EXHIBIT 13

Morrison Financials

1998 Financial Review
Morrison Health Care, Inc. and Subsidiaries

Selected Financial Data..........................................14

Management's Discussion and Analysis of
Financial Condition and Results of Operations....................15

Consolidated Financial Statements................................18

Notes to Consolidated Financial Statements.......................22

Report of Independent Auditors...................................32

Directors and Officers...........................................33

Shareowner Information...........................................33

Selected Financial Data
Morrison Health Care, Inc. and Subsidiaries

The following table summarizes certain selected financial information with
respect to Morrison Health Care, Inc. (the Company or MHCI) and is derived from
the Financial Statements of MHCI. The Selected Financial Data of MHCI is
presented as if MHCI had been a separate entity for fiscal years 1996, 1995 and
1994. The financial information presented below for 1996, 1995 and 1994, may not
be indicative of MHCI's future performance as an independent company. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Financial Statements of MHCI and notes thereto, and the Unaudited Pro Forma
Financial Information of MHCI included in Note 2 of the Notes to Consolidated
Financial Statements. Weighted average shares for 1996 were determined as if the
shares issued in connection with the Distribution were outstanding from the
beginning of the year. Earnings per share and dividend data have not been
presented for fiscal years 1995 and 1994 as MHCI was not a separate publicly
held company prior to March 1996.

Net income for fiscal year 1994 includes the results of education, business and
industry ("B&I") operations which were sold in fiscal year 1995. Net income for
fiscal year 1995 includes an after-tax gain of $25.8 million from the sale of
certain B&I contracts and assets to Gardner Merchant Services, Inc. for a cash
payment of $100 million. The remaining B&I accounts were closed.

For the fiscal year+
-----------------------------------------------------

(in thousands, except per share data) 1998 1997 1996 1995 1994
-----------------------------------------------------

Consolidated statements of income data:
Managed volume (estimated and unaudited)..... $504,400 $464,800 $435,600 $408,300 *
Revenues..................................... $250,371 $221,011 $219,995 $225,392 $461,780
Income before provision for income taxes..... $ 19,065 $ 17,576 $ 16,011 $ 65,295 $ 21,588
Provision for federal and state income taxes. 7,513 7,290 6,731 28,469 8,351
Net income................................... $ 11,552 $ 10,286 $ 9,280 $ 36,826** $ 13,237

Earnings per share - Basic................... $ 0.97 $ 0.87 $ 0.79
Earnings per share - Diluted................. $ 0.95 $ 0.87 $ 0.79

Weighted average common shares - Basic....... 11,938 11,785 11,673
Net dilutive effect of stock options and
nonvested stock awards..................... 254 56 51
-------- --------- --------
Weighted average common shares - Diluted..... 12,192 11,841 11,724
======== ========= ========

+ Fiscal year 1998 is a 12-month year. Fiscal years 1997, 1996, 1995 and 1994
are composed of 52 weeks.
* Fiscal year 1994 information is not presented because it included B&I
information.
** Includes an after-tax gain of $25.8 million from the sale of the B&I
operations.

Other Financial Data:
Total assets............................. $ 84,374 $ 60,203 $ 61,101 $ 69,028 $105,964
Long-term debt........................... $ 31,690 $ 15,022 $ 20,034 $ 19,245 $ 3,128
Stockholders' equity..................... $ 8,372 $ 5,628 $ 4,716 $ 9,015 $ 51,164
Cash dividends per share of common stock. $ 0.82 $ 0.82 $ 0.205*** - -
Working capital.......................... $ 7,344 $ 3,891 $ 8,677 $ 13,318 $ 9,239
Current ratio............................ 1.2:1 1.1:1 1.3:1 1.5:1 1.2:1

***Dividends were not paid prior to the fourth quarter of fiscal year 1996.

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Morrison Health Care, Inc. and Subsidiaries

This discussion should be read in conjunction with the Financial Statements and
related notes found on pages 18 to 31.

RESULTS OF OPERATIONS
Effects of Distribution on Results of Operations
Effective March 9, 1996, Morrison Health Care, Inc. (the Company or MHCI) was
spun-off (the Distribution) from Morrison Restaurants Inc. (MRI), becoming an
independent corporation trading under the symbol MHI on the New York Stock
Exchange. Management believes that the Distribution (see Note 2 of the Notes to
Consolidated Financial Statements) has had a material impact on the results of
operations due to the added separate company costs that are incurred by MHCI.
The estimated effect of the Distribution on the results of operations of MHCI
for the fiscal year ended June 1, 1996, is presented in the Unaudited Pro Forma
Financial Information on pages 23 to 24. Such pro forma financial information is
presented as if the Distribution had been effective as of June 3, 1995.

1998 Compared To 1997

Overview
In MHCI's second full year as an independent company, fiscal year 1998 again
demonstrated strong financial results, with increases in managed volume,
revenue, operating profit and net income. The accomplishments are due to
continued focus on cost reductions in all accounts, growth in existing accounts,
strong new account sales, and the acquisitions of Drake Management Services,
Inc. (January 1998) and Spectra Services, Inc. (March 1998) in the senior living
market. (See Note 3 of the Notes to Consolidated Financial Statements for more
information.)
MHCI is the only national, publicly held company which specializes
exclusively in health care food and nutrition services. MHCI's client base
includes some of the largest and most prestigious hospitals in the United
States.

Managed Volume/Revenue
The Company performs its services pursuant to one of two types of contracts,
either management fee or profit and loss. While actual services performed are
the same, revenue recognition varies by type of contract. In a management fee
account, MHCI manages the services and facilities, but the client is responsible
for all or nearly all the costs. Revenues and fees are recognized for the amount
of the contractually agreed-upon management fee plus any earned incentives plus
the amount of any expenses or employee payroll costs paid by the Company and
charged back to the client. In a profit and loss account, MHCI assumes the risk
of profit or loss for the foodservice operation. For such accounts, the amount
of revenue reported is the actual revenue generated from meals served to
patients, client employees and visitors. Because of the difference between the
amount of revenue that is reported for the fee account (net management fees plus
reimbursed expenses) and the profit and loss account (gross revenues of meal
sales), Management uses the concept of managed volume to evaluate the Company's
true growth. Managed volume is defined by MHCI as the total cost of operating
the foodservices, regardless of which type of contract exists with the client.
Management believes managed volume is a better indicator of performance because
it measures total activity from all client accounts and provides an indication
of what gross revenues would be if the Company performed all services pursuant
to profit and loss contracts.
Managed volume increased $39.6 million or 8.5% in fiscal year 1998 when
compared to fiscal year 1997. Revenue increased $29.4 million or 13.3% in 1998
as compared to 1997. The primary sources of these increases were growth at
existing accounts, including adding vending operations and increasing employee
payrolls, opening more accounts and larger accounts than accounts which were
closed, and key acquisitions.

Gross Profit
Gross profit, defined as revenue less operating expenses, increased $3.3 million
or 8.4% for 1998. Growth of existing account business, continued emphasis on
food and labor cost reductions, and acquisitions all contributed to the
favorable results.

Selling, General and Administrative
Although selling, general and administrative expenses increased compared to the
prior year, they decreased as a percentage of managed volume and revenue. The
expenses were 4.5% of managed volume in fiscal year 1998 and were 4.6% of
managed volume in fiscal year 1997. In fiscal year 1998, these expenses were
9.2% of revenues versus 9.7% in fiscal year 1997. Compared to fiscal year 1997,
the expenses increased $1.5 million or 7.1%, versus the revenue increase of
13.3% for the same period.

Interest Expense, Net
Interest expense increased 39.0% compared to the prior year due to higher debt
levels associated with the Company's acquisitions and increased capital
expenditures for both the Advanced Culinary Centers(TM) and improvements to the
management information systems.

Federal and State Income Taxes
The combined federal and state effective tax rate decreased to 39.4% in 1998
from 41.5% in 1997. The higher effective income tax rate in fiscal 1997 as
compared to fiscal 1998 is primarily due to higher non-deductible expenses in
fiscal 1997.

