage of sales by 3.2% as a result of lower volumes.

         Labor and benefit costs for the fourth quarter increased to $3,127,000
or 27.9% of sales in fiscal 1998 from $2,803,000 or 26.3% of sales in fiscal
1997. Labor costs as a percentage of sales in the KFC's increased 2.1% in the
fiscal 1998 fourth quarter compared to the fiscal 1997 fourth quarter while
labor costs in the East Side Mario's increased as a percentage of sales 1.1% for
the same periods. The changes were primarily caused by the minimum wage increase
which was not offset by price increases and a temporary increase in workers'
compensation costs from retrospective insurance premium charges.




                                       9
<PAGE>   10



                              MORGAN'S FOODS, INC.

                                PART II (CONT'D)


         RESTAURANT OPERATING EXPENSES. Restaurant operating expenses in fiscal
1998 declined slightly to $11,001,000 or 28.3% of revenue from $11,047,000 or
28.9% of revenue in fiscal 1997. KFC operating expenses declined primarily due
to lower rent and advertising expenditures which were partially offset by
increases in East Side Mario's land and building rent. Restaurant operating
expenses decreased to $11,047,000 in fiscal 1997 from $12,256,000 in fiscal 1996
but remained relatively constant as a percentage of sales at 28.9% in fiscal
1997 compared to 28.8% in fiscal 1996. In the KFC restaurants, the decreases
were mainly in occupancy expenses due to the 53 weeks contained in fiscal 1996
and lower advertising expenditures in fiscal 1997. The East Side Mario's
decreases were mainly in royalties due to the lower sales in fiscal 1997,
decreased advertising expenditures and lower rent due to the 53 weeks contained
in fiscal 1996.

         DEPRECIATION AND AMORTIZATION. Depreciation and amortization in fiscal
1998 decreased slightly to $1,840,000 from $1,888,000 in fiscal 1997. This
decrease was the combination of two factors. First, depreciation and
amortization were reduced as a result of the asset impairment write-down taken
in the fourth quarter of fiscal 1997. This decrease was partially offset by the
addition of new restaurants and restaurant equipment related to the restaurant
acquisition, building and refurbishment undertaken by the Company. Depreciation
and amortization in fiscal 1997 decreased slightly to $1,888,000 from $1,988,000
in fiscal 1996. This decrease is the result of the absence of $152,000 of
depreciation from the 24 KFC's sold on May 5, 1995 partially offset by higher
depreciation from the purchase of a previously leased KFC restaurant early in
the fiscal year and two KFC's purchased in the fourth quarter.

         ASSET IMPAIRMENTS. The Company recorded asset impairments of $2,939,000
in the fourth quarter of fiscal 1997. These impairments included $1,700,000 to
write-down the carrying value of certain East Side Mario's restaurants and
$1,239,000 to write-off goodwill remaining from a previous KFC acquisition. The
write-down of these assets resulted from management's evaluation of
recoverability of their carrying values from estimated future cash flows from
their operation and/or liquidation, as explained in Note 2 to the Consolidated
Financial Statements.

         GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased to $2,799,000 in fiscal 1998 from $2,876,000 in fiscal 1997.
The decrease was primarily due to lack of the litigation accrual recorded in
fiscal 1997 and reduction of field administration expenses in the East Side
Mario's restaurants, partially offset by increased expenses related to the
reverse stock split and upgrading of computer systems. General and
administrative expenses decreased to $2,876,000 in fiscal 1997 from $2,947,000
in fiscal 1996. The decrease of $71,000 was the result of a reduction of KFC
field administration expenses and a decrease in corporate overhead, partially
offset by the recording of an accrual for litigation expenses related to
worker's compensation.

         OPERATING INCOME. Operating income in fiscal 1998 was $513,000 compared
to an operating loss of $2,590,000 in fiscal 1997. The operating loss in fiscal
1997 would have been operating income of $349,000 without the asset impairment
write-down of $2,939,000 taken in fiscal 1997. The improvement in fiscal 1998 is
primarily the result of additional KFC restaurants, the addition of Taco Bell
sales, improvement



                                       10
<PAGE>   11



                              MORGAN'S FOODS, INC.

                                PART II (CONT'D)


in food costs and reduction in general and administrative expenses as discussed
above. The operating loss in fiscal 1997 was $2,590,000 including $2,939,000 of
non-recurring charges for the impairment of assets, or income of $349,000 before
the charges, compared to operating income of $535,000 in fiscal 1996. Excluding
asset impairments, the change in operating income was primarily the result of a
decrease in operating income for the East Side Mario's restaurants of $788,000
partially offset by an increase of $602,000 in operating income from the KFC
restaurants.

         INTEREST EXPENSE AND OTHER INCOME. Interest expense from bank debt and
notes payable increased to $836,000 in fiscal 1998 compared to $635,000 in
fiscal 1997. This increase is the result of additional debt incurred for the
purchase of two KFC restaurants late in fiscal 1997, the building of one new
KFC, the image enhancement of 12 KFC's, the addition of Taco Bell facilities to
three KFC restaurants, and the early renewal of substantially all of the
Company's KFC franchise agreements. Interest on capitalized lease debt, at
$554,000 in fiscal 1998, was substantially unchanged from $564,000 in fiscal
1997. Interest expense from bank debt and notes payable decreased to $635,000 in
fiscal 1997 from $705,000 in fiscal 1996 as a result of lower borrowings due to
repayment of $9,750,000 of bank debt in May 1995, partially offset by the net
addition of approximately $1,100,000 of other debt for restaurant acquisitions
and enhancements. Interest expense on capitalized lease obligations remained
substantially unchanged at $564,000 in fiscal 1997 compared to $579,000 in
fiscal 1996. Other income in fiscal 1998 of $61,000 was significantly greater
than the $7,000 in fiscal 1997 due to the lack of write off of deferred
financing costs which occurred in fiscal 1997, partially offset by lower
interest income in fiscal 1998. Other income in fiscal 1997 was $7,000 compared
to $211,000 in fiscal 1996 due to lower vendor discounts and the write-off of
expenses related to previously capitalized financing costs.

