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.

<TABLE>

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

(in thousands, except per share data)               1998       1997       1996        1995       1994
                                                -----------------------------------------------------
<CAPTION>
<S>                                             <C>        <C>        <C>         <C>        <C>  
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
                                                ========  =========   ========
</TABLE>

   + 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.
<TABLE>
<S>                                             <C>         <C>       <C>         <C>         <C>  

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
</TABLE>

***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
<TABLE>

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

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
                                                ============    ============    ============
</TABLE>

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



Consolidated Balance Sheets
Morrison Health Care, Inc. and Subsidiaries
<TABLE>

                                              ------------      ------------
(In thousands)                                May 31, 1998      May 31, 1997
                                              ------------      ------------
<CAPTION>
<S>                                               <C>                <C> 
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
                                              ============      ============
</TABLE>


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

<TABLE>


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
--------------                                               ------------      ------------      ------------
<CAPTION>
<S>                                                              <C>               <C>            <C>  
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
</TABLE>

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



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

                                                                    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>
<S>                                          <C>         <C>         <C>         <C>        <C>           <C>

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
                                             ===================     ===================     ====================

</TABLE>
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.
<TABLE>

(In thousands, except per share data)

                                           For the fiscal year ended
                                                 June 1, 1996
                                    -----------------------------------------
                                                    UNAUDITED
                                                    PRO FORMA      UNAUDITED
                                    HISTORICAL     ADJUSTMENTS     PRO FORMA
                                    ----------     -----------     ----------
<CAPTION>
<S>                                   <C>         <C>                <C>     
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)
</TABLE>


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.

<TABLE>
                                                                           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
                                  -------------------------------------    -------------------------------------
<CAPTION>
<S>                                 <C>           <C>          <C>              <C>           <C>       <C>
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)
                                  =====================================    =====================================
</TABLE>


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):
<TABLE>

                                                      For the Fiscal Year Ended
                                          ------------------------------------------------
                                          May 31, 1998      May 31, 1997      June 1, 1996
                                          ------------      ------------      ------------
<CAPTION>
<S>                                           <C>               <C>               <C>   
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
</TABLE>

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:
<TABLE>

                                   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
                               -------------------     --------------------    --------------------
<CAPTION>
<S>                            <C>         <C>         <C>         <C>        <C>          <C>
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
</TABLE>

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

<TABLE>
                                                           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
---------------     -----------   ----------------     ----------------         -----------  ---------------
<CAPTION>
<S>       <C>          <C>             <C>                    <C>                   <C>             <C>   
$ 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
                    ===========   ================     ================         ===========   ===============
</TABLE>
<TABLE>


                                                           May 31, 1997
                   -----------------------------------------------------------------------------------------
                   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
---------------     -----------   ----------------     ----------------         -----------  ----------------
<CAPTION>
<S>       <C>            <C>           <C>                    <C>                     <C>           <C>   
$ 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
                    ===========   ================     ================         ===========   ===============
</TABLE>



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.
<TABLE>

                                            First        Second       Third        Fourth
(Amounts presented are in thousands)      Quarter       Quarter     Quarter       Quarter      Total
------------------------------------      -------------------------------------------------------------
<CAPTION>
<S>                                       <C>           <C>         <C>           <C>          <C>
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

</TABLE>

*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:
<TABLE>

                               First      Second      Third       Fourth
                             Quarter     Quarter     Quarter     Quarter     Total
                             -------     -------     -------     -------     -----
<CAPTION>
<S>                          <C>         <C>         <C>         <C>         <C>              
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
</TABLE>

      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