1997 COMPARED TO UNAUDITED PRO FORMA 1996

Overview
In MHCI's first full year as an independent company, fiscal year 1997 showed
strong financial results with increases in managed volume, revenue, operating
profit and net income. These achievements were due to continued focus on cost
reduction in accounts and growth in existing accounts.

Managed Volume/Revenue
Managed volume is the Company's method of measuring total growth by determining
the total amount of foodservices that the Company manages. In fiscal year 1997,
managed volume increased $29.2 million or 6.7% when compared to fiscal year
1996. This increase was due to growth at existing accounts and to opening
accounts with larger managed volumes than at accounts which were closed.
Revenue increased $1.0 million or 0.5% in fiscal year 1997 when compared
to fiscal year 1996. The increase was due to the increases in revenues at
existing accounts, attributable primarily to adding vending operations and
employee payroll at those accounts.

Gross Profit
Gross profit, defined as revenue less operating expenses, increased $0.4 million
or 1% for 1997. The continuing emphasis on food and labor cost reductions
combined with the general business growth at numerous existing accounts
generated the improvements in gross profit.

Selling, General and Administrative
Selling, general and administrative expenses decreased slightly as a percentage
of managed volume and revenue due to improved control of expenses.

Interest Expense, Net
Interest expense decreased 47% as the Company funded most of its activities with
internally-generated funds, resulting in lower debt levels in fiscal year 1997.

Federal and State Income Taxes
The combined federal and state effective tax rate decreased to 41.5% in 1997
from 42.1% in 1996.

IMPACT OF YEAR 2000

Currently, there is significant uncertainty within the software industry and
among software users regarding the impact of installed software that has been
programmed to accept only two-digit entries in the date code fields and use such
two-digit entries in the software's calculation and report generation formats.
Current versions of the Company's products have been and are being assessed to
determine the impact of becoming "Year 2000" compliant. Similarly, as part of
its continuing review and improvement of systems and operations, the Company is
in the process of modifying or replacing certain software programs to avoid any
detrimental effects in its installed software programs while upgrading and
enhancing the overall effectiveness of its information management systems. The
project is expected to be completed well in advance of December 31, 1999. While
this project includes both Year 2000 issues and general improvements, the
estimate of the costs to address both issues is less than $5 million, most of
which has already been spent. The Company does not expect this project to pose
significant operational problems for the Company. However, the Company cannot
make any assurances that the Company will not be exposed to any potential claims
resulting from the system problems associated with the century change. See
"Special Note Regarding Forward-Looking Information."

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow, Capital Expenditures and Financing
Due to the nature of its contract foodservice business, MHCI is able to maintain
a relatively steady cash flow. Cash flow from operations has historically
financed MHCI's capital investments. MHCI plans for controlled expansion over
the next several years and anticipates that cash flow from operations plus
utilization of the existing lines of credit will be sufficient to provide for
this expansion. See "Special Note Regarding Forward-Looking Information."
To partially finance its activities in fiscal 1998, MHCI used a $50
million, five-year credit facility from various financial institutions. Of the
total facility, $30 million was revolving lines of credit. The Company had $17.5
million outstanding under the terms of these lines of credit at May 31, 1998.
The remaining $20 million of the credit facility was a five-year term note which
was being repaid in quarterly installments of $1.25 million since June 30, 1997.
The credit facility contained restrictions on incurring additional indebtedness
and certain funded debt, net worth and fixed charge coverage requirements.
The Company managed the interest costs of the term note through an
interest rate swap agreement. This swap agreement effectively fixed the interest
rate for the period of the term note at 6.7%.
For day-to-day operating activities, additional lines of credit allow
borrowing up to $5 million. The Company had $4.2 million under this agreement at
May 31, 1998.
On May 31, 1998, MHCI had $36.7 million outstanding in total debt, an
increase of $16.7 million from the prior year.
Subsequent to May 31, 1998, the Company replaced its $50 million credit
facility with a $75 million revolving credit line from four financial
institutions. Concurrent with this transaction, the Company cancelled the
related interest rate swap agreement that had effectively fixed the interest
rate for the term portion of that facility. The new credit line has a variable
interest rate based upon LIBOR and variable interest payment requirements. The
principal is due no later than June 30, 2003. The initial amount borrowed was
$35.4 million, all of which was used to repay the balance due on the $50 million
and $5 million credit facilities.
Also in June 1998, the Company entered into two interest rate swap
agreements to reduce the impact of changes in the interest rates on its floating
rate debt and to exchange floating rate for fixed rate payments at certain
dates. These swap agreements expire in June 2003 and June 2008 and effectively
convert $20 million of variable rate borrowings to fixed.
Trade accounts receivable make up the majority of MHCI's total current
assets. Historically, the average days outstanding in trade accounts receivable
is less than one month and bad debt expense has been minimal.
MHCI requires capital principally for acquisitions, new accounts,
equipment replacement and remodeling of existing accounts and the construction
of Advanced Culinary Centers,(TM) a food preparation and delivery system that
was initiated in fiscal 1998. Cash provided by operating activities approximated
$10.3 million for fiscal year 1998. Capital expenditures were approximately $8.9
million, an increase of $4.1 million or 83% compared to the prior year period.
Capital expenditures are anticipated to total $12 million to $15 million in
fiscal year 1999. MHCI plans to finance this amount primarily through internally
generated funds. See "Special Note Regarding Forward-Looking Information."

Working Capital
As of May 31, 1998, working capital was $7.3 million while the current ratio was
1.2:1. Working capital increased $3.5 million and the current ratio increased
0.1 when compared to the prior year.

Dividends
MHCI paid approximately $9.9 million in cash dividends to stockholders during
fiscal year 1998. The Company plans to pay annual dividends of approximately
$1.9 million in the next fiscal year. See "Special Note Regarding
Forward-Looking Information."

Deferred Tax Assets
The recognition of deferred tax assets depends on the anticipated existence of
taxable income in future periods in amounts sufficient to realize the assets. A
valuation allowance must be provided for the deferred tax asset if such future
income is not likely to be generated. Management believes that future taxable
income should be sufficient to realize all of MHCI's deferred tax assets based
on historical earnings of MHCI; therefore, a valuation allowance has not been
established.

KNOWN EVENTS, UNCERTAINTIES AND TRENDS

Impact of Inflation
In the past, MHCI has been able to recover inflationary cost increases through
contract inflation adjustments, increased productivity and menu changes. There
have been and there may be in the future, delays in contract inflation
adjustments and competitive pressures which limit MHCI's ability to recover such
cost increases in their entirety. Historically, the effects of inflation on
MHCI's net income have not been materially adverse. See "Special Note Regarding
Forward-Looking Information."

Management's Outlook
In fiscal year 1997, Management began an extensive program of expanding,
restructuring and training of the sales team. Management anticipates that its
continued focus on the sales team will facilitate increases in the number and
economic value of accounts sold in fiscal year 1999 and beyond. Management
believes that growth will also occur through expanding services at existing
accounts and the Advanced Culinary Centers,(TM) a food preparation and delivery
system that was initiated in fiscal 1998. In addition, Management believes the
acquisition of companies that complement its core competencies will allow the
Company to increase its presence in the senior living market while providing
quality services for health care facilities nationwide.
Several MHCI accounts are among the largest acute care and teaching
hospitals in the United States. The Company strives to maintain its long-term
partnerships with these facilities while continuing to increase quality and
lower costs. MHCI believes that ongoing investments in people and programs
designed to enhance its aggressive sales drive will add new clients while
building stronger relationships with current accounts. By focusing on its
primary market of hospitals and expanding into the senior living market, the
Company believes that it is strategically positioned to maintain its steady
growth. See "Special Note Regarding Forward-Looking Information."