         GAIN (LOSS) ON SALE OF RESTAURANTS. In fiscal 1998 the Company recorded
losses of $98,000 related to the closing of one KFC restaurant and the disposal
of equipment during several image enhancements. In fiscal 1997 the Company
recorded losses of $248,000 related to the disposal of three KFC restaurants.
The Company recorded a gain of $1,681,000 in fiscal 1996 from the sale of
twenty-four KFC restaurants on May 5, 1995.

         LIQUIDITY AND CAPITAL RESOURCES. The Company, like others in the
restaurant industry, operates on minimal working capital and relies on cash flow
from operations, debt borrowings and lease financing for the construction and
refurbishment of restaurant properties and repayment of debt. Cash flow activity
for fiscal 1998, 1997 and 1996 is presented in the Consolidated Statements of
Cash Flows.

         Capital expenditures for fiscal 1998 were $3,074,000, substantially all
of which related to KFC restaurants. In fiscal 1998 the Company received
$1,651,000 in mortgage financing for the construction of one new KFC restaurant,
the refurbishment of six KFC restaurants and the addition of Taco Bell products
to three KFC restaurants. The Company also received proceeds of $698,000 from
sale/leaseback transactions used to finance the image enhancement of five KFC
restaurants. The Company made principal payments on long-term debt of $490,000
in fiscal 1998.




                                       11
<PAGE>   12



                              MORGAN'S FOODS, INC.

                                PART II (CONT'D)


         The Company has recently installed the newest version of its accounting
software package and a later version of the network operating system used at the
Home Office, both of which are year 2000 compliant. Management believes that it
has no significant year 2000 operating exposure in its critical core systems.

         The KFC operations of the Company have historically provided sufficient
cash flow to service the Company's debt, refurbish and upgrade KFC restaurant
properties and cover administrative overhead. Management believes that operating
cash flow will provide sufficient capital to continue to operate and maintain
the KFC and East Side Mario's restaurants, service the Company's debt and
support required corporate expenses. In addition to the Company's operating cash
flow, management believes that additional financing, including long-term leases
of build-to-suit restaurants, development lines of credit and sale/leaseback
arrangements can be obtained to refurbish and acquire KFC restaurants.
Subsequent to the end of fiscal 1998 the Company entered into a definitive
agreement to purchase four existing KFC restaurants from another KFC franchisee
which will be financed under an existing mortgage financing commitment.

         The Company is currently not in full compliance with the American Stock
Exchange financial condition guidelines for continued listing. Specifically, the
guidelines indicate that any company with shareholders' equity less than
$4,000,000 and losses in 3 of its last 4 fiscal years may be considered for
delisting. This condition has been reviewed with representatives of the American
Stock Exchange who indicated that the Company's performance will continue to be
monitored by the Exchange.

         The Company will commit approximately $800,000 to image enhancements of
existing KFC restaurants during fiscal 1999 under an existing lease commitment.
There are no plans to add additional East Side Mario's restaurants for the next
fiscal year.

         The Company has authorization from the Board of Directors to purchase
up to 158,333 common shares from time to time in the open market or in
negotiated transactions.

         SEASONALITY. The operations of the Company are affected by seasonal
fluctuations. Historically, the Company's revenues and income have been highest
during the summer months with the fourth fiscal quarter representing the slowest
period. This seasonality is primarily attributable to weather conditions in the
Company's marketplace which consists of portions of Ohio, Pennsylvania,
Missouri, Illinois and West Virginia.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The Consolidated Financial Statements of the Company are set forth in
Item 14 of this Report.

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

             None.



                                       12
<PAGE>   13



                              MORGAN'S FOODS, INC.

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Information on Directors of the Company is incorporated herein by
reference to the definitive Proxy Statement to security holders for the 1998
annual meeting to be filed with the Securities and Exchange Commission on or
before June 25, 1998.

         Information regarding the Executive Officers of the Company is reported
in a separate section captioned "Executive Officers of the Company" included in
Part I hereof.


ITEM 11. EXECUTIVE COMPENSATION.

         Information on executive compensation is incorporated herein by
reference to the definitive Proxy Statement to security holders for the 1998
annual meeting to be filed with the Securities and Exchange Commission on or
before June 25, 1998.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Information on security ownership of certain beneficial owners,
officers and directors is incorporated herein by reference to the definitive
Proxy Statement to security holders for the 1998 annual meeting to be filed with
the Securities and Exchange Commission on or before June 25, 1998.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information on certain relationships and related transactions is
incorporated herein by reference to the definitive Proxy Statement to security
holders for the 1998 annual meeting to be filed with the Securities and Exchange
Commission on or before June 25, 1998.





                                       13
<PAGE>   14



                              MORGAN'S FOODS, INC.

                                     PART IV


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

             (a)     1 and 2. Financial Statements and Financial Statement
                     Schedules.

                     The Financial Statements and Financial Statement Schedules
listed on the accompanying Index to Financial Statements and Financial Statement
Schedules are filed as part of this Annual Report on Form 10-K.

             (a)     3. Exhibits.

                     The Exhibits listed on the accompanying Index to Exhibits
are filed as part of this Annual Report on Form 10-K.





