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      &lt;font style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"&gt;&lt;b&gt;NOTE

      1 &amp;#8211;&lt;/b&gt;&lt;/font&gt; &lt;font style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"&gt;&lt;/font&gt;&lt;font style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"&gt;&lt;b&gt;SUMMARY

      OF SIGNIFICANT ACCOUNTING POLICIES&lt;/b&gt;&lt;/font&gt;

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      &lt;font style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"&gt;The

      interim consolidated financial statements of Morgan's Foods,

      Inc. (the &amp;#8220;Company&amp;#8221;) have been prepared without

      audit. In the opinion of Company management, all adjustments

      have been included. Unless otherwise disclosed, all

      adjustments consist only of normal recurring adjustments

      necessary for a fair statement of results of operations for

      the interim periods. These unaudited financial statements

      have been prepared using the same accounting principles that

      were used in preparation of the Company&amp;#8217;s annual report

      on Form 10-K for the year ended March 3, 2013. Certain prior

      period amounts have been reclassified to conform to current

      period presentations. The results of operations for the

      twelve weeks ended May 26, 2013 are not necessarily

      indicative of the results to be expected for the full year.

      Although the Company believes that the disclosures are

      adequate to make the information presented not misleading, it

      is suggested that these condensed consolidated financial

      statements be read in conjunction with the audited

      consolidated financial statements and the notes thereto

      included in the Company&amp;#8217;s Form 10-K for the fiscal year

      ended March 3, 2013.&lt;/font&gt;

    &lt;/p&gt;&lt;br/&gt;&lt;p id="PARA883" style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"&gt;

      &lt;font style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"&gt;The

      Company&amp;#8217;s debt is reported at historical cost and is

      almost entirely comprised of variable rate borrowings. The

      market for variable rate debt for restaurant financing is

      currently extremely limited. The Company&amp;#8217;s debt is not

      publicly traded and there are few lenders or financing

      transactions for similar debt in the marketplace at this

      time. Management has concluded that it is not practicable to

      estimate the fair value of the Company&amp;#8217;s debt as of May

      26, 2013.&lt;/font&gt;

    &lt;/p&gt;&lt;br/&gt;&lt;p id="PARA885" style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"&gt;

      &lt;font style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"&gt;The

      accompanying consolidated financial statements have been

      prepared assuming that the Company will continue as a going

      concern.&amp;#160;&amp;#160;The Company has incurred&amp;#160;losses in

      fiscal years 2013 and 2012 and has negative working capital

      and an accumulated deficit at May 26, 2013.&amp;#160;&amp;#160;The

      Company has managed its liquidity in fiscal 2013 and will

      manage in fiscal 2014 through the refinancing of debt, the

      sale and leaseback of restaurant properties and the sale of

      additional equity.&amp;#160; Should the Company have difficulty

      meeting its forecasts, this could have an adverse effect on

      its liquidity position. Management has taken actions to

      improve its cash flows, including closely monitoring its

      expenses and store closings for underperforming stores and

      expects to be able to achieve its forecast for fiscal 2014.

      However, there can be no assurances that our cash flow will

      be sufficient to allow us to continue as a going concern if

      we are unable to meet our projections.&lt;/font&gt;

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