Special Note Regarding Forward-Looking Information
The foregoing section contains various "forward-looking statements" which
represent the Company's expectations or beliefs concerning future events,
including the following: statements regarding account growth, impact of the Year
2000, future capital expenditures and borrowings, the payment of dividends, the
impact of inflation and the effects of Management's strategies for growth. The
Company cautions that a number of important factors could, individually or in
the aggregate, cause actual results to differ materially from those included in
the forward-looking statements, including, without limitation, the following:
health care spending trends; the growth of systems and group purchasing
organizations; changes in health care regulations; increased competition in the
health care food and nutrition market; customers' acceptance of the Company's
cost saving programs; and laws and regulations affecting labor and employee
benefit costs.

Consolidated Statements of Income
Morrison Health Care, Inc. and Subsidiaries

For the Fiscal Year Ended
--------------------------------------------
(In thousands, except per share data) May 31, 1998 May 31, 1997 June 1, 1996
------------ ------------ ------------

Revenues....................................... $250,371 $221,011 $219,995

Operating costs and expenses:
Operating expenses....................... 207,265 181,233 180,607
Selling, general and administrative...... 22,919 21,395 20,670
Restructuring costs............................ 0 0 1,398
Asset impairment............................... 0 0 193
Interest expense, net of interest
income of $406 in 1998, $687
in 1997 and $428 in 1996................... 1,122 807 1,116
------------ ------------ ------------
Total costs and expenses................. 231,306 203,435 203,984
------------ ------------ ------------
Income before provision for income taxes....... 19,065 17,576 16,011
Provision for federal and state income taxes... 7,513 7,290 6,731
------------ ------------ ------------
Net income..................................... $ 11,552 $ 10,286 $ 9,280
============ ============ ============
Earnings per share - Basic..................... $ 0.97 $ 0.87 $ 0.79
Earnings per share - Diluted................... $ 0.95 $ 0.87 $ 0.79

Weighted average common shares - Basic......... 11,938 11,785 11,673
Net dilutive effect of stock options
and non-vested stock awards................... 254 56 51
------------ ------------ ------------
Weighted average common shares - Diluted....... 12,192 11,841 11,724
============ ============ ============

The accompanying notes are an integral part of the financial statements.

Consolidated Balance Sheets
Morrison Health Care, Inc. and Subsidiaries

------------ ------------
(In thousands) May 31, 1998 May 31, 1997
------------ ------------

Assets
Current assets:
Cash and short-term investments......... $ 5,720 $ 6,347
Receivables:
Trade, less allowance for
doubtful accounts of $887 at
May 31, 1998 and $744 at
May 31, 1997...................... 21,381 16,387
Other............................. 6,372 4,884
Inventories............................. 2,936 2,686
Prepaid expenses........................ 1,262 1,006
Deferred income tax benefits............ 1,949 1,929
------------ ------------
Total current assets........ 39,620 33,239
------------ ------------
Property and equipment - at cost:
Buildings and improvements.............. 3,425 2,326
Equipment............................... 16,037 13,251
Construction in progress................ 4,729 766
------------ ------------
24,191 16,343
Less accumulated depreciation........... 10,232 8,471
------------ ------------
13,959 7,872
Deferred income tax benefits.................. 2,503 1,610
Cost in excess of net assets acquired, net.... 12,097 4,582
Notes receivable, less current portion........ 3,729 3,817
Deferred charges.............................. 4,083 2,830
Other assets.................................. 8,383 6,253
------------ ------------
Total assets................ $84,374 $60,203
============ ============

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................ $14,545 $12,977
Accrued liabilities:
Taxes, other than income taxes.... 1,818 1,546
Payroll and related costs......... 6,395 4,133
Insurance......................... 2,289 3,436
Other............................. 2,207 2,245
Current portion of long-term debt....... 5,022 5,011
------------ ------------
Total current liabilities...... 32,276 29,348
------------ ------------
Long-term debt................................ 31,690 15,022
Other liabilities............................. 12,036 10,205
Stockholders' equity:
Common stock, $0.01 par value
(authorized 100,000 shares;
issued: 1998 - 12,379 shares,
1997 - 12,165 shares)................... 124 122
Capital in excess of par value.......... 12,859 9,717
Unearned ESOP shares.................... (3,195) (3,517)
Retained earnings....................... 2,322 647
------------ ------------
12,110 6,969
Less cost of treasury stock............. 3,738 1,341
------------ ------------
Total stockholders' equity...... 8,372 5,628
------------ ------------
Total liabilities and
stockholders' equity....... $84,374 $60,203
============ ============

The accompanying notes are an integral part of the financial statements.

Consolidated Statements of Cash Flows
Morrison Health Care, Inc. and Subsidiaries

For the Fiscal Year Ended
------------------------------------------------
(In thousands) May 31, 1998 May 31, 1997 June 1, 1996
- -------------- ------------ ------------ ------------

Operating activities:
Net income $ 11,552 $ 10,286 $ 9,280
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.......................... 2,538 1,992 2,330
Amortization of intangibles............................ 377 153 152
Other, net............................................. 0 1,066 1,172
Deferred income taxes.................................. (811) 514 4,927
(Gain)/Loss on disposition of assets................... (19) 29 170
Changes in operating assets and liabilities:
(Increase)/Decrease in receivables............... (6,359) 2,486 1,345
(Increase)/Decrease in inventories............... (246) (24) 218
(Increase)/Decrease in prepaid and other
assets........................................ (675) 631 (2,005)
Increase/(Decrease) in accounts payable,
accrued and other liabilities................. 3,936 6,046 (12,112)
Increase/(Decrease) in income taxes payable 0 (935) 6,928
------------ ------------ ------------
Net cash provided by operating activities.................... 10,293 22,244 12,405
------------ ------------ ------------
Investing activities:
Purchases of property and equipment.......................... (8,850) (4,843) (2,170)
Proceeds from disposal of assets............................. 268 459 387
Acquisition of businesses, net of cash acquired.............. (7,464) 0 0
Other, net................................................... (2,745) (1,456) 764
Net cash used by investing activities........................ (18,791) (5,840) (1,019)
Financing activities:
Net proceeds from long-term debt............................. 21,690 0 800
Principal payments on long-term debt......................... (5,011) (11) (11)
Net change in short-term borrowings.......................... 0 (6,760) 6,760
Proceeds from exercise of stock options and issuance
of stock, net of income tax benefits....................... 3,054 679 1,544
Dividends paid............................................... (9,877) (9,725) (2,403)
Payments to acquire Treasury Stock........................... (1,891) 0 0
(Increase)/Decrease in Treasury Stock held by Deferred
Compensation Plan.......................................... (506) (412) 29
ESOP shares released......................................... 412 84 0
Net transfers to Morrison Restaurants Inc.................... 0 0 (12,749)
------------ ------------ ------------
Net cash provided/(used) by financing activities............. 7,871 (16,145) (6,030)
------------ ------------ ------------
(Decrease)/Increase in cash and short-term investments....... (627) 259 5,356
Cash and short-term investments at the beginning of the year. 6,347 6,088 732
------------ ------------ ------------
Cash and short-term investments at the end of the year....... $ 5,720 $ 6,347 $ 6,088
============ ============ ============

Supplemental disclosure of cash flow information -
cash paid for:
Interest............................................... 1,696 1,190 1,533
Income taxes........................................... 7,933 8,000 18,586

The accompanying notes are an integral part of the financial statements.