                                       14
<PAGE>   15



                              MORGAN'S FOODS, INC.
                        INDEX TO FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULES
                               ITEM 14 (a) 1 AND 2



                                                                         PAGE
ITEM 14 (a) 1                                                         REFERENCE
-------------                                                         ---------

Independent Auditors' Report.............................................16

Consolidated Balance Sheets
  at March 1, 1998 and March 2, 1997.....................................17

Consolidated Statements of Operations
  for the years ended March 1, 1998, March 2, 1997 and March 3, 1996.....18

Consolidated Statements of Shareholders' Equity
  for the years ended March 1, 1998, March 2, 1997 and March 3, 1996.....19

Consolidated Statements of Cash Flows
  for the years ended March 1, 1998, March 2, 1997 and March 3, 1996.....20

Notes to Consolidated Financial Statements...............................21


ITEM 14 (a) 2
-------------

             All schedules normally required by Form 10-K are not required under
 the related instructions or are inapplicable, and therefore are not presented.



                                       15
<PAGE>   16




INDEPENDENT AUDITORS' REPORT










To the Board of Directors and Shareholders
Morgan's Foods, Inc.
Cleveland, Ohio

We have audited the accompanying consolidated balance sheets of Morgan's
Foods, Inc. and subsidiaries as of March 1, 1998 and March 2, 1997 and the
related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended March 1, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Morgan's Foods, Inc. and
subsidiaries at March 1, 1998 and March 2, 1997 and the results of their
operations and their cash flows for each of the three years in the period
ended March 1, 1998 in conformity with generally accepted accounting
principles.




/s/ Deloitte & Touche LLP
Cleveland, Ohio
May 27, 1998




                                       16
<PAGE>   17



                              MORGAN'S FOODS, INC.
                           CONSOLIDATED BALANCE SHEETS
                         MARCH 1, 1998 AND MARCH 2, 1997

<TABLE>
<CAPTION>

ASSETS
                                                                     1998              1997
                                                                ------------      ------------
<S>                                                             <C>               <C>         
 Current assets:
  Cash and equivalents ....................................     $  2,316,000      $  3,013,000
  Marketable securities (Note 5) ..........................          102,000           198,000
  Receivables .............................................           74,000           112,000
  Inventories .............................................          325,000           293,000
  Prepaid expenses ........................................          157,000           191,000
                                                                ------------      ------------
                                                                   2,974,000         3,807,000

 Property and equipment(Notes 5 and 6):

  Land ....................................................        1,949,000         1,724,000
  Buildings and improvements ..............................        7,160,000         5,973,000
  Property under capital leases ...........................        5,621,000         5,182,000
  Leasehold improvements ..................................        3,280,000         3,323,000
  Equipment, furniture and fixtures .......................        8,995,000         8,121,000
  Construction in progress ................................           28,000           461,000
                                                                ------------      ------------
                                                                  27,033,000        24,784,000
 Less accumulated depreciation and amortization ...........       11,934,000        10,875,000
                                                                ------------      ------------
                                                                  15,099,000        13,909,000
 Other assets .............................................        1,437,000           996,000
 Deferred taxes (Note 8) ..................................          600,000           600,000
                                                                ------------      ------------
                                                                $ 20,110,000      $ 19,312,000

LIABILITIES AND SHAREHOLDERS' EQUITY

 Current liabilities:
  Current maturities of long-term debt (Note 5) ...........     $    563,000      $    324,000
  Current maturities of capital lease obligations (Note 6)           503,000           409,000
  Accounts payable ........................................        1,969,000         1,914,000
  Accrued liabilities (Note 4) ............................        1,985,000         2,044,000
                                                                ------------      ------------
                                                                   5,020,000         4,691,000

 Long-term debt (Note 5) ..................................        7,815,000         6,474,000
 Long-term capital lease obligations (Note 6) .............        5,019,000         4,847,000

 Commitments and contingencies (Notes 3, 5 and 6)

SHAREHOLDERS' EQUITY

 Preferred shares, 1,000,000 shares authorized,
   no shares outstanding
 Common Stock:
   Authorized shares - 25,000,000
   Issued shares - 2,969,405 ..............................           30,000            30,000
   Treasury Shares - 58,566 and 8,333 .....................         (139,000)          (23,000)
 Capital in excess of stated value ........................       28,875,000        28,875,000
 Accumulated deficit ......................................      (26,510,000)      (25,582,000)
                                                                ------------      ------------
 Total shareholders' equity ...............................        2,256,000         3,300,000
                                                                ------------      ------------
                                                                $ 20,110,000      $ 19,312,000
</TABLE>

                 See notes to consolidated financial statements.



                                       17
<PAGE>   18



                              MORGAN'S FOODS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
           YEARS ENDED MARCH 1, 1998, MARCH 2, 1997 AND MARCH 3, 1996


<TABLE>
<CAPTION>

                                             1998              1997              1996
                                        ------------      ------------      ------------

<S>                                     <C>               <C>               <C>         
Revenues ..........................     $ 38,868,000      $ 38,252,000      $ 42,510,000

Cost of sales:
  Food, paper and beverage ........       12,259,000        12,141,000        13,662,000
  Labor and benefits ..............       10,456,000         9,951,000        11,122,000
Restaurant operating expenses .....       11,001,000        11,047,000        12,256,000
Depreciation and amortization .....        1,840,000         1,888,000         1,988,000
Asset impairments (Note 2) ........              -           2,939,000               -
General and administrative expenses        2,799,000         2,876,000         2,947,000
                                        ------------      ------------      ------------
Operating income (loss) ...........          513,000        (2,590,000)          535,000
Interest Expense:
  Bank debt and notes payable .....         (836,000)         (635,000)         (705,000)
  Capital leases ..................         (554,000)         (564,000)         (579,000)
Gain(loss) on sale or
 disposal of restaurants (Note 3) .          (98,000)         (248,000)        1,681,000
Other income and expense, net .....           61,000             7,000           211,000
                                        ------------      ------------      ------------
Income(loss) before income taxes ..         (914,000)       (4,030,000)        1,143,000
Provision for income taxes (Note 8)           14,000            25,000            17,000
                                        ------------      ------------      ------------
Net income (loss) .................     $   (928,000)     $ (4,055,000)     $  1,126,000
                                        ============      ============      ============

Net income (loss) per share .......     $       (.31)     $      (1.37)     $        .38
                                        ============      ============      ============
</TABLE>


                 See notes to consolidated financial statements.