Consolidated Statements of Stockholders' Equity
Morrison Health Care, Inc. and Subsidiaries

For the Fiscal Year Ended
--------------------------------------------------------------------
May 31, 1998 May 31, 1997 June 1, 1996
------------------- ------------------- --------------------
Shares Amounts Shares Amounts Shares Amounts
------------------- ------------------- --------------------
(In Thousands except per share data)
CAPTION>

Beginning balance........................... 12,165 $ 122 11,791 $ 118 0 $ 0
Shares issued pursuant to spin-off from
Morrison Restaurants Inc.................. 0 0 0 0 11,678 117
Shares issued to ESOP....................... 0 0 255 3 0 0
Shares issued under Stock Incentive Plans... 214 2 119 1 113 1
------------------- ------------------- --------------------
Ending balance.................. 12,379 124 12,165 122 11,791 118
------------------- ------------------- --------------------
Capital in Excess of Par Value
Beginning balance........................... 9,717 5,441 0
Shares issued to ESOP....................... 0 3,592 0
Shares issued under Stock Incentive Plans,
net of income tax benefits................ 3,052 678 1,543
Shares released from ESOP................... 90 6 0
Distribution of Morrison Restaurants
Inc.'s investment in the Company
to Morrison Restaurants Inc.
stockholders.......................... 0 0 3,898
------------------- ------------------- --------------------
Ending balance.................. 12,859 9,717 5,441
------------------- ------------------- --------------------

Morrison Restaurants Inc. Equity Investment
Beginning balance........................... 0 0 9,015
Net income.................................. 0 0 6,791
Cash transfers to Morrison Restaurants Inc.. 0 0 (12,749)
Distribution of Morrison Restaurants Inc.'s.
investment in the Company to Morrison
Restaurants Inc. stockholders.......... 0 0 (3,057)
------------------- ------------------- --------------------
Ending balance.................. 0 0 0
------------------- ------------------- --------------------

Unearned ESOP Shares
Beginning balance........................... (249) (3,517) (255) (3,595) 0
Shares issued to ESOP....................... 0 0 0 0 0
Shares released from ESOP................... 23 322 6 78 0
------------------- ------------------- --------------------
Ending balance.................. (226) (3,195) (249) (3,517) 0
------------------- ------------------- --------------------

Retained Earnings
Beginning balance........................... 647 86 0
Net income.................................. 11,552 10,286 2,489
Cash dividends of $0.82 per share in fiscal
1998 and 1997 and $0.205 per share in
fiscal 1996........................... (9,877) (9,725) (2,403)
------------------- ------------------- --------------------
Ending balance.................. 2,322 647 86
------------------- ------------------- --------------------

Treasury Stock
Beginning balance........................... (1,341) (929) 0
Distribution of Morrison Restaurants
Inc.'s investment in the Company to
Morrison Restaurants Inc. stockholders.. 0 0 (958)
Purchase of Treasury Stock.................. (1,891) 0 0
(Purchase)/Sale of Treasury Stock -
held by Deferred Compensation Plan.... (506) (412) 29
------------------- ------------------- --------------------
Ending balance.................. (3,738) (1,341) (929)
------------------- ------------------- --------------------
Total Stockholders' Equity.................. $ 8,372 $ 5,628 $4,716
=================== =================== ====================

The accompanying notes are an integral part of the financial statements.

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
On March 9, 1996, Morrison Health Care, Inc. and Subsidiaries (the "Company" or
"MHCI") was spun off ("the Distribution") from Morrison Restaurants Inc.
("MRI"). Prior to the Distribution, MHCI was a wholly owned health care contract
food and nutrition business of MRI.
The accompanying financial statements for fiscal 1998 and 1997 reflect
MHCI as a stand-alone entity. The financial statements for fiscal 1996 have been
prepared as if MRI's health care contract food and nutrition business had
operated as a stand-alone entity for fiscal year 1996. The fiscal 1996
statements include the assets, liabilities, revenues and expenses that are
directly related to the Company's operations. They also include an allocation of
certain assets, liabilities and general corporate expenses of MRI, such as
executive payroll, legal, data processing and interest, which are related to the
Company. Amounts were allocated on a specific identification method where
appropriate and on a pro rata basis otherwise. Management believes the
allocation methods used are reasonable.

Use of estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk
The Company primarily competes in the health care food and nutrition services
industry, and encounters significant competition in the market in which it
operates. The length of contract varies by customer. Concentration of credit
risk with respect to accounts receivable are limited due to the large number of
customers that make up the Company's customer base, thus spreading trade credit
risk. The Company maintains reserves for potential uncollectible amounts which,
in the aggregate, have not exceeded Management's expectations.

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

Fiscal Year
Effective with the fiscal year ended in 1998, the Company's fiscal year ends on
May 31. The fiscal years ended May 31, 1997 and June 1, 1996 were each comprised
of 52 weeks. Starting with fiscal year 1998, the Company changed from a 52-53
week fiscal year to a 12-month fiscal year ending May 31 each year.

Cash and Short-Term Investments
The Company's cash management program provides for the investment of excess cash
balances in short-term money market instruments. Short-term investments are
stated at cost, which approximates market. The Company considers marketable
securities with a maturity of three months or less when purchased to be
short-term investments.

Inventories
Inventories consist of materials, food supplies, china and silver and are stated
at the lower of cost (first in-first out) or market.

Property and Equipment and Depreciation
Property and equipment are stated at cost and are being depreciated for
financial reporting purposes using the straight-line method over the estimated
useful lives of the assets. Annual rates of depreciation range from 3% to 5% for
buildings and from 8% to 34% for kitchen and other equipment. Costs incurred in
connection with the construction at major facilities or of Advanced Culinary
Centers(TM) are capitalized as construction in progress until such facilities or
centers become operational. Interest is capitalized in connection with these
capitalized construction costs. The capitalized interest is recorded as part of
the asset to which it relates and is amortized over the asset's estimated useful
life. In fiscal 1998, $127,000 of interest cost was capitalized. No interest was
capitalized in fiscal 1997 and 1996.
Property and equipment are periodically reviewed for impairment based on
an assessment of future operations. The Company records impairment losses on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount.

Intangible Assets
Excess of costs over the fair value of net assets acquired with purchased
businesses generally is amortized on a straight-line basis over periods ranging
from 10 to 40 years. At May 31, 1998, May 31, 1997 and June 1, 1996, the
accumulated amortization for costs in excess of net assets acquired was $1.9
million, $1.6 million and $1.4 million, respectively.
The carrying value of goodwill and other intangibles is evaluated
periodically in relation to the operating performance and future undiscounted
cash flows of each operating business acquired. Adjustments are made if the sum
of expected future net cash flows is less than net book value. The Company
believes that the remaining amounts of these assets have continuing value.

Revenue Recognition
Revenue is recognized upon performance of services. The Company performs its
services pursuant to one of two types of contracts, either management fee or
profit and loss. While actual services performed are the same, revenue
recognition varies by type of contract. In a management fee account, MHCI
manages the services and facilities, but the client is responsible for all or
nearly all the costs. Revenues and fees are recognized for the amount of the
contractually agreed-upon management fee plus any earned incentives plus the
amount of any expenses or employee payroll costs paid by the Company and charged
back to the client. In a profit and loss account, MHCI assumes the risk of
profit or loss for the foodservice operation. For such accounts, the amount of
revenue reported is the actual revenue generated from meals served to patients,
client employees and visitors.

Income Taxes
For the first three quarters of 1996, the 1996 statement of income reflects an
income tax expense representing the Company's allocated share of MRI's tax
expense, which approximates the tax expense of the Company on a stand-alone
basis. Beginning with the fourth quarter of fiscal year 1996, the accompanying
statements of income reflect the Company's actual tax expenses.
Deferred income taxes are determined utilizing a liability approach. This
method gives consideration to the future tax consequences associated with
differences between financial accounting and tax bases of assets and
liabilities.

Stock-Based Compensation
Stock options are recorded in accordance with Accounting Principles Board
Opinion ("APB") No. 25, with pro forma disclosures of net income and earnings
per share as if Statement of Financial Accounting Standards ("SFAS") No. 123 had
been applied.

Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128), and has restated earnings per share amounts
reported in prior periods in accordance with SFAS No. 128. Basic earnings per
share is based on the weighted average number of shares outstanding during each
quarter. Diluted earnings per share is based on the weighted average number of
shares outstanding during each quarter plus the effect of outstanding stock
options using the treasury stock method.

New Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" and No. 131,
"Disclosures about Segments of an Enterprise and Related Information." In 1998,
the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 132, "Employer's Disclosures about Pensions and other
Postretirement Benefits." These statements, which are effective for fiscal years
beginning after December 15, 1997, expand or modify disclosures and will have no
impact on the Company's consolidated financial position, results of operations
or cash flow. In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 and will be adopted by the Company in fiscal year
2001. Based upon the Company's current limited use of derivative instruments and
hedging activities, Management does not believe the statement will have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.

Pre-Opening Expenses
Pre-opening costs, such as salaries, personnel training costs and other expenses
of opening a new account, are often reimbursed by the client. In circumstances
when they are not reimbursed, these costs are charged to expense as incurred.

Financial Instruments
The Company's financial instruments at May 31, 1998, May 31, 1997 and June 1,
1996 consisted of cash and short-term investments, accounts and notes
receivable, long-term debt and interest rate swap agreements. The fair value of
these financial instruments approximated the carrying amounts reported in the
balance sheets. Cash is deposited in financial institutions which carry FDIC
insurance. From time to time, the cash balances at these institutions exceed the
insured amount. Management does not believe that this is a significant risk to
the Company.
Although substantially all of the Company's trade accounts receivable are
from health care institutions, Management believes that concentrations of credit
risk are limited due to the geographic diversity of the Company's customer base.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Historically, the Company
has not experienced significant losses related to trade accounts receivable from
individual customers or from groups of customers in any geographic area.

Reclassification
Certain prior year amounts and balances have been reclassified to conform to the
current year presentation.

NOTE 2 DISTRIBUTION
On March 7, 1996, the stockholders of MRI approved the Distribution by MRI of
all the outstanding shares of common stock of MHCI, a wholly owned subsidiary of
MRI. The Board of Directors of MRI believed that the Distribution was in the
best interests of MRI and its stockholders because the separation of MRI's three
lines of business, among other things, (i) allowed management of each of the
three companies to concentrate its full attention on its business and allowed
each company to reward management and employees based on the performance of its
business; (ii) allowed each company to access the capital markets directly to
raise capital; (iii) established a value for each company that is independent of
the other businesses and provided investors and securities analysts a clearer
basis on which to understand and analyze the three businesses; and (iv) allowed
each company to establish equity-based benefit plans which can hold its own
common stock.
The following Unaudited Pro Forma Consolidated Statement of Income has
been prepared to illustrate certain estimated effects of the Distribution. This
statement includes adjustments for the effect of costs and expenses which might
have been incurred had the Distribution occurred June 3, 1995. Adjustments are
based on the assumptions set forth below the statement.

(In thousands, except per share data)

For the fiscal year ended
June 1, 1996
-----------------------------------------
UNAUDITED
PRO FORMA UNAUDITED
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------

Revenues........................... $219,995 $ 0 $219,995
Operating costs and expenses:
Operating expenses........... 180,607 0 180,607
Selling, general and
administrative............. 20,670 1,420(a) 22,090
Restructuring cost........... 1,398 0 1,398
Asset impairment............. 193 0 193
Interest expense, net........ 1,116 400(b) 1,516
---------- ----------- ----------
203,984 1,820 205,804
Income before provision for
income taxes..................... 16,011 (1,820) 14,191
Provision for federal and state
income taxes .................... 6,731 (760)(c) 5,971
---------- ----------- ----------
Net income......................... $ 9,280 $ (1,060) $ 8,220
========== =========== ==========
Earnings per common and common
equivalent share................. $ 0.70
Weighted average common and
common equivalent shares......... 11,811(d)

The pro forma adjustments to the accompanying historical statements of income
for the fiscal year ended June 1, 1996 are described below:

(a) To record the increase in selling and general and administrative expenses
which presumably would have been incurred by MHCI had MHCI been a separate and
stand-alone entity.

(b) To record the increase in interest expense which would have been incurred by
MHCI had MHCI been a separate and stand-alone entity.

(c) To record the estimated income tax benefit associated with pro forma
adjustments (a) and (b) at an assumed combined state and federal effective
income tax rate of 41.8% for the year ended June 1, 1996. The assumed effective
income tax rate is comprised of a 35% statutory federal income tax rate plus
applicable state income taxes and permanent differences, less applicable tax
credits.

(d) The number of equivalent shares for periods prior to the spin-off is based
on the number of MRI's common and common equivalent shares adjusted for the 1
for 3 distribution ratio.

NOTE 3 ACQUISITIONS
In January 1998, the Company acquired all of the outstanding common stock of
Phoenix-based Drake Management Services, Inc. In March 1998, the Company
acquired substantially all of the assets of Chicago-based Spectra Services, Inc.
Both companies, which provide nutrition services in the senior living market,
were acquired for cash, with a total acquisition price of $6.1 million.
Additional contingent payments of $950,000 (of which $400,000 was paid during
June 1998) may be earned by the sellers in fiscal year 1999. The acquisitions
were accounted for using the purchase method. The resulting goodwill of $6.7
million is being amortized over 20 years using the straight-line method. The
operating results of these companies have been included from their respective
acquisition dates. Pro forma results are not presented for these acquisitions as
they are not significant during the periods presented.

NOTE 4 NOTES PAYABLE
Notes payable consists of the following:

(In thousands) Fiscal Year Ended
------------------------------
May 31, 1998 May 31, 1997
------------ ------------
Variable rate revolving credit facility
due in full 3/11/01................ $17,500 $ 0
Variable rate demand lines of credit..... 4,190 0
Term note due in equal quarterly
installments of $1,250 from
1998-2001............................ 15,000 20,000
Other notes and mortgages................ 22 33
------------ ------------
36,712 20,033
Less current maturities.................. 5,022 5,011
------------ ------------
$31,690 $15,022
============ ============

Aggregate maturities of long-term borrowings over the next
five years are as follows: 1999 - $5,022; 2000 - $5,000; and
2001 - $26,690.

In March 1996, the Company entered into a five-year $50 million unsecured
credit facility with various banks. The credit facility includes a $30 million
revolving line of credit which allows the Company to borrow under various
interest rate options. Commitment fees of 0.25% per annum are payable on the
unused portion of the credit facility. At May 31, 1998, the Company had $17.5
million in borrowings under the revolver, with a weighted average variable rate
of approximately 6.6%.
The balance of the $50 million credit facility, $20 million, is a term
note which will be repaid in quarterly installments of $1.25 million commencing
June 30, 1997. At May 31, 1998, the balance on the term note was $15 million. In
order to control the interest cost on the term note, the Company entered into an
interest rate swap agreement. This swap agreement effectively fixes the interest
rate on the outstanding term note balance at 6.7% per annum for the period of
the term note.
In addition, the Company had uncommitted demand lines of credit amounting
to $5 million. At May 31, 1998, the Company had $4.2 million outstanding under
these lines, at a rate of 6.4%.
The credit facility contains certain restrictions on incurring additional
indebtedness and certain funded debt, net worth and fixed charge coverage
requirements.
See Note 11 regarding Subsequent Events.