                                       18
<PAGE>   19



                              MORGAN'S FOODS, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
           YEARS ENDED MARCH 1, 1998, MARCH 2, 1997 AND MARCH 3, 1996



<TABLE>
<CAPTION>


                                                                                           CAPITAL IN                      TOTAL
                                         COMMON SHARES             TREASURY SHARES         EXCESS OF      ACCUMULATED  SHAREHOLDERS'
                                     SHARES        AMOUNT        SHARES       AMOUNT      STATED VALUE      DEFICIT        EQUITY
                                   ----------   -----------    ---------    ----------    ------------   ------------  ------------

<S>                                 <C>         <C>                 <C>     <C>           <C>            <C>            <C>        
Balance, February 26, 1995 .....    2,969,405   $ 2,969,000         (250)   $   (3,000)   $ 25,936,000   $(22,653,000)  $ 6,249,000
Net income .....................                                                                            1,126,000     1,126,000
Issuance of treasury stock
 for 401(k) contributions ......                                     250         3,000                                        3,000
                                   ----------   -----------    ---------    ----------    ------------   ------------   -----------
Balance, March 3, 1996 .........    2,969,405     2,969,000          -             -        25,936,000    (21,527,000)    7,378,000
Change in stated value (Note 9)                  (2,939,000)                                 2,939,000
Net loss .......................                                                                           (4,055,000)   (4,055,000)
Purchase of treasury shares ....                                  (8,333)      (23,000)                                     (23,000)
                                   ----------   -----------    ---------    ----------    ------------   ------------   -----------
Balance, March 2, 1997 .........    2,969,405        30,000       (8,333)      (23,000)     28,875,000    (25,582,000)    3,300,000
Net loss .......................                                                                             (928,000)     (928,000)
Purchase of treasury shares ....                                 (50,233)     (116,000)                                    (116,000)
                                   ----------   -----------    ---------    ----------    ------------   ------------   -----------
Balance, March 1, 1998 .........    2,969,405   $    30,000      (58,566)   $ (139,000)   $ 28,875,000   $(26,510,000)  $ 2,256,000
                                   ==========   ===========    =========    ==========    ============   ============   ===========
</TABLE>



                 See notes to consolidated financial statements.


                                       19
<PAGE>   20



                              MORGAN'S FOODS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
           YEARS ENDED MARCH 1, 1998, MARCH 2, 1997 AND MARCH 3, 1996

<TABLE>
<CAPTION>

                                                      1998              1997              1996     
                                                 ------------      ------------      ------------
<S>                                              <C>               <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss) .........................     $   (928,000)     $ (4,055,000)     $  1,126,000
 Adjustments to reconcile to net cash
  provided by operating activities:
   Depreciation and amortization ...........        1,840,000         1,888,000         1,988,000
   Asset impairments .......................              -           2,939,000               -
   (Gain) loss on sale or
    disposal of restaurants ................           98,000           248,000        (1,681,000)
   Changes in assets and liabilities:
    Decrease in receivables ................           38,000            30,000           121,000
    Decrease (Increase) in inventories .....          (32,000)           54,000           (32,000)
    Decrease in prepaid expenses ...........           34,000            17,000            91,000
    Increase in other assets ...............          (91,000)          (12,000)         (106,000)
    Increase (Decrease) in accounts payable            55,000            30,000          (796,000)
    Increase (Decrease) in accrued
     liabilities ...........................          (60,000)          382,000          (346,000)
                                                 ------------      ------------      ------------
  Net cash provided by operating activities           954,000         1,521,000           365,000
                                                 ------------      ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Sale of restaurants ......................           15,000            21,000        10,257,000
  Capital expenditures .....................       (3,074,000)       (2,203,000)         (813,000)
  Proceeds from sale and maturity
   of marketable securities ................           96,000            87,000            74,000
                                                 ------------      ------------      ------------
 Net cash provided by (used in)
  investing activities .....................       (2,963,000)       (2,095,000)        9,518,000
                                                 ------------      ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of long-term debt,
  net of financing costs ...................        1,651,000         1,355,000         5,343,000
 Principal payments on long-term debt ......         (490,000)         (268,000)         (635,000)
 Principal payments on capital
  lease obligations ........................         (431,000)         (373,000)         (324,000)
 Bank debt repayment in advance of
  scheduled maturities .....................              -                 -         (13,913,000)
 Proceeds from sale/leaseback transactions .          698,000           230,000           319,000
 Purchase of treasury shares ...............         (116,000)          (23,000)              -
                                                 ------------      ------------      ------------
 Net cash provided by (used in)
  financing activities .....................        1,312,000           921,000        (9,210,000)
                                                 ------------      ------------      ------------
 Net change in cash and equivalents ........         (697,000)          347,000           673,000
 Cash and equivalents, beginning balance ...        3,013,000         2,666,000         1,993,000
                                                 ------------      ------------      ------------
 Cash and equivalents, ending balance ......     $  2,316,000      $  3,013,000      $  2,666,000
                                                 ============      ============      ============
 Noncash investing and financing activities
  franchise fees and capital leases ........     $    418,000     $         -        $  1,547,000
                                                 ============      ============      ============
</TABLE>

                 See notes to consolidated financial statements.


                                       20
<PAGE>   21


                              MORGAN'S FOODS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 1, 1998, MARCH 2, 1997 AND MARCH 3, 1996


NOTE 1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

         DESCRIPTION OF BUSINESS. Morgan's Foods, Inc. ("The Company") operates
39 Kentucky Fried Chicken ("KFC") restaurants in the states of Illinois,
Missouri, Ohio, Pennsylvania and West Virginia, which comprised 77% of total
revenues for fiscal 1998. The Company also operates, as franchisee, 6 East Side
Mario's restaurants in the Cleveland/Akron and Columbus, Ohio areas which
comprised 23% of total revenues for fiscal 1998. The Company's fiscal year is a
52-53 week year ending on the Sunday nearest the last day of February. Fiscal
1996 was a 53 week year.

         USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions pending completion of related events. These estimates
and assumptions affect the amounts reported at the date of the financial
statements for assets, liabilities, revenues and expenses and the disclosure of
contingencies. Actual results could differ from those estimates.

         PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions and balances have been eliminated.

         CASH AND EQUIVALENTS. The Company considers all highly liquid debt
instruments purchased with an initial maturity of three months or less to be
cash equivalents.

         MARKETABLE SECURITIES. Marketable securities consist of U.S. Treasury
Notes and Bills, including those pledged as collateral for long-term debt. These
securities are classified as held to maturity and accordingly, are carried at
amortized cost unless there is a permanent impairment of their value.

         INVENTORIES. Inventories, principally food, beverages and paper
products, are stated at the lower of aggregate cost (first-in, first-out basis)
or market.

         PRE-OPENING COSTS. Pre-opening costs, which consist principally of
training costs, are capitalized and amortized over twelve months.

         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 related assets as follows: buildings and improvements - 3 to
20 years; equipment, furniture and fixtures - 10 years. Leasehold improvements
are amortized over 3 to 15 years, which is the shorter of the life of the asset
or life of the lease. The asset values of the capitalized leases are amortized
using the straight-line method over the lives of the respective leases which
range from 15 to 20 years. Depreciation and amortization expense for fiscal
1998, 1997 and 1996 was $1,772,000, $1,770,000 and $1,741,000, respectively.



                                       21
<PAGE>   22


                              MORGAN'S FOODS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 1, 1998, MARCH 2, 1997 AND MARCH 3, 1996


         Management evaluates the net carrying value of property and equipment
periodically in light of both the estimated future cash flows resulting from the
use of the assets as well as the estimated liquidation value of such assets.
Management believes the carrying value of property and equipment at March 1,
1998 will be recovered from future cash flows.

         FRANCHISE AGREEMENTS. Franchise agreements are recorded at cost.
Amortization is computed on the straight-line method over the term of the
franchise agreement. The Company's franchise agreements are predominantly 20
years in length. Annual amortization expense was $29,000, $12,000 and $13,000
for fiscal years 1998, 1997 and 1996.

         GOODWILL. Goodwill was amortized over forty years on a straight-line
basis. Annual amortization expense was $40,000 and $53,000 for fiscal 1997 and
1996, respectively. Management evaluates the carrying amount of goodwill
periodically based upon past and projected cash flows from operations and the
estimated fair value of related assets and as a result wrote off the remaining
balance of goodwill in fiscal 1997 (see Note 2).

         INCOME TAXES. The provision for income taxes is based upon income or
loss before tax for financial reporting purposes. Deferred tax assets or
liabilities are recognized for the expected future tax consequences of temporary
differences between the tax basis of assets and liabilities and their carrying
values for financial reporting purposes. A deferred tax asset is recorded for
the benefits of future deductible temporary differences and operating loss and
tax credit carryforwards. A valuation allowance is recorded to reduce deferred
tax assets to the amount more likely than not to be realized in the future,
based on an evaluation of historical and projected profitability.

         STOCK-BASED COMPENSATION. The Company's outstanding stock options are
accounted for using the intrinsic value method, under which compensation cost is
measured as the excess, if any, of the quoted market price of the stock at the
grant date over the amount an employee must pay to acquire the stock.


NOTE 2. ASSET IMPAIRMENTS.

         The Company recorded asset impairments of $2,939,000 in the fourth
quarter of fiscal 1997. These impairments included $1,700,000 to write-down the
carrying value of certain East Side Mario's restaurants and $1,239,000 to
write-off goodwill remaining from a previous KFC acquisition. The write-down of
these assets resulted from management's evaluation of recoverability of their
carrying values from estimated future cash flows from their operation and/or
liquidation, as explained below.

Comparable restaurant revenues, operating income and cash flows of East Side
Mario's restaurants had decreased in fiscal 1996. The franchisor and the Company
instituted a number of changes in fiscal 1997 which were expected to improve the
financial performance of the East Side Mario's restaurants. However, in



                                       22
<PAGE>   23


                              MORGAN'S FOODS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 1, 1998, MARCH 2, 1997 AND MARCH 3, 1996


spite of those changes, the financial performance of these restaurants further
declined significantly in fiscal 1997. Also, in February 1997, East Side
Mario's, Inc., the franchisor of these restaurants, was sold by Pizza Hut, Inc.,
a subsidiary of PepsiCo, Inc., to another franchisor. Based upon the current
poor financial performance of the East Side Mario's restaurants, which
management expects to continue unless changes are made to this restaurant
concept, and the uncertainty of when or if such improvements may be made by the
new franchisor, management determined that the carrying value of property and
equipment of certain East Side Mario's restaurants was impaired. Accordingly,
the Company recorded asset impairments of $1,700,000 to write-down property and
equipment of certain East Side Mario's restaurants, based upon the present value
of estimated future cash flows of the restaurants.

         The Company also wrote off remaining goodwill of $1,239,000 related to
the 1987 purchase of KFC restaurants in the St. Louis, Missouri market. This
impairment resulted from new requirements for expenditures to upgrade facilities
due to the August 1996 settlement of the long-standing lawsuit between the
Association of KFC Franchisees and KFC Corporation. This settlement included a
requirement that franchisees upgrade their restaurants to current KFC standards
in order to obtain new 20 year franchise agreements under favorable terms. The
specific facility upgrade requirements were communicated to the Company and all
other KFC franchisees in January 1997 after facility inspections by
representatives of KFC Corporation. Including these expenditures, management
estimated that future cash flows from operation or liquidation of these
restaurants would not recover the carrying value of goodwill.