NOTE 5 INCOME TAXES
The components of income tax expense are as follows:

(In thousands) For the Fiscal Year Ended
-------------------------------------------------
May 31, 1998 May 31, 1997 June 1, 1996
------------ ------------ ------------
Current:
Federal............... $6,875 $5,960 $1,479
State................. 1,449 816 325
8,324 6,776 1,804
Deferred:
Federal............... (670) 440 4,127
State................. (141) 74 800
(811) 514 4,927
------------ ------------ ------------
$7,513 $7,290 $6,731
============ ============ ============

Deferred tax assets and liabilities are comprised of the following:

(In thousands) Fiscal Year Ended
------------------------------
May 31, 1998 May 31, 1997
------------ ------------
Deferred tax assets:
Employee benefits........................ $4,346 $3,547
Insurance reserves....................... 1,366 1,841
Bad debt reserve......................... 349 293
Other.................................... 487 438
------------ ------------
Total deferred tax assets................ 6,548 6,119
------------ ------------
Deferred tax liabilities:
Depreciation............................. 282 254
Retirement plans......................... 479 452
Prepaid deductions....................... 131 133
Other.................................... 1,204 1,741
----------- -------------
Total deferred tax liabilities........... 2,096 2,580
----------- -------------
Net deferred tax asset................... $4,452 $3,539
=========== =============
SFAS 109 specifies that deferred tax assets are to be reduced by a
valuation allowance if it is more likely than not that some portion of the
deferred tax assets will not be realized. Management believes that future
taxable income will be sufficient to realize all of the Company's deferred tax
assets based on historical earnings of the Company and, therefore, a valuation
allowance has not been established.
A reconciliation from the statutory federal income tax expense to the
reported income tax expense is shown below:

(In thousands)
For the Fiscal Year Ended
------------------------------------------------
May 31, 1998 May 31, 1997 June 1, 1996
------------ ------------ ------------
Statutory federal income taxes.. $6,673 $6,152 $5,604
State income taxes, net of
federal income tax benefit..... 853 804 732
Other, net...................... (13) 334 395
------------ ------------ ------------
$7,513 $7,290 $6,731
============ ============ ============

The effective income tax rate was 39.4%, 41.5% and 42.0% in 1998, 1997 and
1996, respectively. The higher effective income tax rates in fiscal years 1997
and 1996 were due to the nondeductibility of certain expenses.
In connection with the Distribution, the Company entered into a tax
allocation agreement with Morrison Fresh Cooking, Inc. ("MFC") and Ruby Tuesday,
Inc. ("RTI"). This agreement provides that the Company will pay its share of
RTI's consolidated tax liability for the periods in which the Company was
included in MRI's consolidated federal income tax return. It also provides for
sharing, where appropriate, of state, local and foreign taxes attributable to
periods prior to the date of Distribution. Management does not believe this
agreement will have a material effect on the Company.

NOTE 6 EMPLOYEE BENEFIT PLANS
Salary Deferral Plan
Under the Morrison Health Care, Inc. Salary Deferral Plan, each eligible
employee may elect to make pre-tax contributions to a trust fund in amounts
ranging from 2% to 10% of their annual earnings. Employees contributing a
pre-tax contribution of at least 2% may elect to make after-tax contributions
not in excess of 10% of annual earnings. The Company's contribution to the Plan
is based on the employee's pre-tax contribution and years of service. After
three years of service (including service with MRI prior to the Distribution),
the Company contributes 20% of the employee's pre-tax contribution, 30% after
ten years of service and 40% after 20 years of service. Normally, the full
amount of each participant's interest in the trust fund will be paid upon
retirement or total disability. However, the Plan allows participants to make
early withdrawals of pre-tax and after-tax contributions, subject to certain
restrictions. Under the provisions of the plan, highly compensated employees, as
defined by the Internal Revenue Code, are limited to contributions of 3% and
receive a maximum of a 20% match. The Company's contributions to the trust fund
approximated $414,000, $257,000 and $244,000 for 1998, 1997 and 1996,
respectively.
During fiscal year 1997, the Company began sponsorship of an employee
stock ownership feature ("ESOP") covering participants in the Salary Deferral
Plan. The Company loaned the Plan $3.6 million (with outstanding balances of
$3.2 million and $3.5 million at May 31, 1998 and May 31, 1997, respectively) to
purchase approximately 255,000 shares of common stock, at an interest rate of
5.47%. The loan is payable in 120 monthly installments of principal and
interest. The Company makes monthly contributions sufficient to cover principal
and interest on the loan made to the Plan. Shares are released and allocated to
participant accounts monthly as loan repayments are made.
The Company adopted the provisions of AICPA Statement of Position No. 93-6
which requires that compensation expense be measured based on the fair value of
the shares over the period the shares are earned. Dividends paid on unallocated
shares held by the Plan are used to make principal and interest payments and are
not charged to retained earnings, and shares not yet committed to be released
are not considered outstanding in the calculation of earnings per share. The
fair value of unearned shares at May 31, 1998 and May 31, 1997 was approximately
$3,874,000 and $4,046,000, respectively.

Deferred Compensation Plan
The Company maintains the Morrison Health Care, Inc. Deferred Compensation Plan
for certain selected employees. The provisions of this Plan are similar to those
of the Salary Deferral Plan. Differences include which employees are eligible to
participate and the limitations on the amount of deferrals that may be elected
by participants. The Company's contributions under the Plan approximated
$104,000, $125,000 and $137,000, for 1998, 1997 and 1996, respectively. Assets
of the Plan are held by a rabbi trust. Under current accounting rules, assets
and liabilities of a rabbi trust must be accounted for as if they are assets and
liabilities of the Company. Therefore, all earnings and expenses of the rabbi
trust are recorded in the Company's financial statements. Assets and liabilities
of the Plan approximated $6,043,000 and $4,667,000 at May 31, 1998 and 1997,
respectively, and include $1,848,000 and $1,341,000, respectively, of MHCI
common stock, which is accounted for as treasury stock at cost.

Retirement Plan
The Retirement Plan was frozen by RTI (formerly Morrison Restaurants Inc.) on
December 31, 1987. The Company is a joint sponsor of the Retirement Plan. No
additional benefits accrued and no new participants entered the Plan after that
date. The Company will continue to share in future expenses of the Plan.
Participants will receive benefits based upon salary and length of service. The
Plan's assets include common stock, fixed income securities, short-term
investments and cash. There were no contributions made to the Plan in 1998, 1997
or 1996.

Executive Supplemental Pension Plan
Under the Morrison Health Care, Inc. Executive Supplemental Pension Plan,
employees with average compensation of at least $100,000 for five consecutive
years (including service with MRI prior to the Distribution) in a qualifying
position become eligible to earn supplemental retirement payments based upon
salary and length of service (including service as part of MRI prior to the
Distribution), reduced by Social Security benefits and amounts otherwise
receivable under the Retirement Plan.

Management Retirement Plan
Under the Morrison Health Care, Inc. Management Retirement Plan, individuals who
have 15 years of credited service (including service with MRI prior to the
Distribution) and earn an average annual compensation of at least $40,000 for
the immediately preceding three years become participants. Participants receive
benefits based upon salary and length of service (including service with MRI
prior to the Distribution), reduced by social security benefits and benefits
payable under the Retirement Plan and Executive Supplemental Pension Plan.
To provide a funding source for the payment of benefits under the
Executive Supplemental Pension Plan and the Management Retirement Plan, the
Company owns various life insurance contracts on some of the participants. The
cash value of these policies, net of loans, was $1,897,000 at May 31, 1998, and
$1,256,000 at May 31, 1997. The policies have been placed in a rabbi trust which
will hold the policies and death benefits as they are received.
The following table presents the components of pension expense, the funded
status and amounts recognized in the Company's financial statements for the
Retirement Plan, the Executive Supplemental Pension Plan and the Management
Retirement Plan.