         These asset impairments resulted from management's estimates of future
cash flows from operation and/or liquidation of the assets. It is reasonably
possible that actual cash flows in the future from these assets could be
greater, or less, than management's current estimates, and such differences
could be material. Differences between management's current estimates of future
cash flows and revised estimates, or actual cash flows, in the future could
result in additional gains or losses in future periods from operation or
liquidation of these assets. Cash flows related to the assets for which the
impairment was recorded were similar in fiscal 1998 compared to fiscal 1997.


NOTE 3. DISPOSITION OF ASSETS.

         During fiscal 1998 and 1997, the Company recognized losses totaling
$98,000 and $248,000, respectively from the disposal of restaurant assets and
the closing of unprofitable restaurants. These restaurants did not have a
material effect upon the Company's consolidated results of operations or
financial position. The Company recorded a gain of $1,681,000 in fiscal 1996
from the sale of twenty-four KFC restaurants on May 5, 1995. As of March 1, 1998
the Company remains as the guarantor on two leases related to the sale for
periods of 8 and 12 years.




                                       23
<PAGE>   24



                              MORGAN'S FOODS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 1, 1998, MARCH 2, 1997 AND MARCH 3, 1996


NOTE 4.  ACCRUED LIABILITIES.

         Accrued liabilities consist of the following at March 1, 1998 and March
2, 1997:

<TABLE>
<CAPTION>

                                                         1998             1997
                                                     ----------       ----------
<S>                                                  <C>              <C>       
Accrued compensation .........................       $  631,000       $  598,000
Accrued taxes other than income taxes ........          291,000          381,000
Accrued liabilities related
 to sold restaurants .........................          266,000          352,000
Other accrued expenses .......................          797,000          713,000
                                                     ----------       ----------
                                                     $1,985,000       $2,044,000
                                                     ==========       ==========
</TABLE>


NOTE 5.  LONG-TERM DEBT.

         Long-term debt consists of the following at March 1, 1998 and March 2,
1997:

<TABLE>
<CAPTION>

                                                                     1998           1997
                                                                  ----------     ----------
<S>                                                               <C>            <C>       
Mortgage debt, monthly payments of $84,000 including
 interest at 9.69% to 10.63%, through 2012,
 collateralized by thirteen restaurants having a
 net book value at March 1, 1998 of $4,270,000 ..............     $7,610,000     $6,617,000

Equipment loans, monthly payments of $7,000 including
 interest at 10.1% through February 2004 collateralized
 by equipment at four KFC restaurants .......................        362,000            -

Notes payable, monthly payments of $12,000 including interest
 at 7.0% through June 2000 for early renewal franchise fees .        321,000            -

Note payable at 9%, monthly payments of $9,100 including
 interest through October 1998 and thereafter $500 through
 October 2003, collateralized by marketable securities
 having a value of $102,000 at March 1, 1998 ................         85,000        181,000
                                                                  ----------     ----------
                                                                   8,378,000      6,798,000
Less current maturities .....................................        563,000        324,000
                                                                  ----------     ----------
                                                                  $7,815,000     $6,474,000
                                                                  ==========     ==========
</TABLE>

         The Company paid interest relating to long-term debt of approximately
$800,000, $590,000 and $813,000 in fiscal 1998, 1997 and 1996, respectively.




                                       24
<PAGE>   25


                              MORGAN'S FOODS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 1, 1998, MARCH 2, 1997 AND MARCH 3, 1996


NOTE 6.  LEASE OBLIGATIONS AND OTHER COMMITMENTS.

         Property under capital leases at March 1, 1998 and March 2, 1997 are as
follows:

<TABLE>
<CAPTION>

                                                 1998           1997
                                              ----------     ----------

<S>                                           <C>            <C>       
         Leased property:
             Buildings ..................     $3,895,000     $3,854,000
             Equipment, furniture
              and fixtures ..............      1,726,000      1,328,000
                                              ----------     ----------
             Total ......................      5,621,000      5,182,000
         Less accumulated amortization ..      1,723,000      1,499,000
                                              ----------     ----------
                                              $3,898,000     $3,683,000
</TABLE>

         Amortization of leased property under capital leases was $482,000,
$495,000 and $391,000 in fiscal 1998, 1997 and 1996, respectively.

         Related obligations under capital leases at March 1, 1998 and March 2,
1997 are as follows:

<TABLE>
<CAPTION>

                                                      1998           1997
                                                   ----------     ----------

<S>                                                <C>            <C>       
         Capital lease obligations ...........     $5,522,000     $5,256,000
         Less current maturities .............        503,000        409,000
                                                   ----------     ----------
         Long-term capital lease obligations .     $5,019,000     $4,847,000
                                                   ==========     ==========
</TABLE>

         The Company paid interest of approximately $554,000, $564,000 and
$579,000 relating to capital lease obligations in fiscal 1998, 1997 and 1996,
respectively.

         Future minimum rental payments to be made under capital leases at March
1, 1998, are as follows:

<TABLE>
<CAPTION>

<S>                                                   <C>        
                   1999 .....................         $ 1,042,000
                   2000 .....................             959,000
                   2001 .....................             766,000
                   2002 .....................             693,000
                   2003 .....................             643,000
                   Later years ..............           5,890,000
                                                      -----------
                                                        9,993,000
                   Less amount representing
                   interest .................           4,471,000
                                                      -----------
                   Total obligations under
                   capital leases ...........         $ 5,522,000
                                                      ===========
</TABLE>

The Company's leases for restaurant land and buildings are noncancellable and
expire on various dates through 2014. The leases have renewal options ranging
from 1 to 27 years. Certain restaurant land and building leases require the
payment of additional rent equal to an amount by which a percentage of annual


                                       25
<PAGE>   26



                              MORGAN'S FOODS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 1, 1998, MARCH 2, 1997 AND MARCH 3, 1996


sales exceeds annual minimum rentals. The interest rates on the leases range
predominantly from 9.5% to 13.0%. Total contingent rentals were $72,000, $63,000
and $41,000 in fiscal 1998, 1997 and 1996, respectively. Future noncancellable
minimum rental payments under operating leases at March 1, 1998, are as follows:
1999 - $1,537,000; 2000 - $1,292,000; 2001 - $1,241,000; 2002 - $1,122,000; 2003
- $917,000; and an aggregate $8,564,000 for the years thereafter. Rental expense
for all operating leases was $1,620,000, $1,915,000 and $2,168,000 for fiscal
1998, 1997 and 1996, respectively.