Accumulated Benefits Exceed Assets -
Assets Exceed Accumulated Benefits - Executive Supplemental Pension Plan
(IN THOUSANDS) Retirement Plan and Management Retirement Plan
- -------------- ------------------------------------- -------------------------------------

For the Fiscal Year Ended May 31, May 31, June 1, May 31, May 31, June 1,
1998 1997 1996 1998 1997 1996
------------------------------------- -------------------------------------

Components of pension
(income)/expense:
Service cost................. $ 0 $ 0 $ 0 $ 108 $ 81 $ 63
Interest cost................ 347 341 354 270 230 251
Actual return on plan assets..... (1,046) (700) (833) 0 0 0
Amortization and deferral........ 629 341 526 149 122 122
-------------------------------------- -------------------------------------
$ (70) $ (18) $ 47 $ 527 $ 433 $ 436
-------------------------------------- -------------------------------------
Plan assets at fair value........ $ 4,425 $4,859 $4,766 $ 0 $ 0 $ 0
-------------------------------------- -------------------------------------
Actuarial present value of
projected benefit
obligations:
Accumulated benefit
obligations:
Vested............... 3,895 4,210 4,691 2,615 1,950 1,606
Nonvested............ 0 0 0 274 0 0
Provision for future salary
increases ..................... 0 0 0 1,429 1,296 1,116
-------------------------------------- -------------------------------------
Total projected benefit
obligations................... 3,895 4,210 4,691 4,318 3,246 2,722
-------------------------------------- -------------------------------------
Excess (deficit) of plan
assets over projected
benefit obligations.......... 530 649 75 (4,318) (3,246) (2,722)
Unrecognized net loss (gain)..... 407 150 642 913 258 216
Unrecognized prior service cost.. 0 0 0 276 289 351
Unrecognized net transition
obligations.................... 280 348 412 516 576 541
Additional minimum liability..... 0 0 0 (658) (452) (376)
------------------------------------- -------------------------------------
Prepaid (accrued)
pension cost................... $ 1,217 $1,147 $1,129 $(3,271) $(2,575) $(1,990)
===================================== =====================================

The weighted average discount rate for all three plans was 7.5%, 8.25% and 7.75%
for 1998, 1997 and 1996, respectively. The rate of increase in compensation
levels for the Executive Supplemental Pension Plan and Management Retirement
Plan was 4% for all three years presented. The expected long-term rate of return
on Plan assets for the Retirement Plan was 10% for all three years.

NOTE 7 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care benefits and life insurance benefits to
eligible retirees. Benefits are funded as medical claims and life insurance
premiums are incurred. Retirees become eligible for retirement benefits if they
have met certain service and minimum age requirements at date of retirement. The
Company accrues expenses related to postretirement health care and life
insurance benefits during the years an employee provides services.
The actuarial present value of accumulated postretirement benefit
obligations and the amounts recognized in the Company's balance sheet are as
follows:

(In thousands) Fiscal Year Ended
------------------------------
May 31, 1998 May 31, 1997
------------ ------------
Retirees................................. $1,504 $1,609
Fully eligible active plan participants.. 245 202
Other active plan participants........... 170 123
Accumulated postretirement
benefit obligation..................... 1,919 1,934
Unrecognized net loss.................... (366) (328)
------------ ------------
Accrued postretirement benefit cost...... $1,553 $1,606
============ ============
The postretirement benefit cost is as follows:

(In thousands) For the Fiscal Year Ended
------------------------------------------------
May 31, 1998 May 31, 1997 June 1, 1996
------------ ------------ ------------
Service cost............. $ 7 $ 7 $ 8
Interest cost............ 147 140 155
Amortization of
unrecognized net loss.. 4 23 28
------------ ------------ ------------
Postretirement benefit
cost................... $ 158 $ 170 $ 191
============ ============ ============

The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 0% because the Company has frozen current
and future contribution levels. Increases in health care cost due to factors
such as inflation, changes in health care utilization or delivery patterns,
technological advances and changes in the health status of Plan participants
will be borne by the participants. Measurement of the accumulated postretirement
benefit obligation was based on an assumed 7.50%, 8.25% and 7.75% discount rate
for fiscal years 1998, 1997 and 1996, respectively.

NOTE 8 PREFERRED STOCK
Under its Certificate of Incorporation, the Company is authorized to issue
preferred stock with a par value of $0.01 in an amount not to exceed 250,000
shares which may be divided into and issued in designated series, with dividend
rates, rights of conversion, redemption, liquidation prices and other terms or
conditions as determined by the Board of Directors. No preferred shares have
been issued as of May 31, 1998. The Board of Directors has designated 50,000 of
such shares as Series A Junior Participating Preferred Stock and has issued
rights to acquire such shares, upon certain events, with an exercise price to be
determined, but substantially above the expected trading price. The rights will
expire ten years after the date such rights are issued, and may be redeemed
prior to ten days after the acquisition of 20% or more of the Company's common
stock.

NOTE 9 STOCK INCENTIVE PLANS
Under the Company's stock incentive plans, incentive and non-qualified stock
options may be granted to Management, key employees and outside directors to
purchase shares of Company stock. The Morrison Health Care, Inc. 1996 Stock
Incentive Plan and the Morrison Health Care, Inc. 1996 Non-Executive Stock
Incentive Plan (the "Plans") are administered by a Committee, appointed by the
Board, which has complete discretion to determine participants and the terms and
provisions of stock incentives, subject to the Plans. The Plans permit the
Committee to make awards of a variety of stock incentives, including (but not
limited to) dividend equivalent rights, incentive stock options, non-qualified
stock options, performance unit awards, phantom shares, stock appreciation
rights and stock awards. These discretionary awards may be made on an individual
basis or pursuant to a program approved by the Committee for the benefit of a
group of eligible persons. All options awarded under the Plans have been at the
prevailing market value at the time of issue or grant. All options granted have
five- or ten-year terms and become exercisable at the end of two or three years
of continued employment. At May 31, 1998 and 1997, the Company had reserved a
total of 1,704,376 and 804,376 shares, respectively, of common stock under the
Company's 1996 Stock Incentive Plan.

In March 1997, the Board of Directors approved a resolution to offer the
Company's non-executive employees the opportunity to reprice certain options
which were originally granted under the Company's 1996 Non-Executive Stock
Incentive Plan. The repricing occurred on March 25, 1997, and resulted in the
cancellation of approximately 290,000 options and the granting of approximately
174,000 new options with an exercise price equal to $13.125, the closing price
on March 24, 1997. The canceled options were replaced with fewer new options in
accordance with a formula to result in economic equivalence between the old and
new options. The new options were granted with two-year vesting periods and
ten-year terms. At May 31, 1998 and 1997, the Company had reserved a total of
1,464,820 and 2,582,127 shares, respectively, of common stock for this Plan.
The Morrison Health Care, Inc. Stock Incentive and Deferred Compensation
Plan for Directors provides nonmanagement directors with opportunities to defer
the receipt of their retainer fees or to allocate their retainer fees to
purchase shares of the Company. In general, the Plan sets a target ownership
level for nonmanagement directors. To facilitate attaining the target ownership
level, the Plan provides that the directors must use at least 60% of their
retainer to purchase shares of the Company until they reach the target ownership
level. Each director purchasing stock receives additional shares equal to 15% of
the shares purchased and three times the total shares in options, which vest
after six months and become exercisable for five years from the grant date. All
options awarded under the Plan have been at the prevailing market value at the
time of grant. Pursuant to this Plan, a one-time restricted stock award totaling
5,000 shares was made in fiscal year 1997 to a nonmanagement director. A
Committee, appointed by the Board, administers the Plan on behalf of the
Company. At May 31, 1998 and 1997, the Company had reserved 81,917 and 85,251
shares, respectively, of common stock for this Plan.

Under the terms of the Distribution, holders of MRI stock options received
adjusted, substitute options in MHCI, MFC and RTI which, in the aggregate,
preserved the economic value as well as the material terms, such as option
period, vesting provisions and payment terms, the optionee had in the original
MRI options prior to the Distribution. For SFAS No. 123 disclosure purposes,
these options, if granted in fiscal year 1996, were valued as of the original
grant date.

The Company applies APB No. 25 and related interpretations in
accounting for its stock incentive plans. Under APB No. 25, because the
exercise price of the Company's employee stock options equals the market
price of the stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for 1998, 1997 and 1996,
respectively: risk-free interest rates of 5.7%, 6.6% and 6.0%; volatility
factors of .24, .19 and .22; dividend yields of 0.9%, 4.3% and 4.7%; and
weighted average expected lives of 7.5, 7.6 and 4.8 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except earnings per share amounts):

For the Fiscal Year Ended
------------------------------------------------
May 31, 1998 May 31, 1997 June 1, 1996
------------ ------------ ------------

Pro forma net income...................... $10,771 $9,618 $9,157
Pro forma earnings per share - Basic...... $ 0.90 $ 0.82 $ 0.78
Pro forma earnings per share - Diluted.... $ 0.89 $ 0.82 $ 0.78

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards made
prior to fiscal year 1996, and additional awards are anticipated.
A summary of the Company's stock option activity and related information
for the years ended May, 31, 1998, May 31, 1997 and June 1, 1996 follows:

May 31, 1998 May 31, 1997 June 1, 1996
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------------------- -------------------- --------------------

Outstanding -
Beginning of year........ 2,307 $15.82 2,368 $15.97 0 $ 0.00
Converted MRI options....... 0 0.00 0 0.00 1,493 15.55
Granted..................... 357 17.76 493 13.21 950 16.50
Exercised................... (274) 12.05 (200) 9.69 (57) 11.38
Forfeited................... (144) 15.55 (354) 16.78 (18) 24.44
------------------ ------------------ -------------------
Outstanding - End of year... 2,246 $16.45 2,307 $15.82 2,368 $15.97
================== ================== ===================
Exercisable at end of year 1,110 $17.09 1,068 $15.95 1,056 $14.52
================== ================== ===================

Weighted average fair value of options
granted during the year $ 6.66 $ 1.89 $ 2.70

The following table summarizes information about stock options outstanding at
the end of:

May 31, 1998
-----------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------ ------------------------------------------------------

Weighted Average
Range of Number Weighted Average Remaining Number Weighted Average
Exercise Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ---------------

$ 8.98 - $14.38 567 $12.77 5.70 187 $11.93
$14.50 - $16.38 469 $14.78 1.83 432 $14.68
$16.50 - $16.50 578 $16.50 3.11 110 $16.50
$16.56 - $31.59 632 $20.94 4.48 381 $22.51
----------- ---------------- ---------------- ----------- ---------------
2,246 $16.45 3.88 1,110 $17.09
=========== ================ ================ =========== ===============

May 31, 1997
-----------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------ ------------------------------------------------------

$ 8.98 - $13.13 676 $12.16 5.96 317 $11.15
$13.50 - $15.75 596 $14.56 2.70 475 $14.62
$16.50 - $16.50 622 $16.50 3.84 0 $ 0.00
$17.03 - $31.59 413 $22.61 2.40 276 $23.72
----------- ---------------- ---------------- ----------- ---------------
2,307 $15.82 3.91 1,068 $15.95
=========== ================ ================ =========== ===============

NOTE 10 CONTINGENCIES

At May 31, 1998, the Company was contingently liable for approximately $4.6
million in letters of credit, issued primarily in connection with its Workers'
Compensation and Casualty insurance programs.
The Company is presently, and from time to time, subject to pending claims
and lawsuits arising in the ordinary course of its business. In the opinion of
Management, the ultimate resolution of these pending legal proceedings will not
have a material adverse effect on the Company's operations or financial
position.
Prior to the Distribution, the Company entered into an agreement with MFC
and RTI providing for assumptions of liabilities and cross-indemnities. The
agreements are designed to allocate generally, among the three companies,
effective as of the Distribution date, financial responsibility for liabilities
arising out of or in connection with business activities prior to the
Distribution. No significant amounts were incurred under this agreement during
fiscal year 1998 or 1997.

NOTE 11 SUBSEQUENT EVENTS
Subsequent to May 31, 1998, the Company replaced its $50 million credit facility
with a $75 million revolving credit line from four financial institutions.
Concurrent with this transaction, the Company cancelled the related interest
rate swap agreement that had effectively fixed the interest rate for the term
portion of that facility. The new credit line has a variable interest rate based
upon LIBOR and variable interest payment requirements. The principal is due no
later than June 30, 2003. The initial amount borrowed was $35.4 million, all of
which was used to repay the balance due on the $50 million and $5 million credit
facilities.
Also in June 1998, the Company entered into two interest rate swap
agreements to reduce the impact of changes in the interest rates on its floating
rate debt and to exchange floating rate for fixed rate payments at certain
dates. These swap agreements expire in June 2003 and June 2008 and effectively
convert $20,000,000 of variable rate borrowings to fixed.

NOTE 12 SUPPLEMENTAL QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly financial
results for the years ended May 31, 1998 and May 31, 1997 are summarized below.
For the year ended May 31, 1998, all quarters are composed of three months. For
the year ended May 31, 1997, all quarters are composed of 13 weeks.

First Second Third Fourth
(Amounts presented are in thousands) Quarter Quarter Quarter Quarter Total
- ------------------------------------ -------------------------------------------------------------

For the year ended May 31, 1998
Revenues................................. $57,754 $60,646 $63,337 $68,634 $250,371
=============================================================
Gross profit*............................ $10,027 $10,688 $10,541 $11,850 $ 43,106
Income before income taxes............... $ 4,674 $ 5,035 $ 4,292 $ 5,064 $ 19,065
Provision for federal and state
income taxes........................... 1,846 1,989 1,695 1,983 7,513
-------------------------------------------------------------
Net income............................... $ 2,828 $ 3,046 $ 2,597 $ 3,081 $ 11,552
=============================================================
Earnings per share:
Basic.............................. $ 0.24 $ 0.25 $ 0.22 $ 0.26 $ 0.97
Diluted............................ $ 0.24 $ 0.25 $ 0.21 $ 0.25 $ 0.95

For the year ended May 31, 1997
Revenues................................. $52,658 $54,355 $57,483 $56,515 $221,011
=============================================================
Gross profit*............................ $ 9,634 $10,291 $ 9,416 $10,437 $ 39,778
Income before income taxes............... $ 4,619 $ 4,648 $ 3,695 $ 4,614 $ 17,576
Provision for federal and state
income taxes........................... 1,923 1,922 1,533 1,912 7,290
-------------------------------------------------------------
Net income............................... $ 2,696 $ 2,726 $ 2,162 $ 2,702 $ 10,286
=============================================================
Earnings per share:
Basic.............................. $ 0.23 $ 0.23 $ 0.18 $ 0.23 $ 0.87
Diluted............................ $ 0.23 $ 0.23 $ 0.18 $ 0.23 $ 0.87

*The Company defines gross profit as revenue less operating expenses.

Common Stock Market Prices and Dividends
Morrison Health Care, Inc. common stock is publicly traded on the New York Stock
Exchange (NYSE) under the ticker symbol MHI. The following table sets forth the
reported high and low prices on the NYSE or the high and low bid prices for each
quarter during fiscal years 1998 and 1997.

First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------

1998 market price per share:

High.................. $17.250 $19.750 $20.188 $22.875
Low................... $15.375 $15.750 $17.063 $16.250

1997 market price per share:
High................. $15.000 $14.375 $14.875 $16.500
Low.................. $11.125 $10.750 $13.250 $13.000

Cash dividends on the common stock of Morrison Health Care, Inc. were paid
during each quarter of fiscal years 1998 and 1997 as follows:

First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----

1998 cash dividends
per share................ $0.205 $0.205 $0.205 $0.205 $0.820
1997 cash dividends
per share................. $0.205 $0.205 $0.205 $0.205 $0.820

On July 1, 1998, the Company's Board of Directors declared a quarterly
dividend of $0.04 per share, payable July 31, 1998, to 5,525 shareowners of
record on July 13, 1998.

Report of Independent Auditors
Morrison Health Care, Inc. and Subsidiaries

Stockholders and Board of Directors
Morrison Health Care, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Morrison
Health Care, Inc. and Subsidiaries as of May 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three fiscal years in the period ended May 31, 1998. These financial
statements are the responsibility of the Company's Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Morrison Health
Care, Inc. and Subsidiaries at May 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended May 31, 1998, in conformity with generally accepted
accounting principles.

/s/ Ernst & Young LLP

Atlanta, Georgia
June 23, 1998