         The Company is required to pay royalties of 4% of gross revenues to KFC
Corporation and to expend an additional 5% of gross revenues on national and
local advertising pursuant to its franchise agreements.

         The East Side Mario's franchise agreement requires the Company to pay
royalties of 4% on gross revenues and 1/2% of gross revenues to an advertising
fund. The franchise agreement also requires the Company to expend an additional
2 1/2% of gross revenues for advertising and promotion. Certain royalty and
advertising fund payments are in dispute and the franchisor has issued a notice
of default to the Company on March 19, 1998 alleging non-payment of royalties
and advertising fund contributions. On April 20, 1998 the Company and its wholly
owned subsidiary Morgan's Creative Restaurant Concepts, Inc. filed a lawsuit
against East Side Mario's, Inc. and other related parties in Federal District
Court in Cleveland, Ohio. The suit alleges fraud, deceptive trade practices and
failure to support the East Side Mario's franchisees among other things and sets
forth a demand for $20 million in damages.


NOTE 7. NET INCOME PER COMMON SHARE.

         Net income per common share has been computed based on the weighted
average number of common shares outstanding during each year which totaled
2,936,877, 2,967,574 and 2,969,355 for fiscal 1998, 1997 and 1996, respectively.
A one for six reverse stock split was effective on July 14, 1997. All share and
per share data have been restated to reflect the one for six reverse stock
split.


NOTE 8. INCOME TAXES.

         The current provision for income taxes, which approximates tax
payments, consists of state and local taxes of $14,000, $25,000 and $17,000 for
fiscal 1998, 1997 and 1996, respectively. There was no deferred provision for
income taxes during each of the fiscal years 1998, 1997 and 1996.




                                       26
<PAGE>   27


                              MORGAN'S FOODS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 1, 1998, MARCH 2, 1997 AND MARCH 3, 1996


         A reconciliation between the provision for income taxes and income
taxes calculated at the statutory tax rate of 35% is as follows:

<TABLE>
<CAPTION>

                                                   1998             1997             1996
                                               -----------      -----------      -----------
<S>                                            <C>              <C>              <C>        
         Tax provision (benefit) at
          statutory rate .................     $  (320,000)     $(1,411,000)     $   400,000
         Goodwill amortization/write-off .             -            448,000           19,000
         State and local taxes,
          net of federal benefit .........           9,000           16,000           11,000
         Losses (income) and temporary
          differences with no
          tax benefit (expense) ..........         321,000          970,000         (414,000)
         Other ...........................           4,000            2,000            1,000
                                               -----------      -----------      -----------
                                               $    14,000      $    25,000      $    17,000
                                               ===========      ===========      ===========
</TABLE>


         The components of deferred tax assets (liabilities) at March 1, 1998
and March 2, 1997 are as follows:

<TABLE>
<CAPTION>

                                                           1998             1997
                                                       -----------      -----------

<S>                                                    <C>              <C>        
         Operating loss carryforwards ............     $ 8,835,000      $ 8,689,000
         Tax credit carryforwards ................         214,000          238,000
         Property and equipment ..................       1,013,000          818,000
         Accrued expenses not currently deductible         191,000          213,000
         Inventory valuation .....................           4,000            3,000
         Deferred tax asset valuation adjustment .      (9,657,000)      (9,361,000)
                                                       -----------      -----------
         Net deferred tax asset ..................     $   600,000      $   600,000
                                                       ===========      ===========
</TABLE>

         The valuation allowance increased $296,000 and $827,000 during fiscal
1998 and 1997, respectively and decreased $444,000 during fiscal 1996.

         At March 1, 1998, the Company has net operating loss carryforwards
which, if not utilized, will expire as follows:

<TABLE>
<CAPTION>

<S>               <C>                              <C>        
                  1999 ...................         $ 8,124,000
                  2000 ...................           4,513,000
                  2001 ...................           4,055,000
                  2004 ...................             737,000
                  2005 ...................           2,786,000
                  2009 ...................           1,077,000
                  2012 ...................             743,000
                  2013 ...................             631,000
                                                   -----------
                  Total ..................         $22,666,000
                                                   ===========
</TABLE>

         The Company also has alternative minimum tax net operating loss
carryforwards of $20,719,000 which will expire, if not utilized, in varying
amounts through fiscal 2013. These carryforwards are available to offset up to
90% of any alternative minimum taxable income which would otherwise be taxable.




                                       27
<PAGE>   28


                              MORGAN'S FOODS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 1, 1998, MARCH 2, 1997 AND MARCH 3, 1996


         As of March 1, 1998, the Company has an alternative minimum tax credit
carryforward of $56,000. In addition, the Company has approximately $158,000 of
investment tax credits (after reduction pursuant to the Tax Reform Act of 1986)
available to offset future federal income tax liabilities through fiscal 2000.


NOTE 9.  STOCK OPTIONS AND OTHER EQUITY TRANSACTIONS.

         As of June 28, 1996, the Board of Directors of the Company changed the
stated value of the Company's common shares to $0.01 per share from $1.00 per
share.

         The Company previously had an Incentive Stock Option Plan ("Incentive
Plan") and a Non-Qualified Stock Option Plan ("Stock Option Plan") which
provided options exercisable at the market value of the underlying common shares
on the date of the grant. Both plans expired during fiscal 1995. Options granted
under the Incentive Plan remain outstanding with option prices of $6.75 to
$16.125 until they individually expire through January 2004 according to the
terms of the plan.

         Information with respect to these option plans follows:

<TABLE>
<CAPTION>

                                                NUMBER OF SHARES
                                       ---------------------------------
                                         1998         1997         1996
                                       -------      -------      -------

<S>                                     <C>          <C>          <C>   
    Outstanding, beginning of year      60,167       65,167       66,167
    Expired at $2.6875 per share .      (2,667)      (5,000)      (1,000)
                                       -------      -------      -------
    Outstanding, end of year .....      57,500       60,167       65,167
                                       =======      =======      =======
    Exercisable, end of year .....      57,500       60,167       61,833
                                       =======      =======      =======
</TABLE>

         The Company has Non-Qualified Stock Option Agreements with the Chairman
of the Board and Chief Executive Officer and with the President granting the
option to purchase an additional 83,333 and 50,000 common shares, respectively,
with option prices ranging from $7.50 to $10.50 per share.


NOTE 10. 401-K RETIREMENT PLAN.

         The Company has a 401-K Retirement Plan in which employees age 21 or
older who have completed one year of service with the Company, working at least
1,000 hours, are eligible to participate. The Company matches, in Company stock,
a percentage of employee contributions. During fiscal 1998, 1997 and 1996,
respectively, the Company incurred $20,000, $25,000 and $20,000, respectively,
in expenses for matching contributions to the plan.



                                       28
<PAGE>   29


                              MORGAN'S FOODS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 1, 1998, MARCH 2, 1997 AND MARCH 3, 1996


NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS

         Management believes that the fair value of the Company's debt at March
1, 1998 approximates carrying value, based upon interest rates obtained in
recent financing transactions.


NOTE 12. FUTURE FINANCIAL STATEMENT DISCLOSURES

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of
an Enterprise and Related Information, which will be effective for the Company's
1999 fiscal year. SFAS No. 131 redefines how operating segments are determined
and requires disclosure of certain financial and descriptive information about a
company's operating segments. The Company has not yet completed its analysis of
SFAS No. 131 and accordingly has not yet determined what effect, if any, it may
have on future financial statement disclosures.




                                       29
<PAGE>   30


                              MORGAN'S FOODS, INC.
                                INDEX TO EXHIBITS
                                 ITEM 14 (A) (3)


    Exhibit
    Number                  Exhibit Description
    ------                  -------------------

     3.1      Amended Articles of Incorporation, as amended (1)

     3.2      Amended Code of Regulations (1)

     4.1      Specimen Certificate for Common Shares (2)

     10.1     Specimen KFC Franchise Agreements (3)

     10.2     Amended and Restated Incentive Stock Option Plan (5)

     10.3     Non-Qualified Stock Option Agreement with Leonard R. Stein-Sapir
              (4)

     10.4     Non-Qualified Stock Option Agreement with James J. Liguori (1)

     10.5     Form of East Side Mario's Area Development Agreement and Franchise
              Agreement (5)

     10.6     Form of Mortgage Loan Agreement with Captec Financial Group, Inc.
              (6)

     19       Form of Indemnification Contract between Registrant and its
              Officers and Directors (5)

     21       Subsidiaries

     23       Independent Auditors' Consent

     27       Financial Data Schedule

(1)  Filed as an exhibit to Registrant's Form 10-K for the 1992 fiscal year and
     incorporated herein by reference.

(2)  Filed as an exhibit to the Registrant's Registration Statement (No.
     33-35772) on Form S-2 and incorporated herein by reference.

(3)  Filed as an exhibit to the Registrant's Registration Statement (No.
     2-78035) on Form S-1 and incorporated herein by reference.

(4)  Filed as an exhibit to the Registrant's Form 8-K dated May 4, 1989 and
     incorporated herein by reference.

(5)  Filed as an exhibit to the Registrant's Form 10-K for the 1993 fiscal year
     and incorporated herein by reference.

(6)  Filed as an exhibit to the Registrant's Form 10-K for the 1996 fiscal year
     and incorporated herein by reference.



                                       30
<PAGE>   31


                                   SIGNATURES


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



                                                 Morgan's Foods, Inc.


Dated:         May 29, 1998                    /s/  Leonard Stein-Sapir        
       --------------------------------      -----------------------------------
                                               By:  Leonard Stein-Sapir
                                                    Chairman of the Board,
                                                    Chief Executive Officer 
                                                    & Director


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



/s/ Leonard Stein-Sapir                        /s/ Lawrence S. Dolin        
---------------------------------------      -----------------------------------
By: Leonard Stein-Sapir                        By: Lawrence S. Dolin
    Chairman of the Board,                         Director
    Chief Executive Officer & Director             Dated:  May 29, 1998
    Dated:  May 29, 1998


/s/ James J. Liguori                           /s/ Steven S. Kaufman           
---------------------------------------      -----------------------------------
By: James J. Liguori                           By: Steven S. Kaufman
    Director, President &                          Director
    Chief Operating Officer                        Dated:  May 29, 1998
    Dated:  May 29, 1998


/s/ Kenneth L. Hignett                         /s/ Richard A. Arons     
---------------------------------------      -----------------------------------
By: Kenneth L. Hignett                         By: Richard A. Arons
    Director, Senior Vice President,               Director
    Chief Financial Officer & Secretary            Dated:  May 29, 1998
    Dated:  May 29, 1998


                                               /s/  Bernard Lerner   
                                             -----------------------------------
                                               By:  Bernard Lerner
                                                    Director
                                                    Dated: May 29, 1998




                                    31